Attached files
file | filename |
---|---|
EX-32 - EXHIBIT 32 - Carolina Trust BancShares, Inc. | ba00007x1_ex32.htm |
EX-31.2 - EXHIBIT 31.2 - Carolina Trust BancShares, Inc. | ba00007x1_ex31-2.htm |
EX-31.1 - EXHIBIT 31.1 - Carolina Trust BancShares, Inc. | ba00007x1_ex31-1.htm |
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, 2017
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)
Not Applicable
|
(Former name, former address and former fiscal year, if changed since last report)
|
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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
|
☐ (Do not check if smaller reporting company)
|
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 10, 2017 was 4,656,880
TABLE OF CONTENTS
(Dollars in thousands, except share and per share data)
September 30,
2017
|
December 31,
2016*
|
|||||||
Assets
|
||||||||
Cash and due from banks
|
$
|
6,285
|
$
|
8,063
|
||||
Interest-earning deposits with banks
|
7,594
|
18,086
|
||||||
Cash and cash equivalents
|
13,879
|
26,149
|
||||||
Certificates of deposit with banks
|
1,498
|
1,498
|
||||||
Investment securities available-for-sale, at fair value (amortized cost $28,808 and $27,459 at September 30, 2017 and December 31, 2016, respectively)
|
28,333
|
27,063
|
||||||
Federal Home Loan Bank stock, at cost
|
1,192
|
942
|
||||||
Loans
|
340,038
|
308,492
|
||||||
Less: Allowance for loan and lease losses
|
(3,423
|
)
|
(3,393
|
)
|
||||
Net Loans
|
336,615
|
305,099
|
||||||
Bank-owned life insurance
|
7,144
|
1,498
|
||||||
Accrued interest receivable
|
975
|
945
|
||||||
Bank premises, equipment and software
|
6,533
|
6,388
|
||||||
Foreclosed assets
|
467
|
1,011
|
||||||
Core deposit intangible, net of accumulated amortization of $702 and $667 at September 30, 2017 and December 31, 2016, respectively
|
83
|
117
|
||||||
Other assets
|
3,578
|
4,207
|
||||||
Total Assets
|
$
|
400,297
|
$
|
374,917
|
||||
Liabilities and Stockholders’ Equity
|
||||||||
Noninterest-earning demand deposits
|
$
|
46,920
|
$
|
38,593
|
||||
Interest-earning demand deposits
|
117,158
|
99,084
|
||||||
Savings
|
21,369
|
21,059
|
||||||
Time deposits
|
152,142
|
159,929
|
||||||
Total deposits
|
337,589
|
318,665
|
||||||
Capital lease obligation
|
223
|
268
|
||||||
Federal Home Loan Bank advances
|
20,100
|
14,100
|
||||||
Long term subordinated debt
|
9,658
|
9,605
|
||||||
Accrued interest payable
|
450
|
287
|
||||||
Other liabilities
|
2,512
|
2,959
|
||||||
Total liabilities
|
370,532
|
345,884
|
||||||
Common stock warrant
|
426
|
426
|
||||||
Common stock, $2.50 par value; 10,000,000 shares authorized; 4,654,880 and 4,650,808 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
|
11,637
|
11,627
|
||||||
Additional paid-in capital
|
13,004
|
12,988
|
||||||
Retained earnings
|
4,999
|
4,241
|
||||||
Accumulated other comprehensive loss
|
(301
|
)
|
(249
|
)
|
||||
Total stockholders’ equity
|
29,765
|
29,033
|
||||||
Total Liabilities and Stockholders’ Equity
|
$
|
400,297
|
$
|
374,917
|
*Derived from Carolina Trust BancShares, Inc.’s audited financial statements included in its 2016 Annual Report on Form 10-K
See accompanying notes to Condensed Consolidated Financial Statements.
2
CAROLINA TRUST BANCSHARES, INC.
(Dollars in thousands, except share and per share data)
Three Months Ended September 30,
|
||||||||
2017
|
2016
|
|||||||
Interest Income
|
||||||||
Interest and fees on loans
|
$
|
4,215
|
$
|
3,727
|
||||
Interest on investment securities and cash
|
219
|
239
|
||||||
Total interest income
|
4,434
|
3,966
|
||||||
Interest Expense
|
||||||||
Interest expense non-maturity deposits
|
131
|
78
|
||||||
Interest expense time deposits
|
509
|
566
|
||||||
Interest expense borrowed funds
|
60
|
43
|
||||||
Interest expense capital lease
|
4
|
5
|
||||||
Interest expense on subordinated debt
|
190
|
-
|
||||||
Total interest expense
|
894
|
692
|
||||||
Net interest income
|
3,540
|
3,274
|
||||||
Loan loss provision
|
340
|
202
|
||||||
Net interest income after loan loss provision
|
3,200
|
3,072
|
||||||
Noninterest income
|
||||||||
Overdraft fees on deposits
|
117
|
102
|
||||||
Interchange fee income
|
118
|
111
|
||||||
Service charges on deposits
|
16
|
13
|
||||||
Mortgage fee income
|
32
|
22
|
||||||
Customer service fees
|
13
|
16
|
||||||
ATM income
|
7
|
8
|
||||||
Bank-owned life insurance income
|
55
|
13
|
||||||
Gain on the sale of securities
|
-
|
55
|
||||||
Other income
|
9
|
9
|
||||||
Total noninterest income
|
367
|
349
|
||||||
Noninterest expense
|
||||||||
Salaries & benefits expense
|
1,762
|
1,691
|
||||||
Occupancy expense
|
212
|
230
|
||||||
Furniture, fixture & equipment expense
|
142
|
134
|
||||||
Data processing expense
|
201
|
215
|
||||||
Office supplies expense
|
16
|
16
|
||||||
Professional fees
|
91
|
185
|
||||||
Advertising and marketing
|
33
|
34
|
||||||
Insurance
|
77
|
83
|
||||||
Foreclosed asset expense, net
|
22
|
148
|
||||||
Check card expense
|
85
|
95
|
||||||
Loan expense
|
55
|
51
|
||||||
Stockholder expense
|
26
|
46
|
||||||
Directors fees and expenses
|
59
|
47
|
||||||
Telephone expense
|
76
|
56
|
||||||
Core deposit intangible amortization expense
|
12
|
15
|
||||||
Other operating expense
|
177
|
126
|
||||||
Total noninterest expense
|
3,046
|
3,172
|
||||||
Pre-tax income
|
521
|
249
|
||||||
Income tax expense
|
170
|
164
|
||||||
Net income
|
351
|
85
|
||||||
Less income attributable to noncontrolling interest
|
-
|
58
|
||||||
Net income attributable to Carolina Trust BancShares, Inc.
|
$
|
351
|
$
|
27
|
||||
Earnings per share
|
||||||||
Basic earnings per common share
|
$
|
0.08
|
$
|
0.01
|
||||
Diluted earnings per common share
|
$
|
0.07
|
$
|
0.01
|
||||
Weighted average common shares outstanding
|
4,654,880
|
4,650,221
|
||||||
Diluted average common shares outstanding
|
4,740,660
|
4,699,895
|
See accompanying notes to Condensed Consolidated Financial Statements.
3
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except share and per share data)
2017
|
2016
|
|||||||
Interest Income
|
||||||||
Interest and fees on loans
|
$
|
12,091
|
$
|
11,286
|
||||
Interest on investment securities and cash
|
686
|
790
|
||||||
Total interest income
|
12,777
|
12,076
|
||||||
Interest Expense
|
||||||||
Interest expense non-maturity deposits
|
311
|
202
|
||||||
Interest expense time deposits
|
1,515
|
1,684
|
||||||
Interest expense borrowed funds
|
156
|
132
|
||||||
Interest expense capital lease
|
13
|
16
|
||||||
Interest expense on subordinated debt
|
568
|
-
|
||||||
Total interest expense
|
2,563
|
2,034
|
||||||
Net interest income
|
10,214
|
10,042
|
||||||
Loan loss provision
|
555
|
122
|
||||||
Net interest income after loan loss provision
|
9,659
|
9,920
|
||||||
Noninterest income
|
||||||||
Overdraft fees on deposits
|
294
|
303
|
||||||
Interchange fee income
|
361
|
329
|
||||||
Service charges on deposits
|
41
|
41
|
||||||
Mortgage fee income
|
73
|
72
|
||||||
Customer service fees
|
40
|
43
|
||||||
ATM income
|
20
|
20
|
||||||
Bank-owned life insurance income
|
146
|
39
|
||||||
Gain on sale of securities
|
-
|
55
|
||||||
Other income
|
22
|
45
|
||||||
Total noninterest income
|
997
|
947
|
||||||
Noninterest expense
|
||||||||
Salaries & benefits expense
|
5,279
|
5,105
|
||||||
Occupancy expense
|
636
|
657
|
||||||
Furniture, fixture & equipment expense
|
435
|
393
|
||||||
Data processing expense
|
738
|
556
|
||||||
Office supplies expense
|
59
|
46
|
||||||
Professional fees
|
333
|
504
|
||||||
Advertising and marketing
|
104
|
108
|
||||||
Insurance
|
223
|
244
|
||||||
Foreclosed asset expense, net
|
283
|
379
|
||||||
Check card expense
|
265
|
274
|
||||||
Loan expense
|
146
|
117
|
||||||
Stockholder expense
|
138
|
86
|
||||||
Directors fees and expenses
|
198
|
155
|
||||||
Telephone expense
|
222
|
175
|
||||||
Core deposit intangible amortization expense
|
35
|
44
|
||||||
Other operating expense
|
436
|
402
|
||||||
Total noninterest expense
|
9,530
|
9,245
|
||||||
Pre-tax income
|
1,126
|
1,622
|
||||||
Income tax expense
|
368
|
663
|
||||||
Net income
|
758
|
959
|
||||||
Less income attributable to noncontrolling interest
|
-
|
175
|
||||||
Net income attributable to Carolina Trust BancShares, Inc.
|
$
|
758
|
$
|
784
|
||||
Earnings per share
|
||||||||
Basic earnings per common share
|
$
|
0.16
|
$
|
0.17
|
||||
Diluted earnings per common share
|
$
|
0.16
|
$
|
0.17
|
||||
Weighted average common shares outstanding
|
4,654,717
|
4,649,781
|
||||||
Diluted average common shares outstanding
|
4,732,557
|
4,696,894
|
See accompanying notes to Condensed Consolidated Financial Statements.
4
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
2017
|
2016
|
|||||||
Net income
|
$
|
351
|
$
|
85
|
||||
Other comprehensive income (loss):
|
||||||||
Unrealized gain (loss) on investment securities:
|
||||||||
Reclassification of securities gains recognized in net income
|
-
|
(55
|
)
|
|||||
Deferred income tax benefit
|
-
|
20
|
||||||
Unrealized holding losses arising during period
|
(256
|
)
|
(92
|
)
|
||||
Deferred income tax benefit
|
92
|
35
|
||||||
Total other comprehensive loss
|
(164
|
)
|
(92
|
)
|
||||
Total comprehensive income (loss)
|
$
|
187
|
$
|
(7
|
)
|
|||
See accompanying notes to Condensed Consolidated Financial Statements.
|
5
CAROLINA TRUST BANCSHARES, INC.
(Dollars in thousands)
Nine Months Ended September 30,
|
||||||||
2017
|
2016
|
|||||||
Net income
|
$
|
758
|
$
|
959
|
||||
Other comprehensive income (loss):
|
||||||||
Unrealized gain (loss) on investment securities:
|
||||||||
Reclassification of securities gains recognized in net income
|
-
|
(55
|
)
|
|||||
Deferred income tax benefit
|
-
|
20
|
||||||
Unrealized holding gains (losses) arising during period
|
(78
|
)
|
715
|
|||||
Deferred income tax benefit (expense)
|
26
|
(267
|
)
|
|||||
Total other comprehensive income (loss)
|
(52
|
)
|
413
|
|||||
Total comprehensive income
|
$
|
706
|
$
|
1,372
|
||||
See accompanying notes to Condensed Consolidated Financial Statements.
|
6
CAROLINA TRUST BANCSHARES, INC.
