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EX-32 - CERTIFICATION OF CHIEF EXECUTIVE AND CHIEF FINANCIAL OFFICERS - Carolina Trust BancShares, Inc.ex32.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER - Carolina Trust BancShares, Inc.ex31-2.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER - 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, 2017

 

COMMISSION FILE NUMBER 000-55683

 

CAROLINA TRUST BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

NORTH CAROLINA

(State or other jurisdiction of incorporation or organization)

 

81-2019652

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

 

901 EAST MAIN STREET

LINCOLNTON, NORTH CAROLINA 28092

(Address of Principal Executive Offices) (Zip Code)

 

(704) 735-1104

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ☒      No   ☐

 

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

 

Large Accelerated Filer ☐      Accelerated Filer  
Non-accelerated Filer ☐  (Do not check if smaller reporting company)   Smaller Reporting Company  
        Emerging Growth Company  
                           

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

 

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

 

The number of shares of the registrant’s common stock outstanding as of May 12, 2017 was 4,654,880

 

 

 

 

TABLE OF CONTENTS

 

Part I. FINANCIAL INFORMATION  
     
Item 1 - Financial Statements (Unaudited)  
     
  Condensed Consolidated Balance Sheets March 31, 2017 and December 31, 2016 3
     
  Condensed Consolidated Statements of Operations Three Months Ended March 31, 2017 and 2016 4
     
  Condensed Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2017 and 2016 5
     
  Condensed Consolidated Statements of Changes in Stockholders’ Equity March 31, 2017 and 2016 6
     
  Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2017 and 2016 7
     
  Notes to Condensed Consolidated Financial Statements 8
     
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations 36
     
Item 4 - Controls and Procedures 43
     
Part II. OTHER INFORMATION  
     
Item 6 Exhibits 44

 

2

 

 

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,

2017

   December 31,
2016*
 
Assets          
Cash and due from banks  $10,637   $8,063 
Interest-earning deposits with banks   14,722    18,086 
Cash and cash equivalents   25,359    26,149 
           
Certificates of deposit with banks   1,498    1,498 
Investment securities available-for-sale, at fair value (amortized cost $27,092 and $27,459 at March 31, 2017 and December 31, 2016, respectively)   26,861    27,063 
Federal Home Loan Bank stock, at cost   1,064    942 
Loans   311,609    308,492 
Less:  Allowance for loan and lease losses   (3,471)   (3,393)
Net Loans   308,138    305,099 
           
Bank owned life insurance   7,034    1,498 
Accrued interest receivable   889    945 
Bank premises, equipment and software   6,726    6,388 
Foreclosed assets   880    1,011 
Core deposit intangible, net of accumulated amortization of $679 and $667 at March 31, 2017 and December 31, 2016, respectively    106    117 
Other assets   3,926    4,207 
Total Assets  $382,481   $374,917 
           
Liabilities and Stockholders’ Equity          
Noninterest-earning demand deposits  $43,886   $38,593 
Interest-earning demand deposits   103,966    99,084 
Savings   21,433    21,059 
Time deposits   153,894    159,929 
Total deposits   323,179    318,665 
           
Capital lease obligation   253    268 
Federal Home Loan Bank advances   17,100    14,100 
Long term subordinated debt   9,622    9,605 
Accrued interest payable   420    287 
Other liabilities   2,546    2,959 
Total liabilities   353,120    345,884 
           
Common stock warrant   426    426 
Common stock, $2.50 par value; 10,000,000 shares authorized; 4,654,880 and 4,650,808 shares issued and outstanding at March 31, 2017 and December 31, 2016, respectively   11,637    11,627 
Additional paid-in capital   12,990    12,988 
Retained earnings   4,452    4,241 
Accumulated other comprehensive income (loss)   (144)   (249)
Total stockholders’ equity   29,361    29,033 
Total Liabilities and Stockholders’ Equity  $382,481   $374,917 

 

*Derived from Carolina Trust Bancshares Inc.’s audited financial statements included in its 2016 Annual Report on Form 10-K

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

3

 

 

CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except share and per share data)

 

   Three Months Ended March 31, 
   2017   2016 
Interest Income          
Interest and fees on loans  $3,860   $3,747 
Interest on investment securities and cash   217    280 
Total interest income   4,077    4,027 
           
Interest Expense          
Interest expense non-maturity deposits   75    54 
Interest expense time deposits   508    537 
Interest expense borrowed funds   45    41 
Interest expense capital lease   5    6 
Interest expense on subordinated debt   190     
Total interest expense   823    638 
Net interest income   3,254    3,389 
Loan loss provision/(recovery)   151    (80)
Net interest income after loan loss provision/(recovery)   3,103    3,469 
           
Noninterest income          
Overdraft fees on deposits   84    105 
Interchange fee income   119    105 
Service charges on deposits   14    14 
Mortgage fee income   16    22 
Customer service fees   13    14 
ATM income   6    5 
Bank-owned life insurance income   36    4 
Other income   4    17 
Total noninterest income   292    286 
           
Noninterest expense          
Salaries & benefits expense   1,743    1,717 
Occupancy expense   204    217 
Furniture, fixture & equipment expense   140    119 
Data processing expense   268    175 
Office supplies expense   20    15 
Professional fees   106    219 
Advertising and marketing   35    38 
Insurance   73    81 
Foreclosed asset expense, net   40    128 
Check card expense   99    91 
Loan expense   37    32 
Stockholder expense   58    19 
Directors fees and expenses   70    55 
Telephone expense   70    52 
Core deposit intangible amortization expense   12    15 
Other operating expense   101    132 
Total noninterest expense   3,076    3,105 
Pre-tax income   319    650 
Income tax expense   108    233 
Net income   211    417 
Less income attributable to noncontrolling interest       59 
Net income attributable to Carolina Trust BancShares  $211   $358 
           
Earnings per share          
Basic earnings per common share  $0.05   $0.08 
Diluted earnings per common share  $0.04   $0.08 
Weighted average common shares outstanding   4,654,386    4,649,558 
Diluted average common shares outstanding   4,734,010    4,697,539 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

4

 

 

CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)

 

   Three Months Ended March 31, 
   2017   2016 
         
Net income  $211   $417 
           
Other comprehensive income (loss):          
Unrealized gain (loss) on investment securities:          
Unrealized holding gains (losses) arising during period   166    338 
Deferred income tax benefit (expense)   (61)   (127)
Total other comprehensive income (loss)   105    211 
           
Total comprehensive income (loss)  $316   $628 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

5

 

 

CAROLINA TRUST BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
March 31, 2017 and 2016
(Dollars in thousands)

 

  

2017 Shares Outstanding

  

March 31,

2017

  

2016 Shares Outstanding

  

March 31,

2016

 

Common stock warrant

       $426        $426 
                     
Common stock, $2.50 par value                    
Balance, beginning of year   4,650,808   $11,627    4,646,225   $11,616 
Exercise of stock options   738    2         
Restricted stock vesting   3,334    8    3,333    8 
Balance, end of period   4,654,880   $11,637    4,649,558   $11,624 
                     
Additional paid-in capital                    
Balance, beginning of year       $12,988        $12,936 
Stock-based compensation        9         10 
Exercise of stock options        1          
Restricted stock vesting        (8)        (8)
Balance, end of period       $12,990        $12,938 
                     
Retained earnings (deficit)                    
Balance, beginning of year       $4,241        $3,122 
Net income        211         417 
Dividends declared on preferred stock                 (59)
Balance, end of period       $4,452        $3,480 
                     
Accumulated other comprehensive income (loss)                    
Balance, beginning of year       $(249)       $(216)
Other comprehensive income (loss)        105         211 
Balance, end of period       $(144)       $(5)
                     
