Carolina Trust BancShares, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - Carolina Trust BancShares, Inc.	ex32.htm
EX-31.2 - EXHIBIT 31.2 - Carolina Trust BancShares, Inc.	ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Carolina Trust BancShares, Inc.	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 March 31, 2018

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 May 10, 2018 was 6,970,987.

TABLE OF CONTENTS

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets March 31, 2018 and December 31, 2017	2

		Condensed Consolidated Statements of Operations Three Months Ended March 31, 2018 and 2017	3

		Condensed Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2018 and 2017	4

		Condensed Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended March 31, 2018 and 2017	5

		Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2018 and 2017	6

		Notes to Condensed Consolidated Financial Statements	7

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		32

Item 4 -	Controls and Procedures		40

Part II.	OTHER INFORMATION

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 6 -	Exhibits		41

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1 – Financial Statements

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

	March 31, 2018			December 31, 2017*
Assets
Cash and due from banks	$	12,758		$	5,409
Interest-earning deposits with banks		17,740			3,647
Cash and cash equivalents		30,498			9,056

Certificates of deposit with banks		1,498			1,498
Investment securities available for sale, at fair value (amortized cost $30,016 and $32,067)		29,198			31,112
Equity securities		664			-
Federal Home Loan Bank stock, at cost		1,560			1,341
Loans		367,039			348,679
Less: Allowance for loan and lease losses		(3,780	)		(3,599	)
Net Loans		363,259			345,080

Bank-owned life insurance		7,247			7,197
Accrued interest receivable		1,092			1,078
Bank premises, equipment and software		6,360			6,466
Foreclosed assets		2,215			789
Core deposit intangible, net of accumulated amortization of $720 and $711 at March 31, 2018 and December 31, 2017, respectively		64			73
Other assets		2,955			2,928
Total Assets	$	446,610		$	406,618

Liabilities and Stockholders’ Equity
Noninterest-earning demand deposits	$	55,309		$	49,199
Interest-earning demand deposits		119,884			115,396
Savings		23,441			22,066
Time deposits		174,268			153,992
Total deposits		372,902			340,653

Capital lease obligation		191			207
Federal Home Loan Bank advances		28,100			23,600
Long term debt		2,993			-
Long term subordinated debt		9,695			9,676
Accrued interest payable		501			292
Other liabilities		2,849			3,071
Total liabilities		417,231			377,499

Common stock warrant		426			426
Common stock, $2.50 par value; 10,000,000 shares authorized; 4,660,987 and 4,657,880 shares issued and outstanding		11,652			11,645
Additional paid-in capital		13,017			13,008
Retained earnings		4,910			4,772
Accumulated other comprehensive loss		(626	)		(732	)
Total stockholders’ equity		29,379			29,119
Total Liabilities and Stockholders’ Equity	$	446,610		$	406,618

*Derived from Carolina Trust BancShares, Inc.’s audited financial statements included in its 2017 Annual Report on Form 10-K

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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

	Three Months Ended March 31,
	2018		2017
Interest Income
Interest on investment securities and cash	$	249	$	217
Interest and fees on loans		4,578		3,860
Total interest income		4,827		4,077

Interest Expense
Interest expense non-maturity deposits		146		75
Interest expense time deposits		608		508
Interest expense borrowed funds		110		45
Interest expense capital lease		4		5
Interest expense debt		1		-
Interest expense on subordinated debt		191		190
Total interest expense		1,060		823
Net interest income		3,767		3,254
Loan loss provision		252		151
Net interest income after loan loss provision		3,515		3,103

Noninterest income
Overdraft fees on deposits		140		84
Interchange fee income		46		20
Service charges on deposits		15		14
Mortgage fee income		15		16
Customer service fees		15		13
ATM income		6		6
Bank-owned life insurance income		49		36
Unrealized gain on equity securities		38		-
Other income		6		4
Total noninterest income		330		193

Noninterest expense
Salaries & benefits expense		1,863		1,743
Occupancy expense		228		204
Furniture, fixture & equipment expense		157		140
Data processing expense		202		268
Office supplies expense		20		20
Professional fees		111		106
Advertising and marketing		32		35
Insurance		94		73
Foreclosed asset expense, net		26		40
Loan expense		28		37
Stockholder expense		34		58
Directors fees and expenses		74		70
Telephone expense		71		70
Core deposit intangible amortization expense		9		12
Other operating expense		147		101
Total noninterest expense		3,096		2,977
Pre-tax income		749		319
Income tax expense		168		108
Net income	$	581	$	211

Earnings per share
Basic earnings per common share	$	0.12	$	0.05
Diluted earnings per common share	$	0.12	$	0.04
Weighted average common shares outstanding		4,660,325		4,654,386
Diluted average common shares outstanding		4,764,274		4,734,010

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2018			2017

Net income	$	581		$	211

Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Unrealized holding gains (losses) arising during period		(440	)		166
Deferred income tax benefit (expense)		103			(61	)
Total other comprehensive income (loss)		(337	)		105

Total comprehensive income	$	244		$	316

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

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

(Dollars in thousands)

	2018 Shares Outstanding		March 31, 2018			2017 Shares Outstanding		March 31, 2017

Common stock warrant			$	426				$	426

Common stock, $2.50 par value
Balance, beginning of year		4,657,880		11,645			4,650,808		11,627
Exercise of stock options		3,107		7			738		2
Restricted stock vesting		-		-			3,334		8
Balance, end of period		4,660,987		11,652			4,654,880		11,637

Additional paid-in capital
Balance, beginning of year				13,008					12,988
Stock-based compensation				1					9
Exercise of stock options				8					1
Restricted stock vesting				-					(8	)
Balance, end of period				13,017					12,990

Retained earnings
Balance, beginning of year				4,772					4,241
Net income				581					211
Reclassification of loss on equity securities				(443	)				-
Balance, end of period				4,910					4,452

Accumulated other comprehensive income (loss)
Balance, beginning of year				(732	)				(249	)
Reclassification of loss on equity securities				443					-
Other comprehensive income				(337	)				105
Balance, end of period				(626	)				(144	)

Total stockholders’ equity			$	29,379				$	29,361

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2018			2017
Cash flows from operating activities
Net income	$	581		$	211
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:
Provision for loan losses		252			151
Depreciation and amortization of bank premises, equipment and software		115			93
Accretion of loan fair value adjustments related to acquisition		(1	)		(4	)
Net amortization of bond premiums/discounts		33			41
Amortization of long term subordinated debt issuance costs		19			17
Unrealized gain on equity securities		(38	)		-
Amortization of core deposit intangible		9			12
Stock compensation expense		1			9
Increase in value of life insurance contracts		(49	)		(36	)
Net losses and impairment write-downs on foreclosed assets		-			12
Deferred tax provision		(22	)		266
Decrease (increase) in other assets		98			(183	)
Decrease (increase) in accrued interest receivable		(14	)		55
Increase in accrued interest payable		209			134
Decrease in other liabilities		(222	)		(414	)
Net cash and cash equivalents provided by operating activities		971			364