(Unaudited)
September 30, 2017 and 2016
(Dollars in thousands)
2017 Shares
Outstanding
|
September 30,
2017
|
2016 Shares
Outstanding
|
September 30,
2016
|
|||||||||||||
Common stock warrant
|
$
|
426
|
$
|
426
|
||||||||||||
Common stock, $2.50 par value
|
||||||||||||||||
Balance, beginning of year
|
4,650,808
|
$
|
11,627
|
4,646,225
|
$
|
11,616
|
||||||||||
Exercise of stock options
|
738
|
2
|
1,000
|
2
|
||||||||||||
Restricted stock vesting
|
3,334
|
8
|
3,333
|
8
|
||||||||||||
Balance, end of period
|
4,654,880
|
$
|
11,637
|
4,650,558
|
$
|
11,626
|
||||||||||
Additional paid-in capital
|
||||||||||||||||
Balance, beginning of year
|
$
|
12,988
|
$
|
12,936
|
||||||||||||
Stock-based compensation
|
23
|
48
|
||||||||||||||
Exercise of stock options
|
1
|
-
|
||||||||||||||
Restricted stock vesting
|
(8
|
)
|
(8
|
)
|
||||||||||||
Balance, end of period
|
$
|
13,004
|
$
|
12,976
|
||||||||||||
Retained earnings
|
||||||||||||||||
Balance, beginning of year
|
$
|
4,241
|
$
|
3,122
|
||||||||||||
Net income
|
758
|
959
|
||||||||||||||
Dividends declared on preferred stock
|
-
|
(175
|
)
|
|||||||||||||
Balance, end of period
|
$
|
4,999
|
$
|
3,906
|
||||||||||||
Accumulated other comprehensive income (loss)
|
||||||||||||||||
Balance, beginning of year
|
$
|
(249
|
)
|
$
|
(216
|
)
|
||||||||||
Other comprehensive income
|
(52
|
)
|
413
|
|||||||||||||
Balance, end of period
|
$
|
(301
|
)
|
$
|
197
|
|||||||||||
Noncontrolling interest
|
-
|
2,580
|
||||||||||||||
Total stockholders’ equity
|
$
|
29,765
|
$
|
31,711
|
|
See accompanying notes to Condensed Consolidated Financial Statements.
7
CAROLINA TRUST BANCSHARES, INC.
(Dollars in thousands)
Nine Months Ended September 30,
|
||||||||
2017
|
2016
|
|||||||
Cash flows from operating activities
|
||||||||
Net income
|
$
|
758
|
$
|
959
|
||||
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:
|
||||||||
Provision for loan losses
|
555
|
122
|
||||||
Depreciation and amortization of bank premises, equipment and software
|
327
|
265
|
||||||
Accretion of loan fair value adjustments related to acquisition
|
(6
|
)
|
(7
|
)
|
||||
Net amortization of bond premiums
|
112
|
81
|
||||||
Gain on the sale of investment securities
|
-
|
(55
|
)
|
|||||
Amortization of long term subordinated debt issuance costs
|
53
|
-
|
||||||
Amortization of core deposit intangible
|
35
|
44
|
||||||
Stock compensation expense
|
23
|
48
|
||||||
Increase in value of Bank-owned life insurance contracts
|
(146
|
)
|
(39
|
)
|
||||
Net losses and impairment write-downs on foreclosed assets
|
217
|
329
|
||||||
Deferred tax provision
|
685
|
555
|
||||||
Decrease (increase) in other assets
|
(56
|
)
|
148
|
|||||
Decrease (increase) in accrued interest receivable
|
(30
|
)
|
155
|
|||||
Increase in accrued interest payable
|
163
|
65
|
||||||
Decrease in other liabilities
|
(419
|
)
|
(389
|
)
|
||||
Net cash and cash equivalents provided by operating activities
|
2,271
|
2,281
|
||||||
Cash flows from investing activities
|
||||||||
Net increase in loans
|
(32,262
|
)
|
(9,581
|
)
|
||||
Proceeds from sale of foreclosed assets
|
523
|
1,156
|
||||||
Net purchases of bank premises, equipment and software
|
(472
|
)
|
(308
|
)
|
||||
Purchase of Bank-owned life insurance
|
(5,500
|
)
|
-
|
|||||
Purchase of available-for-sale securities
|
(4,832
|
)
|
(20,386
|
)
|
||||
Proceeds from maturities, calls and pay-downs of available-for-sale securities
|
3,371
|
16,229
|
||||||
Proceeds from the sale of available-for-sale securities
|
-
|
802
|
||||||
Purchase of Federal Home Loan Bank stock
|
(249
|
)
|
(126
|
)
|
||||
Net cash and cash equivalents used in investing activities
|
(39,421
|
)
|
(12,214
|
)
|
||||
Cash flows from financing activities
|
||||||||
Increase in deposits
|
18,923
|
38,247
|
||||||
Increase in Federal Home Loan Bank advances
|
6,000
|
1,100
|
||||||
Payment of capital lease obligation
|
(46
|
)
|
(43
|
)
|
||||
Decrease in federal funds purchased
|
-
|
(2,355
|
)
|
|||||
Dividends paid on preferred stock
|
-
|
(175
|
)
|
|||||
Net proceeds from issuance of common stock
|
3
|
2
|
||||||
Net cash and cash equivalents provided by financing activities
|
24,880
|
36,776
|
||||||
Net increase (decrease) in cash and cash equivalents
|
(12,270
|
)
|
26,843
|
|||||
Cash and cash equivalents, beginning
|
26,149
|
4,813
|
||||||
Cash and cash equivalents, ending
|
$
|
13,879
|
$
|
31,656
|
||||
Supplemental disclosure of cash flow information
|
||||||||
Cash paid during the period for taxes
|
$
|
15
|
$
|
-
|
||||
Cash paid during the period for interest
|
$
|
2,400
|
$
|
1,969
|
||||
Noncash financing and investing activities
|
||||||||
Unrealized gain (loss) on investment securities available-for-sale, net of taxes
|
$
|
(52
|
)
|
$
|
413
|
|||
Transfer of loans to foreclosed assets
|
$
|
196
|
$
|
369
|
|
See accompanying notes to Condensed Consolidated Financial Statements.
8
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated 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 is operating as a registered bank holding company under the Bank Holding Company Act of 1956, as amended. 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, 2017 and for the three and nine months ended September 30, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.
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 2016 Annual Report on Form 10-K. This quarterly report should be read in conjunction with the Annual Report.
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments - Overall, Subtopic 825-10 to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company will begin reporting unrealized gains and losses of its marketable equity securities in income as compared to the current method of reporting through other comprehensive income. For the year ended December 31, 2016, other comprehensive income included $75,000, pre-tax, and $48,000, after tax, for unrealized gains on marketable equity securities. If the standard had been adopted already, the unrealized income would be reported on the income statement. The nonmarketable equity securities that do not have readily determinable values are currently recorded at cost. Following implementation, these securities, primarily FHLB stock, will be recorded at cost less any impairment, plus or minus any observable changes in price resulting from transactions for similar or identical investments of the same issuer. An initial adjustment of accumulated other comprehensive income will be recorded in retained earnings when the standard is adopted.
9
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers, Topic 606. The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. As a result of the deferral, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but the Company does not expect it to have a material impact. As the Company considers, plans and implements new products, the impact of this standard on projected revenues will be evaluated and reported accordingly for contracts that are executed with customers.
In February 2016, the FASB issued ASU 2016-02, Leases, which amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, includ-ing interim periods within those fiscal years. 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. Currently, the Company has several multi-year property leases for which reporting will be impacted by this standard. At the end of 2016, one of our branches had an operating lease that expires in 2018 with aggregate payments totaling $160,000. If the new standard were in effect, the present value of payments would be recognized as an asset and a liability. Similarly, other property leases expire in 2019, 2020 and 2021 that have payments totaling $90,000, $48,000 and $200,000, respectively.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-based Payment Accounting, which is new guidance related to stock compensation. The new guidance eliminates the concept of additional paid-in capital pools for stock-based awards and requires that the related excess tax benefits and tax deficiencies be classified as an operating activity in the statement of cash flows. The new guidance also allows entities to make a one-time policy election to account for forfeitures when they occur, instead of accruing compensation cost based on the number of awards expected to vest. Additionally, the new guidance changes the requirement for an award to qualify for equity classification by permitting tax withholding up to the maximum statutory tax rate instead of the minimum statutory tax rate. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The Company has adopted the new standard, electing to record forfeitures as they occur, and there have been no material impacts on the financial statements.
10
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 allowance for loan and lease losses (ALLL) model that has add on functionality for compliance with the new standard.
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) Noncontrolling Interest
Due to its formation as a holding company, the Company recognized $2,580,000 of the Bank’s preferred stock as a noncontrolling interest in Stockholders’ Equity. On February 6, 2009, the Bank issued $4,000,000 of Senior Preferred Shares to the U.S. Department of Treasury (the “Treasury”), consisting of 4,000 shares, with a liquidation preference of $1,000 per share. In addition, on February 6, 2009, the Bank issued a warrant to the Treasury to purchase 86,957 common shares at an initial exercise price of $6.90 per share with an expiration date of February 6, 2019. Generally accepted accounting principles required management to allocate the net proceeds from the issuance of the preferred stock between the preferred stock and related warrant based upon a relative fair value method. The terms of the preferred shares required management to pay a non-cumulative dividend at the rate of 5 percent per annum for the first five years and 9 percent thereafter. The dividend rate changed from 5 percent to 9 percent on February 16, 2014. Management has determined that the 5 percent dividend rate is below market value, therefore, the fair value of the preferred shares would be less than the $4,000,000 in proceeds. Management determined that a reasonable market rate is 14 percent for the fair value of the preferred shares. Management used the Black-Scholes model for calculating the fair value of the warrant (and related common shares). The allocation between the preferred shares and warrant at February 6, 2009, the date of issuance, net of issuance costs of $20,000 was $3,554,000 and $426,000, respectively. The discount on the preferred shares of $426,000 was accreted through retained earnings over a 60 month period.
11
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
In November 2012, the U.S. Treasury sold the preferred stock to several investors in a Dutch auction process. The Bank had designated a third party bidder to act on its behalf pursuant to the rules of the Dutch auction. In December 2012, pursuant to its agreement with the third party bidder, the Bank in turn repurchased 35% of the preferred stock or $1.4 million at a price of 85.3% of par or $1,194,000 from one of the investors, the same price at which the bidder had purchased the preferred stock from the U.S. Treasury. The gain from the redemption below par totaling $206,000 increased surplus and reduced the amount reported as dividends to preferred shareholders for the year ended December 31, 2012. Following this redemption, the Bank’s preferred stock balance was $2,580,000, which is the par value $2,600,000, net of $20,000 issuance costs.
In June 2013, the U.S. Treasury sold the warrant to private investors in a Dutch auction process. Following the reorganization of the Bank into the Company, the right to acquire up to 86,957 shares of Bank common stock at a price of $6.90 per share was converted to the right to purchase the same number of shares of the Company’s common stock. The warrant book value, $426,000 is recognized as the Company’s stockholders’ equity. The warrant expires February 6, 2019.
In December of 2016, the Company redeemed all 2,600 shares of its outstanding preferred stock; therefore, there is no longer a non-controlling interest in stockholders’ equity. The terms of redemption included principal at a par value of $1,000 per share plus accrued dividends based on a 9% annual dividend rate.
(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.