Noncontrolling interest                 2,580 
                     
Total stockholders’ equity       $29,361        $31,043 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

6

 

 

CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

 

   Three Months Ended March 31, 
   2017   2016 
Cash flows from operating activities          
Net income  $211   $417 
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:          
Provision for (recovery of) loan losses   151    (80)
Depreciation and amortization of bank premises, equipment and software   93    88 
Accretion of loan fair value adjustments related to acquisition   (4)   (3)
Net amortization of bond premiums / discounts   41    (3)
Net amortization of long term subordinated debt issuance costs   17     
Amortization of core deposit intangible   12    15 
Stock compensation expense   9    10 
Increase in value of life insurance contracts   (36)   (13)
Net losses and impairment write-downs on foreclosed assets   12    113 
Deferred tax provision   266    230 
Decrease (increase) in other assets   (183)   71 
Decrease in accrued interest receivable   55    23 
Increase in accrued interest payable   134    28 
Decrease in other liabilities   (414)   (522)
Net cash and cash equivalents provided by operating activities   364    374 
           
Cash flows from investing activities          
Net increase in loans   (3,186)   (5,503)
Proceeds from sale of foreclosed assets   119    81 
Net purchases of bank premises, equipment and software   (431)   (27)
Purchase of Bank owned life insurance   (5,500)    
Purchase of available-for-sale securities   (1,284)   (16,808)
Proceeds from maturities, calls and pay-downs of available-for-sale securities   1,748    7,229 
Purchase of Federal Home Loan Bank stock   (122)   (249)
Net cash and cash equivalents used in investing activities   (8,656)   (15,277)
           
Cash flows from financing activities          
Increase in deposits   4,514    35,895 
Increase in Federal Home Loan Bank advances   3,000    5,000 
Payment of capital lease obligation   (15)   (14)
Decrease in federal funds purchased       (2,355)
Dividends paid on preferred stock       (58)
Net proceeds from issuance of common stock   3     
Net cash and cash equivalents provided by financing activities   7,502    38,468 
           
Net increase (decrease) in cash and cash equivalents   (790)   23,565 
           
Cash and cash equivalents, beginning   26,149    4,813 
Cash and cash equivalents, ending  $25,359   $28,378 
           
Supplemental disclosure of cash flow information          
Cash paid during the period for taxes  $   $ 
Cash paid during the period for interest  $538   $610 
           
Noncash financing and investing activities          
Unrealized gain (loss) on investment securities available-for-sale, net  $105   $211 
Transfer of loans to foreclosed assets  $   $ 

 

See accompanying notes to Condensed Consolidated Financial Statements.

 

7

 

 


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, as amended. The Bank is the only subsidiary of the Company.

 

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for fair presentation of the financial information as of March 31, 2017 and for the three-month periods ended March 31, 2017 and 2016, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three-month period ended March 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.

 

The organization and business of Carolina Trust BancShares, Inc., accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2016 Annual Report on Form 10-K. This quarterly report should be read in conjunction with the Annual Report.

 

(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 2016-1”) to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The amendments will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company will apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values will be applied prospectively to equity investments that exist as of the date of adoption of the amendments. The Company will begin reporting unrealized gains and losses of its marketable equity securities in income as compared to the current method of reporting through other comprehensive income. For the year ended December 31, 2016, other comprehensive income included $75,000, pre-tax, and $48,000, after tax, for unrealized gains on marketable equity securities. If the standard had been adopted already, the unrealized income would be reported on the income statement. The nonmarketable equity securities that do not have readily determinable values are currently recorded at cost. Following implementation, these securities, primarily FHLB stock, will be recorded at cost less any impairment, plus or minus any observable changes in price resulting from transactions for similar or identical investments of the same issuer. An initial adjustment of accumulated other comprehensive income will be recorded in retained earnings when the standard is adopted.

 

8 

 

 

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 will need to use more judgment and make more estimates than under existing guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. As a result of the deferral, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company is currently evaluating the impact of adopting the new guidance on the consolidated financial statements, but the Company does not expect it to have a material impact. The long-term contracts that the Company currently has with customers, loans and time deposits, are being evaluated and are not expected to be impacted by this standard. As the Company considers, plans and implements new products, the impact of this standard on projected revenues will be evaluated and reported accordingly for contracts that are executed with customers.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. Currently, the Company has several multi-year property leases for which reporting will be impacted by this standard. At the end of 2016, one of our branches had an operating lease that expires in 2018 with aggregate payments totaling $160,000. If the new standard were in effect, the present value of payments would be recognized as an asset and a liability. Similarly, other property leases expire in 2019, 2020 and 2021 that have payments totaling $90,000, $48,000 and $200,000, respectively.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-based Payment Accounting, which is new guidance related to stock compensation. The new guidance eliminates the concept of additional paid-in capital pools for stock-based awards and requires that the related excess tax benefits and tax deficiencies be classified as an operating activity in the statement of cash flows. The new guidance also allows entities to make a one-time policy election to account for forfeitures when they occur, instead of accruing compensation cost based on the number of awards expected to vest. Additionally, the new guidance changes the requirement for an award to qualify for equity classification by permitting tax withholding up to the maximum statutory tax rate instead of the minimum statutory tax rate. Cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and interim periods within those fiscal years. The Company has adopted the new standard, electing to record forfeitures as they occur, and there have been no material impacts on the financial statements.

 

9 

 

 

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

 

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new standard introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. ASU 2016-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. The Company has formed a management committee including those responsible for credit analysis and review, accounting and finance, information technology and lending to develop an understanding of the requirements and plan implementation. The Company has adopted a software model for the ALLL model that has add on functionality for compliance with the new standard.

 

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

 

(3)          Noncontrolling Interest

 

Due to its formation as a holding company, the Company recognized $2,580,000 of the Bank’s preferred stock as a noncontrolling interest in Stockholders’ Equity. On February 6, 2009, the Bank issued $4,000,000 of Senior Preferred Shares to the U.S. Department of Treasury (the “Treasury”), consisting of 4,000 shares, with a liquidation preference of $1,000 per share. In addition, on February 6, 2009, the Bank issued a warrant to the Treasury to purchase 86,957 common shares at an initial exercise price of $6.90 per share with an expiration date of February 6, 2019. Generally accepted accounting principles required management to allocate the net proceeds from the issuance of the preferred stock between the preferred stock and related warrant based upon a relative fair value method. The terms of the preferred shares required management to pay a non-cumulative dividend at the rate of 5 percent per annum for the first five years and 9 percent thereafter. The dividend rate changed from 5 percent to 9 percent on February 16, 2014. Management has determined that the 5 percent dividend rate is below market value, therefore, the fair value of the preferred shares would be less than the $4,000,000 in proceeds. Management determined that a reasonable market rate is 14 percent for the fair value of the preferred shares. Management used the Black-Scholes model for calculating the fair value of the warrant (and related common shares). The allocation between the preferred shares and warrant at February 6, 2009, the date of issuance, net of issuance costs of $20,000 was $3,554,000 and $426,000, respectively. The discount on the preferred of $426,000 was accreted through retained earnings over a 60 month period.

 

10 

 

 

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

 

In November 2012, the U.S. Treasury sold the preferred stock to several investors in a Dutch auction process. The Bank had designated a third party bidder to act on its behalf pursuant to the rules of the Dutch auction. In December 2012, pursuant to its agreement with the third party bidder, the Bank in turn repurchased 35% of the preferred stock or $1.4 million at a price of 85.3% of par or $1,194,000 from one of the investors, the same price at which the bidder had purchased the preferred stock from the U.S. Treasury. The gain from the redemption below par totaling $206,000 increased surplus and reduced the amount reported as dividends to preferred shareholders for the year ended December 31, 2012. Following this redemption, the Bank’s preferred stock balance was $2,580,000, which is the par value $2,600,000, net of $20,000 issuance costs.