Cash flows from investing activities
Net increase in loans		(19,856	)		(3,186	)
Proceeds from sale of foreclosed assets		-			119
Net purchases of bank premises, equipment and software		(9	)		(431	)
Purchase of Bank-owned life insurance		-			(5,500	)
Purchase of available for sale securities		-			(1,284	)
Proceeds from maturities, calls and pay-downs of available for sale securities		814			1,748
Purchase of Federal Home Loan Bank stock		(219	)		(122	)
Net cash and cash equivalents used in investing activities		(19,270	)		(8,656	)

Cash flows from financing activities
Increase in deposits		32,249			4,514
Increase in Federal Home Loan Bank advances		4,500			3,000
Payment of capital lease obligation		(16	)		(15	)
Issuance of loan term debt		2,993			-
Net proceeds from issuance of common stock		15			3
Net cash and cash equivalents provided by financing activities		39,741			7,502
Net increase (decrease) in cash and cash equivalents		21,442			(790	)

Cash and cash equivalents, beginning		9,056			26,149
Cash and cash equivalents, ending	$	30,498		$	25,359

Supplemental disclosure of cash flow information
Cash paid during the period for taxes	$	70		$	-
Cash paid during the period for interest	$	851		$	538

Noncash financing and investing activities
Unrealized gain (loss) on investment securities available-for-sale, net of taxes	$	(337	)	$	105
Transfer of loans to foreclosed assets	$	1,426		$	-

See accompanying notes to Condensed Consolidated Financial Statements.

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

(1)	Presentation of Financial Statements

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

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for fair presentation of the financial information as of March 31, 2018, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.

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 2017 Annual Report on Form 10-K. This quarterly report should be read in conjunction with the Annual Report.

(2)	Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments - Overall, Subtopic 825-10 (“ASU 2016-01”) to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The fair value measurement based on an exit price assumes that an asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability, or (2) in the absence of a principal market, in the most advantageous market for the asset or liability. The company has adopted the standard and applied the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the 2018 fiscal year. The amendments related to equity securities without readily determinable fair values were applied prospectively to equity investments that existed as of January 1, 2018. The Company is now reporting unrealized gains and losses of its marketable equity securities in income as compared to the previous method of reporting through other comprehensive income. The nonmarketable equity securities that do not have readily determinable values were previously recorded at cost. Following implementation, these securities, primarily Federal Home Loan Bank, or FHLB, stock, are 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. The unrealized loss on equity securities in accumulated other comprehensive income in the amount of $443,000 was reclassified to retained earnings on January 1, 2018.

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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 (“ASU 2014-09”). 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 need to use more judgment and make more estimates than under existing guidance. This analysis 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 adopted this standard in 2018 using the full retrospective approach. The majority of the Company’s revenues are generated from financial instruments which are not within the scope of this standard. Management has evaluated the impact for its various other revenue streams including the following: deposit account fees and service charges; other fees such as wire services and check cashing services; ATM surcharges; card related fees; and gains and losses from sales of foreclosed properties and fixed assets. This evaluation led management to conclude that this standard does not materially impact its financial statements. Additionally, based on underlying contracts, this standard requires the Company to report costs associated with debit card and ATM transactions netted against the related fees from such transactions. Previously, such costs were reported as check card expenses. For the three months ended March 31, 2018, gross interchange fees totaled $121,000 and related costs totaled $75,000. In the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2018, we reported on a net basis $46,000 as interchange fee income. For the three months ended March 31, 2017, gross interchange fees totaled $119,000 and related costs totaled $99,000. In the accompanying Condensed Consolidated Statements of Operations for the three months ended March 31, 2017, we reported on a net basis $20,000 as interchange fee income..

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 2017, four of our locations have operating leases that expire in 2019 with aggregate payments totaling $157,000. If the new standard were in effect, an asset and a liability for the present value of payments would be recognized. Similarly, other property leases expire in 2020 and 2021 that have payments totaling $126,000 and $159,000, respectively.

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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 is adopting a software model for the 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)	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.

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.

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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 months ended March 31, 2018 and 2017, respectively:

Dollars in thousands, except per share data	Net Income		Weighted Average Common Shares		Per Share Amount
Three months ended March 31, 2018
Basic earnings per common share	$	581		4,660,325	$	0.12
Effect of dilutive stock securities				80,735
Effect of dilutive stock warrants				23,214
Diluted earnings per common share	$	581		4,764,274	$	0.12

Three months ended March 31, 2017
Basic earnings per common share	$	211		4,654,386	$	0.05
Effect of dilutive stock securities				69,702
Effect of dilutive stock warrants				9,922
Diluted earnings per common share	$	211		4,734,010	$	0.04

For the three months ended March 31, 2018, there were 500 shares related to stock options that were anti-dilutive because the exercise price exceeded the average market price for the period. For the three months ended March 31, 2017, there were 41,481 shares related to stock options 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.

(4)	Fair Value Measurements

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

Cash and Due from Banks, Interest-Earning Deposits with Banks, Certificates of Deposit with Banks and Federal Funds Sold

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

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

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 in active markets for identical securities (level 1), fair value may be estimated using observable inputs such as quoted prices for similar securities, interest rates and yield curves, implied volatilities and credit spreads (level 2). Otherwise, unobservable inputs such as independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating on similar securities, prepayment assumptions and other factors such as credit loss assumptions (level 3). The fair value would be based on an exit price between market participants that may include adjustments for liquidity and credit.

Loans

The fair value of loans is estimated based on exit price. These cash flows include assumptions for prepayment estimates over each loan’s remaining life, considerations for the current interest rate environment compared to the weighted average rate of each portfolio and a credit risk component based on the historical and expected performance of each portfolio. The calculation also includes market liquidity and credit adjustments. These valuations are not comparable with the fair values disclosed for December 31, 2017 which were based on an entrance price basis.

Accrued Interest

The carrying amount is a reasonable estimate of fair value.

Deposits

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

Capital Lease Obligation, Advances from the Federal Home Loan Bank, Long Term Debt 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 9, the fair value amounts are not material.