12
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The following table summarizes earnings per share and the shares utilized in the computations for the three and nine months ended September 30, 2017 and 2016, respectively:
Dollars in thousands, except per share data
|
Net Income
Available to
Common
Shareholders
|
Weighted
Average
Common
Shares
|
Per Share
Amount
|
|||||||||
Three months ended September 30, 2017
|
||||||||||||
Basic earnings per common share
|
$
|
351
|
4,654,880
|
$
|
0.08
|
|||||||
Effect of dilutive stock securities
|
-
|
73,545
|
||||||||||
Effect of dilutive stock warrants
|
-
|
12,235
|
||||||||||
Diluted earnings per common share
|
$
|
351
|
4,740,660
|
$
|
0.07
|
|||||||
Three months ended September 30, 2016
|
||||||||||||
Basic earnings per common share
|
$
|
27
|
4,650,221
|
$
|
0.01
|
|||||||
Effect of dilutive stock securities
|
-
|
49,674
|
||||||||||
Effect of dilutive stock warrants
|
-
|
-
|
||||||||||
Diluted earnings per common share
|
$
|
27
|
4,699,895
|
$
|
0.01
|
Dollars in thousands, except per share data
|
Net Income
Available to
Common
Shareholders
|
Weighted
Average
Common
Shares
|
Per Share
Amount
|
|||||||||
Nine months ended September 30, 2017
|
||||||||||||
Basic earnings per common share
|
$
|
758
|
4,654,717
|
$
|
0.16
|
|||||||
Effect of dilutive stock securities
|
-
|
69,168
|
||||||||||
Effect of dilutive stock warrants
|
-
|
8,672
|
||||||||||
Diluted earnings per common share
|
$
|
758
|
4,732,557
|
$
|
0.16
|
|||||||
Nine months ended September 30, 2016
|
||||||||||||
Basic earnings per common share
|
$
|
784
|
4,649,781
|
$
|
0.17
|
|||||||
Effect of dilutive stock securities
|
-
|
47,113
|
||||||||||
Effect of dilutive stock warrants
|
-
|
-
|
||||||||||
Diluted earnings per common share
|
$
|
784
|
4,696,894
|
$
|
0.17
|
For the three and nine months ended September 30, 2017, there were 35,981 shares related to stock options that were anti-dilutive because the exercise price exceeded the average market price for the period. For the three and nine months ended September 30, 2016, there were 134,690 and 144,691 shares, respectively, related to stock options and the common stock warrant that were anti-dilutive because the exercise price exceeded the average market price of the Company’s common stock for the period. Therefore, they were omitted from the calculation of diluted earnings per share for their respective periods.
13
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
(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 period, 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, Interest-Earning Deposits with Banks and Certificates of Deposits with Banks
The carrying amounts for cash and due from banks, interest-earning deposits with banks and certificates of deposits with banks approximate fair value because of the short maturities of those instruments.
Investment Securities
Fair value for investment securities equals the quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.
Loans
The fair value of loans is estimated based on discounted expected cash flows. 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 does not include an estimate for illiquidity in the market.
Accrued Interest
The carrying amount is a reasonable estimate of fair value.
14
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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.
Capital Lease Obligation, Advances from the Federal Home Loan Bank 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, 2017 and December 31, 2016:
Fair Value Measurements at September 30, 2017 using
|
||||||||||||||||||||
Carrying
Value
|
Quoted Prices in
Active Markets for
Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
Total Fair
Value
|
||||||||||||||||
Dollars in thousands
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||||||
ASSETS
|
||||||||||||||||||||
Cash and due from banks
|
$
|
6,285
|
$
|
6,285
|
$
|
-
|
$
|
-
|
$
|
6,285
|
||||||||||
Interest-earning deposits with banks
|
7,594
|
7,594
|
-
|
-
|
7,594
|
|||||||||||||||
Certificates of deposit with banks
|
1,498
|
-
|
1,524
|
-
|
1,524
|
|||||||||||||||
Federal Home Loan Bank stock
|
1,192
|
-
|
1,192
|
-
|
1,192
|
|||||||||||||||
Investment securities available-for-sale
|
28,333
|
820
|
27,513
|
-
|
28,333
|
|||||||||||||||
Net loans
|
336,615
|
-
|
-
|
338,002
|
338,002
|
|||||||||||||||
Accrued interest receivable
|
975
|
-
|
975
|
-
|
975
|
|||||||||||||||
LIABILITIES
|
||||||||||||||||||||
Deposits
|
$
|
337,589
|
$
|
-
|
$
|
329,784
|
$
|
-
|
$
|
329,784
|
||||||||||
Capital lease obligation
|
223
|
-
|
223
|
-
|
223
|
|||||||||||||||
Federal Home Loan Bank Advances
|
20,100
|
-
|
20,024
|
-
|
20,024
|
|||||||||||||||
Long term subordinated debt
|
9,658
|
-
|
9,686
|
-
|
9,686
|
|||||||||||||||
Accrued interest payable
|
450
|
-
|
450
|
-
|
450
|
15
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Fair Value Measurements at December 31, 2016 using
|
||||||||||||||||||||
Carrying
Value
|
Quoted Prices in
Active Markets for
Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
Total Fair
Value
|
||||||||||||||||
Dollars in thousands
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||||||
ASSETS
|
||||||||||||||||||||
Cash and due from banks
|
$
|
8,063
|
$
|
8,063
|
$
|
-
|
$
|
-
|
$
|
8,063
|
||||||||||
Interest-earning deposits with banks
|
18,086
|
18,086
|
-
|
-
|
18,086
|
|||||||||||||||
Certificates of deposit with banks
|
1,498
|
-
|
1,498
|
-
|
1,498
|
|||||||||||||||
Federal Home Loan Bank stock
|
942
|
-
|
942
|
-
|
942
|
|||||||||||||||
Investment securities available-for-sale
|
27,063
|
1,112
|
25,201
|
750
|
27,063
|
|||||||||||||||
Net loans
|
305,099
|
-
|
-
|
305,714
|
305,714
|
|||||||||||||||
Accrued interest receivable
|
945
|
-
|
945
|
-
|
945
|
|||||||||||||||
LIABILITIES
|
||||||||||||||||||||
Deposits
|
$
|
318,665
|
$
|
-
|
$
|
311,464
|
$
|
-
|
$
|
311,464
|
||||||||||
Capital lease obligation
|
268
|
-
|
268
|
-
|
268
|
|||||||||||||||
Federal Home Loan Bank Advances
|
14,100
|
-
|
14,115
|
-
|
14,115
|
|||||||||||||||
Long term subordinated debt
|
9,605
|
-
|
9,616
|
-
|
9,616
|
|||||||||||||||
Accrued interest payable
|
287
|
-
|
287
|
-
|
287
|
|||||||||||||||
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.
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.
|
16
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available-for-Sale
Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in an active over-the-counter market. Level 2 securities include U.S. government agency securities, mortgage-backed securities issued by government-sponsored entities and municipal bonds. Securities classified as Level 3 include a corporate debt security and a common stock in a less liquid market. The value of the corporate debt security is determined via the going rate of a similar debt security if it were to enter the market at period end. The derived market value requires significant management judgment and is further substantiated by discounted cash flow methodologies. There have been no changes in valuation techniques for the quarter ended September 30, 2017. Valuation techniques are consistent with techniques used in prior periods.
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, 2017
|
||||||||||||||||
U.S. Government and federal agency
|
$
|
9,396
|
$
|
-
|
$
|
9,396
|
$
|
-
|
||||||||
Mortgage-backed securities*
|
17,808
|
-
|
17,808
|
-
|
||||||||||||
Municipal securities
|
309
|
-
|
309
|
-
|
||||||||||||
Equity securities
|
820
|
820
|
-
|
-
|
||||||||||||
Total
|
$
|
28,333
|
$
|
820
|
$
|
27,513
|
$
|
-
|
||||||||
December 31, 2016
|
||||||||||||||||
U.S. Government and federal agency
|
$
|
6,543
|
$
|
-
|
$
|
6,543
|
$
|
-
|
||||||||
Mortgage-backed securities*
|
18,658
|
-
|
18,658
|
-
|
||||||||||||
Corporate debt securities
|
750
|
-
|
-
|
750
|
||||||||||||
Equity securities
|
1,112
|
1,112
|
-
|
-
|
||||||||||||
Total
|
$
|
27,063
|
$
|
1,112
|
$
|
25,201
|
$
|
750
|
||||||||
*All of the Company’s mortgage-backed securities are issued either by the U.S. Government, which includes GNMA pools, or by government-sponsored agencies 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, 2017 and December 31, 2016.
17
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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, 2017, the discounted cash flows method was used in determining the fair value of nine loans totaling $1.8 million and the fair value of the collateral method was used in the other thirty-two loans totaling $4.9 million. At December 31, 2016, the discounted cash flows method was used in determining the fair value of ten loans totaling $3.3 million and the fair value of the collateral method was used in the other thirty-three loans totaling $3.8 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 assumptions 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 quarter ended September 30, 2017. 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, 2017 and 2016.
September 30, 2017
|
September 30, 2016
|
|||||||||||||||
Dollars in thousands
|
Level 2
|
Level 3
|
Level 2
|
Level 3
|
||||||||||||
Carrying value of impaired loans before allocations
|
$
|
-
|
$
|
1,812
|
$
|
-
|
$
|
2,711
|
||||||||
Specific valuation allowance allocations
|
-
|
(251
|
)
|
-
|
(811
|
)
|
||||||||||
Carrying value of impaired loans after allocations
|
$
|
-
|
$
|
1,561
|
$
|
-
|
$
|
1,900
|
Foreclosed Assets
Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is 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 OREO is classified as Level 3. Although appraisals of these properties are frequently based on comparable properties, they are not identical. Significant unobservable assumptions will need to be used in assessing the value.
There have been no changes in valuation techniques for the quarter ended September 30, 2017. Valuation techniques are consistent with techniques used in prior periods.
18
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The following table presents foreclosed assets that were re-measured and reported at fair value during the three months ended September 30, 2017 and 2016:
September 30,
2017
|
September 30,
2016
|
|||||||
Dollars in thousands
|
||||||||
Foreclosed assets re-measured subsequent to initial recognition:
|
||||||||
Carrying value of foreclosed assets prior to re-measurement
|
$
|
-
|
$
|
996
|
||||
Write-downs included in foreclosed asset expense, net
|
-
|
(117
|
)
|
|||||
Fair value
|
$
|
-
|
$
|
879
|
For the three months ended September 30, 2017 and September 30, 2016, the Company did not have any foreclosed assets that were re-measured at initial recognition.
The following table presents foreclosed assets that were re-measured and reported at fair value during the nine months ended September 30, 2017 and 2016:
September 30,
2017
|
September 30,
2016
|
|||||||
Dollars in thousands
|
||||||||
Foreclosed assets re-measured subsequent to initial recognition:
|
||||||||
Carrying value of foreclosed assets prior to re-measurement
|
$
|
-
|
$
|
1,156
|
||||
Write-downs included in foreclosed asset expense, net
|
-
|
(277
|
)
|
|||||
Fair value
|
$
|
-
|
$
|
879
|
For the nine months ended September 30, 2017 and September 30, 2016, the Company did not have any foreclosed assets that were re-measured at initial recognition.