 

In June 2013, the U.S. Treasury sold the warrant to private investors in a Dutch auction process. Following the reorganization of the Bank into the Company, the right to acquire up to 86,957 shares of Bank common stock at a price of $6.90 per share was converted to the right to purchase the same number of shares of the Company’s common stock. The warrant book value, $426,000 is recognized as the Company’s stockholders’ equity. The warrant expires February 6, 2019.

 

In December of 2016, the Company redeemed all 2,600 shares of its outstanding preferred stock; therefore, there is no longer a non-controlling interest in stockholders’ equity. The terms of redemption included principal at a par value of $1,000 per share plus accrued dividends based on a 9% annual dividend rate.

 

(4)          Earnings Per Share

 

Basic Earnings per Common Share

Basic earnings per common share is computed by dividing net income 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.

 

11 

 

 

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, 2017 and 2016, respectively:

 

  

Net Income Available to Common Shareholders

  

Weighted Average Common Shares

  

Per Share Amount

 
Dollars in thousands, except per share data               
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 
                
Three months ended March 31, 2016               
Basic earnings per common share  $358    4,649,558   $0.08 
Effect of dilutive stock securities       47,981      
Effect of dilutive stock warrants             
Diluted earnings per common share  $358    4,697,539   $0.08 

 

For the three-month period 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 for the period. For the three-month period ended March 31, 2016 there were 46,321 and 86,957 shares, respectively, related to stock options and the common stock warrant that were anti-dilutive because the exercise price exceeded the average market price for the period. Therefore, they were omitted from the calculation of diluted earnings per share for their respective periods. 

 

(5)          Fair Value Measurements

 

The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at December 31 of each year, based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The methodologies for financial assets and financial liabilities are discussed below:

 

Cash and Due from Banks, Interest-Earning Deposits with Banks and Certificates of Deposits with Banks

 

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

 

12 

 

 

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, fair value is estimated using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.

 

Loans

 

The fair value of loans is estimated based on discounted expected cash flows. These cash flows include assumptions for prepayment estimates over each loan’s remaining life, considerations for the current interest rate environment compared to the weighted average rate of each portfolio and a credit risk component based on the historical and expected performance of each portfolio. The calculation does not include an estimate for illiquidity in the market.

 

Accrued Interest

 

The carrying amount is a reasonable estimate of fair value.

 

Deposits

 

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

 

Capital Lease Obligation, Advances from the Federal Home Loan Bank and Long Term Subordinated Debt

 

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

 

Financial Instruments with Off-Balance Sheet Risk

 

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

 

13 

 

 

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, 2017 and December 31, 2016:

 

       Fair Value Measurements at March 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  $10,637   $10,637   $   $   $10,637 
Interest-earning deposits with banks   14,722    14,722            14,722 
Certificates of deposit with  banks   1,498        1,498        1,498 
Federal Home Loan Bank  Stock   1,064        1,064        1,064 
Securities available-for-sale   26,861    1,234    25,627        26,861 
Net loans   308,138            308,572    308,572 
Accrued interest receivable   889        889        889 
                          
LIABILITIES                         
Deposits  $323,179   $   $314,851   $   $314,851 
Capital lease obligation   253        253        253 
FHLB Advances   17,100        17,140        17,140 
Long term subordinated debt   9,622        9,610        9,610 
Accrued interest payable   420        420        420 

 

       Fair Value Measurements at December 31, 2016 using 
      

Quoted Prices in Active Markets for Identical Assets

   Significant Other Observable Inputs  

Significant Unobservable Inputs

  

Total Fair Value 

 
Dollars in thousands  Carrying Value   Level 1   Level 2   Level 3   Balance 
ASSETS                    
Cash and due from banks  $8,063   $8,063   $   $   $8,063 
Interest-earning deposits with banks   18,086    18,086            18,086 
Certificates of deposit with  banks   1,498        1,498        1,498 
Securities available-for-sale   27,063    1,112    25,201    750    27,063 
Federal Home Loan Bank Stock   942        942        1,064 
Net loans   305,099            305,714    305,714 
Accrued interest receivable   945        945        945 
                          
LIABILITIES                         
Deposits  $318,665   $   $311,464   $   $311,464 
Capital lease obligation   268        268        268 
FHLB Advances   14,100        14,115        14,115 
Long term subordinated debt   9,605        9,616        9,616 
Accrued interest payable   287        287        287 

 

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

 

14 

 

 

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 entities, and municipal bonds. Securities classified as Level 3 include a corporate debt security and a common stock in a less liquid market. The value of the corporate debt security is determined via the going rate of a similar debt security if it were to enter the market at period end. The derived market value requires significant management judgment and is further substantiated by discounted cash flow methodologies. There have been no changes in valuation techniques for the quarter ended March 31, 2017. Valuation techniques are consistent with techniques used in prior periods.

 

15 

 

 

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, 2017                    
U.S. Government and federal agency  $7,466   $   $7,466   $ 
Government sponsored enterprises *   17,857        17,857     
Municipal securities   304        304     
Equity securities   1,234    1,234         
Total  $26,861   $1,234   $25,627   $ 
                     
December 31, 2016                    
U.S. Government and federal agency  $6,543   $   $6,543   $ 
Government sponsored enterprises *   18,658        18,658     
Corporate debt securities   750            750 
Equity securities   1,112    1,112         
Total  $27,063   $1,112   $25,201   $750 

 

* Such as FNMA, FHLMC and FHLB.

 

The Company did not have any transfers between Levels 1, 2 or 3 during the periods ended March 31, 2017 and December 31, 2016.

 

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, 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 thirty-three loans totaling $4.2 million. At December 31, 2016, the discounted cash flows method was used in determining the fair value of ten loans totaling $3.3 million and the fair value of the collateral method was used in the other thirty-three loans totaling $3.8 million. Impaired loans where an allowance is established based on the fair value of collateral and also when written down with the discounted cash flow method require classification in the fair value hierarchy. The fair value of the collateral for an impaired loan is classified as level 3. Although appraisals of these properties are frequently based on comparable properties, they are not identical. Significant unobservable assumptions will need to be used in assessing the value. When the discounted cash flows method is used, the Company records the impaired loan as nonrecurring Level 3. There have been no changes in valuation techniques for the three months ended March 31, 2017. Valuation techniques are consistent with techniques used in prior periods.

 

16 

 

 

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, 2017 and 2016.

 

  

March 31, 2017

  

March 31, 2016

 
Dollars in thousands  Level 2   Level 3   Level 2   Level 3 
Carrying value of impaired loans before allocations  $   $2,728   $   $1,398 
Specific valuation allowance allocations       (900)       (160)
Carrying value of impaired loans after allocations  $   $1,828   $   $1,238 

 

Foreclosed Assets

 

Other real estate owned (“OREO”) is adjusted to fair value upon transfer of the loans to OREO. Subsequently, OREO is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The fair value of OREO is classified as level 3. Although appraisals of these properties are frequently based on comparable properties, they are not identical. Significant unobservable assumptions will need to be used in assessing the value.

 

There have been no changes in valuation techniques for the three months ended March 31, 2017. Valuation techniques are consistent with techniques used in prior periods.