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

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 March 31, 2018 and December 31, 2017:

			Fair Value Measurements at March 31, 2018 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Dollars in thousands	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
ASSETS
Cash and due from banks	$	12,758	$	12,758	$	-	$	-	$	12,758
Interest-earning deposits with banks		17,740		17,740		-		-		17,740
Certificates of deposit with banks		1,498		-		1,493		-		1,493
Federal Home Loan Bank stock		1,560		-		1,560		-		1,560
Investment securities available for sale		29,198		-		29,198		-		29,198
Equity securities		664		664		-		-		664
Net loans		363,259		-		-		354,838		354,838
Accrued interest receivable		1,092		-		1,092		-		1,092

LIABILITIES
Deposits	$	372,902	$	-	$	357,749	$	-	$	357,749
Capital lease obligation		191		-		191		-		191
Federal Home Loan Bank Advances		28,100		-		27,904		-		27,904
Long term debt		2,993		-		3,000		-		3,000
Long term subordinated debt		9,695		-		9,449		-		9,449
Accrued interest payable		501		-		501		-		501

			Fair Value Measurements at December 31, 2017 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Dollars in thousands	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
ASSETS
Cash and due from banks	$	5,409	$	5,409	$	-	$	-	$	5,409
Interest-earning deposits with banks		3,647		3,647		-		-		3,647
Certificates of deposit with banks		1,498		-		1,519		-		1,519
Federal Home Loan Bank stock		1,341		-		1,341		-		1,341
Investment securities available for sale		31,112		626		30,486		-		31,112
Net loans		345,080		-		-		345,370		345,370
Accrued interest receivable		1,078		-		1,078		-		1,078

LIABILITIES
Deposits	$	340,653	$	-	$	330,672	$	-	$	330,672
Capital lease obligation		207		-		207		-		207
Federal Home Loan Bank Advances		23,600		-		23,495		-		23,495
Long term subordinated debt		9,676		-		9,619		-		9,619
Accrued interest payable		292		-		292		-		292

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.

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

Fair Value Hierarchy

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

Level 1

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

Level 2

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

Level 3

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

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 enterprises and municipal bonds. There have been no changes in valuation techniques for the quarter ended March 31, 2018. Valuation techniques are consistent with techniques used in prior periods.

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

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
March 31, 2018
U.S. Government and federal agency	$	10,936	$	-	$	10,936	$	-
Mortgage-backed securities*		17,975		-		17,975		-
Municipal securities		287		-		287		-
Equity securities		664		664		-		-
Total	$	29,862	$	664	$	29,198	$	-

December 31, 2017
U.S. Government and federal agency	$	11,276	$	-	$	11,276	$	-
Mortgage-backed securities*		18,915		-		18,915		-
Municipal securities		295		-		295		-
Equity securities		626		626		-		-
Total	$	31,112	$	626	$	30,486	$	-

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

The Company did not have any transfers of assets between Levels 1, 2 or 3 during the periods ended March 31, 2018 and December 31, 2017.

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 March 31, 2018, 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 twenty-three loans totaling $2.6 million. At December 31, 2017, the discounted cash flows method was used in determining the fair value of nine loans totaling $1.9 million and the fair value of the collateral method was used in the other twenty-nine loans totaling $4.2 million. Impaired loans where an allowance is established based on the fair value of collateral and also when written down with the discounted cash flow method require classification in the fair value hierarchy. The fair value of the collateral for an impaired loan is classified as Level 3. Although appraisals of these properties are frequently based on comparable properties, they are not identical. Significant unobservable inputs will need to be used in assessing the value. When the discounted cash flows method is used, the Company records the impaired loan as nonrecurring Level 3. There have been no changes in valuation techniques for the period ended March 31, 2018. Valuation techniques are consistent with techniques used in prior periods.

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

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 three months ended March 31, 2018 and 2017.

	March 31, 2018					March 31, 2017
Dollars in thousands	Level 2		Level 3			Level 2		Level 3
Carrying value of impaired loans before allocations	$	-	$	1,873			-	$	2,728
Specific valuation allowance allocations		-		(255	)		-		(900	)
Carrying value of impaired loans after allocations	$	-	$	1,618			-	$	1,828

Foreclosed Assets

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

The carrying value of foreclosed assets is periodically reviewed and written down to fair value. Any loss is included in earnings. For the period ended March 31, 2018, foreclosed assets in the amount of $1,158,000 were written down by $180,000 to $978,000 prior to foreclosure. For the period ended March 31, 2018, there were no re-measurements of foreclosed assets subsequent to foreclosure. For the period ended March 31, 2017, foreclosed assets with a carrying value of $889,000 were written down by $9,000 to $880,000.

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
March 31, 2018
Foreclosed assets	$	978	$	-	$	-	$	978
Impaired loans		1,618		-		-		1,618
Total	$	2,596	$	-	$	-	$	2,596

December 31, 2017
Foreclosed assets	$	324	$	-	$	-	$	324
Impaired loans		1,621		-		-		1,621
Total	$	1,945	$	-	$	-	$	1,945

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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
March 31, 2018
Impaired loans	$	1,618	Discounted cash flows	Discount rate		4.75% - 8.50	%		7.02	%
Foreclosed assets		978	Discounted appraisals	Appraisal adjustments		15	%		15	%

December 31, 2017
Impaired loans	$	101	Discounted appraisals	Appraisal adjustments		20.00 – 25.00	%		23.33	%
		1,520	Discounted cash flows	Discount rate		4.75 – 8.50	%		7.06	%

Foreclosed assets		324	Discounted appraisals	Appraisal adjustments		15.00	%		15.00	%

(5)	Investment Securities

The amortized cost and fair value of securities, with gross unrealized gains and losses, is as follows:

In thousands	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 31, 2018
Available for sale securities
U.S. Government and federal agency	$	11,243	$	7	$	(314	)	$	10,936
Mortgage-backed securities *		18,477		35		(537	)		17,975
Municipal securities		296		-		(9	)		287
Total available for sale securities	$	30,016	$	42	$	(860	)	$	29,198

December 31, 2017
U.S. Government and federal agency	$	11,424	$	11	$	(159	)	$	11,276
Mortgage-backed securities *		19,142		61		(288	)		18,915
Municipal securities		297		-		(2	)		295
Equity securities		1,204		-		(578	)		626
	$	32,067	$	72	$	(1,027	)	$	31,112

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

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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 March 31, 2018 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	$	1	$	1
Due after one but within five years		7,184		7,013
Due after five but within ten years		6,875		6,696
Due after ten years		15,956		15,488
	$	30,016	$	29,198

The following table details unrealized losses and related fair values in the Company’s 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 March 31, 2018 and December 31, 2017, 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
March 31, 2018
Available for sale securities
U.S. Government and federal agency	$	8,888	$	(233	)	$	1,887	$	(81	)	$	10,775	$	(314	)
Mortgage-backed securities *		5,577		(105	)		9,980		(432	)		15,557		(537	)
Municipal Securities		287		(9	)		-		-			287		(9	)
Total temporarily impaired securities	$	14,752	$	(347	)	$	11,867	$	(513	)	$	26,619	$	(860	)

December 31, 2017
U.S. Government and federal agency	$	7,101	$	(88	)	$	2,008	$	(71	)	$	9,109	$	(159	)
Mortgage-backed securities *		5,472		(38	)		10,560		(250	)		16,032		(288	)
Municipal securities		295		(2	)		-		-			295		(2	)
Equity securities		626		(577	)		-		(1	)		626		(578	)
Total temporarily impaired securities	$	13,494	$	(705	)	$	12,568	$	(322	)	$	26,062	$	(1,027	)

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

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

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 March 31, 2018, 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 reported decreased 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.

