Carolina Trust BancShares, Inc. - FORM 10-K - EX-13 - EXHIBIT 13

Attached files

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EX-32.01 - EXHIBIT 32.01 - Carolina Trust BancShares, Inc.	ex32_01.htm
EX-32.02 - EXHIBIT 31.02 - Carolina Trust BancShares, Inc.	ex31_02.htm
EX-31.01 - EXHIBIT 31.01 - Carolina Trust BancShares, Inc.	ex31_01.htm
EX-23.01 - EXHIBIT 23.01 - Carolina Trust BancShares, Inc.	ex23_01.htm
EX-21.01 - EXHIBIT 21.01 - Carolina Trust BancShares, Inc.	ex21_01.htm
EX-4.01 - EXHIBIT 4.01 - Carolina Trust BancShares, Inc.	ex4_01.htm
10-K - 10-K - Carolina Trust BancShares, Inc.	form10k.htm

Exhibit 13

Carolina Trust BancShares Inc.

2017 Annual Report

Carolina Trust BancShares, Inc.

TABLE OF CONTENTS

	Page No.

Forward-Looking and Cautionary Statements	1

Report of Management	2

Selected Financial and Other Data	5

Management’s Discussion and Analysis	6

Report of Independent Registered Public Accounting Firm	27

Consolidated Financial Statements

Consolidated Balance Sheets	28

Consolidated Statements of Operations	29

Consolidated Statements of Comprehensive Income	30

Consolidated Statements of Changes in Stockholders’ Equity	31

Consolidated Statements of Cash Flows	32

Notes to Consolidated Financial Statements	33

General Corporate Information	75

FORWARD-LOOKING AND CAUTIONARY STATEMENTS

This annual report contains statements that management believes are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to the caution regarding financial condition of Carolina Trust BancShares, Inc. (the “Company”), results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to, those described in this annual report. 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;

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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;

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

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

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risks related to the concentration in commercial real estate;

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declines in commercial and residential real estate;

☐

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

☐

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

☐

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

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

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

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

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

☐

changes in political and economic conditions;

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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.

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Carolina Trust BancShares, Inc.

Report of Management

Dear Shareholders:

Your company, Carolina Trust BancShares, Inc. (NASDAQ: CART), completed its 17^th year of business with impressive growth as we served the financial needs of individuals, businesses and other organizations from nine branches in the North Carolina counties of Lincoln, Gaston, Rutherford, Catawba, and Iredell and a loan production office in Rowan County. We value each of our customers’ 12,258 deposit accounts and 3,099 loan and credit line accounts. Our commitment to serve our customers well, to operate in a safe and sound manner, and to prepare for future success led to the following accomplishments in 2017:

✓

Completed construction and relocated our Hickory, NC branch to a new building with an attractive and modern branch design in the Viewmont neighborhood

✓

Consolidated our Boger City, NC branch into the Main Office in Lincolnton, NC

✓

Converted our loan production office in Mooresville, NC to a full-service branch

✓

Opened a loan production office in Salisbury, NC

✓

Upgraded to a more robust core banking system to support our continued loan and deposit growth

✓

Continued our balance sheet growth:

Assets increased by 8% to $407 million

Loans increased by 13% to $349 million

Deposits increased by 7% to $341 million

✓

Adopted a new 3 year plan for 2017 through 2020 and progressed according to action plans throughout the year

We earned $404,000 in 2017 after deducting a tax expense charge of $936,000 from revaluing our deferred tax assets when the Tax Cuts and Jobs Act (“tax reform”) was enacted into law on December 22. Deferred tax assets represent tax benefits that we expect from deductions on future tax returns. The deferred tax assets are primarily derived from both (1) the allowance for loan and lease losses that represent estimated future net charge-offs and (2) the net operating losses from prior years that are carried forward to future years’ tax returns. As a result of tax reform, we will realize lower future tax benefits as tax deductions will be applied to a federal tax rate of 21% beginning with 2018 returns as compared to the 34% tax rate on 2017 and prior tax returns. So while the lower tax rate will increase overall net income in future years, we decreased 2017 net income by recording additional tax expense to reflect this reduced benefit of future tax deductions.

If the $936,000 tax charge attributed to the deferred tax revaluation were excluded, 2017 net income available to common shareholders, as adjusted was $1,340,000, which would have been a $141,000 increase, or 12%, over the comparable 2016 amount, $1,199,000. This comparable 2016 amount was the sum of reported net income to common shareholders, $1,119,000 plus an $80,000 income tax charge when deferred taxes were revalued due to decrease in the North Carolina state income tax rate in 2016.

