Quarterly Report (10-q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED September 30, 2019

COMMISSION FILE NUMBER 000-55683

CAROLINA TRUST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

NORTH CAROLINA

(State or other jurisdiction of incorporation or organization)

81-2019652

(I.R.S. Employer Identification No.)

901 EAST MAIN STREET

LINCOLNTON, NORTH CAROLINA 28092

(Address of Principal Executive Offices) (Zip Code)

(704) 735-1104

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of exchange on which registered
Common stock, par value $2.50 per share		CART		The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☐	Accelerated Filer	☐

Non-accelerated Filer	☒	Smaller Reporting Company	☒

		Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s common stock outstanding as of November 12, 2019 was 9,305,214.

TABLE OF CONTENTS

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets September 30, 2019 and December 31, 2018	2

	Condensed Consolidated Statements of Operations Three Months Ended September 30, 2019 and 2018	3

	Condensed Consolidated Statements of Operations Nine Months Ended September 30, 2019 and 2018	4

	Condensed Consolidated Statements of Comprehensive Income Three Months Ended September 30, 2019 and 2018	5

	Condensed Consolidated Statements of Comprehensive Income Nine Months Ended September 30, 2019 and 2018	6

	Condensed Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended September 30, 2019 and 2018	7

	Condensed Consolidated Statements of Changes in Stockholders’ Equity Nine Months Ended September 30, 2019 and 2018	8

	Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2019 and 2018	9

	Notes to Condensed Consolidated Financial Statements	10

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 4 -	Controls and Procedures	48

Part II.	OTHER INFORMATION

Item 6 -	Exhibits	49

Table of Contents

Part I.

FINANCIAL INFORMATION

Item 1. Financial Statements

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(Dollars in thousands, except share and per share data)

	September 30, 2019			December 31, 2018*
Assets
Cash and due from banks	$	13,865		$	10,918
Interest-earning deposits with banks		28,229			21,022
Cash and cash equivalents		42,094			31,940

Certificates of deposit with banks		2,245			1,498
Investment securities available for sale, at fair value (amortized cost $62,535 and $32,677)		63,761			31,960
Equity securities		780			617
Federal Home Loan Bank stock		1,400			1,050
Loans		483,164			393,282
Less: Allowance for loan losses		(3,983	)		(3,978	)
Net Loans		479,181			389,304

Bank-owned life insurance		11,099			7,393
Accrued interest receivable		1,714			1,259
Bank premises, equipment and software		8,840			6,093
Foreclosed assets		1,043			1,157
Goodwill		5,717			-
Core deposit intangibles, net of accumulated amortization of $1,168 and $744 at September 30, 2019 and December 31, 2018, respectively		2,447			40
Other assets		2,214			2,793
Total Assets	$	622,535		$	475,104

Liabilities and Stockholders’ Equity
Noninterest-earning demand deposits	$	92,476		$	61,120
Interest-earning demand deposits		191,997			142,899
Savings		38,011			22,693
Time deposits		193,649			168,437
Total deposits		516,133			395,149

Finance lease obligation		88			141
Federal Home Loan Bank advances		20,200			16,100
Long term subordinated debt		9,814			9,753
Accrued interest payable		760			421
Other liabilities		4,104			3,279
Total liabilities		551,099			424,843

Common stock warrant		-			426
Common stock, $2.50 par value; 20,000,000 and 10,000,000 shares authorized as of September 30, 2019 and December 31, 2018, respectively; 9,305,714 and 7,156,987 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively		23,264			17,892
Additional paid-in capital		36,371			25,211
Retained earnings		10,863			7,281
Accumulated other comprehensive income (loss)		938			(549	)
Total stockholders’ equity		71,436			50,261
Total Liabilities and Stockholders’ Equity	$	622,535		$	475,104

*Derived from Carolina Trust BancShares, Inc.’s audited financial statements included in its 2018 Annual Report on Form 10-K

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Dollars in thousands, except share and per share data)

	Three Months Ended September 30,
	2019			2018
Interest Income
Interest on investment securities	$	487		$	215
Interest and fees on loans		6,739			5,036
Other interest income		146			168
Total interest income		7,372			5,419

Interest Expense
Interest expense non-maturity deposits		385			188
Interest expense time deposits		935			733
Interest expense borrowed funds		99			58
Interest expense on subordinated debt		193			192
Interest expense, other		2			5
Total interest expense		1,614			1,176
Net interest income		5,758			4,243
Provision for (recovery of) loan losses		(37	)		75
Net interest income after loan loss provision		5,795			4,168

Noninterest income
Overdraft fees on deposits		192			131
Interchange fee income, net		124			67
Service charges on deposits		25			18
Mortgage fee income		179			44
Customer service fees		21			14
ATM income		16			8
Bank-owned life insurance income		66			49
Unrealized gain (loss) on equity securities		(100	)		35
Other income		11			8
Total noninterest income		534			374

Noninterest expense
Salaries & benefits expense		2,262			1,799
Occupancy expense		214			193
Furniture, fixture & equipment expense		244			214
Data processing expense		278			198
Office supplies expense		27			1
Professional fees		77			105
Advertising and marketing		43			31
Insurance		23			83
Foreclosed asset expense, net		15			127
Loan expense		34			75
Stockholder expense		86			45
Directors fees and expenses		84			51
Telephone expense		93			101
Amortization of core deposit intangibles		138			9
Merger expenses		585			157
Other operating expense		203			138
Total noninterest expense		4,406			3,327
Pre-tax income		1,923			1,215
Income tax expense		496			300
Net income	$	1,427		$	915

Earnings per share
Basic earnings per common share	$	0.15		$	0.13
Diluted earnings per common share	$	0.15		$	0.13
Weighted average common shares outstanding		9,304,051			7,156,987
Diluted average common shares outstanding		9,375,163			7,243,875

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(Dollars in thousands, except share and per share data)

	Nine Months Ended September 30,
	2019		2018
Interest Income
Interest on investment securities	$	1,480	$	639
Interest and fees on loans		19,940		14,460
Other interest income		435		345
Total interest income		21,855		15,444

Interest Expense
Interest expense non-maturity deposits		1,089		500
Interest expense time deposits		2,635		2,043
Interest expense borrowed funds		273		248
Interest expense on subordinated debt		579		574
Interest expense, other		8		26
Total interest expense		4,584		3,391
Net interest income		17,271		12,053
Provision for loan losses		116		415
Net interest income after loan loss provision		17,155		11,638

Noninterest income
Overdraft fees on deposits		542		412
Interchange fee income, net		320		165
Service charges on deposits		91		49
Mortgage fee income		428		86
Customer service fees		69		43
ATM income		39		21
Bank-owned life insurance income		199		147
Unrealized gain on equity securities		96		123
Other income		34		24
Total noninterest income		1,818		1,070

Noninterest expense
Salaries & benefits expense		6,982		5,496
Occupancy expense		666		607
Furniture, fixture & equipment expense		663		524
Data processing expense		801		588
Office supplies expense		102		42
Professional fees		322		328
Advertising and marketing		129		90
Insurance		160		269
Foreclosed asset expense, net		117		453
Loan expense		167		161
Stockholder expense		220		114
Directors fees and expenses		283		191
Telephone expense		282		241
Amortization of core deposit intangibles		424		26
Merger expenses		2,356		480
Other operating expense		631		433
Total noninterest expense		14,305		10,043
Pre-tax income		4,668		2,665
Income tax expense		1,086		659
Net income	$	3,582	$	2,006

Earnings per share
Basic earnings per common share	$	0.39	$	0.33
Diluted earnings per common share	$	0.38	$	0.32
Weighted average common shares outstanding		9,297,383		6,118,461
Diluted average common shares outstanding		9,370,628		6,211,670

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended September 30,
	2019			2018

Net income	$	1,427		$	915

Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Unrealized holding gains (losses) arising during period		132			(208	)
Deferred income tax benefit (expense)		(31	)		48
Total other comprehensive income (loss)		101			(160	)

Total comprehensive income	$	1,528		$	755

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2019			2018

Net income	$	3,582		$	2,006

Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Unrealized holding gains (losses) arising during period		1,943			(812	)
Deferred income tax benefit (expense)		(456	)		190
Total other comprehensive income (loss)		1,487			(622	)

Total comprehensive income	$	5,069		$	1,384

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands)

			Common Stock
	Warrant		Shares		Amount		Additional paid-in capital			Retained earnings		Accumulated other comprehensive income (loss)			Total

Balances at June 30, 2018	$	426		7,156,987	$	17,892	$	25,214		$	5,420	$	(751	)	$	48,201
Net income		-		-		-		-			915		-			915
Issuance of common stock		-		-		-		(2	)		-		-			(2	)
Other comprehensive loss		-		-		-		-			-		(160	)		(160	)
Balance at September 30, 2018	$	426		7,156,987	$	17,892	$	25,212		$	6,335	$	(911	)	$	48,954

Balances at June 30, 2019	$	-		9,301,575	$	23,254	$	36,370		$	9,436	$	837		$	69,897
Net income		-		-		-		-			1,427		-			1,427
Exercise of stock options		-		4,139		10		1			-		-			11
Other comprehensive income		-		-		-		-			-		101			101
Balance at September 30, 2019	$	-		9,305,714	$	23,264	$	36,371		$	10,863	$	938		$	71,436

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands)

				Common Stock
	Warrant			Shares		Amount		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Total

Balances at December 31, 2017	$	426			4,657,880	$	11,645	$	13,008	$	4,772		$	(732	)	$	29,119
Net income		-			-		-		-		2,006			-			2,006
Exercise of stock options		-			3,107		7		8		-			-			15
Stock based compensation		-			-		-		1		-			-			1
Issuance of common stock		-			2,496,000		6,240		12,195		-			-			18,435
Reclassification of certain tax effects		-			-		-		-		(443	)		443			-
Other comprehensive loss		-			-		-		-		-			(622	)		(622	)
Balance at September 30, 2018	$	426			7,156,987	$	17,892	$	25,212	$	6,335		$	(911	)	$	48,954

Balances at December 31, 2018	$	426			7,156,987	$	17,892	$	25,211	$	7,281		$	(549	)	$	50,261
Net income		-			-		-		-		3,582			-			3,582
Exercise of stock options		-			10,994		27		7		-			-			34
Acquisition of Clover Community Bankshares, Inc.		-			2,123,858		5,310		10,762		-			-			16,072
Exercise of warrant		(426	)		13,875		35		391		-			-			-
Other comprehensive income		-			-		-		-		-			1,487			1,487
Balance at September 30, 2019	$	-			9,305,714	$	23,264	$	36,371	$	10,863		$	938		$	71,436