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 March 31, 2018, 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 $1.0 million at March 31, 2018 were pledged to secure public funds. The Company had no sales of securities during the three month periods ended March 31, 2018 and March 31, 2017.

(6)

Loans

The following is a summary of loans at March 31, 2018 and December 31, 2017:

	March 31, 2018					December 31, 2017
Dollars in thousands	Amount		Percent of Total			Amount		Percent of Total
Commercial real estate
Residential ADC	$	8,208		2.24	%	$	7,242		2.08	%
Commercial ADC		27,369		7.46	%		24,364		6.99	%
Farmland		5,621		1.53	%		5,392		1.55	%
Multifamily		13,138		3.58	%		11,967		3.43	%
Owner occupied		93,394		25.45	%		84,808		24.32	%
Non-owner occupied		85,839		23.39	%		79,549		22.81	%
Total commercial real estate		233,569		63.65	%		213,322		61.18	%

Commercial
Commercial and industrial		42,667		11.62	%		47,032		13.49	%
Agriculture		379		0.10	%		415		0.12	%
Other		1,406		0.38	%		1,420		0.40	%
Total commercial		44,452		12.10	%		48,867		14.01	%

Residential mortgage
First lien, closed-end		50,453		13.75	%		47,936		13.75	%
Junior lien, closed-end		785		0.21	%		1,123		0.32	%
Total residential mortgage		51,238		13.96	%		49,059		14.07	%

Home equity lines		33,856		9.22	%		33,672		9.66	%
Consumer – other		3,924		1.07	%		3,759		1.08	%

Total loans	$	367,039		100.00	%	$	348,679		100.00	%

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

Loans are primarily originated for customers residing in Lincoln, Gaston, Rutherford, Catawba, Iredell, and Rowan 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.

Non-Accrual and Past Due Loans

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

	March 31, 2018		December 31, 2017
Dollars in thousands
Commercial real estate
Commercial ADC	$	4	$	5
Owner occupied		991		2,031
Non-owner occupied		7		28
Total commercial real estate		1,002		2,064
Commercial
Commercial and industrial		-		25
Total commercial		-		25
Residential mortgage:
First lien, closed end		80		86
Junior lien, closed end		6		455
Total residential mortgage		86		541
Home equity lines		32		34
Consumer – other		5		-
Total non-accrual loans	$	1,125	$	2,664

Interest foregone on non-accrual loans was approximately $15,000 for the three months ended March 31, 2018 and $14,000 for the three months ended March 31, 2017.

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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
March 31, 2018
Commercial real estate:
Residential ADC	$	-	$	-	$	-	$	8,208	$	8,208	$	-
Commercial ADC		16		-		16		27,353		27,369		-
Farmland		-		-		-		5,621		5,621		-
Multifamily		-		-		-		13,138		13,138		-
Owner occupied		60		980		1,040		92,354		93,394		-
Non-owner occupied		140		-		140		85,699		85,839		-
Total commercial real estate		216		980		1,196		232,373		233,569		-
Commercial:
Commercial and industrial		109		-		109		42,558		42,667		-
Agriculture		-		-		-		379		379		-
Other		-		-		-		1,406		1,406		-
Total commercial		109		-		109		44,343		44,452		-
Residential mortgage:
First lien, closed end		-		52		52		50,401		50,453		-
Junior lien, closed-end		-		-		-		785		785		-
Total residential mortgage		-		52		52		51,186		51,238		-
Home equity lines		112		-		112		33,744		33,856		-
Consumer – other		4		-		4		3,920		3,924		-
Total loans	$	441	$	1,032	$	$1,473	$	365,566	$	367,039		-

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, 2017
Commercial real estate:
Residential ADC	$	-	$	-	$	-	$	7,242	$	7,242	$	-
Commercial ADC		-		-		-		24,364		24,364		-
Farmland		-		-		-		5,392		5,392		-
Multifamily		-		-		-		11,967		11,967		-
Owner occupied		254		2,018		2,272		82,536		84,808		-
Non-owner occupied		144		-		144		79,405		79,549		-
Total commercial real estate		398		2,018		2,416		210,906		213,322		-
Commercial:
Commercial and industrial		-		25		25		47,007		47,032		-
Agriculture		-		-		-		415		415		-
Other		-		-		-		1,420		1,420		-
Total commercial		-		25		25		48,842		48,867		-
Residential mortgage:
First lien, closed end		50		135		185		47,751		47,936		79
Junior lien, closed-end		-		449		449		674		1,123		-
Total residential mortgage		50		584		634		48,425		49,059		79
Home equity lines		200		3		203		33,469		33,672		3
Consumer – other		10		-		10		3,749		3,759		-
Total loans	$	658	$	2,630	$	3,288	$	345,391	$	348,679	$	82

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

At March 31, 2018 there were no loans past due 90 days or more, which were still accruing interest. There were two loans totaling $82,000 past due 90 days or more and still accruing interest at December 31, 2017.

Impaired loans

Impaired loans are set forth in the following tables.