 

The following table presents foreclosed assets that were re-measured and reported at fair value during the three months ended March 31, 2017 and 2016:

 

   March 31, 2017   March 31, 2016 
Dollars in thousands          
Foreclosed assets re-measured at initial recognition:          
Carrying value of foreclosed assets prior to re-measurement  $   $ 
Charge-offs recognized in the allowance for loan losses        
Fair value  $   $ 
           
Foreclosed assets re-measured subsequent to initial recognition:          
Carrying value of foreclosed assets prior to re-measurement  $889   $1,904 
Write-downs included in foreclosed asset expense, net   (9)   (104)
Fair value  $880   $1,800 

 

17 

 

 

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

 

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, 2017                    
Foreclosed assets  $880   $   $   $880 
Impaired loans   1,828            1,828 
Total  $2,708   $   $   $2,708 
                     
December 31, 2016                    
Foreclosed assets  $1,011   $   $   $1,011 
Impaired loans   1,915            1,915 
Total  $2,926   $   $   $2,926 

 

Quantitative Information About Level 3 Fair Value Measurements:

 

  

Fair Value

  

Valuation Technique

 

Unobservable Input

 

Range

  

Weighted Average

 
Dollars in thousands                     
March 31, 2017                     
Impaired loans   1,828   Discounted cash flows  Discount rate   4.25% -8.50%   6.90%
Foreclosed assets   880   Discounted appraisals  Appraisal adjustments   15.11% - 60.47%   26.06%
                      
December 31, 2016                     
Impaired loans   1,915   Discounted cash flows  Discount rate   4.25% –6.50%   5.89%
Foreclosed assets   1,011   Discounted appraisals  Appraisal adjustments   15.11% - 60.47%   30.75%

 

(6)Investment Securities

 

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

 

In thousands

  Amortized Cost   Unrealized Gains   Unrealized Losses  

Fair Value

 
March 31, 2017                    
U.S. Government and federal agency  $7,538   $16   $(88)  $7,466 
Government-sponsored enterprises *   18,050    88    (281)   17,857 
Municipal securities   300    4        304 
Equity securities   1,204    31    (1)   1,234 
   $27,092   $139   $(370)  $26,861 
                     
December 31, 2016                    
U.S. Government and federal agency  $6,664   $17   $(138)  $6,543 
Government-sponsored enterprises *   18,841    101    (284)   18,658 
Corporate debt securities   750            750 
Equity securities   1,204        (92)   1,112 
   $27,459   $118   $(514)  $27,063 
                     
* Such as GNMA, FNMA, FHLMC and FHLB.                    

 

18 

 

 

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, 2017 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Amortized Cost  

Fair Value

 
Dollars in thousands          
Due within one year  $   $ 
Due after one but within five years   2,528    2,517 
Due after five but within ten years   8,471    8,418 
Due after ten years   14,889    14,692 
   $25,888   $25,627 

 

The following table details unrealized losses and related fair values in the Company’s available-for-sale investment security portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2017 and December 31, 2016, respectively.

 

   Temporarily Impaired Securities in AFS Portfolio 
   Less than 12 Months   Greater than 12 Months   Total 
  

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

  

Fair Value

  

Unrealized Losses

 
Dollars in thousands                        
March 31, 2017                        
U.S. Government and federal agency  $6,257   $(88)  $   $   $6,257   $(88)
Government-sponsored enterprises *   14,327    (281)           14,327    (281)
Equity securities           1    (1)   1    (1)
Total temporarily impaired securities  $20,584   $(369)  $1   $(1)  $20,585   $(370)
                               
December 31, 2016                              
U.S. Government and federal agency  $5,332   $(138)  $   $   $5,332   $(138)
Government-sponsored enterprises *   14,965    (282)   140    (2)   15,105    (284)
Equity securities   1,203    (91)   1    (1)   1,204    (92)
Total temporarily impaired securities  $21,500   $(511)  $141   $(3)  $21,641   $(514)
                               
* Such as FNMA, FHLMC and FHLB.                              

 

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, 2017, management believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.

 

19 

 

 

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

 

Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality. Accordingly, as of March 31, 2017, management believes the impairments detailed in the table above are temporary and no impairment loss has been realized in the Company’s net income.

 

Securities with a fair value of $3.3 million at March 31, 2017 were pledged to secure public funds. The Company had no sales of securities during the three-month periods ended March 31, 2017 and March 31, 2016.

 

The following table presents the changes in the Company’s accumulated other comprehensive income, net of tax, by component for the periods indicated:

 

   Unrealized Gains (Losses) on Available-for-Sale Securities 
(Dollars in thousands)    
Beginning balance, January 1, 2017  $(249)
Other comprehensive income (loss) before reclassifications   105 
Amounts reclassified from accumulated other comprehensive income    
Net current period other comprehensive income (loss)   105 
Ending balance, March 31, 2017  $(144)

 

   Unrealized Gains (Losses) on Available-for-Sale Securities 
(Dollars in thousands)    
Beginning balance, January 1, 2016  $(216)
Other comprehensive income (loss) before reclassifications   211 
Amounts reclassified from accumulated other comprehensive income    
Net current period other comprehensive income (loss)   211 
Ending balance, March 31, 2016  $(5)

 

The Company did not have any reclassifications out of accumulated other comprehensive income for the three-month periods ended March 31, 2017 and March 31, 2016.

 

20 

 

 

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

 

(7)Loans

 

Following is a summary of loans at March 31, 2017 and December 31, 2016:

 

   March 31, 2017   December 31, 2016 

Dollars in thousands

 

Amount

   Percent of Total  

Amount

   Percent of Total 
Commercial real estate                    
Residential ADC  $3,438    1.10%  $2,463    0.80%
Commercial ADC   23,330    7.47%   24,583    7.95%
Farmland   4,680    1.50%   3,826    1.24%
Multifamily   12,202    3.91%   11,980    3.88%
Owner occupied   72,270    23.14%   70,279    22.74%
Non-owner occupied   68,556    21.96%   68,079    22.02%
Total commercial real estate   184,476    59.08%   181,210    58.63%
                     
Commercial                    
Commercial and industrial   42,359    13.57%   41,935    13.56%
Agriculture   374    0.12%   209    0.07%
Other   1,341    0.43%   1,636    0.53%
Total commercial   44,074    14.12%   43,780    14.16%
                     
Residential mortgage                    
First lien, closed-end   44,133    14.14%   43,811    14.17%
Junior lien, closed-end   855    0.27%   887    0.29%
Total residential mortgage   44,988    14.41%   44,698    14.46%
                     
Home equity lines   34,199    10.95%   35,119    11.36%
                     
Consumer – other   4,498    1.44%   4,278    1.39%
                     
Total gross loans   312,235    100.00%   309,085    100.00%
Deferred loan origination fees, net   (626)        (593)     
Total loans  $311,609        $308,492      
                     

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

 

21 

 

 

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

 

Non-Accrual and Past Due Loans

 

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

 

  

March 31,

2017

   December 31,
2016
 
Dollars in thousands          
Commercial real estate          
Commercial ADC  $1,009   $1,022 
Farmland   41    43 
Multifamily   149    153 
Owner occupied   53    55 
Non-owner occupied   34    37 
Total commercial real estate   1,286    1,310 
Commercial          
Commercial and industrial   994    1,139 
Total commercial   994    1,139 
Residential mortgage:          
First lien, closed end   650    179 
Junior lien, closed end   7     
Total residential mortgage   657    179 
Home equity lines        
Consumer – other        
Total non-accrual loans  $2,937   $2,628 

 

Interest foregone on non-accrual loans was approximately $14,000 and $35,000 for the three months ended March 31, 2017 and 2016, respectively.