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2019			2018
Cash flows from operating activities
Net income	$	3,582		$	2,006
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:
Provision for loan losses		116			415
Depreciation and amortization of bank premises, equipment and software, and operating lease right-of-use assets		558			346
Acquired loan accretion		(447	)		(5	)
Accretion of time deposit discount and amortization of core deposit intangibles		452			26
Net amortization of bond premiums/discounts		242			104
Amortization of long-term subordinated debt issuance costs		61			57
Unrealized gain on equity securities		(96	)		(123	)
Stock compensation expense		-			1
Increase in value of bank-owned life insurance		(199	)		(147	)
Net losses and impairment write-downs on foreclosed assets		49			295
Deferred tax provision		592			27
Increase in other assets		(649	)		(17	)
Decrease (increase) in accrued interest receivable		48			(132	)
Increase in accrued interest payable		306			286
Increase (decrease) in other liabilities		(1,349	)		80
Net cash and cash equivalents provided by operating activities		3,266			3,219

Cash flows from investing activities
Net cash received from acquisition		8,741			-
Net increase in loans		(25,710	)		(33,769	)
Maturities of certificates of deposit with banks		593			-
Proceeds from the sale of foreclosed assets		1,159			330
Purchase of available for sale securities		(532	)		(3,034	)
Net purchases of bank premises, equipment and software		(377	)		(34	)
Proceeds from maturities, calls and pay-downs of available for sale securities		9,957			2,612
Redemptions (purchases) of Federal Home Loan Bank stock		(350	)		291
Net cash and cash equivalents used in investing activities		(6,519	)		(33,604	)

Cash flows from financing activities
Increase in deposits		9,326			45,844
Increase (decrease) in Federal Home Loan Bank advances		4,100			(7,500	)
Finance lease payments		(53	)		(49	)
Issuance of long term debt		-			3,000
Repayment of long term debt		-			(3,000	)
Net proceeds from the issuance of common stock		34			18,450
Net cash and cash equivalents provided by financing activities		13,407			56,745
Net increase (decrease) in cash and cash equivalents		10,154			26,360

Cash and cash equivalents, beginning		31,940			9,056
Cash and cash equivalents, ending	$	42,094		$	35,416

Supplemental disclosure of cash flow information
Cash paid during the period for taxes	$	339		$	631
Cash paid during the period for interest	$	4,482		$	3,105

Noncash financing and investing activities
Unrealized gain (loss) on investment securities available-for-sale, net of taxes	$	1,487		$	(622	)
Transfer of loans to foreclosed assets	$	202		$	1,618
Fair value of assets acquired	$	115,141		$	-
Fair value of liabilities assumed	$	113,500		$	-
Initial recognition of operating lease right-of-use assets	$	457		$	-
Initial recognition of operating lease liabilities	$	443		$	-

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

(1)	Presentation of Financial Statements

The consolidated financial statements include the accounts of Carolina Trust BancShares, Inc. (the “Company”), its subsidiary, Carolina Trust Bank (the “Bank”), and the Bank’s wholly owned subsidiary, Western Carolina Holdings, LLC, which owns certain Bank assets. All significant intercompany balances and transactions have been eliminated in consolidation. On August 16, 2016, the Company announced that it had consummated a statutory share exchange pursuant to which it became the parent company of the Bank. Shares of the Bank’s common stock were exchanged for shares of the Company’s common stock at a one-for-one exchange rate. The Company is a North Carolina business corporation that operates as a registered bank holding company under the Bank Holding Company Act of 1956. The Bank is the only subsidiary of the Company.

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for fair presentation of the financial information as of September 30, 2019, in conformity with accounting principles generally accepted in the United States of America. Operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.

Information regarding the organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2018 Annual Report on Form 10-K. This quarterly report should be read in conjunction with the Annual Report.

(2)	Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. ASU 2016-02 was effective for the Company on January 1, 2019. The standard provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company has elected to apply the standard as of the beginning of the period of adoption (January 1, 2019) and did not restate comparative periods. The Company has adopted all the optional practical expedients available under ASU 2016-02.

The operating leases of the Company relate to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use (“ROU”) asset of $457,000 and an operating lease liability of $443,000 on January 1, 2019, with no impact on net income or stockholders’ equity. The ROU asset and operating lease liability are recorded in bank premises, equipment and software and other liabilities, respectively, in the consolidated balance sheet as of September 30, 2019. See Note 12 - Leases for additional information.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new standard introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. The Company has formed a management committee including those responsible for credit analysis and review, accounting and finance, information technology and lending to develop an understanding of the requirements and plan implementation. The Company has adopted a software model for the ALLL model that has add-on functionality for compliance with the new standard and has contracted with a vendor to help with the development of the ALLL model for the new standard. The Company has also selected the methodologies to be used with the different loan segments and has ran different scenarios. Notwithstanding the effective dates described above, at its October 16, 2019 meeting, the FASB approved its August 2019 proposal to grant private companies, not-for-profit organizations, and certain small public companies various effective date delays. The implementation date for the Company, which is defined as a smaller reporting company by the SEC will be for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Changes to the Disclosure Requirements for Fair Value Measurement. These amendments remove the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact this standard will have on its disclosures.

Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

(3)	Business Combination

Acquisition of Clover Community Bankshares, Inc.

On January 1, 2019 the Company acquired by merger Clover Community Bankshares, Inc. (“Clover”), the parent holding company for Clover Community Bank, Clover, South Carolina. Pursuant to the Agreement and Plan of Merger and Reorganization between the Company and Clover dated June 14, 2018, Clover merged with and into the Company, with the Company being the surviving corporation in the merger. Immediately following the parent merger, Clover Community Bank was merged with and into the Bank, also effective January 1, 2019. Pursuant to the merger agreement, each share of Clover capital stock was converted into either 2.7181 shares of the Company’s common stock or $22.00 in cash and subject to a prescribed allocation in the merger agreement that provided that 80% of Clover’s shares would be converted to the stock consideration and 20% of Clover’s shares would be converted into the cash consideration. Overall, the Company issued 2,123,858 shares of its common stock in exchange for 80% of the Clover shares and paid $3,008 in lieu of fractional shares that would otherwise have been issued. The cash merger consideration paid for 20% of the Clover shares totaled $4,298,360. The stock consideration was valued at $7.58 per share, based on the most recent closing price reported on The Nasdaq Stock Market for a share of the Company’s common stock on the date immediately preceding the merger date. In accordance with the merger agreement, cash in lieu of fractional shares was valued at a rate of $7.63 per share, based on the 20-day average closing price for a share of the Company’s common stock for the 20-trading days immediately preceding the merger date. The total purchase price paid was $20.4 million.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

The transaction was accounted for using the purchase method of accounting for business combinations. Under the purchase method of accounting, the assets and liabilities of Clover were recorded based on estimates of fair values as of January 1, 2019. In the second quarter of 2019, there were some additional adjustments to the fair value of assets acquired. An increase in the amount of $76,000 was made to the fair value adjustments of loans acquired due to a correction on the valuation of interest only loans. A decrease of $330,000 to Core deposit intangible was recorded due to correction of the FHLB offering rates used in the valuation calculation. An offsetting entry was made to the deferred tax asset, which is included in other assets, for $96,000. The remaining $310,000 was recorded as an increase to goodwill. In the third quarter of 2019, there was one adjustment to the fair value of assets acquired. A decrease of $68,000 was made to other assets due to the decrease in the value of a foreclosed asset. An offsetting entry was made to the deferred tax asset, which is included in other assets, for $16,000. The remaining $52,000 was recorded as an increase to goodwill.

The following table summarizes the allocation of the purchase price to the assets acquired and the liabilities assumed based on their estimated fair value:

(Dollars in thousands)	As Recorded by Clover			Fair Value Adjustments			As Recorded by the Company
Assets
Cash and cash equivalents	$	13,042		$	-		$	13,042
Certificates of deposit with banks		1,340			-			1,340
Securities		39,637			(45	)		39,592
Loans		66,343			(2,294	)		64,049
Allowance for loan losses		(1,452	)		1,452			-
Bank premises, equipment and software		1,827			644			2,471
Core deposit intangible		-			2,830			2,830
Other assets		5,854			(995	)		4,859
Total	$	126,591		$	1,592		$	128,183

Liabilities
Deposits	$	111,675		$	(46	)	$	111,629
Other liabilities		1,438			433			1,871
Total	$	113,113		$	387		$	113,500

Net identifiable assets acquired							$	14,683

Total cost of acquisition
Value of stock issued				$	16,099
Cash paid in the acquisition					4,301
Total cost of acquisition								20,400

Goodwill recorded							$	5,717

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

The following table presents the purchased credit impaired (“PCI”) and non-PCI loans receivable at the acquisition date. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond:

Dollars in thousands	PCI loans			Non-PCI loans			Total loans acquired
January 1, 2019
Gross contractual amount receivable	$	5,246		$	61,097		$	66,343
Fair value adjustments		(1,318	)		(976	)		(2,294	)
Fair value of loans receivable	$	3,928		$	60,121		$	64,049

Goodwill recorded for Clover represents future revenues to be derived, including efficiencies that are expected to result from combining operations, and other non-identifiable intangible assets. None of the goodwill is expected to be deductible for tax purposes.

The following pro forma financial information presents the combined results of the Company and Clover as if the acquisition had occurred as of January 1, 2018. The pro forma results are adjusted for acquisition-related expense and are not necessarily indicative of the results of operations that would have occurred had the acquisition actually taken place on January 1, 2018, nor of future results of operations.

Pro forma income statement line items	Three Months Ended September 30,
	2019			2018
Dollars in thousands
Net interest income	$	5,779		$	5,529
Noninterest income		534			891
Total revenue		6,313			6,420

Net income available to common shareholders	$	1,484	*	$	1,144

Pro forma income statement line items	Nine Months Ended September 30,
	2019			2018
Dollars in thousands
Net interest income	$	17,241		$	15,917
Noninterest income		1,818			2,210
Total revenue		19,059			18,127

Net income available to common shareholders	$	4,998	*	$	2,713

*Pro forma net income for the three months and nine months ended September 30, 2019 excludes $50,000 and $1,821,000 respectively, in merger related expenses that were recognized during the periods. Net of tax, the amounts excluded for the three months and nine months ended September 30, 2019 were $38,000 and $1,407,000, respectively. Merger related expenses include payments to Clover employees for severance contracts, data processing conversion expenses, investment banker fees, consulting and auditing fees.

Proposed Merger with Carolina Financial

As previously reported, on July 15, 2019, the Company 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, it is proposed that the Company will merge with and into CARO (the “Merger”), and the Bank will merge with and into CresCom Bank. Subject to the terms and conditions of the Merger Agreement, the Company’s shareholders would receive 0.3000 shares of CARO common stock or $10.57 in cash for each share of the Company’s common stock, subject to election and proration such that the aggregate consideration will consist of 90% CARO common stock and 10% cash. The closing of the proposed Merger is subject to the required approval of the Company’s shareholders, requisite regulatory approvals, and other customary closing conditions.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

(4)	Earnings Per Share

Basic Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.