March 31, 2018
In thousands	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
Commercial real estate
Commercial ADC	$	4	$	4	$	-	$	-
Owner occupied		2,531		2,388		143		1
Non-owner occupied		7		7		-		-
Total commercial real estate		2,542		2,399		143		1
Commercial
Commercial and industrial		715		-		715		149
Residential mortgage
First lien, closed-end		939		80		800		24
Junior lien, closed- end		426		213		213		79
Total residential mortgage		1,365		293		1,013		103
Home equity lines		151		106		-		-
Consumer – other		6		4		2		2
Total loans	$	4,779	$	2,802	$	1,873	$	255

December 31, 2017
In thousands	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
Commercial real estate
Commercial ADC	$	4	$	4	$	-	$	-
Owner occupied		3,721		3,591		-		-
Non-owner occupied		28		28		-		-
Total commercial real estate		3,753		3,623		-		-
Commercial
Commercial and industrial		766		25		741		144
Residential mortgage
First lien, closed-end		1,040		165		811		24
Junior lien, closed- end		884		670		215		79
Total residential mortgage		1,924		835		1,026		103
Home equity lines		151		106		-		-
Consumer – other		1		-		1		1
Total loans	$	6,595	$	4,589	$	1,768	$	248

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

	3 months ended March 31, 2018				3 months ended March 31, 2017
In thousands	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate
Commercial ADC	$	2	$	-	$	1,829	$	-
Farmland		-		-		42		-
Multifamily		-		-		150		-
Owner occupied		1,531		23		2,143		28
Non-owner occupied		9		-		35		-
Total commercial real estate		1,542		23		4,199		28
Commercial
Commercial and industrial		370		12		1,900		16
Residential mortgage
First lien, closed-end		463		18		1,332		16
Junior lien, closed- end		329		7		-		-
Total residential mortgage		792		25		1,332		16
Home equity lines		52		1		138		2
Consumer – other		2		-		2		-
Total loans	$	2,758	$	61	$	7,571	$	62

Troubled Debt Restructurings

As of March 31, 2018, eleven loans totaling $4,096,000 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. Ten loans totaling $4,163,000 were identified as troubled debt restructurings and considered impaired at December 31, 2017, none of which had unfunded commitments.

Of the eleven loans identified as troubled debt restructurings at March 31, 2018, nine loans totaling $3,338,000 were accruing interest. Of the ten loans identified as troubled debt restructurings at December 31, 2017, nine loans totaling $3,398,000 were accruing interest.

For the three months ended March 31, 2018, the following table presents a breakdown of the types of concessions made by loan class.

	Three months ended March 31, 2018
Dollars in thousands	Number of loans		Unpaid Principal Pre-Modification		Post-Modification Outstanding Recorded Investment
Extended payment terms
Consumer - other		1	$	2	$	2
Total		1	$	2	$	2
Grand Total		1	$	2	$	2

For the three months ended March 31, 2017, there were no concessions made on newly restructured loans.

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

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

There were no loans that were modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three months ended March 31, 2018 and March 31, 2017.

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 March 31, 2018 and 2017.

	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
March 31, 2018					(Dollars in thousands)
Extended payment terms		-	$	-		1	$	2		-	$	-		-	$	-
Forgiveness of principal		-		-		2		426		-		-
Total		-	$	-		3	$	428		-	$	-			$

	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
March 31, 2017					(Dollars in thousands)
Other		-	$	-		1	$	370		-	$	-		-	$	-
Total		-	$	-		1	$	370		-	$	-		-	$	-

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.

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.

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

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

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

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

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

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

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

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.

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

The following table presents the credit risk profile by internally assigned risk grades.

March 31, 2018
Dollars in thousands	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial real estate:
Residential ADC	$	8,208	$	-	$	-	$	-	$	-
Commercial ADC		26,893		472		4		-		-
Farmland		5,621		-		-		-		-
Multifamily		13,138		-		-		-		-
Owner occupied		91,233		1,027		1,134		-		-
Non-owner occupied		84,859		840		140		-		-
Total commercial real estate		229,952		2,339		1,278		-		-
Commercial:
Commercial and industrial		41,203		1,081		383		-		-
Agriculture		379		-		-		-		-
Other		1,406		-		-		-		-
Total commercial		42,988		1,081		383		-		-
Residential mortgage:
First lien, closed-end		49,919		454		80		-		-
Junior lien, closed-end		353		426		6		-		-
Total residential mortgage		50,272		880		86		-		-
Home equity lines		32,233		1,504		119		-		-
Consumer – other		3,762		157		5		-		-
Total	$	359,207	$	5,961	$	1,871	$	-	$	-

December 31, 2017
Dollars in thousands	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial real estate:
Residential ADC	$	7,242	$	-	$	-	$	-	$	-
Commercial ADC		23,883		477		4		-		-
Farmland		5,392		-		-		-		-
Multifamily		11,967		-		-		-		-
Owner occupied		81,584		1,049		2,175		-		-
Non-owner occupied		78,531		855		163		-		-
Total commercial real estate		208,599		2,381		2,342		-		-
Commercial:
Commercial and industrial		45,480		1,130		422		-		-
Agriculture		415		-		-		-		-
Other		1,420		-		-		-		-
Total commercial		47,315		1,130		422		-		-
Residential mortgage:
First lien, closed-end		47,257		513		166		-		-
Junior lien, closed-end		239		-		884		-		-
Total residential mortgage		47,496		513		1,050		-		-
Home equity lines		32,005		1,543		124		-		-
Consumer – other		3,596		162		1		-		-
Total	$	339,011	$	5,729	$	3,939	$	-	$	-

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

Allowance for Loan Losses

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

Based on this methodology, provisions for loan losses are made to maintain an adequate allowance for loan losses. The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance. The provision for loan losses is the amount necessary to adjust the allowance for loan losses to the amount that management has determined to be adequate to provide for probable losses inherent in the loan portfolio. The Company recorded provisions for loan losses of $252,000 and $151,000 for the quarters ended March 31, 2018 and 2017, 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 March 31, 2018 and 2017.

	Beginning Balance		Provision for (Recovery of) Loan Losses			Charge- offs			Recoveries		Ending Balance
Dollars in thousands
March 31, 2018
Commercial real estate	$	2,260	$	246		$	(50	)	$	3	$	2,459
Commercial and industrial		634		(14	)		(25	)		2		597
Residential mortgage		505		22			-			-		527
Consumer		200		(2	)		(4	)		3		197
Total	$	3,599	$	252		$	(79	)	$	8	$	3,780

March 31, 2017
Commercial real estate	$	1,607	$	82		$	-		$	3	$	1,692
Commercial and industrial		1,171		(39	)		-			-		1,132
Residential mortgage		427		83			(66	)		-		444
Consumer		188		25			(12	)		2		203
Total	$	3,393	$	151		$	(78	)	$	5	$	3,471

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

The allocation of the allowance for loan losses for March 31, 2018 and December 31, 2017 is presented in the table below.

	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total
Dollars in thousands
March 31, 2018
Commercial real estate	$	1	$	2,458	$	2,459
Commercial and industrial		149		448		597
Residential mortgage		103		424		527
Consumer		2		195		197
Total	$	255	$	3,525	$	3,780

December 31, 2017
Commercial real estate	$	-	$	2,260	$	2,260
Commercial and industrial		144		490		634
Residential mortgage		103		402		505
Consumer		1		199		200
Total	$	248	$	3,351	$	3,599

The Company’s recorded investment in loans as of March 31, 2018 and December 31, 2017 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the Company’s impairment methodology was as follows:

	March 31, 2018				December 31, 2017
	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	$	2,542	$	231,027	$	3,623	$	209,699
Commercial and industrial		715		43,737		766		48,101
Residential mortgage		1,311		49,927		1,861		47,198
Consumer and home equity lines		106		37,674		107		37,324
Total	$	4,674	$	362,365	$	6,357	$	342,322

At March 31, 2018, the Company had pre-approved but unused lines of credit totaling $71.6 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.