 

An analysis of past due loans, segregated by class, is 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, 2017                        
Commercial real estate:                              
Residential ADC  $   $   $   $3,438   $3,438   $ 
Commercial ADC       1,004    1,004    22,326    23,330     
Farmland               4,680    4,680     
Multifamily               12,202    12,202     
Owner occupied       34    34    71,610    71,644     
Non-owner occupied   106        106    68,451    68,556     
Total commercial real estate   106    1,038    1,144    182,706    183,850     
Commercial:                              
Commercial and industrial   53    26    79    42,280    42,359     
Agriculture               374    374     
Other               1,341    1,341     
Total commercial   53    26    79    43,995    44,074     
Residential mortgage:                              
First lien, closed end   231    602    833    43,300    44,133     
Junior lien, closed-end   449        449    406    855     
Total residential mortgage   680    602    1,282    43,706    44,988     
Home equity lines   84        84    34,115    34,199     
Consumer – other   1        1    4,497    4,498     
Total loans  $924   $1,666   $2,590   $309,019   $311,609   $ 

 

 22

 

 

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

 

In thousands  Loans
30-89
Days
Past Due
   Loans
90 or more
Days
Past Due
   Total Past
Due Loans
   Current
Loans
   Total
Loans
   Accruing
Loans 90
or More
Days
Past Due
 
December 31, 2016                        
Commercial real estate:                              
Residential ADC  $   $   $   $2,463   $2,463   $ 
Commercial ADC   1,232    1,016    2,248    22,335    24,583     
Farmland               3,826    3,826     
Multifamily               11,980    11,980     
Owner occupied               69,686    69,686     
Non-owner occupied   14        14    68,065    68,079     
Total commercial real estate   1,246    1,016    2,262    178,355    180,617     
Commercial:                              
Commercial and industrial   29    56    85    41,850    41,935     
Agriculture               209    209     
Other               1,636    1,636     
Total commercial   29    56    85    43,695    43,780     
Residential mortgage:                              
First lien, closed end   24    128    152    43,659    43,811     
Junior lien, closed-end               887    887     
Total residential mortgage   24    128    152    44,546    44,698     
Home equity lines   111    247    358    34,761    35,119    247 
Consumer – other   10        10    4,268    4,278     
Total loans  $1,420   $1,447   $2,867   $305,625   $308,492   $247 

 

At March 31, 2017 there were no loans past due 90 days or more, which were still accruing interest. There were two loans totaling $247,000 past due 90 days or more and still accruing interest at December 31, 2016.

 

Impaired loans

 

Impaired loans are set forth in the following tables.

   Loans without an allowance at March 31, 2017 
In thousands  Unpaid
Contractual
Principal
Balance
   Total
Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial real estate                         
Commercial ADC  $1,675   $1,009   $   $1,829   $ 
Farmland   41    41        42     
Multifamily   149    149        150     
Owner occupied   1,985    1,985        1,992    26 
Non-owner occupied   34    34        35     
Total commercial real estate   3,884    3,218        4,048    26 
Commercial                         
Commercial and industrial   98    93        214    1 
Total commercial   98    93        214    1 
Residential mortgage                         
First lien, closed-end   1,060    915        512    2 
Total residential mortgage   1,060    915        512    2 
Home equity lines   90    90        138    2 
Consumer – other                    
Total loans  $5,132   $4,316   $   $4,912   $31 

 

 23

 

 

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

 

   Loans with a related allowance at March 31, 2017 
In thousands  Unpaid
Contractual
Principal
Balance
   Total
Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial real estate                         
Owner occupied  $152   $151   $35   $151   $2 
Total commercial real estate   152    151    35    151    2 
                          
Commercial                         
Commercial and industrial   1,930    1,730    829    1,686    15 
Total commercial   1,930    1,730    829    1,686    15 
                          
Residential mortgage                         
First lien, closed-end   847    847    36    820    14 
Total residential mortgage   847    847    36    820    14 
                          
Consumer – other               2     
                          
Total loans  $2,929   $2,728   $900   $2,659   $31 

 

   Total Impaired Loans at March 31, 2017 
In thousands  Unpaid
Contractual
Principal
Balance
   Total
Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial real estate                         
Commercial ADC  $1,675   $1,009   $   $1,829   $ 
Farmland   41    41        42     
Multifamily   149    149        150     
Owner occupied   2,137    2,136    35    2,143    28 
Non-owner occupied   34    34        35     
Total commercial real estate   4,036    3,369    35    4,199    28 
                          
Commercial                         
Commercial and industrial   2,028    1,823    829    1,900    16 
Total commercial   2,028    1,823    829    1,900    16 
                          
Residential mortgage                         
First lien, closed-end   1,907    1,762    36    1,332    16 
Total residential mortgage   1,907    1,762    36    1,332    16 
                          
Home equity lines   90    90        138    2 
                          
Consumer – other               2     
                          
Total loans  $8,061   $7,044   $900   $7,571   $62 

  

 24

 

  

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

 

   Loans without an allowance at December 31, 2016 
In thousands  Unpaid
Contractual
Principal
Balance
   Total
Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial real estate                         
Commercial ADC  $2,920   $2,253   $   $2,307   $54 
Farmland   43    43        19    1 
Multifamily   153    153        119    1 
Owner occupied   2,006    2,006        2,005    110 
Non-owner occupied   37    37        41     
Total commercial real estate   5,159    4,492        4,491    166 
                          
Commercial                         
Commercial and industrial   178    130        459    8 
Total commercial   178    130        459    8 
                          
Residential mortgage                         
First lien, closed-end   305    226        351    3 
Total residential mortgage   305    226        351    3 
                          
Home equity lines   338    338        259    18 
                          
Consumer – other               39     
                          
Total loans  $5,980   $5,186   $   $5,599   $195 

 

   Loans with a related allowance at December 31, 2016 
In thousands  Unpaid
Contractual
Principal
Balance
   Total
Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial real estate                         
Owner occupied  $153   $152   $35   $173   $4 
Total commercial real estate   153    152    35    173    4 
                          
Commercial                         
Commercial and industrial   2,065    1,865    840    946    76 
Total commercial   2,065    1,865    840    946    76 
                          
Residential mortgage                         
First lien, closed-end   812    812    39    828    20 
Total residential mortgage   812    812    39    828    20 
                          
Home equity lines               1     
                          
Total loans  $3,030   $2,829   $914   $1,948   $100 

  

 25

 

 

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

 

   Total Impaired Loans at December 31, 2016 
In thousands  Unpaid
Contractual
Principal
Balance
   Total
Recorded
Investment
   Related
Allowance
   Average
Recorded
Investment
   Interest
Income
Recognized
 
Commercial real estate                         
Commercial ADC  $2,920   $2,253   $   $2,307   $54 
Farmland   43    43        19    1 
Multifamily   153    153        119    1 
Owner occupied   2,159    2,158    35    2,178    114 
Non-owner occupied   37    37        41     
Total commercial real estate   5,312    4,644    35    4,664    170 
                          
Commercial                         
Commercial and industrial   2,243    1,995    840    1,405    84 
Total commercial   2,243    1,995    840    1,405    84 
                          
Residential mortgage                         
First lien, closed-end   1,117    1,038    39    1,179    23 
Total residential mortgage   1,117    1,038    39    1,179    23 
                          
Home equity lines   338    338        260    18 
                          
Consumer – other               39     
                          
Total loans  $9,010   $8,015   $914   $7,547   $295 

 

Troubled Debt Restructures

 

As of March 31, 2017, ten loans totaling $3,701,000 were identified as troubled debt restructurings and considered impaired, none of which had unfunded commitments. Eleven loans totaling $4,992,000 were identified as troubled debt restructurings and considered impaired at December 31, 2016, none of which had unfunded commitments. Of the ten loans identified as troubled debt restructurings at March 31, 2017, nine loans totaling $3,331,000 were accruing interest, and of the eleven loans identified as troubled debt restructurings at December 31, 2016, ten loans totaling $4,616,000 were accruing interest.