Diluted Earnings per Common Share

The computation of diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. These additional common shares would include employee equity share options, nonvested shares and similar equity instruments granted to employees, as well as the shares associated with the common stock warrants issued to the U.S. Treasury Department as part of the preferred stock transaction completed in February 2009. Diluted earnings per common share are based upon the actual number of options or shares granted and not yet forfeited unless doing so would be antidilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.

The following table summarizes earnings per share and the shares utilized in the computations for the three and nine months ended September 30, 2019 and 2018, respectively:

Dollars in thousands, except per share data	Net Income		Weighted Average Common Shares		Per Share Amount
Three months ended September 30, 2019
Basic earnings per common share	$	1,427		9,304,051	$	0.15
Effect of dilutive stock securities		-		71,112		-
Diluted earnings per common share	$	1,427		9,375,163	$	0.15

Three months ended September 30, 2018
Basic earnings per common share	$	915		7,156,987	$	0.13
Effect of dilutive stock securities		-		72,609		-
Effect of dilutive stock warrants		-		14,279		-
Diluted earnings per common share	$	915		7,243,875	$	0.13

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Dollars in thousands, except per share data	Net Income		Weighted Average Common Shares		Per Share Amount
Nine months ended September 30, 2019
Basic earnings per common share	$	3,582		9,297,383	$	0.39
Effect of dilutive stock securities		-		70,962		(0.01	)
Effect of dilutive stock warrants		-		2,283		-
Diluted earnings per common share	$	3,582		9,370,628	$	0.38

Nine months ended September 30, 2018
Basic earnings per common share	$	2,006		6,118,461	$	0.33
Effect of dilutive stock securities		-		75,598		(0.01	)
Effect of dilutive stock warrants		-		17,611		-
Diluted earnings per common share	$	2,006		6,211,670	$	0.32

For the three and nine months ended September 30, 2019 and September 30, 2018, there were no anti-dilutive shares.

(5)	Fair Value Measurements

The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at each reporting date, based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The methodologies for financial assets and financial liabilities are discussed below:

Cash and Due from Banks and Interest-Earning Deposits with Banks

The carrying amounts for cash and due from banks and interest-earning deposits with banks approximate fair value because of the short maturities of those instruments.

Certificates of Deposit with Banks

The fair value of certificates of deposit with banks is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities.

Investment and Equity Securities

Fair value for investment and equity securities equals the quoted market price if such information is available. If a quoted market price is not available in active markets for identical securities (Level 1), fair value may be estimated using observable inputs such as quoted prices for similar securities, interest rates and yield curves, implied volatilities and credit spreads (Level 2). Otherwise, unobservable inputs such as independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating on similar securities, prepayment assumptions and other factors such as credit loss assumptions (Level 3). The fair value would be based on an exit price between market participants that may include adjustments for liquidity and credit.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Loans

The fair value of loans is estimated based on exit price. These cash flows include assumptions for prepayment estimates over each loan’s remaining life, considerations for the current interest rate environment compared to the weighted average rate of each portfolio and a credit risk component based on the historical and expected performance of each portfolio. The calculation also includes market liquidity and credit adjustments.

Accrued Interest Receivable and Payable

The carrying amount is a reasonable estimate of fair value.

Deposits

The fair value of demand deposits, savings, money market and negotiable order of withdrawal (NOW) accounts is the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities.

Finance Lease Obligation, Federal Home Loan Bank Advances and Long Term Subordinated Debt

The fair value of borrowings is based upon discounted expected cash flows using current rates at which borrowings of similar maturity could be obtained.

Financial Instruments with Off-Balance Sheet Risk

With regard to commitments to extend credit discussed in Note 10, the fair value amounts are not material.

The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at September 30, 2019 and December 31, 2018:

			Fair Value Measurements at September 30, 2019 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Dollars in thousands	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
ASSETS
Cash and due from banks	$	13,865	$	13,865	$	-	$	-	$	13,865
Interest-earning deposits with banks		28,229		28,229		-		-		28,229
Certificates of deposit with banks		2,245		-		2,283		-		2,283
Federal Home Loan Bank stock		1,400		-		1,400		-		1,400
Investment securities available for sale		63,761		-		62,779		982		63,761
Equity securities		780		780		-		-		780
Net loans		479,181		-		-		464,526		464,526
Accrued interest receivable		1,714		-		1,714		-		1,714

LIABILITIES
Deposits	$	516,133	$	-	$	524,320	$	-	$	524,320
Finance lease obligation		88		-		88		-		88
Federal Home Loan Bank Advances		20,200		-		20,371		-		20,371
Long term subordinated debt		9,814		-		9,837		-		9,837
Accrued interest payable		760		-		760		-		760

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

			Fair Value Measurements at December 31, 2018 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Dollars in thousands	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
ASSETS
Cash and due from banks	$	10,918	$	10,918	$	-	$	-	$	10,918
Interest-earning deposits with banks		21,022		21,022		-		-		21,022
Certificates of deposit with banks		1,498		-		1,484		-		1,484
Federal Home Loan Bank stock		1,050		-		1,050		-		1,050
Investment securities available for sale		31,960		-		31,960		-		31,960
Equity securities		617		617		-		-		617
Net loans		389,304		-		-		378,675		378,675
Accrued interest receivable		1,259		-		1,259		-		1,259

LIABILITIES
Deposits	$	395,149	$	-	$	389,493	$	-	$	389,493
Capital lease obligation		141		-		141		-		141
Federal Home Loan Bank Advances		16,100		-		16,053		-		16,053
Long term subordinated debt		9,753		-		9,946		-		9,946
Accrued interest payable		421		-		421		-		421

The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Fair Value Hierarchy

The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1

Valuation based upon quoted prices for identical instruments traded in active markets.

Level 2

Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3

Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured on a recurring basis.

	Total		Level 1		Level 2		Level 3
Dollars in thousands
September 30, 2019
Available-for-Sale Securities
U.S. Government and federal agency	$	17,901	$	-	$	17,901	$	-
Mortgage-backed securities*		27,412		-		27,412		-
Municipal securities		17,466		-		17,466		-
Corporate debt securities		982		-		-		982
Total available-for-sale securities		63,761		-		62,779		982
Equity securities		780		780		-		-
Total	$	64,541	$	780	$	62,779	$	982

December 31, 2018
Available-for-Sale Securities
U.S. Government and federal agency	$	10,789	$	-	$	10,789	$	-
Mortgage-backed securities*		20,541		-		20,541		-
Municipal securities		630		-		630		-
Total available-for-sale securities		31,960		-		31,960		-
Equity securities		617		617		-		-
Total	$	32,577	$	617	$	31,960	$	-

*All of the Company’s mortgage-backed securities are issued either by the U.S. Government, which includes GNMA pools, or by government-sponsored enterprises such as FNMA and FHLMC.

The Company did not have any transfers of assets between Levels 1, 2 or 3 during the periods ended September 30, 2019 and December 31, 2018.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

The tables below present the changes during the three and nine months ended September 30, 2019 in the amount of Level 3 assets measured on a recurring basis.

	Three months ended September 30, 2019
Dollars in thousands
Balance, beginning of period	$	978
Additions		-
Change in valuation recognized in OCI		4
Balance, end of period	$	982

	Nine months ended September 30, 2019
Dollars in thousands
Balance, beginning of period	$	-
Additions		956
Change in valuation recognized in OCI		26
Balance, end of period	$	982

The Company did not have any Level 3 assets measured on a recurring basis as of September 30, 2018.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures it for impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, a loan’s observable market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value exceeds the recorded investments in such loans. At September 30, 2019, the discounted cash flows method was used in determining the fair value of eight loans totaling $0.8 million and the fair value of the collateral method was used in the other sixteen loans totaling $2.3 million. At December 31, 2018, the discounted cash flows method was used in determining the fair value of nine loans totaling $1.7 million and the fair value of the collateral method was used in the other twenty-two loans totaling $2.4 million. Impaired loans where an allowance is established based on the fair value of collateral and also when written down with the discounted cash flow method require classification in the fair value hierarchy. The fair value of the collateral for an impaired loan is classified as Level 3. Although appraisals of these properties are frequently based on comparable properties, they are not identical. Significant unobservable inputs will need to be used in assessing the value. When the discounted cash flows method is used, the Company records the impaired loan as nonrecurring Level 3. There have been no changes in valuation techniques for the three- or nine-month period ended September 30, 2019. Valuation techniques are consistent with techniques used in prior periods.

The following table presents impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral or discounted cash flows during the nine months ended September 30, 2019 and 2018.

	September 30
Dollars in thousands	2019			2018
Carrying value of impaired loans before allocations	$	559		$	1,354
Specific valuation allowance allocations		(26	)		(233	)
Carrying value of impaired loans after allocations	$	533		$	1,121

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Foreclosed Assets

Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The fair value of foreclosed assets is classified as Level 3. Although appraisals of these properties are frequently based on comparable properties, they are not identical. Significant unobservable inputs will need to be used in assessing the value.

The carrying value of foreclosed assets is periodically reviewed and written down to fair value. Any loss is included in earnings. For the three months ended September 30, 2019 and 2018, there were no assets that were written down prior to foreclosure. For the nine months ended September 30, 2019 there were no assets that were written down prior to foreclosure. Comparatively, for the nine months ended September 30, 2018, foreclosed assets in the amount of $1,158,000 were written down by $180,000 to $978,000 prior to foreclosure. For the three months ended September 30, 2019, foreclosed assets with a carrying value of $592,000 were written down by $68,000 to $524,000 subsequent to foreclosure and for the nine months ended September 30, 2019, foreclosed assets with a carrying value of $823,000 were written down by $105,000 to $718,000 subsequent to foreclosure. For the three months ended September 30, 2018, foreclosed assets with a carrying value of $640,000 were written down by $53,000 to $587,000 subsequent to foreclosure and for the nine months ended September 30, 2018, $1,618,000 were written down by $301,000 to $1,317,000 subsequent to foreclosure.

Assets measured at fair value on a nonrecurring basis are included in the table below.