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, 2017
|
||||||||||||||||
Foreclosed assets
|
$
|
271
|
$
|
-
|
$
|
-
|
$
|
271
|
||||||||
Impaired loans
|
1,561
|
-
|
-
|
1,561
|
||||||||||||
Total
|
$
|
1,832
|
$
|
-
|
$
|
-
|
$
|
1,832
|
||||||||
December 31, 2016
|
||||||||||||||||
Foreclosed assets
|
$
|
1,011
|
$
|
-
|
$
|
-
|
$
|
1,011
|
||||||||
Impaired loans
|
1,915
|
-
|
-
|
1,915
|
||||||||||||
Total
|
$
|
2,926
|
$
|
-
|
$
|
-
|
$
|
2,926
|
19
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Quantitative Information About Level 3 Fair Value Measurements:
Fair Value
|
Valuation Technique
|
Unobservable Input
|
Range
|
Weighted Average
|
|||||||||||
Dollars in thousands
|
|||||||||||||||
September 30, 2017
|
|||||||||||||||
Impaired loans
|
$
|
1,561
|
Discounted cash flows
|
Discount rate
|
4.75% -8.50
|
%
|
7.05
|
%
|
|||||||
Foreclosed assets
|
271
|
Discounted appraisals
|
Appraisal adjustments
|
9.09% - 18.84
|
%
|
9.83
|
%
|
||||||||
December 31, 2016
|
|||||||||||||||
Impaired loans
|
$
|
1,915
|
Discounted cash flows
|
Discount rate
|
4.25% –6.50
|
%
|
5.89
|
%
|
|||||||
Foreclosed assets
|
1,011
|
Discounted appraisals
|
Appraisal adjustments
|
15.11% - 60.47
|
%
|
30.75
|
%
|
(6) Investment Securities
The amortized cost and fair value of securities available-for-sale, with gross unrealized gains and losses, is as follows:
In thousands
|
Amortized Cost
|
Unrealized Gains
|
Unrealized Losses
|
Fair Value
|
||||||||||||
September 30, 2017
|
||||||||||||||||
U.S. Government and federal agency
|
$
|
9,434
|
$
|
45
|
$
|
(83
|
)
|
$
|
9,396
|
|||||||
Mortgage-backed securities *
|
17,872
|
92
|
(156
|
)
|
17,808
|
|||||||||||
Municipal securities
|
298
|
11
|
-
|
309
|
||||||||||||
Equity securities
|
1,204
|
-
|
(384
|
)
|
820
|
|||||||||||
$
|
28,808
|
$
|
148
|
$
|
(623
|
)
|
$
|
28,333
|
||||||||
December 31, 2016
|
||||||||||||||||
U.S. Government and federal agency
|
$
|
6,664
|
$
|
17
|
$
|
(138
|
)
|
$
|
6,543
|
|||||||
Mortgage-backed securities *
|
18,841
|
101
|
(284
|
)
|
18,658
|
|||||||||||
Corporate debt securities
|
750
|
-
|
-
|
750
|
||||||||||||
Equity securities
|
1,204
|
-
|
(92
|
)
|
1,112
|
|||||||||||
$
|
27,459
|
$
|
118
|
$
|
(514
|
)
|
$
|
27,063
|
||||||||
*All mortgage-backed securities are issued either by the U.S. Government through GNMA or by government sponsored agencies FNMA or FHLMC.
20
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The amortized cost and fair values of securities available-for-sale (excluding marketable equity securities) at September 30, 2017 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.
Amortized Cost
|
Fair Value
|
|||||||
Dollars in thousands
|
||||||||
Due within one year
|
$
|
4
|
$
|
4
|
||||
Due after one but within five years
|
6,244
|
6,246
|
||||||
Due after five but within ten years
|
6,302
|
6,243
|
||||||
Due after ten years
|
15,054
|
15,020
|
||||||
$
|
27,604
|
$
|
27,513
|
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, 2017 and December 31, 2016, respectively.
Temporarily Impaired Securities in AFS 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, 2017
|
||||||||||||||||||||||||
U.S. Government and federal agency
|
$
|
3,172
|
$
|
(34
|
)
|
$
|
2,030
|
$
|
(49
|
)
|
$
|
5,202
|
$
|
(83
|
)
|
|||||||||
Mortgage-backed securities *
|
10,519
|
(132
|
)
|
1,796
|
(24
|
)
|
12,315
|
(156
|
)
|
|||||||||||||||
Equity securities
|
820
|
(383
|
)
|
-
|
(1
|
)
|
820
|
(384
|
)
|
|||||||||||||||
Total temporarily impaired securities
|
$
|
14,511
|
$
|
(549
|
)
|
$
|
3,826
|
$
|
(74
|
)
|
$
|
18,337
|
$
|
(623
|
)
|
|||||||||
December 31, 2016
|
||||||||||||||||||||||||
U.S. Government and federal agency
|
$
|
5,332
|
$
|
(138
|
)
|
$
|
-
|
$
|
-
|
$
|
5,332
|
$
|
(138
|
)
|
||||||||||
Mortgage-backed securities *
|
14,965
|
(282
|
)
|
140
|
(2
|
)
|
15,105
|
(284
|
)
|
|||||||||||||||
Equity securities
|
1,203
|
(91
|
)
|
1
|
(1
|
)
|
1,204
|
(92
|
)
|
|||||||||||||||
Total temporarily impaired securities
|
$
|
21,500
|
$
|
(511
|
)
|
$
|
141
|
$
|
(3
|
)
|
$
|
21,641
|
$
|
(514
|
)
|
|||||||||
*All mortgage-backed securities are issued either by the U.S. Government through GNMA or by government sponsored agencies 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 Company 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, 2017, management believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The unrealized losses on debt securities 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 re-pricing date or if market yields for such investments decline. Most of the unrealized loss on the equity security occurred after the issuer of the security lowered its second quarter earnings due to several factors and indicated there may be a reduction in the dividend that is paid monthly. Management analyzed the issuer data from public filings, reviewed transcripts of earnings discussions, and assessed whether the decline in value was other than temporary.
21
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 for the debt securities and due to financial position, financial performance, and management of the equity issuer. Accordingly, as of September 30, 2017, 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 $3.5 million at September 30, 2017 were pledged to secure public funds. The Company had no sales of securities during the three and nine month periods ended September 30, 2017. For the three and nine month periods ended September 30, 2016, proceeds from the sales of securities amounted to $802,000 and gross realized gains on these securities were $55,000.
The following table presents the changes in the Company’s accumulated other comprehensive income, net of tax:
2017
|
2016
|
|||||||
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
|||||||
Dollars in thousands
|
||||||||
Beginning balance, July 1
|
$
|
(137
|
)
|
$
|
289
|
|||
Other comprehensive income before reclassifications
|
(164
|
)
|
(57
|
)
|
||||
Amounts reclassified from accumulated other comprehensive income
|
-
|
(35
|
)
|
|||||
Net current period other comprehensive income
|
(164
|
)
|
(92
|
)
|
||||
Ending balance, September 30
|
$
|
(301
|
)
|
$
|
197
|
2017
|
2016
|
|||||||
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
Unrealized Gains
(Losses) on
Available-for-Sale
Securities
|
|||||||
Dollars in thousands
|
||||||||
Beginning balance, January 1
|
$
|
(249
|
)
|
$
|
(216
|
)
|
||
Other comprehensive income before reclassifications
|
(52
|
)
|
448
|
|||||
Amounts reclassified from accumulated other comprehensive income
|
-
|
(35
|
)
|
|||||
Net current period other comprehensive income
|
(52
|
)
|
413
|
|||||
Ending balance, September 30
|
$
|
(301
|
)
|
$
|
197
|
22
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The Company did not have any reclassifications out of accumulated other comprehensive income for the three or nine months ended September 30, 2017. During the three and nine months ended September 30, 2016, the company sold a security with a gain, net of taxes, of $35,000. This amount was reclassified out of accumulated other comprehensive income and is shown as a Gain on sale of securities on the Condensed Consolidated Statement of Operations.
(7) Loans
The following is a summary of loans at September 30, 2017 and December 31, 2016:
September 30, 2017
|
December 31, 2016
|
|||||||||||||||
Dollars in thousands
|
Amount
|
Percent of Total
|
Amount
|
Percent of Total
|
||||||||||||
Commercial real estate
|
||||||||||||||||
Residential ADC
|
$
|
6,180
|
1.82
|
%
|
$
|
2,463
|
0.80
|
%
|
||||||||
Commercial ADC
|
24,443
|
7.19
|
%
|
24,583
|
7.97
|
%
|
||||||||||
Farmland
|
4,795
|
1.41
|
%
|
3,826
|
1.24
|
%
|
||||||||||
Multifamily
|
11,360
|
3.34
|
%
|
11,980
|
3.88
|
%
|
||||||||||
Owner occupied
|
80,932
|
23.80
|
%
|
69,686
|
22.59
|
%
|
||||||||||
Non-owner occupied
|
78,383
|
23.05
|
%
|
68,079
|
22.07
|
%
|
||||||||||
Total commercial real estate
|
206,093
|
60.61
|
%
|
180,617
|
58.55
|
%
|
||||||||||
Commercial
|
||||||||||||||||
Commercial and industrial
|
45,532
|
13.39
|
%
|
41,935
|
13.59
|
%
|
||||||||||
Agriculture
|
154
|
0.04
|
%
|
209
|
0.07
|
%
|
||||||||||
Other
|
1,450
|
0.43
|
%
|
1,636
|
0.53
|
%
|
||||||||||
Total commercial
|
47,136
|
13.86
|
%
|
43,780
|
14.19
|
%
|
||||||||||
Residential mortgage
|
||||||||||||||||
First lien, closed-end
|
47,587
|
13.99
|
%
|
43,811
|
14.20
|
%
|
||||||||||
Junior lien, closed-end
|
1,179
|
0.35
|
%
|
887
|
0.29
|
%
|
||||||||||
Total residential mortgage
|
48,766
|
14.34
|
%
|
44,698
|
14.49
|
%
|
||||||||||
Home equity lines
|
34,206
|
10.06
|
%
|
35,119
|
11.38
|
%
|
||||||||||
Consumer – other
|
3,837
|
1.13
|
%
|
4,278
|
1.39
|
%
|
||||||||||
Total loans
|
$
|
340,038
|
100.00
|
%
|
$
|
308,492
|
100.00
|
%
|
Loans are primarily originated for customers residing in Lincoln, Gaston, Rutherford, Catawba, and Iredell Counties in North 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.
23
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,
2017
|
December 31,
2016
|
|||||||
Dollars in thousands
|
||||||||
Commercial real estate
|
||||||||
Commercial ADC
|
$
|
5
|
$
|
1,022
|
||||
Farmland
|
-
|
43
|
||||||
Multifamily
|
147
|
153
|
||||||
Owner occupied
|
1,043
|
55
|
||||||
Non-owner occupied
|
218
|
37
|
||||||
Total commercial real estate
|
1,413
|
1,310
|
||||||
Commercial
|
||||||||
Commercial and industrial
|
136
|
1,139
|
||||||
Total commercial
|
136
|
1,139
|
||||||
Residential mortgage:
|
||||||||
First lien, closed end
|
101
|
179
|
||||||
Junior lien, closed end
|
455
|
-
|
||||||
Total residential mortgage
|
556
|
179
|
||||||
Home equity lines
|
36
|
-
|
||||||
Consumer – other
|
1
|
-
|
||||||
Total non-accrual loans
|
$
|
2,142
|
$
|
2,628
|
Interest foregone on non-accrual loans was approximately $48,000 and $85,000 for the three and nine months ended September 30, 2017 and $43,000 and $97,000 for the three and nine months ended September 30, 2016.