 

For the three months ended March 31, 2017 and 2016, there were no concessions made on newly restructured loans.

 

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

 

 26

 

 

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

 

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, 2017 and March 31, 2016.

 

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, 2017 and 2016.

  

   

Paid in full 

  

Paying as restructured 

  

Converted to non-accrual 

  

Foreclosure/Default 

 
    Number of
loans
   Recorded
Investment
   Number of
loans
   Recorded
Investment
   Number of
loans
   Recorded
Investment
   Number of
loans
   Recorded
Investment
 
March 31, 2017   (Dollars in thousands) 
      
Other       $    1   $370       $       $ 
Total       $    1   $370       $       $ 

 

March 31, 2016 

   Paid in full   Paying as restructured   Converted to non-accrual   Foreclosure/Default 
   Number of
loans
   Recorded
Investment
   Number of
loans
   Recorded
Investment
   Number of
loans
   Recorded
Investment
   Number of
loans
   Recorded
Investment
 
   (Dollars in thousands) 
     
Extended payment terms      $    2   $961       $       $ 
Total      $    2   $961       $       $ 

 

Credit Quality Indicators

 

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

 

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

 

Loan Portfolio Risk Grades

 

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

 

27 

 

 

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; they 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.

 

28 

 

  

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, 2017

 

  Pass  

Special 

Mention
   Substandard   Doubtful   Loss 
Dollars in thousands                         
Commercial real estate:                         
Residential ADC  $3,438   $   $   $   $ 
Commercial ADC   21,827    493    1,010         
Farmland   4,639        41         
Multifamily   12,053        149         
Owner occupied   69,227    886    1,531         
Non-owner occupied   67,377    893    286         
Total commercial real estate   178,561    2,272    3,017         
Commercial:                         
Commercial and industrial   40,470    471    1,418         
Agriculture   374                 
Other   1,341                 
Total commercial   42,185    471    1,418         
Residential mortgage:                         
First lien, closed-end   42,088    1,130    915         
Junior lien, closed-end   399        456         
Total residential mortgage   42,487    1,130    1,371         
Home equity lines   32,552    1,546    101         
Consumer – other   4,333    165             
                          
Total  $300,118   $5,584   $5,907   $   $ 

  

December 31, 2016  

                     
  Pass   Special
Mention
   Substandard   Doubtful   Loss 
Dollars in thousands                         
Commercial real estate:                         
Residential ADC  $2,463   $   $   $   $ 
Commercial ADC   21,832    1,729    1,022         
Farmland   3,783        43         
Multifamily   11,827        153         
Owner occupied   66,820    1,303    1,563         
Non-owner occupied   66,511    1,276    292         
Total commercial real estate   173,236    4,308    3,073         
Commercial:                         
Commercial and industrial   39,918    442    1,575         
Agriculture   209                 
Other   1,636                 
Total commercial   41,763    442    1,575         
Residential mortgage:                         
First lien, closed-end   41,822    1,174    815         
Junior lien, closed-end   437        450         
Total residential mortgage   42,259    1,174    1,265         
Home equity lines   33,274    1,579    266         
Consumer – other   4,111    167             
                          
Total  $294,643   $7,670   $6,179   $   $ 

  

29 

 

 

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. 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 potential losses inherent in the loan portfolio. The Company recorded $151,000 in provision for loan losses for the quarter ended March 31, 2017 and an $80,000 recovery of loan losses for the quarter ended March 31, 2016. 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, 2017 and 2016.

 

  

Beginning
Balance 

  

Provision
for 

(Recovery of)
Loan

Losses 

  

Charge-offs 

  

Recoveries 

  

Ending
Balance 

 
Dollars in thousands                         
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 
Unallocated                    
Total  $3,393   $151   $(78)  $5   $3,471 
                          
March 31, 2016                         
Commercial real estate  $2,302   $45   $(70)  $3   $2,280 
Commercial and industrial   570    (71)   (58)   17    458 
Residential mortgage   505    (9)           496 
Consumer   346    (45)   (17)   3    287 
Unallocated                    
Total  $3,723   $(80)  $(145)  $23   $3,521 

30 

 

 

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

 

The allocation of the allowance for loan losses for March 31, 2017 and December 31, 2016 is presented in the table below.

 

   Loans
Individually
Evaluated for
Impairment
   Loans
Collectively
Evaluated for
Impairment
  

Total

 
Dollars in thousands               
March 31, 2017               
Commercial real estate  $35   $1,657   $1,692 
Commercial and industrial   829    303    1,132 
Residential mortgage   36    408    444 
Consumer       203    203 
Unallocated            
Total  $900   $2,571   $3,471 
                
December 31, 2016               
Commercial real estate  $35   $1,572   $1,607 
Commercial and industrial   840    331    1,171 
Residential mortgage   39    388    427 
Consumer       188    188 
Unallocated            
Total  $914   $2,479   $3,393 

 

The Company’s recorded investment in loans as of March 31, 2017 and December 31, 2016 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the Company’s impairment methodology was as follows:

 

   March 31, 2017   December 31, 2016 
   Loans
Individually
Evaluated for
Impairment
   Loans
Collectively
Evaluated for
Impairment
   Loans
Individually
Evaluated for
Impairment
   Loans
Collectively
Evaluated for
Impairment
 
Dollars in thousands                    
Commercial real estate  $3,369   $181,108   $4,644   $176,566 
Commercial and industrial   1,823    42,250    1,995    41,785 
Residential mortgage   1,762    43,226    1,038    43,660 
Consumer   90    38,607    338    39,059 
Unearned Discounts       (626)       (593)
                     
Total  $7,044   $304,565   $8,015   $300,477 

 

At March 31, 2017 the Company had pre-approved but unused lines of credit totaling $56.9 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.

 

31 

 

 

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

 

A summary of related party loan activity as of March 31, 2017 and 2016 is as follows:

 

  

March 31, 2017

  

March 31, 2016

 
Dollars in thousands          
Balance, beginning of year  $2,043   $2,347 
Loan disbursements   33    564 
Loan repayments   (98)   (246)
Changes in related parties        
Balance, end of quarter  $1,978   $2,665 

 

At March 31, 2017 and 2016 the Company had pre-approved but unused lines of credit totaling $364,000 and $311,000, respectively, to executive officers, directors and their related interests. Related party deposits totaled $1,614,000 and $1,292,000 at March 31, 2017 and 2016, respectively.

 

(8)Foreclosed Assets

 

The following table summarizes the activity in foreclosed assets for the periods ended March 31, 2017 and 2016:

 

  

March 31, 2017

  

March 31, 2016

 
Dollars in thousands          
Balance, beginning of year  $1,011   $1,994 
Additions        
Proceeds from sale   (119)   (81)
Valuation adjustments   (9)   (105)
Losses on sales   (3)   (8)
Balance, end of quarter  $880   $1,800 

 

The Company has two foreclosed residential real estate properties held totaling $50,000 as of March 31, 2017.

 

The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $55,000 for March 31, 2017.

 

(9)Stock Option Plans

 

The Company has six share-based compensation plans in effect at March 31, 2017 and March 31, 2016. The compensation cost charged against income for those plans was approximately $9,000 for the three months ended March 31, 2017. The compensation cost charged against income for those plans for the three months ended March 31, 2016 was $10,000.

 

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.

 

32 

 

 

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 $15.80.

 

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 in 2014. The shares vest over a 3-year period, fully vesting in January 2017.