	Total		Level 1		Level 2		Level 3
Dollars in thousands
September 30, 2019
Foreclosed assets	$	718	$	-	$	-	$	718
Impaired loans		533		-		-		533
Total	$	1,251	$	-	$	-	$	1,251

December 31, 2018
Foreclosed assets	$	942	$	-	$	-	$	942
Impaired loans		1,487		-		-		1,487
Total	$	2,429	$	-	$	-	$	2,429

Quantitative information about Level 3 fair value measurements for each category of assets as of the dates indicated is summarized in the following table:

	Fair Value		Valuation Technique	Unobservable Input	Range			Weighted Average
Dollars in thousands
September 30, 2019
Impaired loans	$	533	Discounted cash flows	Discount rate		4.75% - 8.50	%		6.69	%
Foreclosed assets		718	Discounted appraisals	Appraisal adjustments		12.00% – 71.11	%		17.28	%

December 31, 2018
Impaired loans	$	122	Discounted appraisals	Appraisal adjustments		15.00	%		15.00	%
		1,365	Discounted cash flows	Discount rate		4.75 – 8.50	%		7.05	%

Foreclosed assets		942	Discounted appraisals	Appraisal adjustments		8.00% - 15.00	%		9.68	%

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

(6)	Investment Securities

The amortized cost and fair value of investment securities, with gross unrealized gains and losses, as of the dates indicated was as follows:

In thousands	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2019
Available-for-sale:
U.S. Government and federal agency	$	17,644	$	289	$	(32	)	$	17,901
Mortgage-backed securities *		27,100		428		(116	)		27,412
Municipal securities		16,835		631		-			17,466
Corporate debt securities		956		26		-			982
Total available-for-sale securities		62,535		1,374		(148	)		63,761
Equity securities**		1,271		-		(491	)		780
Total	$	63,806	$	1,374	$	(639	)	$	64,541

December 31, 2018
Available-for-sale:
U.S. Government and federal agency	$	11,036	$	6	$	(253	)	$	10,789
Mortgage-backed securities *		21,010		36		(505	)		20,541
Municipal securities		631		1		(2	)		630
Total available-for-sale securities		32,677		43		(760	)		31,960
Equity securities**		1,204		-		(587	)		617
Total	$	33,881	$	43	$	(1,347	)	$	32,577

* All mortgage-backed securities are issued either by the U.S. Government through GNMA or by government sponsored enterprises FNMA or FHLMC.

**Gains/losses on equity securities have been “recognized” instead of unrealized.

The amortized cost and fair values of securities available for sale at September 30, 2019 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

	Amortized Cost		Fair Value
Dollars in thousands
Due within one year	$	684	$	685
Due after one but within five years		12,682		12,837
Due after five but within ten years		15,517		15,810
Due after ten years		33,652		34,429
	$	62,535	$	63,761

The following table details unrealized losses and related fair values in the Company’s available for sale investment security portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2019 and December 31, 2018, respectively.

	Temporarily Impaired Securities in Available-for-Sale Portfolio

	Less than 12 Months					Greater than 12 Months					Total

	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Dollars in thousands
September 30, 2019

U.S. Government and federal agency	$	4,393	$	(23	)	$	989	$	(9	)	$	5,382	$	(32	)
Mortgage-backed securities *		925		(3	)		11,370		(113	)		12,295		(116	)
Municipal Securities		-		-			-		-			-		-
Total temporarily impaired securities	$	5,318	$	(26	)	$	12,359	$	(122	)	$	17,677	$	(148	)

December 31, 2018

U.S. Government and federal agency	$	-	$	-		$	10,657	$	(253	)	$	10,657	$	(253	)
Mortgage-backed securities *		2,885		(10	)		13,644		(495	)		16,529		(505	)
Municipal Securities		-		-			290		(2	)		290		(2	)
Total temporarily impaired securities	$	2,885	$	(10	)	$	24,591	$	(750	)	$	27,476	$	(760	)

* All mortgage-backed securities are issued either by the U.S. Government through GNMA or by government sponsored enterprises FNMA or FHLMC.

Management considers the nature of the investment, the underlying causes of the decline in the market value and the severity and duration of the decline in market value in determining if impairment is other than temporary. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of September 30, 2019, management believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality. Accordingly, as of September 30, 2019, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s net income. Securities with a fair value of $8.0 million were pledged to secure public funds at September 30, 2019. The Company had no sales of securities during the three or nine month periods ended September 30, 2019 and September 30, 2018.

(7)

Loans

Loans are summarized in the following table which includes $3.2 million at September 30, 2019 of PCI loans resulting from the acquisition of Clover on January 1, 2019; loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered PCI loans.

	September 30, 2019						December 31, 2018
Dollars in thousands	Loans - excluding PCI		PCI Loans		Total Loans		Loans - excluding PCI		PCI Loans		Total Loans
Commercial real estate
Residential ADC	$	8,685	$	-	$	8,685	$	4,650	$	-	$	4,650
Commercial ADC		38,999		10		39,009		20,790		-		20,790
Farmland		6,380		-		6,380		4,833		-		4,833
Multifamily		19,361		-		19,361		18,537		-		18,537
Owner occupied		126,026		1,574		127,600		103,983		-		103,983
Non-owner occupied		106,042		-		106,042		97,034		-		97,034
Total commercial real estate		305,493		1,584		307,077		249,827		-		249,827

Commercial
Commercial and industrial		54,337		301		54,638		49,499		-		49,499
Agriculture		200		-		200		262		-		262
Other		7,257		-		7,257		1,573		-		1,573
Total commercial		61,794		301		62,095		51,334		-		51,334

Residential mortgage
First lien, closed-end		67,487		1,248		68,735		53,395		-		53,395
Junior lien, closed-end		901		-		901		812		-		812
Total residential mortgage		68,388		1,248		69,636		54,207		-		54,207

Home equity lines		38,962		-		38,962		33,968		-		33,968
Consumer – other		5,322		72		5,394		3,946		-		3,946
Total loans	$	479,959	$	3,205	$	483,164	$	393,282	$		$	393,282

Loans are primarily originated for customers residing in Lincoln, Gaston, Rutherford, Catawba, Iredell, and Rowan Counties in North Carolina and York County, South Carolina. Real estate loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Non-Accrual and Past Due Loans

Non-accrual loans, segregated by category, were as follows:

	September 30, 2019		December 31, 2018
Dollars in thousands
Commercial real estate
Commercial ADC	$	2	$	42
Owner occupied		813		932
Non-owner occupied		5		4
Total commercial real estate		820		978
Commercial
Commercial and industrial		163		-
Total commercial		163		-
Residential mortgage:
First lien, closed end		99		57
Junior lien, closed end		3		4
Total residential mortgage		102		61
Consumer – other		1		7
Total non-accrual loans	$	1,086	$	1,046

Interest foregone on non-accrual loans was approximately $32,000 and $73,000 for the three and nine months ended September 30, 2019 and $22,000 and $59,000 for the three and nine months ended September 30, 2018.

An analysis of past due loans, segregated by class, at September 30, 2019 and December 31, 2018 is shown below:

In thousands	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
September 30, 2019
Commercial real estate:
Residential ADC	$	-	$	-	$	-	$	8,685	$	8,685	$	-
Commercial ADC		-		-		-		39,009		39,009		-
Farmland		-		-		-		6,380		6,380		-
Multifamily		-		-		-		19,361		19,361		-
Owner occupied		439		-		439		127,161		127,600		-
Non-owner occupied		541		5		546		105,496		106,042		-
Total commercial real estate		980		5		985		306,092		307,077		-
Commercial
Commercial and industrial		218		41		259		54,379		54,638		-
Agriculture		-		-		-		200		200		-
Other		-		-		-		7,257		7,257		-
Total commercial		218		41		259		61,836		62,095		-
Residential mortgage:
First lien, closed end		-		197		197		68,538		68,735		117
Junior lien, closed-end		59		-		59		842		901		-
Total residential mortgage		59		197		256		69,380		69,636		117
Home equity lines		145		-		145		38,817		38,962		-
Consumer – other		-		-		-		5,394		5,394		-
Total loans	$	1,402	$	243	$	1,645	$	481,519	$	483,164	$	117

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

In thousands	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
December 31, 2018
Commercial real estate:
Residential ADC	$	-	$	-	$	-	$	4,650	$	4,650	$	-
Commercial ADC		39		-		39		20,751		20,790		-
Farmland		-		-		-		4,833		4,833		-
Multifamily		-		-		-		18,537		18,537		-
Owner occupied		-		927		927		103,056		103,983		-
Non-owner occupied		-		4		4		97,030		97,034		-
Total commercial real estate		39		931		970		248,857		249,827		-
Commercial:
Commercial and industrial		126		-		126		49,373		49,499		-
Agriculture		-		-		-		262		262		-
Other		-		-		-		1,573		1,573		-
Total commercial		126		-		126		51,208		51,334		-
Residential mortgage:
First lien, closed end		247		33		280		53,115		53,395		-
Junior lien, closed-end		-		-		-		812		812		-
Total residential mortgage		247		33		280		53,927		54,207
Home equity lines		85		-		85		33,883		33,968		-
Consumer – other		-		13		13		3,933		3,946		5
Total loans	$	497	$	977	$	1,474	$	391,808	$	393,282	$	5

Impaired loans

Information regarding the Company’s impaired loans is set forth in the following tables.

September 30, 2019

In thousands	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
Commercial real estate
Commercial ADC	$	2	$	2	$	-	$	-
Owner occupied		2,092		2,092		-		-
Non-owner occupied		5		5		-		-
Total commercial real estate		2,099		2,099		-		-
Commercial
Commercial and industrial		314		314		-		-
Residential mortgage
First lien, closed-end		419		99		310		26
Junior lien, closed- end		308		59		249		-
Total residential mortgage		727		158		559		26
Home equity lines		-		-		-		-
Consumer – other		1		1		-		-
Total loans	$	3,141	$	2,572	$	559	$	26

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

December 31, 2018

In thousands	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
Commercial real estate
Commercial ADC	$	42	$	42	$	-	$	-
Owner occupied		2,409		2,269		140		17
Non-owner occupied		5		5		-		-
Total commercial real estate		2,456		2,316		140		17
Commercial
Commercial and industrial		624		-		624		111
Residential mortgage
First lien, closed-end		876		56		760		42
Junior lien, closed- end		478		270		208		75
Total residential mortgage		1,354		326		968		117
Home equity lines		-		-		-		-
Consumer – other		7		7		-		-
Total loans	$	4,441	$	2,649	$	1,732	$	245

	Three months ended September 30, 2019				Three months ended September 30, 2018

In thousands	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate
Commercial ADC	$	3	$	-	$	1	$	-
Multifamily		-		-		-		-
Owner occupied		2,119		16		619		20
Non-owner occupied		5		-		1		-
Total commercial real estate		2,127		16		621		20
Commercial
Commercial and industrial		554		3		171		11
Residential mortgage
First lien, closed-end		430		4		216		16
Junior lien, closed- end		349		3		107		5
Total residential mortgage		779		7		323		21
Home equity lines		-		-		22		1
Consumer – other		3		-		1		-
	$	3,463	$	26	$	1,138	$	53

	Nine months ended September 30, 2019				Nine months ended September 30, 2018

In thousands	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate
Commercial ADC	$	22	$	-	$	7	$	-
Multifamily		-		-		57		-
Owner occupied		2,218		50		2,658		10
Non-owner occupied		5		-		12		-
Total commercial real estate		2,245		50		2,734		10
Commercial
Commercial and industrial		616		13		711		18
Residential mortgage
First lien, closed-end		598		13		892		96
Junior lien, closed- end		417		16		519		16
Total residential mortgage		1,015		29		1,411		112
Home equity lines		-		-		96		2
Consumer – other		6		-		6		17
Total loans	$	3,882	$	92	$	4,958	$	159

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Troubled Debt Restructurings

As of September 30, 2019, eight loans totaling $2,620,000 were identified as troubled debt restructurings and considered impaired, none of which had unfunded commitments. Ten loans totaling $3,856,000 were identified as troubled debt restructurings and considered impaired at December 31, 2018, none of which had unfunded commitments. Of the eight loans identified as troubled debt restructurings at September 30, 2019, seven loans totaling $1,989,000 were accruing interest. Of the ten loans identified as troubled debt restructurings at December 31, 2018, nine loans totaling $3,140,000 were accruing interest.