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

A summary of related party loan activity as of March 31, 2018 and 2017 is as follows:

	March 31, 2018			March 31, 2017
Dollars in thousands
Balance, beginning of year	$	1,740		$	2,043
Loan disbursements		70			33
Loan repayments		(1,143	)		(98	)
Balance, end of quarter	$	667		$	1,978

At March 31, 2018 and 2017, the Company had pre-approved but unused lines of credit totaling $286,000 and $364,000, respectively, to executive officers, directors and their related interests. Related party deposits totaled $2,603,000 and $1,614,000 at March 31, 2018 and 2017, respectively.

(7)	Foreclosed Assets

The following table summarizes the activity in foreclosed assets for the three month periods ended March 31, 2018 and 2017:

	March 31, 2018		March 31, 2017
Dollars in thousands
Balance, beginning of year	$	789	$	1,011
Additions		1,426		-
Proceeds from sale		-		(119	)
Valuation adjustments		-		(9	)
Losses on sales		-		(3	)
Balance, end of quarter	$	2,215	$	880

The Company has two foreclosed residential real estate properties totaling $645,000 as of March 31, 2018.

The company did not have any consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process as of March 31, 2018.

(8)	Stock Option Plans

The Company has six share-based compensation plans in effect at March 31, 2018 and March 31, 2017. The compensation cost charged against income for those plans was approximately $1,000 and $9,000 respectively for the three months ended March 31, 2018 and March 31, 2017, 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.

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

The options granted in 2006 through 2011 under the 2001 Director Plan and the 2001 Employee Plan vest over a four-year period. The options granted in 2005 under the 2001 Director Plan and the 2001 Employee Plan vest over a three-year period. All unexercised options expire ten years after the year 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 makes available options to purchase 72,389 shares of the Company’s common stock and the 2005 Director Plan makes 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 $12.25.

The options granted in 2005 under the 2005 Director Plan and the 2005 Employee Plan vest 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 during the year ended December 31, 2014. The shares vested over a 3-year period.

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. As of December 31, 2017, there were 79,845 options outstanding from the converted plans with exercise prices ranging from $2.13 to $10.40.

Total stock-based compensation recognized as compensation expense on our consolidated statement of income for the three months ended March 31, 2018 and 2017 is as follows:

	Three months ended March 31, 2018		Three months ended March 31, 2017
Dollars in thousands
Option Grants	$	1	$	9
Restricted Stock Grants		-		-
Total compensation expense	$	1	$	9

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

A summary of option activity under the stock option plans as of March 31, 2018 and changes during the three-month period ended March 31, 2018 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, December 31, 2017		151,173		$	4.54	2.26 years
Exercised		(3,107	)		4.84
Expired		(11,500	)		12.25
Forfeited		-			-
Granted		-			-
Outstanding, March 31, 2018		136,566		$	3.88	2.08 years	$	740,177

Exercisable, March 31, 2018		135,608		$	3.87		$	736,460

There were no options vested or granted during the three months ended March 31, 2018. As of March 31, 2018 there was no unrecognized compensation cost related to non-vested options granted under all of the Company’s equity compensation plans.

There was no restricted stock granted or vested during the three months ended March 31, 2018.

A summary of restricted stock activity during the three months ended March 31, 2017 is presented below:

	Three Months Ended March 31, 2017
	Non-Vested Restricted Stock Outstanding			Weighted Average Grant Date Fair Value
Beginning balance outstanding		3,334		$	3.31
Granted		-
Vested		(3,334	)
Ending balance outstanding		-		$	-

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.

(9)	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.

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

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 March 31, 2018 is as follows:

Financial instruments whose contract represents credit risk

	March 31, 2018
Dollars in thousands
Undisbursed lines of credit	$	71,604
Letters of credit		656
	$	72,260

(10)	Preferred Stock

Our articles of incorporation authorize us to issue up to 1,000,000 shares of one or more series of preferred stock. Our board of directors, in its sole discretion, has the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series, the designation of such series, and the dividend rate for each series, without any further vote or action by our shareholders. Our preferred stock may be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. There were no shares of preferred stock outstanding as of March 31, 2018.

(11)	Subsequent Events

In April 2018, after reviewing its capital requirements to support plans for continued growth and general corporate purposes, the Company initiated and completed a follow-on public offering of 2,310,000 shares of common stock at $8.00 per share for aggregate gross proceeds of $18.5 million. The offering closed on April 23, 2018. After deducting the underwriting discount and estimated offering expenses, the Company received net proceeds of approximately $17.1 million.

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

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

Important Note Regarding Forward-Looking Statements

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

☐

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

☐

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

☐

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

☐

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

☐

risks related to the concentration in commercial real estate;

☐

declines in commercial and residential real estate;

☐

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

☐

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

☐

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;

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☐

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.

Discussion of Financial Condition at March 31, 2018 and December 31, 2017

During the period from December 31, 2017 to March 31, 2018, total assets increased by approximately $40.0 million, or 9.84%. The increase, reflected primarily in cash and due from banks, interest-earning deposits with banks, and loans, was funded by an increase in deposits and Federal Home Loan Bank advances. Interest-earning deposits with banks, and investment securities at March 31, 2018 totaled $47.6 million compared to $34.8 million at December 31, 2017.

The Company’s investment securities portfolio as of March 31, 2018 totaled $29.9 million, a decrease of $1.2 million when compared to the $31.1 million reported at December 31, 2017. At March 31, 2018, the Company had a net unrealized loss on available-for-sale securities of $626,000, net of tax, as compared to a net unrealized loss of $732,000, net of tax, at December 31, 2017. On January 1, 2018 the Company adopted the FASB ASU 2016-01 in which there was an initial adjustment of accumulated other comprehensive income in the amount of $443,000 recorded in retained earnings for the loss on equity investments.

At March 31, 2018, net loans constituted 81.34% of the Company’s total assets. Net loans increased by $18.2 million from December 31, 2017 to March 31, 2018. Of all of the portfolio segments that increased during the first three months of 2018, commercial real estate experienced the largest amount of growth at $20.2 million or 9.49%. Management’s continued goal is to grow the loan portfolio to provide maximum income proportionate with acceptable risks.