 

As a result of the merger with Carolina Commerce Bank, Carolina Trust Bank assumed all outstanding options of Carolina Commerce under the existing terms and at the conversion rate of 0.625 shares of Carolina Trust stock for each share of Carolina Commerce stock. All options assumed became fully vested at the merger date. As of March 31, 2017, there were 105,219 options outstanding from the converted plans with exercise prices ranging from $2.13 to $19.20.

 

Total stock-based compensation recognized as compensation expense on our consolidated statement of income for the three months ended March 31, 2017 and 2016 is as follows:

 

  

Three Months
Ended
March 31, 2017

  

Three Months
Ended
March 31, 2016

 
Dollars in thousands          
Option Grants  $9   $8 
Restricted Stock Grants       2 
Total compensation expense  $9   $10 

 

33 

 

 

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

 

A summary of option activity under the stock option plans as of March 31, 2017 and changes during the period ended March 31, 2017 is presented below:

 

   

Shares

  

Weighted
Average
Exercise Price

  

Weighted
Average
Remaining
Contractual
Term

  

Aggregate
Intrinsic
Value

 
Outstanding, December 31, 2016   184,892   $6.67   5.40 years    
Exercised   (738)  $2.39          
Expired      $          
Forfeited      $          
Granted      $          
Outstanding, March 31, 2017   184,154   $6.69   5.16 years   $ 
                    
Exercisable, March 31, 2017   169,363   $6.84       $ 

 

There were no options vested or granted over the three months ended March 31, 2017. The approximate fair value of options vested over the three months ended March 31, 2016 was $36,000. No options were granted during the quarter ended March 31, 2016. As of March 31, 2017 the unrecognized compensation cost related to non-vested options granted under all of the Company equity compensation plans was $16,000.

 

A summary of restricted stock activity during the three months ended March 31, 2017 and 2016 is presented below:

 

   March 31, 2017   March 31, 2016 
                 
  

Non-Vested
Restricted
Stock
Outstanding

  

Weighted
Average
Grant Date
Fair Value

  

Non-Vested
Restricted
Stock
Outstanding

  

Weighted
Average
Grant Date
Fair Value

 
Beginning balance outstanding   3,334   $3.31    6,667   $3.31 
Granted                  
Vested   (3,334)        (3,333)     
Ending balance outstanding           3,334   $3.31 

 

The restricted stock cost was recognized in 2014, 2015 and 2016.

 

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

 

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

 

(10)Off-Balance Sheet Risk and Commitments

 

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

 

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

 

A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of March 31, 2017 is as follows:

 

Financial instruments whose contract represents credit risk
 
  

March 31, 2017

 
Dollars in thousands     
Undisbursed lines of credit  $56,200 
Letters of credit   697 
   $56,897 

 

35 

 

 

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

 

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

 

Important Note Regarding Forward-Looking Statements

 

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

 

·deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and other adverse impacts to results of operations and financial condition;
·changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest sensitive assets and liabilities;
·the failure of assumptions underlying the establishment of reserves for possible loan and lease losses;
·changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;
·a failure in or a breach of the Company’s operational or security systems or those of its third party service providers;
·changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including demand for the Company’s products and services and commercial and residential real estate development and prices;
·changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
·the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, and other financial institutions operating in the Company’s market area and elsewhere, together with such competitors offering banking products and services by mail, telephone and the Internet;
·the Company’s ability to attract and retain key personnel;
·changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes;
·changes in political and economic conditions;
·the Company’s ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result; and
·the success at managing the risks involved in the foregoing.

 

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

 

36 

 

 

Discussion of Financial Condition at March 31, 2017 and December 31, 2016

 

During the period from December 31, 2016 to March 31, 2017, total assets increased by approximately $7.6 million, or 2.02%. The increase, reflected primarily in bank owned life insurance, loans, and cash and due from banks, was funded by an increase in deposits and Federal Home Loan Bank advances. Interest-earning deposits with banks, federal funds sold, and securities available-for-sale at March 31, 2017 totaled $41.6 million compared to $45.0 million at December 31, 2016.

 

The Company’s investment securities portfolio as of March 31, 2017 totaled $26.9 million, remaining relatively flat compared to the $27.1 million reported at December 31, 2016. All of the Company’s investment securities are classified as available-for-sale (AFS). At March 31, 2017, the Company had net unrealized loss on available-for-sale securities of $144,000, net of tax, as compared to net unrealized loss of $249,000, net of tax, at December 31, 2016.

 

At March 31, 2017, net loans constituted 80.56% of the Company’s total assets. Net loans increased by $3.0 million from December 31, 2016 to March 31, 2017. Of all of the portfolio segments that increased during the first three months of 2017, commercial real estate experienced the largest amount of growth at $3.3 million or 1.80%. Management’s continued goal is to grow the loan portfolio to provide maximum income proportionate with acceptable risks.

 

At March 31, 2017 and December 31, 2016 impaired loans, which consisted primarily of troubled debt restructures and non-accrual loans, were $7.0 million and $8.0 million respectively. Impaired loans of $2.7 million and $2.8 million had related allowances for loan losses aggregating $900,000 and $914,000 at March 31, 2017 and December 31, 2016, respectively. There were $4.3 million and $5.2 million of impaired loans without an allowance at March 31, 2017 and December 31, 2016. Impaired loans at March 31, 2017 consisted primarily of commercial real estate, commercial and industrial loans and residential mortgage loans. At March 31, 2017 there were ten loans amounting to approximately $3.7 million, that had been restructured to facilitate the borrowers’ ability to repay the outstanding balance. These ten restructured loans are considered troubled debt restructurings at March 31, 2017 and have specific reserves amounting to approximately $361,000. Of these ten loans, nine loans totaling $3.3 million were accruing interest at March 31, 2017. At December 31, 2016, there were eleven loans totaling $5.0 million that had been restructured to facilitate the borrowers’ ability to repay the outstanding balance and of these eleven loans, ten loans totaling $4.6 million were accruing interest. Reserves for loans not considered impaired were approximately $2.6 million and $2.5 million at March 31, 2017 and December 31, 2016, respectively. The allowance for loan losses at March 31, 2017 and December 31, 2016 was 1.11% and 1.10%, respectively, of gross loans outstanding. This increase of 1 basis point indicates that credit quality was stable during the three months ended March 31, 2017.

 

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.

 

37 

 

 

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 $22.2 million at March 31, 2017 compared to $19.7 million at December 31, 2016. The increase is attributed mostly to the increase in cash and due from banks of $2.6 million or 31.9%, which was offset by a decrease in interest earning deposits with banks, for the purpose of funding loans. At March 31, 2017 foreclosed assets consisted of seven properties valued at $880,000.

 

Deposit accounts represent the Company’s primary funding source and are comprised of non-interest bearing demand deposits, interest bearing demand deposits, savings accounts and time deposits. Total deposits increased by approximately $4.5 million or 1.42% for the three months ended March 31, 2017. The increase is primarily due to the increase in business deposits of $4 million. During the three months ended March 31, 2017, time deposits decreased $6.0 million or 3.77% and were offset by an increase of $5.2 million or 9.33% in money market accounts.

 

Federal Home Loan Bank advances totaled $17.1 million at March 31, 2017, an increase of $3.0 million over the $14.1 million advanced at December 31, 2016.

 

Stockholders’ equity amounted to $29.4 million, or 7.68% of total assets at March 31, 2017, compared to $29.0 million, or 7.74% of total assets at December 31, 2016.