For the three- and nine-month periods ended September 30, 2019, there were no concessions made on newly restructured loans.

For the three months ended September 30, 2018, there were no concessions made on newly restructured loans. For the nine months ended September 30, 2018, the following table presents a breakdown of the types of concessions made by loan class.

	Nine months ended September 30, 2018
Dollars in thousands	Number of loans		Unpaid Principal Pre-Modification		Post-Modification Outstanding Recorded Investment
Extended payment terms
Consumer - other		1	$	1	$	1
Total		1	$	1	$	1
Grand Total		1	$	1	$	1

Qualitative factors are calculated for each segment of the loan portfolio. Factors include economic, concentrations, trends in terms of volume and mix, interest rate movement, and delinquency. If a restructured loan is delinquent, it is addressed in the delinquency factor for that segment. Because the number and dollar amounts of restructured loans represent a relatively small percentage (1%) of the total loan balances, there is no specific qualitative factor tied to restructured loans.

There were no loans that were modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three and nine months ended September 30, 2019 and September 30, 2018.

If a restructured loan defaults after being restructured, the loan is liquidated or charged off. Defaults of restructured loans are addressed in the qualitative factor of the delinquency component.

There were no loans that were modified as troubled debt restructurings within the previous 12 months as of September 30, 2019. The following table presents the successes and failures of the types of modifications within the previous 12 months as of September 30, 2018.

	Paid in full				Paying as restructured				Converted to non-accrual				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment
September 30, 2018					(Dollars in thousands)
Extended payment terms		-	$	-		1	$	1		-	$	-		-	$	-
Total		-	$	-		1	$	1		-	$	-		-	$	-

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Credit Quality Indicators

As part of the ongoing monitoring of credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the local, state and national economic outlook, (ii) concentrations of credit, (iii) interest rate movements, (iv) volume, mix and size of loans, and (v) delinquencies. The Company also has an internal Loan Review Officer who monitors risk grades on an ongoing basis.

The Company utilizes a risk-grading matrix to assign a risk grade to each of its commercial and consumer loans. Loans are graded on a scale of 1-9. Risk grades 1-5 represent pass rated loans. The general characteristics of the 9 risk grades are broken down into commercial and consumer and described below:

Loan Portfolio Risk Grades

Pass credits are grades 1-5 and represent credits with above average risk characteristics that are in accordance with loan policy guidelines regarding repayment ability, loan to value, and credit history. These types of credits have very few exceptions to policy.

Grade 6 – Watch List or Special Mention. The loans in this category include the following characteristics:

•

Loans with one or more major exceptions with no mitigating factors.

•

Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date. Potential weaknesses are the result of deviations from prudent lending practice.

•

Loans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do substantially increase the level of risk may also warrant this rating.

Grade 7 – Substandard. A substandard loan is inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The weaknesses may include, but are not limited to (i) high debt to worth ratios, (ii) declining or negative earnings trends, (iii) declining or inadequate liquidity, (iv) improper loan structure, (v) questionable repayment sources, (vi) lack of well-defined secondary repayment source and (vii) unfavorable competitive comparisons.

Grade 8 – Doubtful. Loans classified Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are injection of capital, alternative financing and liquidation of assets or the pledging of additional collateral. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists. Doubtful is a temporary grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Grade 9 – Loss. Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to

defer writing off the loan even though partial recoveries may be realized in the future. Probable loss portions of doubtful assets should be charged against the allowance for loan losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.

The following table presents the credit risk profile of the Company’s loan portfolio by internally assigned risk grades.

September 30, 2019
Dollars in thousands	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial real estate:
Residential ADC	$	8,685	$	-	$	-	$	-	$	-
Commercial ADC		38,997		-		2		-		-
Farmland		6,380		-		-		-		-
Multifamily		19,361		-		-		-		-
Owner occupied		123,993		1,221		812		-		-
Non-owner occupied		106,037		-		5		-		-
Total commercial real estate		303,453		1,221		819		-		-
Commercial:
Commercial and industrial		53,547		524		266		-		-
Agriculture		200		-		-		-		-
Other		7,257		-		-		-		-
Total commercial		61,004		524		266		-		-
Residential mortgage:
First lien, closed-end		66,481		789		217		-		-
Junior lien, closed-end		547		295		59		-		-
Total residential mortgage		67,028		1,084		276		-		-
Home equity lines		38,331		631		-		-		-
Consumer – other		5,148		173		1		-		-
Purchased credit impaired loans		1,186		552		1,467		-		-
Total	$	476,150	$	4,185	$	2,829	$	-	$	-

December 31, 2018
Dollars in thousands	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial real estate:
Residential ADC	$	4,650	$	-	$	-	$	-	$	-
Commercial ADC		20,509		239		42		-		-
Farmland		4,833		-		-		-		-
Multifamily		18,537		-		-		-		-
Owner occupied		101,706		1,207		1,070		-		-
Non-owner occupied		96,907		-		127		-		-
Total commercial real estate		247,142		1,446		1,239		-		-
Commercial:
Commercial and industrial		48,157		981		361		-		-
Agriculture		262		-		-		-		-
Other		1,573		-		-		-		-
Total commercial		49,992		981		361		-		-
Residential mortgage:
First lien, closed-end		52,622		647		126		-		-
Junior lien, closed-end		334		416		62		-		-
Total residential mortgage		52,956		1,063		188		-		-
Home equity lines		33,198		770		-		-		-
Consumer – other		3,778		161		7		-		-
Total	$	387,066	$	4,421	$	1,795	$	-	$	-

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

Allowance for Loan Losses

The allowance for loan losses represents management's estimate of an amount adequate to provide for probable losses inherent in the loan portfolio. Management determines the allowance for loan losses based on a number of factors, including a review and evaluation of the Company's loan portfolio and current and projected economic conditions locally and nationally. The allowance is monitored and analyzed in conjunction with the Company's loan analysis and grading program. The look-back period is a weighted twenty-quarter period.

Based on this methodology, provisions for loan losses are made to maintain an adequate allowance for loan losses. The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance. The provision for loan losses is the amount necessary to adjust the allowance for loan losses to the amount that management has determined to be adequate to provide for probable losses inherent in the loan portfolio. The Company recorded a recovery of loan losses of $37,000 for the three months ended September 30, 2019 and recorded a provision for loan losses of $116,000 for the nine months ended September 30, 2019. The Company recorded provisions for loan losses for the three and nine months ended September 30, 2018 that totaled $75,000 and $415,000, respectively. Management realizes that general economic trends greatly affect loan losses, and no assurances can be made that future charges to the allowance for loan losses may not be significant in relation to the amount provided during a particular period, or that future evaluations of the loan portfolio based on conditions then prevailing will not require sizable additions to the allowance, thus necessitating similarly sizable charges to income.

Based on its best judgment, evaluation, and analysis of the loan portfolio, management considers the allowance for loan losses to be appropriate in light of the risk inherent in the Company’s loan portfolio for the reporting periods.

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2019 and 2018.

	Beginning Balance		Provision for (Recovery of) Loan Losses			Charge- offs			Recoveries		Ending Balance
Dollars in thousands
September 30, 2019
Commercial real estate	$	2,879	$	(5	)	$	-		$	6	$	2,880
Commercial and industrial		613		56			(139	)		2		532
Residential mortgage		487		(99	)		(4	)		19		403
Consumer		167		11			(12	)		2		168
Total	$	4,146	$	(37	)	$	(155	)	$	29	$	3,983

September 30, 2018
Commercial real estate	$	2,504	$	76		$	-		$	3	$	2,583
Commercial and industrial		608		4			-			3		615
Residential mortgage		532		-			-			-		532
Consumer		200		(5	)		(3	)		3		195
Total	$	3,844	$	75		$	(3	)	$	9	$	3,925

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2019 and 2018.

	Beginning Balance		Provision for (Recovery of) Loan Losses			Charge- offs			Recoveries		Ending Balance
Dollars in thousands
September 30, 2019
Commercial real estate	$	2,683	$	174		$	-		$	23	$	2,880
Commercial and industrial		596		68			(139	)		7		532
Residential mortgage		520		(132	)		(4	)		19		403
Consumer		179		6			(34	)		17		168
Total	$	3,978	$	116		$	(177	)	$	66	$	3,983

September 30, 2018
Commercial real estate	$	2,260	$	340		$	(50	)	$	33	$	2,583
Commercial and industrial		634		(2	)		(25	)		8		615
Residential mortgage		505		77			(50	)		-		532
Consumer		200		-			(13	)		8		195
Total	$	3,599	$	415		$	(138	)	$	49	$	3,925

The allocation of the allowance for loan losses for September 30, 2019 and December 31, 2018 is presented in the table below.

	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total
Dollars in thousands
September 30, 2019
Commercial real estate	$	-	$	2,880	$	2,880
Commercial and industrial		-		532		532
Residential mortgage		26		377		403
Consumer		-		168		168
Total	$	26	$	3,957	$	3,983

December 31, 2018
Commercial real estate	$	17	$	2,666	$	2,683
Commercial and industrial		111		485		596
Residential mortgage		117		403		520
Consumer		-		179		179
Total	$	245	$	3,733	$	3,978

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

The Company’s recorded investment in loans as of September 30, 2019 and December 31, 2018 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the Company’s impairment methodology was as follows:

	September 30, 2019						December 31, 2018
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		PCI		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment
Dollars in thousands
Commercial real estate	$	2,099	$	303,394	$	1,584	$	2,456	$	247,371
Commercial and industrial		314		61,480		301		624		50,710
Residential mortgage		717		67,671		1,248		1,294		52,912
Consumer and home equity lines		1		44,283		72		7		37,907
Total	$	3,131	$	476,828	$	3,205	$	4,381	$	388,900

In conjunction with the acquisition of Clover on January 1, 2019, the acquired loan portfolio was accounted for at fair value as follows:

January 1, 2019	PCI loans			Non-PCI loans
Dollars in thousands
Contractual principal and interest at acquisition	$	6,121		$	61,097
Nonaccretable difference		(1,670	)		-
Expected cash flows at acquisition		4,451			61,097
Accretable yield		(523	)		(976	)
Basis in loans at acquisition – estimated fair value	$	3,928		$	60,121

A summary of changes in the recorded investment of acquired loans for the three and nine months ended September 30, 2019 was as follows:

Three months ended September 30, 2019	PCI loans			Non-PCI loans
Dollars in thousands
Recorded investment, beginning of period	$	3,255		$	49,896
Fair value of loans acquired during the period		-			-
Accretion		50			68
Reduction for payments, sales and foreclosures		(100	)		(4,335	)
Recorded investment, end of period	$	3,205		$	45,629
Outstanding principal balance, end of period	$	3,857		$	46,315

Nine months ended September 30, 2019	PCI loans			Non-PCI loans
Dollars in thousands
Recorded investment, beginning of period	$	-		$	-
Fair value of loans acquired during the period		3,928			60,121
Accretion		158			289
Reduction for payments, sales and foreclosures		(881	)		(14,781	)
Recorded investment, end of period	$	3,205		$	45,629
Outstanding principal balance, end of period	$	3,857		$	46,315

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

The Company did not have any investment in PCI loans for the three or nine months ended September 30, 2018.