24
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
An analysis of past due loans, segregated by class, was as follows:
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, 2017
|
||||||||||||||||||||||||
Commercial real estate:
|
||||||||||||||||||||||||
Residential ADC
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
6,180
|
$
|
6,180
|
$
|
-
|
||||||||||||
Commercial ADC
|
164
|
-
|
164
|
24,279
|
24,443
|
-
|
||||||||||||||||||
Farmland
|
-
|
-
|
-
|
4,795
|
4,795
|
-
|
||||||||||||||||||
Multifamily
|
-
|
147
|
147
|
11,213
|
11,360
|
-
|
||||||||||||||||||
Owner occupied
|
1,284
|
1,028
|
2,312
|
78,620
|
80,932
|
-
|
||||||||||||||||||
Non-owner occupied
|
10
|
188
|
198
|
78,185
|
78,383
|
-
|
||||||||||||||||||
Total commercial real estate
|
1,458
|
1,363
|
2,821
|
203,272
|
206,093
|
-
|
||||||||||||||||||
Commercial:
|
||||||||||||||||||||||||
Commercial and industrial
|
4
|
136
|
140
|
45,392
|
45,532
|
-
|
||||||||||||||||||
Agriculture
|
-
|
-
|
-
|
154
|
154
|
-
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
1,450
|
1,450
|
-
|
||||||||||||||||||
Total commercial
|
4
|
136
|
140
|
46,996
|
47,136
|
-
|
||||||||||||||||||
Residential mortgage:
|
||||||||||||||||||||||||
First lien, closed end
|
448
|
60
|
508
|
47,079
|
47,587
|
-
|
||||||||||||||||||
Junior lien, closed-end
|
9
|
449
|
458
|
721
|
1,179
|
-
|
||||||||||||||||||
Total residential mortgage
|
457
|
509
|
966
|
47,800
|
48,766
|
-
|
||||||||||||||||||
Home equity lines
|
236
|
- |
236
|
33,970
|
34,206
|
-
|
||||||||||||||||||
Consumer – other
|
40
|
-
|
40
|
3,797
|
3,837
|
-
|
||||||||||||||||||
Total loans
|
$
|
2,195
|
$
|
2,008
|
$
|
4,203
|
$
|
335,835
|
$
|
340,038
|
$
|
-
|
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, 2016
|
||||||||||||||||||||||||
Commercial real estate:
|
||||||||||||||||||||||||
Residential ADC
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
2,463
|
$
|
2,463
|
$
|
-
|
||||||||||||
Commercial ADC
|
1,232
|
1,016
|
2,248
|
22,335
|
24,583
|
-
|
||||||||||||||||||
Farmland
|
-
|
-
|
-
|
3,826
|
3,826
|
-
|
||||||||||||||||||
Multifamily
|
-
|
-
|
-
|
11,980
|
11,980
|
-
|
||||||||||||||||||
Owner occupied
|
-
|
-
|
-
|
69,686
|
69,686
|
-
|
||||||||||||||||||
Non-owner occupied
|
14
|
-
|
14
|
68,065
|
68,079
|
-
|
||||||||||||||||||
Total commercial real estate
|
1,246
|
1,016
|
2,262
|
178,355
|
180,617
|
-
|
||||||||||||||||||
Commercial:
|
||||||||||||||||||||||||
Commercial and industrial
|
29
|
56
|
85
|
41,850
|
41,935
|
-
|
||||||||||||||||||
Agriculture
|
-
|
-
|
-
|
209
|
209
|
-
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
1,636
|
1,636
|
-
|
||||||||||||||||||
Total commercial
|
29
|
56
|
85
|
43,695
|
43,780
|
-
|
||||||||||||||||||
Residential mortgage:
|
||||||||||||||||||||||||
First lien, closed end
|
24
|
128
|
152
|
43,659
|
43,811
|
-
|
||||||||||||||||||
Junior lien, closed-end
|
-
|
-
|
-
|
887
|
887
|
-
|
||||||||||||||||||
Total residential mortgage
|
24
|
128
|
152
|
44,546
|
44,698
|
-
|
||||||||||||||||||
Home equity lines
|
111
|
247
|
358
|
34,761
|
35,119
|
247
|
||||||||||||||||||
Consumer – other
|
10
|
-
|
10
|
4,268
|
4,278
|
-
|
||||||||||||||||||
Total loans
|
$
|
1,420
|
$
|
1,447
|
$
|
2,867
|
$
|
305,625
|
$
|
308,492
|
$
|
247
|
25
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
At September 30, 2017, there were no loans past due 90 days or more, which were still accruing interest. There were two loans totaling $247,000 past due 90 days or more and still accruing interest at December 31, 2016.
Impaired loans
Impaired loans are set forth in the following tables.
September 30, 2017 | ||||||||||||||||
In thousands
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
With No
Allowance
|
Recorded
Investment
With
Allowance
|
Related
Allowance
|
||||||||||||
Commercial real estate
|
||||||||||||||||
Farmland
|
$
|
5
|
$
|
5
|
$
|
-
|
$
|
-
|
||||||||
Multifamily
|
147
|
147
|
-
|
-
|
||||||||||||
Owner occupied
|
3,787
|
3,658
|
-
|
-
|
||||||||||||
Non-owner occupied
|
287
|
218
|
-
|
-
|
||||||||||||
Total commercial real estate
|
4,226
|
4,028
|
-
|
-
|
||||||||||||
Commercial
|
||||||||||||||||
Commercial and industrial
|
1,142
|
136
|
772
|
144
|
||||||||||||
Residential mortgage
|
||||||||||||||||
First lien, closed-end
|
1,069
|
179
|
823
|
28
|
||||||||||||
Junior lien, closed- end
|
888
|
672
|
216
|
78
|
||||||||||||
Total residential mortgage
|
1,957
|
851
|
1,039
|
106
|
||||||||||||
Home equity lines
|
165
|
118
|
-
|
-
|
||||||||||||
Consumer – other
|
1
|
-
|
1
|
1
|
||||||||||||
Total loans
|
$
|
7,491
|
$
|
5,133
|
$
|
1,812
|
$
|
251
|
December 31, 2016
|
||||||||||||||||
In thousands
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
With No
Allowance
|
Recorded
Investment
With
Allowance
|
Related
Allowance
|
||||||||||||
Commercial real estate
|
||||||||||||||||
Commercial ADC
|
$
|
2,920
|
$
|
2,253
|
$
|
-
|
$
|
-
|
||||||||
Farmland
|
43
|
43
|
-
|
-
|
||||||||||||
Multifamily
|
153
|
153
|
-
|
-
|
||||||||||||
Owner occupied
|
2,159
|
2,006
|
152
|
35
|
||||||||||||
Non-owner occupied
|
37
|
37
|
-
|
-
|
||||||||||||
Total commercial real estate
|
5,312
|
4,492
|
152
|
35
|
||||||||||||
Commercial
|
||||||||||||||||
Commercial and industrial
|
2,243
|
130
|
1,865
|
840
|
||||||||||||
Residential mortgage
|
||||||||||||||||
First lien, closed-end
|
1,117
|
226
|
812
|
39
|
||||||||||||
Home equity lines
|
338
|
338
|
-
|
-
|
||||||||||||
Total loans
|
$
|
9,010
|
$
|
5,186
|
$
|
2,829
|
$
|
914
|
26
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
3 months ended
September 30, 2017
|
3 months ended
September 30, 2016
|
|||||||||||||||
In thousands
|
Average
Recorded
Investment
|
Interest
Income
Recognized
|
Average
Recorded
Investment
|
Interest
Income
Recognized
|
||||||||||||
Commercial real estate
|
||||||||||||||||
Commercial ADC
|
$
|
746
|
$
|
-
|
$
|
1,273
|
$
|
16
|
||||||||
Farmland
|
30
|
-
|
37
|
-
|
||||||||||||
Multifamily
|
147
|
-
|
149
|
-
|
||||||||||||
Owner occupied
|
3,482
|
40
|
2,740
|
15
|
||||||||||||
Non-owner occupied
|
222
|
-
|
110
|
-
|
||||||||||||
Total commercial real estate
|
4,627
|
40
|
4,309
|
31
|
||||||||||||
Commercial
|
||||||||||||||||
Commercial and industrial
|
1,005
|
13
|
1,525
|
33
|
||||||||||||
Residential mortgage
|
||||||||||||||||
First lien, closed-end
|
1,461
|
13
|
1,436
|
14
|
||||||||||||
Junior lien, closed-end
|
890
|
3
|
403
|
-
|
||||||||||||
Total residential mortgage
|
2,351
|
16
|
1,839
|
14
|
||||||||||||
Home equity lines
|
119
|
1
|
133
|
1
|
||||||||||||
Consumer – other
|
-
|
-
|
1
|
-
|
||||||||||||
Total loans
|
$
|
8,102
|
$
|
70
|
$
|
7,807
|
$
|
79
|
9 months ended
September 30, 2017
|
9 months ended
September 30, 2016
|
|||||||||||||||
In thousands
|
Average
Recorded
Investment
|
Interest
Income
Recognized
|
Average
Recorded
Investment
|
Interest
Income
Recognized
|
||||||||||||
Commercial real estate
|
||||||||||||||||
Commercial ADC
|
$
|
1,061
|
$
|
-
|
$
|
2,323
|
$
|
43
|
||||||||
Farmland
|
31
|
-
|
11
|
1
|
||||||||||||
Multifamily
|
124
|
-
|
107
|
1
|
||||||||||||
Owner occupied
|
2,284
|
94
|
2,184
|
79
|
||||||||||||
Non-owner occupied
|
91
|
-
|
42
|
-
|
||||||||||||
Total commercial real estate
|
3,591
|
94
|
4,667
|
124
|
||||||||||||
Commercial
|
||||||||||||||||
Commercial and industrial
|
1,271
|
45
|
1,150
|
110
|
||||||||||||
Residential mortgage
|
||||||||||||||||
First lien, closed-end
|
1,196
|
44
|
1,214
|
47
|
||||||||||||
Junior lien, closed-end
|
336
|
9
|
-
|
-
|
||||||||||||
Total residential mortgage
|
1,532
|
53
|
1,214
|
47
|
||||||||||||
Home equity lines
|
111
|
5
|
241
|
15
|
||||||||||||
Consumer – other
|
1
|
-
|
50
|
-
|
||||||||||||
Total loans
|
$
|
6,506
|
$
|
197
|
$ | 7,322 | 296 |
Troubled Debt Restructures
As of September 30, 2017, eleven loans totaling $4,363,000 were identified as troubled debt restructurings and considered impaired, none of which had unfunded commitments. A sold participation loan of $704,000 that was related to one of these troubled debt restructurings was repurchased from the participating bank in May 2017. This repurchase increased our carrying value by $704,000. The borrower has made scheduled payments since 2014, and the loan is accruing interest. Eleven loans totaling $4,992,000 were identified as troubled debt restructurings and considered impaired at December 31, 2016, none of which had unfunded commitments.
27
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Of the eleven loans identified as troubled debt restructurings at September 30, 2017, ten loans totaling $4,227,000 were accruing interest. Of the eleven loans identified as troubled debt restructurings at December 31, 2016, ten loans totaling $4,616,000 were accruing interest.
For the three and nine months ended September 30, 2017, the following table presents a breakdown of the types of concessions made by loan class.
Three months ended September 30, 2017
|
Nine months ended September 30, 2017
|
|||||||||||||||||||||||
Number of
loans
|
Unpaid
Principal
Pre-Modification
|
Post-Modification
Outstanding
Recorded
Investment
|
Number of
loans
|
Unpaid
Principal
Pre-Modification
|
Post-Modification
Outstanding
Recorded
Investment
|
|||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||
Forgiveness of Principal
Residential Mortgage: |
||||||||||||||||||||||||
Junior lien, closed end
|
-
|
$
|
-
|
$
|
-
|
2
|
$
|
636
|
$
|
433
|
||||||||||||||
Total residential mortgage
|
-
|
-
|
-
|
2
|
$
|
636
|
$
|
433
|
||||||||||||||||
Total
|
-
|
$
|
-
|
$
|
-
|
2
|
$
|
636
|
$
|
433
|
||||||||||||||
Grand Total
|
-
|
$
|
-
|
$
|
-
|
2
|
$
|
636
|
$
|
433
|
For the three and nine months ended September 30, 2016, there were no concessions made on newly restructured loans.
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.
The following table presents loans that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the three and nine months ended September 30, 2017. The type labeled other includes concessions made to capitalize interest and extend interest only periods.
Three months ended
September 30, 2017
|
Nine months ended
September 30, 2017
|
|||||||||||||||
Number of loans
|
Recorded Investment
|
Number of loans
|
Recorded Investment
|
|||||||||||||
Other Commercial
|
||||||||||||||||
Commercial and industrial
|
-
|
$
|
-
|
1
|
$
|
136
|
||||||||||
Total commercial
|
-
|
$
|
-
|
1
|
$
|
136
|
||||||||||
Grand Total
|
$
|
-
|
1
|
$
|
136
|
There were no payment defaults during the three and nine months ended September 30, 2016, for loans that were modified as troubled debt restructurings within the 12 months ended September 30, 2016.
28
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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.
The following table presents the successes and failures of the types of modifications within the previous 12 months as of September 30, 2017 and 2016.
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, 2017
|
(Dollars in thousands)
|
|||||||||||||||||||||||||||||||
Forgiveness of principal
|
-
|
$
|
-
|
2
|
$
|
433
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||||||||||||
Other
|
-
|
-
|
-
|
-
|
-
|
-
|
1
|
$
|
136
|
|||||||||||||||||||||||
Total
|
-
|
$
|
-
|
2
|
$
|
433
|
-
|
$
|
-
|
1
|
$
|
136
|
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, 2016
|
(Dollars in thousands)
|
|||||||||||||||||||||||||||||||
Extended payment terms
|
-
|
$
|
-
|
1
|
$
|
119
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||||||||||||
Total
|
-
|
$
|
-
|
1
|
$
|
119
|
-
|
$
|
-
|
-
|
$
|
-
|
Credit Quality Indicators
As part of the on-going 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 that monitors risk grades on an on-going 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.