The $141,000 increase in net income available to common shareholders, as adjusted for the income tax charges was attributed mostly to an increase in net interest income of $397,000, net of income taxes, and a decrease in preferred stock dividends of $222,000. The preferred stock of our subsidiary, Carolina Trust Bank (the “Bank”) was redeemed in December 2016. Partially offsetting the adjusted net income increase was a $468,000 increase in the loan loss provision, net of income taxes, due mostly to two factors: (1) provision for additional general allowances for growth in performing loans and (2) provision for specific allowances on loans that became impaired during the year.

Our stable net interest margin of 3.81% in 2017, an increase of 1 basis point from 3.80% in 2016, enabled net interest income to grow proportionately with the growth in our average earning assets. Net interest income increased by 4.6%, and average earning assets that include loans, investment securities, certificates of deposit and other interest deposits with banks, increased by 4.5%. Our yield on earning assets was 4.76% in 2017, an increase of 14 basis points from the 2016 margin, 4.62%. Our cost of interest-bearing deposit liabilities and borrowings also increased by 14 basis points to 1.11% in 2017 from 0.97% in 2016. Yields on both earning assets and deposits were up in 2017, in part, because the Federal Reserve increased the target fed funds rate four times totaling 1.00% since December 2016, and debt market interest rates increased as well. The slight increase in our net interest margin of 1 basis point was attributed to non-interest bearing deposit liability growth. We increased our average non-interest bearing checking deposits in 2017 by 17% to $45,362,000 as compared to $38,662,000 in 2016. More details about our net interest income are provided in the net interest income table found later in this annual report.

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We are very pleased with the results of our efforts to continue to increase loans throughout our geographic footprint in the western piedmont and extending into the mountains of North Carolina. We remained disciplined with respect to asset quality and loan yield. In 2017, the FDIC’s Uniform Bank Performance Report (“UBPR”) shows that the Bank grew net loans and leases by 13.10% which placed us in the 76^th percentile among FDIC-insured banks with assets ranging from $300 million to $1 billion. Similarly, the Bank’s net interest income as a percentage of assets was above median in the 57^th percentile. While our cost of interest-bearing deposits and borrowings was higher than our peers and in the 83^rd percentile, we were able to outpace our peer group with our ratio of net interest income to average earning assets in the 67^th percentile. This net interest income ratio performance was due to investing a higher percentage of our earning assets in loans than peers invested. We experienced a moderate to high level of competition for deposits in our markets as we worked to build banking relationships and increase liquidity in order to support our loan growth.

We leveraged our fixed costs and gained efficiencies in 2017, in part because we added a net of only one full-time equivalent employee during the year. Total assets grew by 8%, but our net non-interest expense (i.e. non-interest expense minus non-interest income) grew by only 1%. Managing our growth includes cost control, and we accomplished that goal during 2017, including decreases in professional fee expenses and foreclosed asset expenses.

Our board members and employees serve each of our communities through the United Way, school volunteering, and many other civic and charitable service organizations. I thank each of our team members for their efforts to improve the quality of life and provide more opportunities for all citizens in our market areas. Steve Huffstetler, our Senior Vice President and Market Executive in Gaston County, was a key leader in the effort to build a new YMCA in Gastonia to replace a 60 year old facility. The four year project involved site selection, fund raising, and construction of the new facility. The effort resulted in the 60,000 square foot Warlick Family YMCA that includes two swimming pools and offers outdoor water activities around Robinwood Lake, an iconic location that holds warm memories for the community. In addition to Steve’s tireless effort, the Bank also supported the project with a generous financial contribution. Steve shared his thoughts, “As one of the authors of this project, and being the Chief Volunteer Officer for the Board of the YMCA throughout the construction, I feel that the community has come together, leaving a legacy for many years to come for the youth and adults of Gastonia and Gaston County.”

Pam Huskey, a valuable member of the board of directors of our Bank since incorporation in 2000, will be retiring at our annual meeting. Pam is active in her community, as an owner of a commercial sprinkler business, a volunteer with various non-profit organizations, and a retiree from the clerk of court’s office. We appreciate deeply Pam’s 17+ years of service to the board and wish her and her family much happiness and success in the future.