 

38 

 

 

Discussion of Results of Operations

 

For the three months ended March 31, 2017 and 2016

 

Net Income and Net Income Available to Common Shareholders

 

Net income for the three months ended March 31, 2017 was $211,000 compared to $417,000 for the first quarter of 2016, a decrease of $206,000. Diluted earnings per common share was $0.04 for the three months ended March 31, 2017 compared to $0.08 for the first quarter of 2016. The decrease in net income is primarily due to an increase in the loan loss provision of $231,000, or $152,000 net of taxes, and the interest expense of $190,000 related to the subordinated debt that was issued on October 13, 2016. The provision for the three months ended March 31, 2017 of $151,000 was attributed to two charged off loans that became impaired in the first quarter of 2017, additional general allowance for loan losses related to loan growth and an increase in the rolling historical loss factor for commercial real estate loans.

 

Net Interest Income

 

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

 

Net interest income for the quarter ended March 31, 2017, totaled $3,254,000 compared to $3,389,000 for the quarter ended March 31, 2016. The Company’s net interest spread was approximately 3.56% and 3.97% for the quarters ended March 31, 2017 and 2016, respectively. Net interest margin on average interest earning assets was 3.72% and 4.11% for the quarters ended March 31, 2017 and 2016, respectively. Net interest spread decreased by 41 basis points, and net interest margin decreased by 39 basis points. The decreases in net interest spread and net interest margin are due primarily to interest expense on subordinated debt that was issued in October 2016, accounting for 22 basis points, while the remainder of the decreases relates to a decrease in the yields for loans and investments

 

Provision for Loan Losses

 

The Company recorded a provision for loan losses of $151,000 for the quarter ended March 31, 2017 and recovery of $80,000 for the quarter ended March 31, 2016. This increase of $231,000 in the provision for loan losses is due primarily to an increase in the amount of loans outstanding. The recovery in the prior-period was the result of improvement in credit quality trends, including lower nonperforming assets, lower charge-off levels and lower classified asset levels. The ratio of the allowance for loan and lease losses as a percentage of total loans decreased from 1.18% at March 31, 2016 to 1.11% at March 31, 2017 while remaining relatively flat compared to 1.10% at December 31, 2016. The decrease in this percentage from the first quarter of last year is due to decrease in the historical loss factor for Residential and Commercial ADC loans used in the model which uses the prior twelve quarters of losses that are components of the general allowance for non-impaired loans. 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.

 

39 

 

 

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

 

    Loans
Outstanding
   Non-
Performing
Loans
   Net
Charge-offs
(recoveries)
   Allowance
for Loan
Losses
 
    (Dollars in thousands) 
      
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 
June 30, 2014    222,529    2,767    (102)   4,143 
March 31, 2014    221,887    3,603    (54)   4,165 

 

Non-interest Income

 

Non-interest income for the quarter ended March 31, 2017 totaled $292,000, an increase of $6,000 over the $286,000 reported for the quarter ended March 31, 2016. The primary factor contributing to the overall increase was the bank-owned life insurance income increase of $23,000. Interchange fee income increased $13,000 for the quarter ended March 31, 2017 when compared to the same period in 2016. The increase in interchange fees is due to an increase in deposit accounts and card usage over the past twelve months. Overdraft fees on deposits decreased $21,000 from the first quarter of 2017 compared to the first quarter of 2016 related to a decrease in insufficient funds activity. Service charges on deposits, customer service fees and ATM income remained relatively constant for the quarters ended March 31, 2017 and March 31, 2016.

 

Non-interest Expense

 

Non-interest expenses for the March 31, 2017 and 2016 quarters totaled $3,076,000 and $3,105,000, respectively. The $29,000 decrease was due in part to a decrease of $113,000, or 51.6%, in professional fees, specifically outside consultant expense declined $89,000, or 78.2%, while audit services decreased $33,000, or 38.8%. During 2016, a consultant was engaged to perform the services of interim CFO. There was also a decrease of $88,000, or 68.8%, in foreclosed asset expense, due to a decrease of $96,000 in impairment losses partially offset by $14,000 in expenses related to terminating a lease contract on a foreclosed property that was sold in March 2017. An increase of $92,000 was also recorded in data processing expense due to an increase in the number of customer accounts and also due to expenses for conversion of our core processing systems that was in progress at March 31, 2017. The conversion was completed in April 2017.

 

40 

 

 

Income Tax Expense

 

The Company recorded income tax expense of $108,000 for the three month period ended March 31, 2017 resulting in an effective tax rate of 34%. For the same period in 2016, the Company recorded income tax expense of $233,000 with an effective tax rate of 36%. The state of North Carolina reduced its corporate tax rate to 4% in 2016 and to 3% in 2017.

 

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, federal funds sold and investment securities classified as available-for-sale, comprised 14.04% and 14.59% of total assets at March 31, 2017 and December 31, 2016, respectively.

 

Should the need arise, management believes the Company would have the capability to sell securities classified as available-for-sale or to borrow funds as necessary to meet the Company’s cash flow demands. The Company has established credit lines with other financial institutions to purchase up to $13 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, 2017. The Company has also established a credit line with the Federal Home Loan Bank of Atlanta. The credit line is secured by a portion of the Company’s loan portfolio that qualifies under FHLB guidelines as eligible collateral. Total availability, based on collateral pledged at March 31, 2017 was $56.4 million, of which $17.1 million was advanced.

 

Total deposits were $323.2 million and $318.7 million at March 31, 2017 and December 31, 2016 respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 47.62% and 50.19% of total deposits at March 31, 2017 and December 31, 2016 respectively. At March 31, 2017 and December 31, 2016 the Company had brokered time deposits of $24.6 million and $25.4 million respectively. Management accepts time deposits from outside the Bank’s local market area when such funding sources are necessary to fund growth and the rates paid are comparable to rates offered to retail customers or lower. Management believes most time deposits are relationship-oriented. While the Company will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

 

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

 

41 

 

 

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 its subsidiary 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 require the Bank to comply with the following minimum capital ratios: (i) a new common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets (increased from the prior requirement of 4.0%); (iii) a total capital ratio of 8.0% of risk-weighted assets (unchanged from the prior requirement); and (iv) a leverage ratio of 4.0% of total assets (unchanged from the prior requirement). 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 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 Bank to be well-capitalized and expects to be able to meet future needs caused by growth and expansion, as well as capital requirements implemented by the regulatory agencies.

 

Beginning January 1, 2015, the Bank calculates regulatory capital under the U.S. Basel III Standardized Approach. As a small bank holding company with less than $1 billion in total assets, the risk-based capital guidelines of the Federal Reserve do not apply to the Company on a consolidated basis.

 

42 

 

 

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

 

   At March 31, 2017 
   Actual Ratio   Minimum Requirement   Well-Capitalized Requirement 
             
Common equity tier 1 capital ratio   11.23%   4.50%   6.50%
Total risk-based capital ratio   12.28%   8.00%   10.00%
Tier 1 risk-based capital ratio   11.23%   6.00%   8.00%
Tier 1 leverage ratio   9.87%   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.

 

43 

 

 

Part II. OTHER INFORMATION

 

Item 6. Exhibits

 

Exhibit #   Description
     
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, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2017 and 2016; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2017 and 2016; (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) as of March 31, 2017 and 2016; and (v) Notes to Condensed Consolidated Financial Statements (Unaudited)

 

44 

 

 

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 12, 2017 By: /s/ Jerry L. Ocheltree
    Jerry L. Ocheltree
    President and Chief Executive Officer
     
Date: May 12, 2017 By: /s/ Edwin E. Laws
    Edwin E. Laws
    Executive Vice President and Chief Financial Officer

 

 

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EXHIBIT INDEX

 

Exhibit #   Description
     
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, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2017 and 2016; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2017 and 2016; (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) as of March 31, 2017 and 2016; and (v) Notes to Condensed Consolidated Financial Statements (Unaudited)

 

 

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