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.
|
29
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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.
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.
30
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The following table presents the credit risk profile by internally assigned risk grades.
September 30, 2017
|
||||||||||||||||||||
Dollars in thousands
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
|||||||||||||||
Commercial real estate:
|
||||||||||||||||||||
Residential ADC
|
$
|
6,180
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Commercial ADC
|
23,955
|
483
|
5
|
-
|
-
|
|||||||||||||||
Farmland
|
4,795
|
-
|
-
|
-
|
-
|
|||||||||||||||
Multifamily
|
11,213
|
-
|
147
|
-
|
-
|
|||||||||||||||
Owner occupied
|
77,301
|
1,271
|
2,360
|
-
|
-
|
|||||||||||||||
Non-owner occupied
|
77,297
|
868
|
218
|
-
|
-
|
|||||||||||||||
Total commercial real estate
|
200,741
|
2,622
|
2,730
|
-
|
-
|
|||||||||||||||
Commercial:
|
||||||||||||||||||||
Commercial and industrial
|
43,780
|
1,208
|
544
|
-
|
-
|
|||||||||||||||
Agriculture
|
154
|
-
|
-
|
-
|
-
|
|||||||||||||||
Other
|
1,450
|
-
|
-
|
-
|
-
|
|||||||||||||||
Total commercial
|
45,384
|
1,208
|
544
|
-
|
-
|
|||||||||||||||
Residential mortgage:
|
||||||||||||||||||||
First lien, closed-end
|
46,870
|
538
|
179
|
-
|
-
|
|||||||||||||||
Junior lien, closed-end
|
291
|
-
|
888
|
-
|
-
|
|||||||||||||||
Total residential mortgage
|
47,161
|
538
|
1,067
|
-
|
-
|
|||||||||||||||
Home equity lines
|
32,525
|
1,544
|
137
|
-
|
-
|
|||||||||||||||
Consumer – other
|
3,673
|
163
|
1
|
-
|
-
|
|||||||||||||||
Total
|
$
|
329,484
|
$
|
6,075
|
$
|
4,479
|
$
|
-
|
$
|
-
|
||||||||||
December 31, 2016
|
||||||||||||||||||||
Dollars in thousands
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
|||||||||||||||
Commercial real estate:
|
||||||||||||||||||||
Residential ADC
|
$
|
2,463
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Commercial ADC
|
21,832
|
1,729
|
1,022
|
-
|
-
|
|||||||||||||||
Farmland
|
3,783
|
-
|
43
|
-
|
-
|
|||||||||||||||
Multifamily
|
11,827
|
-
|
153
|
-
|
-
|
|||||||||||||||
Owner occupied
|
66,820
|
1,303
|
1,563
|
-
|
-
|
|||||||||||||||
Non-owner occupied
|
66,511
|
1,276
|
292
|
-
|
-
|
|||||||||||||||
Total commercial real estate
|
173,236
|
4,308
|
3,073
|
-
|
-
|
|||||||||||||||
Commercial:
|
||||||||||||||||||||
Commercial and industrial
|
39,918
|
442
|
1,575
|
-
|
-
|
|||||||||||||||
Agriculture
|
209
|
-
|
-
|
-
|
-
|
|||||||||||||||
Other
|
1,636
|
-
|
-
|
-
|
-
|
|||||||||||||||
Total commercial
|
41,763
|
442
|
1,575
|
-
|
-
|
|||||||||||||||
Residential mortgage:
|
||||||||||||||||||||
First lien, closed-end
|
41,822
|
1,174
|
815
|
-
|
-
|
|||||||||||||||
Junior lien, closed-end
|
437
|
-
|
450
|
-
|
-
|
|||||||||||||||
Total residential mortgage
|
42,259
|
1,174
|
1,265
|
-
|
-
|
|||||||||||||||
Home equity lines
|
33,274
|
1,579
|
266
|
-
|
-
|
|||||||||||||||
Consumer – other
|
4,111
|
167
|
-
|
-
|
-
|
|||||||||||||||
Total
|
$
|
294,643
|
$
|
7,670
|
$
|
6,179
|
$
|
-
|
$
|
-
|
||||||||||
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. In the second quarter of 2017, the allowance methodology used in the analysis was modified by expanding the look-back period for average loss rates to a weighted twenty quarter period instead of the twelve quarter period used previously. The impact of the change was a $240,000 increase to the allowance.
31
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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 provisions for loan losses for both the three and nine months ended September 30, 2017 that totaled $340,000 and $555,000, respectively. The Company recorded provisions for loan losses for the both the three and nine months ended September 30, 2016 that totaled $202,000 and $122,000, 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, 2017 and 2016.
Beginning
Balance
|
Provision for
(Recovery of)
Loan Losses
|
Charge-offs
|
Recoveries
|
Ending Balance
|
||||||||||||||||
Dollars in thousands
|
||||||||||||||||||||
September 30, 2017
|
||||||||||||||||||||
Commercial real estate
|
$
|
1,954
|
$
|
133
|
$
|
(134
|
)
|
$
|
140
|
$ |
2,093
|
|||||||||
Commercial and industrial
|
501
|
241
|
(136
|
)
|
-
|
606
|
||||||||||||||
Residential mortgage
|
524
|
(13
|
)
|
-
|
-
|
511
|
||||||||||||||
Consumer
|
234
|
(21
|
)
|
(8
|
)
|
8
|
213
|
|||||||||||||
Total
|
$
|
3,213
|
$
|
340
|
$
|
(278
|
)
|
$
|
148
|
$
|
3,423
|
|||||||||
September 30, 2016
|
||||||||||||||||||||
Commercial real estate
|
$
|
2,283
|
$
|
(459
|
)
|
$
|
-
|
$
|
4
|
$
|
1,828
|
|||||||||
Commercial and industrial
|
551
|
676
|
(41
|
)
|
-
|
1,186
|
||||||||||||||
Residential mortgage
|
406
|
29
|
-
|
-
|
435
|
|||||||||||||||
Consumer
|
301
|
(44
|
)
|
(22
|
)
|
3
|
238
|
|||||||||||||
Total
|
$
|
3,541
|
$
|
202
|
$
|
(63
|
)
|
$
|
7
|
$
|
3,687
|
32
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, 2017 and 2016.
Beginning
Balance
|
Provision for
(Recovery of)
Loan Losses
|
Charge-offs
|
Recoveries
|
Ending Balance
|
||||||||||||||||
Dollars in thousands
|
||||||||||||||||||||
September 30, 2017
|
||||||||||||||||||||
Commercial real estate
|
$
|
1,607
|
$
|
546
|
$
|
(208
|
)
|
$
|
148
|
$ |
2,093
|
|||||||||
Commercial and industrial
|
1,171
|
(214
|
)
|
(369
|
)
|
18
|
606
|
|||||||||||||
Residential mortgage
|
427
|
139
|
(66
|
)
|
11
|
511
|
||||||||||||||
Consumer
|
188
|
84
|
(73
|
)
|
14
|
213
|
||||||||||||||
Total
|
$
|
3,393
|
$
|
555
|
$
|
(716
|
)
|
$
|
191
|
$
|
3,423
|
|||||||||
September 30, 2016
|
||||||||||||||||||||
Commercial real estate
|
$
|
2,302
|
$
|
(432
|
)
|
$
|
(70
|
)
|
$
|
28
|
$
|
1,828
|
||||||||
Commercial and industrial
|
570
|
698
|
(99
|
)
|
17
|
1,186
|
||||||||||||||
Residential mortgage
|
505
|
(70
|
)
|
-
|
-
|
435
|
||||||||||||||
Consumer
|
346
|
(74
|
)
|
(51
|
)
|
17
|
238
|
|||||||||||||
Total
|
$
|
3,723
|
$
|
122
|
$
|
(220
|
)
|
$
|
62
|
$
|
3,687
|
The allocation of the allowance for loan losses for September 30, 2017 and December 31, 2016 is presented in the table below.
Loans
Individually
Evaluated for
Impairment
|
Loans
Collectively
Evaluated for
Impairment
|
Total
|
||||||||||
Dollars in thousands
|
||||||||||||
September 30, 2017
|
||||||||||||
Commercial real estate
|
$
|
-
|
$
|
2,093
|
$
|
2,093
|
||||||
Commercial and industrial
|
144
|
462
|
606
|
|||||||||
Residential mortgage
|
106
|
405
|
511
|
|||||||||
Consumer
|
1
|
212
|
213
|
|||||||||
Total
|
$
|
251
|
$
|
3,172
|
$
|
3,423
|
||||||
December 31, 2016
|
||||||||||||
Commercial real estate
|
$
|
35
|
$
|
1,572
|
$
|
1,607
|
||||||
Commercial and industrial
|
840
|
331
|
1,171
|
|||||||||
Residential mortgage
|
39
|
388
|
427
|
|||||||||
Consumer
|
-
|
188
|
188
|
|||||||||
Total
|
$
|
914
|
$
|
2,479
|
$
|
3,393
|
33
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The Company’s recorded investment in loans as of September 30, 2017 and December 31, 2016 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, 2017
|
December 31, 2016
|
|||||||||||||||
Loans
Individually
Evaluated for
Impairment
|
Loans
Collectively
Evaluated for
Impairment
|
Loans
Individually
Evaluated for
Impairment
|
Loans
Collectively
Evaluated for
Impairment
|
|||||||||||||
Dollars in thousands
|
||||||||||||||||
Commercial real estate
|
$
|
4,028
|
$
|
202,870
|
$
|
4,644
|
$
|
176,566
|
||||||||
Commercial and industrial
|
908
|
46,228
|
1,995
|
41,785
|
||||||||||||
Residential mortgage
|
1,890
|
46,876
|
1,038
|
43,660
|
||||||||||||
Consumer
|
119
|
37,924
|
338
|
39,059
|
||||||||||||
Unearned discounts
|
-
|
(805
|
)
|
-
|
(593
|
)
|
||||||||||
Total
|
$
|
6,945
|
$
|
333,093
|
$
|
8,015
|
$
|
300,477
|
At September 30, 2017, the Company had pre-approved but unused lines of credit totaling $67.4 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, 2017 and 2016 is as follows:
September 30, 2017
|
September 30, 2016
|
|||||||
Dollars in thousands
|
||||||||
Balance, beginning of year
|
$
|
2,043
|
$
|
2,347
|
||||
Loan disbursements
|
84
|
229
|
||||||
Loan repayments
|
(345
|
)
|
(375
|
)
|
||||
Changes in related parties
|
-
|
-
|
||||||
Balance, end of quarter
|
$
|
1,782
|
$
|
2,201
|
At September 30, 2017 and 2016, the Company had pre-approved but unused lines of credit totaling $374,000 and $277,000, respectively, to executive officers, directors and their related interests. Related party deposits totaled $1,912,000 and $1,443,000 at September 30, 2017 and 2016, respectively.
34
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, 2017 and 2016:
September 30, 2017
|
September 30, 2016
|
|||||||
Dollars in thousands
|
||||||||
Balance, beginning of year
|
$
|
1,011
|
$
|
1,994
|
||||
Additions
|
196
|
370
|
||||||
Proceeds from sale
|
(523
|
)
|
(1,156
|
)
|
||||
Valuation adjustments
|
(193
|
)
|
(278
|
)
|
||||
Losses on sales
|
(24
|
)
|
(51
|
)
|
||||
Balance, end of quarter
|
$
|
467
|
$
|
879
|
The Company has one foreclosed residential real estate property in the amount of $196,000 as of September 30, 2017.
The recorded investment in consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $462,000 as of September 30, 2017.
(9) Stock Option Plans
The Company has six share-based compensation plans in effect at September 30, 2017 and September 30, 2016. The compensation cost charged against income for those plans was approximately $5,000 and $23,000 respectively for the three and nine months ended September 30, 2017. The compensation cost charged against income for those plans for the three and nine months ended September 30, 2016 was $5,000 and $48,000, respectively.