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

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At March 31, 2018 and December 31, 2017 impaired loans, which consisted primarily of troubled debt restructurings and non-accrual loans, were $4.7 million and $6.4 million, respectively. Impaired loans of $1.9 million and $1.8 million had related allowances for loan losses totaling $255,000 and $248,000 at March 31, 2018 and December 31, 2017, respectively. There were $2.8 million and $4.6 million of impaired loans without a specific allowance at March 31, 2018 and December 31, 2017, respectively. Impaired loans at March 31, 2018 and December 31, 2017 consisted primarily of commercial real estate, commercial and industrial and residential mortgage loans. At March 31, 2018, there were eleven loans amounting to approximately $4.1 million, which were restructured to facilitate the borrowers’ ability to repay the outstanding balance. These eleven restructured loans are considered troubled debt restructurings at March 31, 2018 and have specific reserves amounting to approximately $255,000. Of these eleven loans, nine loans totaling $3.3 million were accruing interest at March 31, 2018. At December 31, 2017, there were ten loans totaling $4.2 million which were restructured to facilitate the borrowers’ ability to repay the outstanding balance, and of these ten loans, nine loans totaling $3.4 million were accruing interest. Reserves for loans not considered impaired were approximately $3.5 million and $3.4 million at March 31, 2018 and December 31, 2017, respectively. The allowance for loan losses at both March 31, 2018 and December 31, 2017 was 1.03% of gross loans outstanding.

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 increased to $24.3 million at March 31, 2018 compared to $15.6 million at December 31, 2017. The increase is attributed mostly to the increase in cash and due from banks of $7.3 million, or 135.87% and to an increase in foreclosed assets of $1.4 million or 180.77%. At March 31, 2018, foreclosed assets consisted of seven properties valued at $2.2 million. At December 31, 2017, foreclosed assets consisted of five properties valued at $789,000.

Deposit accounts represent the Company’s primary funding source and consist of non-interest bearing demand deposits, interest-bearing demand deposits, savings accounts and time deposits. Total deposits increased by approximately $32.2 million, or 9.47%, for the three months ended March 31, 2018. The growth is due to the increases in noninterest-earning demand deposits of $6.1 million, or 12.42%, interest-earning demand deposits of $4.5 million, or 3.89%, savings deposits of $1.4 million or 6.23%, and time deposits of $20.3 million or 13.17%.

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Federal Home Loan Bank advances totaled $28.1 million at March 31, 2018, an increase of $4.5 million over the $23.6 million advanced at December 31, 2017. The new advances were for three months, five months and 12 months.

On March 29, 2018, the Company entered into a Term Loan Agreement and a Security Agreement with, and executed and delivered a Promissory Note to Community Bankers’ Bank, Midlothian, Virginia (the “Lender”). These documents provide for a $3 million secured term loan to the Company. The term loan accrues interest at the Wall Street Journal prime rate, which was 4.75% on the Promissory Note date, with a maximum rate of 18.0%. The Company will make 12 interest payments beginning on April 29, 2018, and on the 29^th day of each month thereafter. Beginning on April 29, 2019, and on the 29^th day of each month thereafter, the Company will make 84 payments of principal and interest of the lesser of $41,798.65, or accrued interest and so much of the $3,000,000 Promissory Note amount as has been advanced. Changes to the scheduled payments will be made to reflect changes, if any, in the interest rate. There is no penalty for voluntary prepayment of the Promissory Note.

Pursuant to the terms of the Security Agreement, the Company has pledged and granted to the Lender a first priority security interest in 100% of the outstanding shares of common stock of the Company’s wholly owned subsidiary, Carolina Trust Bank, for the purpose of securing the Company’s obligations to the Lender under the Term Loan Agreement and Promissory Note.

The Term Loan Agreement, Security Agreement, and Promissory Note contain certain customary representations, warranties, covenants, and events of default. In the event of a default by the Company, the Lender may declare the entire amount owed under the Promissory Note immediately due and payable, enforce any and all remedies available under the documents executed in connection with the term loan, and exercise all other rights available under law.

Stockholders’ equity amounted to $29.4 million, or 6.58% of total assets at March 31, 2018, compared to $29.1 million, or 7.16% of total assets at December 31, 2017.

Discussion of Results of Operations

For the three months ended March 31, 2018 and 2017

Net Income

Net income for the three months ended March 31, 2018 was $581,000 compared to $211,000 for the first quarter of 2017, an increase of $370,000. Diluted earnings per common share was $0.12 for the three months ended March 31, 2018 compared to $0.04 for the first quarter of 2017. The increase in net income is primarily due to an increase in interest income on loans of $718,000 due to an increase in loans outstanding. The interest income was partially offset by an increase in interest expense of $237,000 due to an increase in total deposits outstanding.

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.

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Net interest income for the quarter ended March 31, 2018 totaled $4,827,000 compared to $4,077,000 for the quarter ended March 31, 2017. The Company’s net interest spread was approximately 3.62% and 3.56% for the quarters ended March 31, 2018 and 2017, respectively. Net interest margin on average interest earning assets was 3.79% and 3.72% for the quarters ended March 31, 2018 and 2017, respectively. Net interest spread increased by 6 basis points, and net interest margin increased by 7 basis points. The increases in net interest spread and net interest margin are due primarily to the 2% increase in the ratio of loans to earning assets from the quarter ended March 31, 2017 to the quarter ended March 31, 2018. The increase in loan yield from 5.04% to 5.15% over the same periods also contributed to the spread and margin improvement.

Provision for Loan Losses

The Company recorded a provision for loan losses of $252,000 for the quarter ended March 31, 2018 and $151,000 for the quarter ended March 31, 2017. This increase of $101,000 in the provision for loan losses is due to an increase in the amount of loans outstanding. The ratio of the allowance for loan and lease losses as a percentage of total loans was 1.03% at March 31, 2018 December 31, 2017. The provision for loan losses is charged to operations to bring the allowance to a level deemed appropriate based on management’s evaluation of the adequacy of the allowance for loan losses.

The following table sets forth information with respect to the asset quality of our loan portfolio as of the dates indicated.