A summary of changes in the accretable yield for PCI loans for the three and nine months ended September 30, 2019 was as follows:

	Three months ended September 30, 2019			Nine months ended September 30, 2019
Dollars in thousands
Accretable yield, beginning of period	$	415		$	-
Addition from acquisition		-			523
Accretion		(50	)		(158	)
Reclassification from nonaccretable difference		-			-
Other changes, net		-			-
Accretable yield, end of period	$	365		$	365

At September 30, 2019, the Company had pre-approved but unused lines of credit totaling $91.3 million. In management’s opinion, these unused lines of credit represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

The Company has entered into loan transactions with certain of its directors and executive officers. Such loans were made in the ordinary course of business and on substantially the same terms and collateral as those for comparable transactions prevailing at the time and did not involve more than the normal risk of collectability or present other unfavorable features.

A summary of related-party loan activity as of September 30, 2019 and 2018 is as follows:

	September 30, 2019			September 30, 2018
Dollars in thousands
Balance, beginning of year	$	393		$	1,740
Loan disbursements		628			236
Loan repayments		(1,222	)		(1,505	)
Changes in related parties		572			-
Balance, end of quarter	$	371		$	471

At September 30, 2019 and 2018, the Company had pre-approved but unused lines of credit totaling $864,000 and $145,000, respectively, to executive officers, directors and their related interests. Related party deposits totaled $3,537,000 and $2,689,000 at September 30, 2019 and 2018, respectively.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

(8)	Foreclosed Assets

The following table summarizes the activity in foreclosed assets for the nine-month periods ended September 30, 2019 and 2018:

	September 30, 2019			September 30, 2018
Dollars in thousands
Balance, beginning of year	$	1,157		$	789
Acquired from Clover		892			-
Additions		202			1,618
Proceeds from sale		(1,159	)		(330	)
Valuation adjustments		(37	)		(317	)
Gains/(losses) on sales		(12	)		22
Balance, end of quarter	$	1,043		$	1,782

The Company has three foreclosed residential real estate properties totaling $720,000 as of September 30, 2019.

The Company has two consumer mortgage loan secured by residential real estate property totaling $198,000 for which formal foreclosure proceedings are in process as of September 30, 2019.

(9)	Stock Option Plans

The Company has six share-based compensation plans in effect at September 30, 2019 and September 30, 2018. Information regarding these plans is contained in the notes to the consolidated financial statements filed as part of the Company’s 2018 Annual Report on Form 10-K. There was no compensation cost charged against income for those plans for the three and nine months ended September 30, 2019 and the three months ended September 30, 2018. The compensation cost charged against income for those plans was approximately $1,000 for the nine months ended September 30, 2018.

A summary of option activity under the stock option plans as of September 30, 2019 and changes during the nine-month period ended September 30, 2019 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, December 31, 2018		135,566		$	3.83	4.71 years
Exercised		(10,994	)		3.10
Expired		(9,166	)		4.18
Forfeited		-			-
Granted		-			-
Outstanding, September 30, 2019		115,406		$	3.88	4.08 years	$	763,233

Exercisable, September 30, 2019		115,406		$	3.88		$	763,233

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

There were no options vested or granted during the three or nine months ended September 30, 2019. As of September 30, 2019 there was no unvested grants and no remaining unrecognized compensation expense under any of the Company’s equity compensation plans.

There was no restricted stock granted or vested during the three or nine months ended September 30, 2019.

Upon exercise of stock options, the Company issues shares from authorized but unissued shares. The Company does not typically purchase shares on the open market to fulfill obligations under its equity compensation plans.

(10)	Off-Balance Sheet Risk and Commitments

The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.

A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of September 30, 2019 is as follows:

Financial instruments whose contract represents credit risk

	September 30, 2019
Dollars in thousands
Undisbursed lines of credit	$	91,325
Letters of credit		1,650
	$	92,975

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

(11)	Preferred Stock

Our articles of incorporation authorize us to issue up to 1,000,000 shares of one or more series of preferred stock. Our board of directors, in its sole discretion, has the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series, the designation of such series, and the dividend rate for each series, without any further vote or action by our shareholders. Our preferred stock may be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. There were no shares of preferred stock outstanding as of September 30, 2019.

(12)

Leases

Operating leases in which the Company is the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in bank premises, equipment and software and other liabilities, respectively, on our consolidated balance sheet as of September 30, 2019. The Bank leases its main office facility under a lease with an initial term of twenty years. The portion of the lease applicable to the building is being accounted for as a finance lease.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental collateralized borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which includes amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy expense in the condensed consolidated statements of operations for the three and nine months ended September 30, 2019.

Our leases relate to office space and bank branches with remaining lease terms of 1 to 5 years. Certain lease arrangements contain extension options which typically range from 1 to 5 years at the then-fair market rental rates. These extension options are not included in the lease term as they are not generally considered reasonably certain of exercise. As of September 30, 2019, operating lease ROU assets and liabilities were $333,000 and $322,000, respectively. Operating lease costs for the three and nine months ended September 30, 2019 were $44,000 and $131,000, respectively.

The table below summarizes other information related to our operating leases:

	Nine months ended September 30, 2019
In thousands except for percent and period data
Cash paid for amounts included in the measurement of lease liabilities Operating cash outflows for operating leases	$	128
Right-of-use assets obtained in exchange for new operating lease liabilities		-
Weighted-average remaining lease term – operating leases, in years		2.1
Weighted-average discount rate – operating leases		2.8	%

Table of Contents

CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements

The table below summarizes the maturity of remaining lease liabilities as of September 30, 2019:

	Operating Leases			Finance Lease
Dollars in thousands
2019	$	44		$	20
2020		172			72
2021		102			-
2022		13			-
Total lease payments		331			92
Less: interest		(9	)		(4	)
Present value of lease liabilities	$	322		$	88

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of Carolina Trust BancShares, Inc. (the “Company”). The Company conducts its business operations primarily through its wholly owned subsidiary, Carolina Trust Bank, a North Carolina-chartered commercial bank (which we refer to herein as the “Bank”)

Important Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to those described in this quarterly report on Form 10-Q. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Forward-looking statements contained in this report are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:

☐

deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and other adverse impacts to results of operations and financial condition;

☐

changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest-sensitive assets and liabilities;

☐

the failure of assumptions underlying the establishment of reserves for possible loan and lease losses;

☐

the impact of liquidity needs on our results of operations and financial condition;

☐

risks related to the concentration in commercial real estate;

☐

declines in commercial and residential real estate;

☐

changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;

☐

a failure in or a breach of the Company’s operational or security systems or those of its third-party service providers;

☐

our ability to obtain shareholder approval or satisfy the other closing conditions for our recently announced merger with Carolina Financial Corporation on the timelines expected or at all;

☐

that the proposed merger may distract management or otherwise adversely impact our day-to-day operations;

☐

the costs, effects, and outcomes of existing or future litigation, including any litigation related to our merger activity;

Table of Contents

☐

changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including demand for the Company’s products and services and commercial and residential real estate development and prices;

☐

changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;

☐

the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, financial technology companies, and other financial institutions operating in the Company’s market area and elsewhere, together with such competitors offering banking products and services by mail, telephone and the Internet;

☐

the Company’s ability to attract and retain key personnel;

☐

changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes;

☐

changes in political and economic conditions;

☐

the Company’s ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result; and

☐

the success at managing the risks involved in the foregoing.

Except as otherwise disclosed, forward-looking statements do not reflect any changes in laws, regulations or regulatory interpretations after the date as of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

Note Regarding Use of Non-GAAP Financial Measures

This quarterly report presents certain non-GAAP (Generally Accepted Accounting Principles) financial measures including, without limitation, adjusted net income. Non-GAAP financial measures include numerical measures of a company’s historical financial performance, financial position, or cash flows that exclude (or include) amounts, or that are subject to adjustments that have the effect of excluding (or including) amounts, that are included (or, as applicable, excluded) in the most directly comparable measures calculated and presented in accordance with GAAP. The Company has presented the adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures where applicable. The Company considers these adjustments to the GAAP financial measures to be relevant to ongoing operating results. The Company believes that excluding the amounts associated with these adjustments to present the non-GAAP financial measures provides a meaningful base for the period-to-period comparisons, which will assist investors and analysts in analyzing the operating results or financial position of the Company. The non-GAAP financial measures are used by management to assess the performance of the Company’s business, including for presentations of Company performance to investors. The Company further believes that presenting the non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that applied by management. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included with this report.

Recent Developments

On July 15, 2019, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Carolina Financial Corporation (“Carolina Financial”), the holding company for CresCom Bank, Charleston, South Carolina. Under the Merger Agreement, it is proposed that the Company will merge with and into Carolina Financial, and the Bank will merge with and into CresCom Bank. Subject to the terms and conditions of the Merger Agreement, the Company’s shareholders would receive 0.3000 shares of Carolina Financial common stock or $10.57 in cash for each share of the Company’s common stock, subject to election and proration such that the aggregate merger consideration will consist of 90% Carolina Financial common stock and 10% cash. The Company has called a special meeting of shareholders for December 18, 2019, to vote on approval of the Merger Agreement.

On January 1, 2019, the Company completed its previously announced merger with Clover Community Bankshares, Inc. (“Clover”), parent company of Clover Community Bank, Clover, South Carolina. The fair market value of loans and deposits acquired on the merger date was $64.0 million and $111.6 million, respectively. For additional discussion of the Company’s acquisition of Clover, see “Note 3 – Business Combination” in the Company’s Notes to Condensed Consolidated Financial Statements included under Part 1 – Item 1 of this Quarterly Report.

Table of Contents

Discussion of Financial Condition at September 30, 2019 and December 31, 2018

During the period from December 31, 2018 to September 30, 2019, total assets increased by approximately $147.4 million, or 31.03%. The increase was mostly attributable to the acquisition of Clover on January 1, 2019, and was reflected primarily in cash and due from banks, investment securities available for sale, and loans. The increase in total assets was funded by an increase in deposits and an increase in advances from the Federal Home Loan Bank. Interest-earning deposits with banks, and investment securities including investment securities available for sale and equity securities at September 30, 2019 totaled $92.8 million compared to $53.6 million at December 31, 2018.