During 2001, the Company adopted, with shareholder approval, an Incentive Stock Option Plan (the “2001 Employee Plan”) and a Non-statutory Stock Option Plan (the “2001 Director Plan”). Each plan makes available options to purchase 100,771 shares of the Company’s common stock, for an aggregate number of common shares reserved for options under these plans of 201,542. The exercise price of all options granted to date under these plans is $3.14.
The options granted in 2006 through 2011 under the 2001 Director Plan and the 2001 Employee Plan vested over a four-year period. The options granted in 2005 under the 2001 Director Plan and the 2001 Employee Plan vested over a three-year period. All unexercised options expire ten years after the date of the grant or earlier in certain circumstances. The fair market value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The 2001 Employee Plan and the 2001 Director Plan expired in 2011 in accordance with their terms and no further options may be granted under these plans.
During 2005, the Company adopted, with shareholder approval, an Incentive Stock Option Plan (the “2005 Employee Plan”) and a Non-statutory Stock Option Plan (the “2005 Director Plan”). The 2005 Employee Plan made available options to purchase 72,389 shares of the Company’s common stock and the 2005 Director Plan made available 73,527 shares of the Company’s common stock, for an aggregate number of common shares reserved under these plans of 145,916. The exercise price of all options granted to date under these plans range from $2.13 to $15.80.
35
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The options granted in 2005 under the 2005 Director Plan and the 2005 Employee Plan vested over a three-year period. The options granted in 2006 through 2015 under the 2005 Employee Plan vest over a four-year period. All unexercised options expire ten years after the date of grant. The fair market value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The 2005 Employee Plan and the 2005 Director Plan expired in 2015 in accordance with their terms and no further options may be granted under these plans. Additionally, the Company granted 10,000 shares of restricted stock under the 2005 Employee Plan in 2014. The shares vested over a 3-year period, fully vesting in January 2017.
As a result of the merger with Carolina Commerce Bank, Carolina Trust Bank assumed all outstanding options of Carolina Commerce under the existing terms and at the conversion rate of 0.625 shares of Carolina Trust stock for each share of Carolina Commerce stock. All options assumed became fully vested at the merger date. These options were converted to options to purchase shares of the Company’s common stock in August 2016 in connection with the Bank’s reorganization into the bank holding company structure. As of September 30, 2017, there were 104,776 options outstanding from the converted plans with exercise prices ranging from $2.13 to $19.20.
Total stock-based compensation recognized as compensation expense on our consolidated statement of income for the three and nine months ended September 30, 2017 and 2016 is as follows:
Three months
ended
September 30, 2017
|
Three months
ended
September 30, 2016
|
|||||||
Dollars in thousands
|
||||||||
Option Grants
|
$
|
5
|
$
|
2
|
||||
Restricted Stock Grants
|
-
|
3
|
||||||
Total compensation expense
|
$
|
5
|
$
|
5
|
Nine months
ended
September 30, 2017
|
Nine months
ended
September 30, 2016
|
|||||||
Dollars in thousands
|
||||||||
Option Grants
|
$
|
23
|
$
|
40
|
||||
Restricted Stock Grants
|
-
|
8
|
||||||
Total compensation expense
|
$
|
23
|
$
|
48
|
36
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
A summary of option activity under the stock option plans as of September 30, 2017 and changes during the period ended September 30, 2017 is presented below:
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
|||||||||||
Outstanding, December 31, 2016
|
184,892
|
$
|
6.67
|
5.40 years
|
||||||||||
Exercised
|
(738
|
)
|
2.39
|
|||||||||||
Expired
|
(5,500
|
)
|
15.06
|
|||||||||||
Forfeited
|
-
|
-
|
||||||||||||
Granted
|
-
|
-
|
||||||||||||
Outstanding, September 30, 2017
|
178,654
|
$
|
6.43
|
4.80 years
|
$
|
616,532
|
||||||||
Exercisable, September 30, 2017
|
175,696
|
$
|
6.45
|
$
|
607,818
|
There were 11,833 options vested and no options granted during the nine months ended September 30, 2017. The approximate fair value of options vested over the three and nine months ended September 30, 2017 was $28,000 and $31,000, respectively. No options were granted during the three and nine months ended September 30, 2016.
A summary of restricted stock activity during the three and nine months ended September 30, 2017 and 2016 is presented below:
Three Months Ended September 30, 2017
|
Three Months Ended September 30, 2016
|
|||||||||||||||
Non-Vested
Restricted
Stock
Outstanding
|
Weighted
Average
Grant Date
Fair Value
|
Non-Vested
Restricted
Stock
Outstanding
|
Weighted
Average
Grant Date
Fair Value
|
|||||||||||||
Beginning balance outstanding
|
-
|
-
|
3,334
|
$
|
3.31
|
|||||||||||
Granted
|
-
|
-
|
||||||||||||||
Vested
|
-
|
-
|
||||||||||||||
Ending balance outstanding
|
-
|
-
|
3,334
|
$
|
3.31
|
Nine Months Ended September 30, 2017
|
Nine Months Ended September 30, 2016
|
|||||||||||||||
Non-Vested
Restricted
Stock
Outstanding
|
Weighted
Average
Grant Date
Fair Value
|
Non-Vested
Restricted
Stock
Outstanding
|
Weighted
Average
Grant Date
Fair Value
|
|||||||||||||
Beginning balance outstanding
|
3,334
|
$
|
3.31
|
6,667
|
$
|
3.31
|
||||||||||
Granted
|
-
|
-
|
||||||||||||||
Vested
|
(3,334
|
)
|
(3,333
|
)
|
||||||||||||
Ending balance outstanding
|
-
|
-
|
3,334
|
$
|
3.31
|
37
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
As of September 30, 2017, there was $2,000 unrecognized compensation cost related to non-vested options granted under all of the Company equity compensation plans.
Upon exercise of the options, the Company issues shares from authorized but unissued shares. The Company does not typically purchase shares on the open market to fulfill obligations of the 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, 2017 is as follows:
Financial instruments whose contract represents credit risk
|
||||
September 30, 2017
|
||||
Dollars in thousands
|
||||
Undisbursed lines of credit
|
$
|
67,377
|
||
Letters of credit
|
646
|
|||
$
|
68,023
|
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;
|
☐
|
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;
|
☐
|
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, 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.
39
Discussion of Financial Condition at September 30, 2017 and December 31, 2016
During the period from December 31, 2016 to September 30, 2017, total assets increased by approximately $25.4 million, or 6.77%. The increase, reflected primarily in loans, bank owned life insurance (“BOLI”), and investment securities available-for-sale, was funded by an increase in deposits and Federal Home Loan Bank advances. Interest-earning deposits with banks, and securities available-for-sale at September 30, 2017 totaled $35.9 million compared to $45.1 million at December 31, 2016.
The Company’s investment securities portfolio as of September 30, 2017 totaled $28.3 million, an increase of $1.3 million when compared to the $27.1 million reported at December 31, 2016. All of the Company’s investment securities are classified as available-for-sale (AFS). At September 30, 2017, the Company had net unrealized loss on available-for-sale securities of $301,000, net of tax, as compared to net unrealized loss of $249,000, net of tax, at December 31, 2016.
At September 30, 2017, net loans constituted 84.09% of the Company’s total assets. Net loans increased by $31.5 million from December 31, 2016 to September 30, 2017. Of all of the portfolio segments that increased during the first nine months of 2017, commercial real estate experienced the largest amount of growth at $25.5 million or 14.11%. Management’s continued goal is to grow the loan portfolio to provide maximum income proportionate with acceptable risks.
At September 30, 2017 and December 31, 2016 impaired loans, which consisted primarily of troubled debt restructures and non-accrual loans, were $6.9 million and $8.0 million, respectively. Impaired loans of $1.8 million and $2.8 million had related allowances for loan losses aggregating $251,000 and $914,000 at September 30, 2017 and December 31, 2016, respectively. There were $5.1 million and $5.2 million of impaired loans without a specific allowance at September 30, 2017 and December 31, 2016, respectively. Impaired loans at September 30, 2017 and December 31, 2016 consisted primarily of commercial real estate, commercial and industrial and residential mortgage loans. At September 30, 2017, there were eleven loans amounting to approximately $4.4 million, which were restructured to facilitate the borrowers’ ability to repay the outstanding balance. These eleven restructured loans are considered troubled debt restructurings at September 30, 2017 and have specific reserves amounting to approximately $250,000. Of these eleven loans, ten loans totaling $4.2 million were accruing interest at September 30, 2017. At December 31, 2016, there were eleven loans totaling $5.0 million which were restructured to facilitate the borrowers’ ability to repay the outstanding balance, and of these eleven loans, ten loans totaling $4.6 million were accruing interest. Reserves for loans not considered impaired were approximately $3.2 million and $2.5 million at September 30, 2017 and December 31, 2016, respectively. The allowance for loan losses at September 30, 2017 and December 31, 2016 was 1.01% and 1.10%, respectively, of gross loans outstanding. The allowance percentage decreased by 9 basis points due primarily to two factors and was partially offset by a third factor. First of all, there was a decrease in the percentage of loans that were impaired from 2.6% at December 31, 2016 to 2.0% at September 30, 2017, and impaired loans consistently have a higher ratio of allowance to total loans than non-impaired loans do. This factor accounted for 6 basis points of the decline in the overall allowance percentage. Secondly, the ratio of aggregate reserves for impaired loans to total impaired loans declined from 11.4% at December 31, 2016 to 3.6% at September 30, 2017. This factor accounted for a 16 basis point decline in the overall allowance percentage. The third factor, partially offsetting the decreases discussed above, was an increase in the aggregate ratio of general allowances for pools of non-impaired loans to total non-impaired loans from 0.83% at December 31, 2016 to 0.95% at September 30, 2017 due to the expansion of the look back period for average loss rates to a weighted 20 quarter period in the second quarter of 2017. This factor accounted for an offsetting 13 basis point increase in the overall allowance percentage. In summary the first two factors decreased the allowance percentage by 22 basis points, and the third factor added 13 basis points for a net decrease of 9 basis points.
40
The Company records 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.
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 decreased to $16.9 million at September 30, 2017 compared to $19.7 million at December 31, 2016. The decrease is attributed mostly to the decrease in cash and due from banks of $1.8 million, or 22.05% and to a decrease in foreclosed assets. At September 30, 2017, foreclosed assets consisted of three properties valued at $467,000.
Deposit accounts represent the Company’s primary funding source and are comprised of non-interest bearing demand deposits, interest bearing demand deposits, savings accounts and time deposits. Total deposits increased by approximately $18.9 million, or 5.94%, for the nine months ended September 30, 2017. The growth is primarily due to the increases in money market accounts of $17.7 million, or 31.57%, and noninterest-earning demand deposits of $8.3 million, or 21.57%. Conversely, time deposits decreased $7.8 million, or 4.87%, including an $11.2 million decline in brokered and listing service time deposits as the Company intentionally reduced its reliance on wholesale deposits. Brokered and listing service deposits rates are generally higher than rates for retail deposits.
Federal Home Loan Bank advances totaled $20.1 million at September 30, 2017, an increase of $6.0 million over the $14.1 million advanced at December 31, 2016. The new advances were for three month, six month, and 10 year terms. The 10 year advance totaled $2.0 million and is callable by the issuer after 1 year.
Stockholders’ equity amounted to $29.8 million, or 7.44% of total assets at September 30, 2017, compared to $29.0 million, or 7.74% of total assets at December 31, 2016.
41
Discussion of Results of Operations
For the three months ended September 30, 2017 and 2016
Net Income and Net Income Available to Common Shareholders
Net income for the three months ended September 30, 2017 was $351,000 compared to $85,000 for the third quarter of 2016, an increase of $266,000. Net income attributed to the Company’s common shareholders was also $351,000 for the three months ended September 30, 2017 as compared to $27,000 for the third quarter of 2016. The $58,000 difference between net income and net income to the Company’s common shareholders in the third quarter of 2016 was attributed to the preferred dividend paid by the Bank to its preferred shareholders. The Bank redeemed its preferred stock in December 2016, which eliminated dividends on the preferred stock for 2017. Diluted earnings per common share was $0.07 for the three months ended September 30, 2017 compared to $0.01 for the third quarter of 2016. The increase in net income is primarily due to an increase in interest income on loans of $488,000 due to an increase in loans outstanding. The interest income was partially offset by the interest expense of $190,000 related to the subordinated debt that was issued on October 13, 2016.