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

March 31, 2018	$	367,039	$	1,125	$	71		$	3,780
December 31, 2017		348,679		2,746		(26	)		3,599
September 30, 2017		340,038		2,142		130			3,423
June 30, 2017		324,349		2,896		322			3,213
March 31, 2017		311,609		2,937		73			3,471
December 31, 2016		308,492		2,875		(303	)		3,393
September 30, 2016		301,420		3,579		56			3,687
June 30, 2016		293,157		1,739		(20	)		3,541
March 31, 2016		297,746		2,100		122			3,521
December 31, 2015		292,362		2,164		2			3,723
September 30, 2015		286,469		2,079		(109	)		3,825
June 30, 2015		278,305		3,335		68			3,886
March 31, 2015		257,919		3,562		48			3,954
December 31, 2014		244,646		4,166		162			4,002
September 30, 2014		227,933		3,081		(22	)		4,165

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Non-interest Income

Non-interest income for the quarter ended March 31, 2018 totaled $330,000, an increase of $137,000 over the $193,000 reported for the quarter ended March 31, 2017. The primary factors contributing to the overall increase was the increase in overdraft fees on deposits of $56,000 for the quarter ended March 31, 2018 when compared to the same period in 2017 and the gain on equity investment of $38,000 for the quarter ended March 31, 2018. On January 1, 2018 the net unrealized loss on equity securities was reclassified from accumulated other comprehensive income to retained earnings and from that date forward will be recorded on the income statement.

Interchange fees, or “swipe” fees, are charges that merchants pay to the Bank and other card-issuing banks for processing electronic payment transactions. Interchange fees consist of income from check card usage, point of sale income from PIN-based debit card transactions and ATM service fees. With the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, in 2018, interchange fees are reported net of related costs. See Note 2 – Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Previously, such costs were reported as check card expense. Interchange fees for the three months ended March 31, 2018 and March 31, 2017 reported on a net basis totaled $46,000 and $20,000, respectively.

A comparison of gross interchange fees and associated costs for the reported periods is presented in the table below:

	Three months ended March 31, 2018		Three months ended March 31, 2017
Dollars in thousands
Interchange fees	$	121	$	119
Gross interchange fees		121		119
Check card expenses		75		99
Net interchange fees	$	46	$	20

Non-interest Expense

Non-interest expenses for the March 31, 2018 and 2017 quarters totaled $3,096,000 and $2,977,000, respectively. The $119,000 increase was due in part to an increase of $119,000, or 6.85%, in compensation expense 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 first quarter 2017 to first quarter 2018. There was also an increase of $46,000 or 46.06% in other operating expenses which included a $40,000 increase in state franchise tax due to the reversal of an overage in the accrual during the first quarter of 2017. Slightly offsetting these increases was a $66,000 or 24.63% decrease in data processing expenses. During the first quarter of 2017, data processing expenses were higher due to the conversion of our core processing system that was complete in April of that year.

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Income Tax Expense

The Company recorded income tax expense of $168,000 for the three-months ended March 31, 2018 resulting in an effective tax rate of 22%. For the same period in 2017, the Company recorded income tax expense of $108,000 with an effective tax rate of 34%. The Company’s federal income tax rate was lowered from 34% to 21% due to the enactment of the Tax Cuts and Jobs Act of 2017 on December 22, 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.

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, investment securities classified as available-for-sale, and equity securities represented 13.85% and 10.25% of total assets at March 31, 2018 and December 31, 2017, 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 March 31, 2018. 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 March 31, 2018 was $68.3 million, of which $28.1 million was advanced and $7 million was securing a letter of credit.

Total deposits were $372.9 million and $340.7 million at March 31, 2018 and December 31, 2017, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 46.73% and 45.20% of total deposits at March 31, 2018 and December 31, 2017, respectively. At March 31, 2018 and December 31, 2017, the Company had brokered time deposits of $22.0 million and $23.3 million, respectively. The Company also obtains time accounts by connecting with institutional depositors through an online listing service. At March 31, 2018 and December 31, 2017, respectively, the deposits attributed to the listing service were $14.5 million and $14.3 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.

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

Capital Resources

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

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 Act. Effective January 1, 2015, the final rules required the Company and the Bank to comply with the following minimum capital ratios: (i) a 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; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. These are the initial capital requirements, which will be phased in over a four-year period. When fully phased in on January 1, 2019, the rules will require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio 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.

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.

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

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Beginning January 1, 2015, the Company and the Bank calculate regulatory capital under the U.S. Basel III Standardized Approach.

The table below presents the regulatory capital ratios for the Bank.

	At March 30, 2018
	Actual Ratio			Minimum Requirement			Well-Capitalized Requirement
Common equity tier 1 capital ratio		10.44	%		4.50	%		6.50	%
Total risk-based capital ratio		11.41	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		10.44	%		6.00	%		8.00	%
Tier 1 leverage ratio		9.49	%		4.00	%		5.00	%

Item 4. - Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective. 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.

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Part II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(b) Underwritten Follow-On Public Offering. On April 18, 2018, the Company’s Registration Statement on Form S-1 (File No. 333-224178) was declared effective by the Securities and Exchange Commission. Pursuant to the Registration Statement, the Company registered the offer and sale of shares of its common stock, $2.50 par value per share, having an aggregate offering price of up to $23,000,000.

On April 23, 2018, the Company issued and sold 2,310,000 shares of its common stock in an underwritten follow-on public offering. Sandler O’Neill & Partners, L.P., was the managing underwriter for the offering. The Company granted Sandler O’Neill an option, which is exercisable until May 18, 2018, to purchase up to 346,500 additional shares of common stock. Underwriting discounts and commissions equaled $1,062,600. A reasonable estimate of the total expenses of the offering, excluding underwriting discounts and commissions, is approximately $367,000 These expenses are not direct or indirect payments (1) to directors, officers, or general partners of the Company or their associates; (2) to persons owning ten percent or more of any class of equity securities of the Company; or (3) to affiliates of the Company. The offering proceeds to the Company after deducting underwriting discounts, commissions, and total expenses are expected to be $17,050,400.

Following the closing of the offering, the Company placed $14,050,400 of the net offering proceeds in a deposit account at the Bank and used an additional $3,000,000 of the net offering proceeds to repay the full outstanding balance of its secured term loan with Community Bankers’ Bank, Midlothian, Virginia. As indicated in its Registration Statement on Form S-1, the Company intends to use the remaining net proceeds to support the continued growth of its franchise and for other general corporate purposes.

Item 6.

Exhibits

Exhibit #		Description

3.1		Bylaws of Carolina Trust BancShares, Inc. as amended (incorporated by reference from Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on February 2, 2018)

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

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

32		Section 1350 Certification

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2018 and December 31, 2017; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2018 and 2017; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2018 and 2017; (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2018 and 2017; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2018 and 2017; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited)

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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: May 14, 2018	By:	/s/	Jerry L. Ocheltree
		Jerry L. Ocheltree
		President and Chief Executive Officer

Date: May 14, 2018	By:	/s/	Edwin E. Laws
		Edwin E. Laws
		Executive Vice President and Chief Financial Officer

Carolina Trust BancShares, Inc. - FORM 10-Q - May 14, 2018

Attached files

Carolina Trust BancShares, Inc. Reports