The Company’s investment securities portfolio as of September 30, 2019 totaled $64.5 million, an increase of $31.9 million when compared to the $32.6 million reported at December 31, 2018. This increase included $39.6 million acquired from Clover that was partially offset by decreases from called bonds and principal paydowns of amortizing securities. At September 30, 2019, the Company had a net unrealized gain on available-for-sale securities of $938,000, net of tax, as compared to a net unrealized loss of $549,000, net of tax, at December 31, 2018.

At September 30, 2019, net loans constituted 76.97% of the Company’s total assets. Net loans increased by $89.9 million from December 31, 2018 to September 30, 2019. The increase in loans since December 31, 2018 included $64.0 million acquired from Clover on the effective date of the merger, January 1, 2019, and $25.9 million in additional growth. Commercial real estate experienced the largest amount of growth in 2019 at $57.3 million or 22.92%. Management’s continued goal is to grow the loan portfolio to provide maximum income proportionate with acceptable risks.

As part of the ongoing monitoring of credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the local, state and national economic outlook, (ii) concentrations of credit, (iii) interest rate movements, (iv) volume, mix and size of loans, and (v) delinquencies. The Company also has a Senior Credit Officer who monitors risk grades on an ongoing basis. Furthermore, the Company employs a third-party contractor to perform an annual loan review. The scope of the review is typically 50 – 60% of the loan portfolio in any given year.

At September 30, 2019 and December 31, 2018 impaired loans, which consisted primarily of troubled debt restructurings and non-accrual loans, were $3.1 million and $4.4 million, respectively. The Company also had $3.2 million of PCI loans at September 30, 2019. See Notes 3 and 7 of the Notes to Condensed Consolidated Financial Statements for additional discussion of PCI loans. Recorded investment in impaired loans of $0.5 million and $1.7 million had related allowances for loan losses totaling $26,000 and $245,000 at September 30, 2019 and December 31, 2018, respectively. There were $2.6 million of impaired loans without a specific allowance at both September 30, 2019 and December 31, 2018. Impaired loans at September 30, 2019 and December 31, 2018 consisted primarily of commercial real estate, commercial and industrial and residential mortgage loans. At September 30, 2019, there were eight loans totaling approximately $2.6 million, which were restructured to facilitate the borrowers’ ability to repay the outstanding balances. These eight restructured loans are considered troubled debt restructurings at September 30, 2019 and have specific reserves amounting to approximately $26,000 at such date. Of these eight loans, seven loans totaling $2.0 million were accruing interest at September 30, 2019. At December 31, 2018, there were ten loans totaling $3.9 million which were restructured to facilitate the borrowers’ ability to repay the outstanding balance, and of these ten loans, nine loans totaling $3.1 million were accruing interest. Reserves for loans not considered impaired were approximately $3.9 million and $3.7 million at September 30, 2019 and December 31, 2018, respectively. The allowance for loan losses at September 30, 2019 and December 31, 2018 was 0.82% and 1.01%, respectively, of gross loans outstanding. The decrease in the allowance for loan losses as a percentage of gross loans is mainly due to the addition of the Clover loan portfolio and improved credit quality.

Table of Contents

Identified problem and impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral-dependent. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change. The adequacy of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, collateral values, loan concentrations, changes in the mix and volume of the loan portfolio, trends in portfolio credit quality, including delinquency and charge-off rates and current economic conditions that may affect a borrower’s ability to repay. Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment.

Non-interest earning assets consisting of cash and due from banks, bank premises, equipment and software, foreclosed assets and other assets increased to $26.0 million at September 30, 2019 compared to $21.0 million at December 31, 2018. The increase is attributed mostly to the increase in cash and due from banks of $2.9 million, or 27.00% and the increase in bank premises, equipment and software of $2.7 million or 45.08%. At September 30, 2019, foreclosed assets consisted of five properties with an aggregate value of $1.0 million. Of these five properties, one property with a value of $524,000 was acquired in the Clover merger.

Deposit accounts represent the Company’s primary funding source and consist of non-interest bearing demand deposits, interest-bearing demand deposits, savings accounts and time deposits. Total deposits increased by approximately $121.0 million, or 30.62%, for the nine months ended September 30, 2019. Of this growth, $111.6 million is due to the acquisition of Clover and the additional $9.4 million was organic growth. The total increase includes increases in noninterest-earning demand deposits of $31.4 million, or 51.30%, interest-earning demand deposits of $49.1 million, or 34.36%, savings deposits of $14.6 million, or 62.63%, and time deposits of $25.2 million, or 14.97%.

Federal Home Loan Bank advances increased $4.1 million to $20.2 million at September 30, 2019 up from the $16.1 million reported at December 31, 2018.

Stockholders’ equity amounted to $71.4 million, or 11.47%, of total assets at September 30, 2019, compared to $50.3 million, or 10.58%, of total assets at December 31, 2018.

Table of Contents

Discussion of Results of Operations

for the Three Months ended September 30, 2019 and 2018

Net Income

Net income for the three months ended September 30, 2019 was $1,427,000 compared to $915,000 for the third quarter of 2018, an increase of $512,000. Basic and diluted earnings per common share were both $0.15 for the three months ended September 30, 2019 compared to $0.13 for the third quarter of 2018. During the third quarter of 2019, the Company incurred $585,000 in merger-related expenses mainly due to the pending merger with Carolina Financial Corporation. If the merger expenses, and certain other income statement items including accretion of discounts recorded on loans and deposits and amortization of the core deposit intangibles, net of tax, were excluded, net income for third quarter 2019 would have been $2,009,000, which is a non-GAAP (Generally Accepted Accounting Principles) measurement. Please refer to “Note Regarding Use of non-GAAP Financial Measures” above and the non-GAAP reconciliation table below for additional information.

Net Interest Income

Net interest income is the primary source of earnings for the Company. Net interest income is the difference between interest income on earning assets (primarily loans and investment securities) and the interest expense on deposits and other interest-bearing liabilities. Net interest spread is the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. Net interest margin is the ratio of net interest income to average earning assets for the period. Changes in net interest income result from changes in interest rates and the volume and mix of earning assets and interest-bearing liabilities.

Net interest income for the quarter ended September 30, 2019 totaled $5,758,000 compared to $4,243,000 for the quarter ended September 30, 2018. The Company’s net interest spread was approximately 3.66% and 3.53% for the quarters ended September 30, 2019 and 2018, respectively. Net interest margin on average interest earning assets was 3.97% and 3.82% for the quarters ended September 30, 2019 and 2018, respectively. Net interest spread increased by 13 basis points, and net interest margin increased by 15 basis points. Accretion on the discount of purchased loans increased net interest margin by 5 basis points for the quarter ended September 30, 2019. The yield on earning assets increased by 22 basis points, from 4.87% for the quarter ended September 30, 2018 to 5.09% for the quarter ended September 30, 2019. Comparatively, the cost of funds, including deposits, borrowings and holding company debt, was 1.18% at the end of the third quarter of 2019, an increase of 6 basis points when compared to 1.12% at the end of the third quarter of 2018. The improvement in the yield on earning assets and the net interest margin was softened slightly by the shift in the earning asset mix, as the ratio of average loans to average earning assets declined from 85% in third quarter 2018 to 83% in the third quarter of 2019. The additional liquidity maintained in interest earning cash and securities resulted in those categories increasing from 15% to 17% as a percentage of earning assets for the same periods.

The margin and asset yield increases were attributed both to loan and investment yields which increased by 25 basis points and 23 basis points, respectively. For the quarter ending September 30, 2019, average yield on loans and investments was 5.57% and 2.81%, respectively. Although loan yields were impacted by prime rate increases of 25 basis points in each of September 2018 and December 2018, the benefit was partially offset in the third quarter of 2019 due to prime rate decreases of 25 basis points each on August 1, 2019 and on September 19, 2019. The loan yields also benefited from accretion of the discounts on purchased loans, while the cost of funds was increased by the accretion of the discounts on acquired time deposits. The net impact of loan and deposit accretion added 5 basis points to the net interest margin.

Table of Contents

Provision for Loan Losses

The Company records a provision for loan losses based upon known problem loans and estimated probable losses in the existing loan portfolio. The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key components, which are a specific allowance for identified problem or impaired loans and a model estimating probable losses for the remainder of the portfolio.

The Company recorded a recovery of loan losses of ($37,000) for the quarter ended September 30, 2019 and a provision for loan losses of $75,000 for the quarter ended September 30, 2018. This decrease of $112,000 in the provision for loan losses is due to continued improvement in credit quality. The ratio of the allowance for loan and lease losses as a percentage of total loans was 0.82% and 1.01% at September 30, 2019 and December 31, 2018, respectively. The decrease of 19 basis points is due in part to the addition of the Clover loan portfolio. No additional allowance was recorded in connection with the Clover acquisition since the discount credit marks reflect management’s estimate of an amount adequate to provide for probable losses inherent in the portfolio of acquired loans. The decrease is also due to a decrease in the historical loss factors of all the pools except for the commercial and industrial pool. The provision for loan losses is charged to operations to bring the allowance to a level deemed appropriate based on management’s evaluation of the adequacy of the allowance for loan losses.

The following table sets forth information with respect to the asset quality of our loan portfolio as of the dates indicated. The non-performing loans exclude PCI loans.

	Loans Outstanding		Non- Performing Loans		Net Charge-offs (Recoveries)			Allowance for Loan Losses
			(Dollars in thousands)

September 30, 2019	$	483,164	$	1,203	$	111		$	3,983
June 30, 2019		485,435		1,149		(2	)		4,146
March 31, 2019		474,239		1,035		(13	)		4,068
December 31, 2018		393,282		1,051		(133	)		3,978
September 30, 2018		380,746		1,057		(6	)		3,925
June 30, 2018		374,026		1,105		95			3,844
March 31, 2018		367,039		1,125		71			3,780
December 31, 2017		348,679		2,746		(26	)		3,599
September 30, 2017		340,038		2,142		130			3,423
June 30, 2017		324,349		2,896		322			3,213
March 31, 2017		311,609		2,937		73			3,471
December 31, 2016		308,492		2,875		(303	)		3,393
September 30, 2016		301,420		3,579		56			3,687
June 30, 2016		293,157		1,739		(20	)		3,541
March 31, 2016		297,746		2,100		122			3,521
December 31, 2015		292,362		2,164		2			3,723
September 30, 2015		286,469		2,079		(109	)		3,825
June 30, 2015		278,305		3,335		68			3,886
March 31, 2015		257,919		3,562		48			3,954
December 31, 2014		244,646		4,166		162			4,002

Table of Contents

Non-interest Income

Non-interest income for the quarter ended September 30, 2019 totaled $534,000, an increase of $160,000 over the $374,000 reported for the quarter ended September 30, 2018. The primary factors contributing to the overall increase were the increase in mortgage fee income of $135,000, the increase in interchange fee income, net of $57,000, and the increase in overdraft fees on deposits of $61,000 for the quarter ended September 30, 2019. Offsetting these increases, was a $135,000 change in the value of equity investments from a gain of $35,000 for the quarter ended September 30, 2018 to a loss of $100,000 for the quarter ended September 30, 2019. The growth in mortgage fee income was partially attributable to the addition of experienced mortgage specialists who are in the South Carolina market and to a renewed emphasis by management on meeting the demand for mortgages in the Bank’s existing markets. The interchange fees and overdraft fees on deposits increased as a result of an increase in the Bank’s checking account customer base for which the average total balance grew by 41% from September 30, 2018 to September 30, 2019, primarily due to the acquisition of Clover, and as a result of an overall increase in debit card usage. The unrealized losses in equity securities were driven by a decrease in the market value of the Bank’s investment security holdings that trade in public markets.