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, 2017 totaled $3,540,000 compared to $3,274,000 for the quarter ended September 30, 2016. The Company’s net interest spread was approximately 3.64% and 3.52% for the quarters ended September 30, 2017 and 2016, respectively. Net interest margin on average interest earning assets was 3.80% and 3.67% for the quarters ended September 30, 2017 and 2016, respectively. Net interest spread increased by 12 basis points, and net interest margin increased by 13 basis points. The increases in net interest spread and net interest margin are due primarily to the 6% increase in the ratio of loans to earning assets from the quarter ended September 30, 2016 to the quarter ended September 30, 2017. The increase in loan yield from 4.98% to 5.04% over the same periods also contributed to the spread and margin improvement.
42
Provision for Loan Losses
The Company recorded a provision for loan losses of $340,000 for the quarter ended September 30, 2017 and $202,000 for the quarter ended September 30, 2016. This increase of $138,000 in the provision for loan losses is due to an increase in the amount of loans outstanding and an increase in the historical loss history. The ratio of the allowance for loan and lease losses as a percentage of total loans decreased from 1.22% at September 30, 2016 to 1.01% at September 30, 2017. The decrease in this percentage is due to the charge-off of loans that were previously impaired and to improved credit with respect to one relationship. 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. In the second quarter of 2017, the allowance methodology used in the analysis was modified by expanding the look back period for average loss rates to a weighted twenty quarter period instead of the twelve quarter period used previously. The impact of the change was a $240,000 increase to the allowance.
The following table sets forth information with respect to the asset quality of our loan portfolio as of the dates indicated.
Loans
Outstanding
|
Non-Performing
Loans
|
Net Charge-offs
(Recoveries)
|
Allowance for
Loan Losses
|
|||||||||||||
(Dollars in thousands)
|
||||||||||||||||
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
|
||||||||||||
September 30, 2014
|
227,933
|
3,081
|
(22
|
)
|
4,165
|
Non-interest Income
Non-interest income for the quarter ended September 30, 2017 totaled $367,000, an increase of $18,000 over the $349,000 reported for the quarter ended September 30, 2016. The primary factor contributing to the overall increase was the bank-owned life insurance income increase of $42,000 following a $5.5 million investment in BOLI in February 2017. The Company invested in BOLI for additional income to fund increases to health care benefits and supplemental executive retirement plans. Overdraft fees on deposits increased $15,000 for the quarter ended September 30, 2017 when compared to the same period in 2016. The bank experienced a higher volume of customer overdrafts, partially due to the growth in transaction accounts. Mortgage fee income increased by $10,000 as the bank collected more fees from brokered jumbo mortgages in the quarter ended September 2017 as compared to the quarter ended September 30, 2016. Also, in the quarter ended September 30, 2016 the Company recorded a gain on the sale of an investment security of $55,000 and did not have any sales of securities in the quarter ended September 30, 2017.
43
Non-interest Expense
Non-interest expenses for the September 30, 2017 and 2016 quarters totaled $3,046,000 and $3,172,000, respectively. The $126,000 decrease was due in part to a decrease of $126,000, or 84.82%, in foreclosed asset expense, including maintenance, repairs, losses and write-downs. A decrease of $94,000 was also recorded in professional fees due to legal fees, audit fees, compliance support, strategic planning, and other consultants used in prior years. In the third quarter of 2016, there were legal fees recorded that were related to the reorganization to a bank holding company. Offsetting these decreases was an increase in compensation expense of $71,000 due to salary and wage increases. The increase in salaries and wages was attributable to annual raises and an average of two additional full-time employees from third quarter 2016 to third quarter 2017.
Income Tax Expense
The Company recorded income tax expense of $170,000 for the three-months ended September 30, 2017 resulting in an effective tax rate of 33%. For the same period in 2016, the Company recorded income tax expense of $164,000 with an effective tax rate of 66%. The state of North Carolina reduced its corporate tax rate to 4% in 2016 and to 3% in 2017. Income tax expense for the period ended September 30, 2016 included a rate revaluation of $79,000 of the deferred tax asset to reflect the decrease in state corporate tax rates. If the rate revaluation were excluded, the effective tax rate would have been 34% for the quarter ended September 30, 2016. The additional tax exempt income from the BOLI investment in February 2017 also contributed to the lower overall effective tax rate in 2017.
In June 2017, the North Carolina corporate tax rate was lowered from 3% to 2.5%, effective in 2019. Management has determined initially that the impact of the rate change on deferred tax assets is not material and will continue to monitor the impact until the new tax rate is effective in 2019.
Discussion of Results of Operations
For the nine months ended September 30, 2017 and 2016
Net Income and Net Income Available to Common Shareholders
Net income for the nine months ended September 30, 2017 was $758,000 compared to $959,000 for the nine months ended September 30, 2016, a decrease of $201,000. Net income available to common shareholders (which includes the effect of dividends on the non-controlling interest – see Note 3 to the Notes to Condensed Consolidated Financial Statements) was $758,000 for the nine months ended September 30, 2017 compared to $784,000 for the nine months ended September 30, 2016, a $26,000 decrease. Diluted earnings per common share was $0.16 for the nine months ended September 30, 2017 and $0.17 for the nine months ended September 30, 2016.
Net Interest Income
Net interest income for the nine months ended September 30, 2017 totaled $10,214,000 compared to $10,042,000 for the nine months ended September 30, 2016. The Company’s net interest spread was approximately 3.62% and 3.72% for the nine months ended September 30, 2017 and 2016, respectively. Net interest margin on average interest earning assets was 3.77% and 3.87% for the nine months ended September 30, 2017 and 2016, respectively. The decreases in net interest spread and net interest margin were both 0.10%. The decreases in net interest spread and net interest margin were due to the interest expense on subordinated debt, issued in October 2016, that accounted for 15 basis points.
44
Provision for Loan Losses
The Company recorded provision for loan losses of $555,000 for the nine months ended September 30, 2017 and recorded a provision of loan losses of $122,000 for the nine months ended September 30, 2016. This increase in the provision for loan losses was due to an increase in the amount of loans outstanding and to expanding the period for calculating the historical loss factors that are applied to pools of performing loans. In the second quarter of 2017, the allowance methodology used was modified by expanding the look back period for average loss rates to a weighted twenty quarter period instead of the twelve quarter period used previously. The impact of the change was a $240,000 increase to the allowance. 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, 2017 and 2016 totaled $997,000 and $947,000, respectively. The increase of $50,000 was comprised of interchange fee income and BOLI income. Interchange fee income increased $32,000, or 9.7%, and bank-owned life insurance income increased $106,000, or 274.4%, due to the increase in the investment in bank-owned life insurance. Offsetting these increases was a decrease in gain on the sale of securities. In the quarter ended September 30, 2016 the Company recorded a gain on the sale of an investment security of $55,000 but did not have any sales of securities in the quarter ended September 30, 2017.
Non-interest Expense
Non-interest expenses for the nine months ended September 30, 2017 and 2016 totaled $9,530,000 and $9,245,000, respectively. The $285,000 increase was due in part to a $174,000, or 3.4%, increase in salaries and employee benefits as a result of health insurance increases, merit increases and performance bonus increases. An increase of $182,000, or 32.7%, was also recorded in data processing expense due to an increase in the number of customer accounts and expenses for conversion of our core products that was completed in April 2017. Offsetting these increases were decreases in professional fees of $171,000 or 33.9% due to legal fees related to the reorganization to a bank holding company in 2016 and decreases in foreclosed asset expenses of $96,000 or 25.3% including maintenance, repairs, losses and write-downs.
Income Tax Expense
The Company recorded income tax expense of $368,000 for the nine months ended September 30, 2017 resulting in an effective tax rate of 33%. For the same period in 2016, the Company recorded income tax expense of $663,000 resulting in an effective tax rate of 41%. The state of North Carolina reduced its corporate tax rate to 4% in 2016 and to 3% in 2017. Income tax expense for the nine months ended September 30, 2016 included a rate revaluation of $79,000 of the deferred tax asset to reflect the decrease in state corporate tax rates. If the rate revaluation were excluded, the effective tax rate would have been 36% for the nine months ended September 30, 2016. The additional $106,000 in tax exempt BOLI income in the nine months ended September 30, 2017 also contributed to the lower overall effective tax rate.
45
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 general interest rates, economic conditions and competition. Liquid assets, which consist of cash and due from banks, interest-earning deposits with banks, certificates of deposit with banks and investment securities classified as available-for-sale, comprised 10.92% and 14.59% of total assets at September 30, 2017 and December 31, 2016, 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 $14 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, 2017. 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, 2017 was $58.5 million, of which $20.1 million was advanced.
Total deposits were $337.6 million and $318.7 million at September 30, 2017 and December 31, 2016, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 45.07% and 50.19% of total deposits at September 30, 2017 and December 31, 2016, respectively. At September 30, 2017 and December 31, 2016, the Company had brokered time deposits of $23.3 million and $25.4 million, respectively. The Company also obtains time accounts by connecting with institutional depositors through an online listing service. At September 30, 2017 and December 31, 2016, respectively, the deposits attributed to the listing service were $12.7 million and $21.8 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.
46
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 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 quality and stability of earnings, asset quality, guidance, expertise and liquidity. Regulatory guidelines place an emphasis on stockholders’ equity in relation to total assets adjusted for risk.
In July 2013, the Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Effective January 1, 2015, the final rules require the Bank to comply with the following minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets (increased from the prior requirement of 4.0%); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.0% of total assets (unchanged from the prior requirement). The rules also establish a requirement for the Bank to maintain a capital conservation buffer. The capital conservation buffer requirement began January 1, 2016, at 0.625% of risk-weighted assets, and will increase by the same amount each year until fully implemented at 2.5% on January 1, 2019. 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.
When fully phased in on January 1, 2019, the rules will require 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 as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (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 as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (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 as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
Management considers 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.
Beginning January 1, 2015, the Bank calculates regulatory capital under the U.S. Basel III Standardized Approach. As a small bank holding company with less than $1 billion in total assets, the risk-based capital guidelines of the Federal Reserve do not apply to the Company on a consolidated basis.
47
The table below presents the regulatory capital ratios for the Bank.
At June 30, 2017
|
||||||||||||
Actual
Ratio
|
Minimum
Requirement
|
Well-Capitalized
Requirement
|
||||||||||
Common equity tier 1 capital ratio
|
10.31
|
%
|
4.50
|
%
|
6.50
|
%
|
||||||
Total risk-based capital ratio
|
10.31
|
%
|
8.00
|
%
|
10.00
|
%
|
||||||
Tier 1 risk-based capital ratio
|
11.26
|
%
|
6.00
|
%
|
8.00
|
%
|
||||||
Tier 1 leverage ratio
|
9.54
|
%
|
4.00
|
%
|
5.00
|
%
|
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. 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.
48
Exhibit #
|
Description
|
|
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
|
||
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
|
||
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, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2017 and 2016; (iii) Condensed Consolidated Statements of Operations (Unaudited) for the Nine Months Ended September 30, 2017 and 2016; (iv) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended September 30, 2017 and 2016; (v) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Nine Months Ended September 30, 2017 and 2016; (vi) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2017 and 2016; (vii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2017 and 2016; and (viii) Notes to Condensed Consolidated Financial Statements (Unaudited)
|
49
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, 2017
|
By:
|
/s/Jerry L. Ocheltree
|
Jerry L. Ocheltree
|
||
President and Chief Executive Officer
|
||
Date: November 13, 2017
|
By:
|
/s/Edwin E. Laws
|
Edwin E. Laws
|
||
Executive Vice President and Chief Financial Officer
|