Non-interest Expense

Non-interest expenses for the quarters ended September 30, 2019 and 2018 totaled $4,406,000 and $3,327,000, respectively. The $1.1 million increase was due in part to increases in salaries and benefits, up $463,000, and in data processing expenses, up $80,000 due to the additional employees and customer accounts following the acquisition of Clover on January 1, 2019. Amortization of core deposit intangibles increased by $129,000 due to the core deposit intangible recognized on January 1, 2019 from the valuation of Clover’s non-maturing deposits. Merger expenses increased by $428,000 due to the pending merger with Carolina Financial Corporation.

Offsetting the impact of increases in other noninterest expenses that were mostly attributed to the growth from Clover acquisition were decreases in foreclosed asset expenses of $112,000 and insurance expenses of $60,000 in the quarter ending September 30, 2019 as compared to the quarter ending September 30, 2018. The Bank’s foreclosed asset expenses have declined, as foreclosed assets have decreased over the past 12 months by $739,000. The decrease in insurance expenses is mainly due to the application of the Small Bank Credit Balance on the FDIC Insurance assessment for June 30, 2019 that was due in September 2019.

Income Tax Expense

The Company recorded income tax expense of $496,000 for the three months ended September 30, 2019 resulting in an effective tax rate of 26%. For the same period in 2018, the Company recorded income tax expense of $300,000 with an effective tax rate of 25%.

Discussion of Results of Operations for the Nine Months ended September 30, 2019 and 2018

Net Income and Net Income Available to Common Shareholders

Net income for the nine months ended September 30, 2019 was $3,582,000 compared to $2,006,000 for the nine months ended September 30, 2018, an increase of $1,576,000. Basic and diluted earnings per common share were $0.39 and $0.38, respectively, for the nine months ended September 30, 2019 and $0.33 and $0.32, respectively, for the nine months ended September 30, 2018.

Table of Contents

Net Interest Income

Net interest income for the nine months ended September 30, 2019 totaled $17,271,000 compared to $12,053,000 for the nine months ended September 30, 2018. The Company’s net interest spread was approximately 3.75% and 3.56% for the nine months ended September 30, 2019 and 2018, respectively. Net interest margin on average interest earning assets was 4.05% and 3.79% for the nine months ended September 30, 2019 and 2018, respectively. The increase in net interest spread was 19 basis points and the increase in net interest margin was 26 basis points. Accretion on the discount of purchased loans increased net interest margin by 8 basis points for the nine months ended September 30, 2019.

Provision for Loan Losses

The Company recorded provision for loan losses of $116,000 and $415,000 for the nine months ended September 30, 2019 and 2018, respectively. This decrease in the provision for loan losses is due to continued improvement in credit quality and to a decrease in the historical loss factors of all the pools except for the commercial and industrial pool. The provision for loan losses is charged to operations to bring the allowance to a level deemed appropriate based on management’s evaluation of the adequacy of the allowance for loan losses.

Non-interest Income

Non-interest income for the nine months ended September 30, 2019 and 2018 totaled $1,818,000 and $1,070,000, respectively. The increase of $748,000 consists of overdraft fees on deposits, interchange fee income, and mortgage fee income. Overdraft fees on deposits increased by $130,000 and interchange fee income increased by $155,000 as a result of an increase in the Bank’s checking account customer base for which the average total balance grew by 41% from September 30, 2018 to September 30, 2019 primarily due to the acquisition of Clover, and as a result of an overall increase in debit card usage. Mortgage fee income increased by $342,000 due in part to the addition of experienced mortgage specialists in the South Carolina market and a renewed emphasis by management on meeting the demand for mortgages in the Bank’s existing markets.

Non-interest Expense

Non-interest expenses for the nine months ended September 30, 2019 and 2018 totaled $14,305,000 and $10,043,000, respectively. The $4,262,000 increase was due in part to an increase of $1,876,000 in merger expenses related to the Clover merger and the pending merger with Carolina Financial Corporation, an increase of $1,486,000 in compensation expense due to the addition of employees following the acquisition of Clover on January 1, 2019, and an increase of $398,000 of amortization of core deposit intangibles due to the core deposit intangible recognized on January 1, 2019 from the valuation of Clover’s non-maturing deposits. Slightly offsetting these increases was a $336,000 decrease in foreclosed asset expenses due to a decline in foreclosed assets over the past 12 months of $739,000.

Income Tax Expense

The Company recorded income tax expense of $1,086,000 for the nine months ended September 30, 2019, resulting in an effective tax rate of 23%. For the same period in 2018, the Company recorded income tax expense of $659,000, with an effective tax rate of 25%.

Table of Contents

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost-effective manner. The Company’s principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid assets, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by interest rates, general economic conditions and competition. Liquid assets, which consist of cash and due from banks, interest-earning deposits with banks, certificates of deposit with banks, investment securities classified as available-for-sale, and equity securities represented 17.49% and 13.89% of total assets at September 30, 2019 and December 31, 2018, respectively.

Should the need arise, management believes the Company would have the capability to sell securities classified as available-for-sale or to borrow funds as necessary to meet the Company’s cash flow demands. The Company has established credit lines with other financial institutions to purchase up to $38 million in federal funds and to borrow up to $10 million under a reverse repurchase agreement. There were no borrowings outstanding against these credit lines at September 30, 2019. The Company has also established a credit line with the Federal Home Loan Bank of Atlanta. The credit line is secured by a portion of the Company’s loan portfolio that qualifies under FHLB guidelines as eligible collateral. Total availability, based on collateral pledged at September 30, 2019 was $106.4 million, of which $20.2 million was advanced and $15 million was securing a letter of credit.

Total deposits were $516.1 million and $395.1 million at September 30, 2019 and December 31, 2018, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate-sensitive. Time deposits represented 37.52% and 42.63% of total deposits at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019 and December 31, 2018, the Company had brokered time deposits of $14.1 million and $15.0 million, respectively. The Company also obtains time accounts by connecting with institutional depositors through an online listing service. At September 30, 2019 and December 31, 2018, respectively, the deposits attributed to the listing service were $14.4 million and $10.2 million, respectively. Management accepts time deposits from outside the Bank’s local market area when such funding sources are necessary to fund growth and the rates paid are comparable to rates offered to retail customers or lower. Management believes most time deposits are relationship-oriented. While the Company will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

Management believes that the Company’s current sources of funds provide adequate liquidity for its current cash flow needs.

Capital Resources

Future growth and expansion of the Company are dictated by the ability to create capital, which is generated principally by retained earnings. Adequacy of the Company’s and the Bank’s capital is also monitored to ensure compliance with regulatory requirements. One of management’s primary objectives is to maintain a strong capital position in order to warrant confidence from customers, investors, bank regulators and stockholders. A measure of capital position is capital adequacy, defined as the amount of capital needed to maintain future asset growth and absorb unforeseen losses. Regulators consider a variety of factors in determining an institution’s capital adequacy, including the quality and stability of earnings, asset quality, guidance and expertise and liquidity. Regulatory guidelines place an emphasis on stockholders’ equity in relationship to total assets adjusted for risk.

Table of Contents

Regulatory capital rules require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

Management considers the Company and the Bank to be well-capitalized and expects to be able to meet future needs caused by growth and expansion, as well as capital requirements implemented by the regulatory agencies. In the course of its ongoing capital management, the Company evaluates regularly any potential need for additional capital both at the Company and subsidiary Bank. The Company considers various alternatives such as debt or equity issued by the Company, from which proceeds may be invested in the Bank to support asset growth and to increase regulatory capital ratios.

The table below presents the regulatory capital ratios for the Bank as of the date indicated.

	At September 30, 2019

	Actual Ratio			Minimum Requirement			Well-Capitalized Requirement
Common equity tier 1 capital ratio		13.09	%		7.00	%		6.50	%
Total risk-based capital ratio		13.86	%		10.50	%		10.00	%
Tier 1 risk-based capital ratio		13.09	%		8.50	%		8.00	%
Tier 1 leverage ratio		11.22	%		4.00	%		5.00	%

Non-GAAP Reconciliation

The table below presents the Non-GAAP reconciliation for adjusted net income for the period.

	Three months ended September 30, 2019
Dollars in thousands
Net income	$	1,427
Adjustments:
Merger expenses		585
Accretion of purchased loan discounts		(78	)
Accretion of purchased time deposit discounts		8
Amortization of core deposit intangibles		138
Net tax effect of adjustments		(71	)
Adjusted net income	$	2,009

Table of Contents

Item 4. - Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that it is able to record, process, summarize, and report in a timely manner the information required to be disclosed in the reports it files under the Exchange Act.

(b)

Changes in Internal Control Over Financial Reporting. No change in the Company’s internal control over financial reporting occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

Part II. OTHER INFORMATION

Item 6.

Exhibits

Exhibit #		Description

2.1		Agreement and Plan of Merger and Reorganization dated July 15, 2019, by and between the Company and Carolina Financial Corporation (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on July 18, 2019)

31.1		Certification of the Principal Executive Officer pursuant to Rule 13a-14(a)

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)

32		Section 1350 Certification

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2019 and December 31, 2018; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2019 and 2018; (iii) Condensed Consolidated Statements of Operations (Unaudited) for the Nine Months Ended September 30, 2019 and 2018 (iv) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended September 30, 2019 and 2018; (v) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Nine Months Ended September 30, 2019 and 2018; (vi) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended September 30, 2019 and 2018; (vii) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2019 and 2018; (viii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2019 and 2018; and (ix) Notes to Condensed Consolidated Financial Statements (Unaudited)

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAROLINA TRUST BANCSHARES, INC.

Date: November 13, 2019	By:	/s/ Jerry L. Ocheltree

		Jerry L. Ocheltree
		President and Chief Executive Officer

Date: November 13, 2019
	By:	/s/ Edwin E. Laws

		Edwin E. Laws
		Executive Vice President and Chief Financial Officer

Maplebear (NASDAQ:CART)
Historical Stock Chart
From Mar 2024 to Apr 2024

Maplebear (NASDAQ:CART)
Historical Stock Chart
From Apr 2023 to Apr 2024

Boards:

Quotes:

Boards

News

Market Data

Markets

Discover

CART Maplebear Inc

Latest CART Messages

Loading Messages....

Carolina Trust Bancshares, Inc. News

Loading Messages....

Your Recent History