Thank you for your investment and for allowing us to be stewards of Carolina Trust BancShares, Inc. and Carolina Trust Bank. We appreciate the opportunities we have each day to serve our communities and build banking relationships with businesses, organizations, and citizens, as we work to provide the long-term return on capital that you expect.

Sincerely,

Jerry L. Ocheltree

President and CEO

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Carolina Trust BancShares, Inc.

Selected Financial and Other Data

In thousands, except share and per share data

	As of or for the Years Ended December 31,
	2017			2016			2015			2014			2013
Summary of Operations:
Interest income	$	17,449		$	16,222		$	14,905		$	13,042		$	12,815
Interest expense		3,479			2,872			2,311			1,951			2,140
Net interest income		13,970			13,350			12,594			11,091			10,675
Provision (recovery) for loan losses		704			(27	)		(270	)		(80	)		2,285
Net interest income after provision for loan losses		13,266			13,377			12,864			11,171			8,390
Non-interest income		1,376			1,229			1,109			936			1,019
Non-interest expense		12,644			12,388			11,751			9,789			10,857
Income (loss) before income taxes		1,998			2,218			2,222			2,318			(1,448	)
Provision (benefit) for income taxes		1,594			877			1,164			(4,539	)		-
Net income (loss)	$	404		$	1,341		$	1,058		$	6,857		$	(1,448	)
Preferred stock dividend and accretion of discount on warrants		-			222			234			227			191
Net income (loss) available (attributable) to common stockholders	$	404		$	1,119		$	824		$	6,630		$	(1,639	)

Per Share Data and Shares Outstanding Data:
Basic net income (loss) per common share	$	0.09		$	0.24		$	0.18		$	1.43		$	(0.35	)
Diluted net income (loss) per common share		0.09			0.24			0.18			1.42			(0.35	)
Book value per common share at period end		6.25			6.24			6.00			5.87			4.25
Weighted average number of common shares outstanding:
Basic		4,655,369			4,649,405			4,645,408			4,635,096			4,634,565
Diluted		4,737,874			4,697,765			4,685,814			4,678,108			4,634,565
Shares outstanding at period end		4,657,880			4,650,808			4,646,225			4,635,422			4,634,702

Balance Sheet Data:
Total assets	$	406,618		$	374,917		$	334,049		$	293,041		$	266,435
Loans receivable		348,679			308,492			292,362			244,646			223,891
Allowance for loan and lease losses		3,599			3,393			3,723			4,002			4,066
Other interest-earning assets		37,598			47,589			25,341			29,677			28,619
Deposits		340,653			318,665			284,794			237,176			228,883
Borrowings		33,483			23,973			15,681			22,373			12,152
Stockholders’ equity		29,119			29,033			30,464			29,807			22,256
Selected Performance Ratios:
Return on average assets		0.10	%		0.36	%		0.33	%		2.53	%		(0.54	%)
Return on average common equity		1.36	%		3.87	%		2.95	%		28.30	%		(6.08	%)
Net interest margin		3.81	%		3.80	%		4.20	%		4.33	%		4.22	%
Net interest spread		3.65	%		3.65	%		4.06	%		4.21	%		4.11	%
Noninterest income to average assets		0.35	%		0.33	%		0.35	%		0.37	%		0.38	%
Noninterest expense to average assets		3.24	%		3.35	%		3.66	%		3.63	%		4.02	%
Efficiency ratio (1)		82.39	%		84.98	%		85.75	%		81.48	%		92.85	%
Asset Quality Ratios:
Nonperforming loans to period-end loans		0.79	%		0.93	%		0.74	%		1.70	%		1.70	%
Allowance for loan and lease losses to period-end loans		1.03	%		1.10	%		1.27	%		1.64	%		1.82	%
Allowance for loan and lease losses to nonperforming loans		131.03	%		118.02	%		172.10	%		96.08	%		106.92	%
Nonperforming assets to total assets		0.87	%		1.04	%		1.24	%		2.12	%		2.89	%
Net loan charge-offs (recoveries) to average loans outstanding		0.15	%		0.10	%		0.00	%		(0.01	%)		1.36	%
Capital Ratios: (*indicates subsidiary bank ratio)
Common equity tier 1 capital ratio*		10.10	%		11.40	%		8.67	%		N/A			N/A
Total risk-based capital ratio*		11.08	%		12.46	%		10.30	%		11.03	%		10.80	%
Tier 1 risk-based capital ratio*		10.10	%		11.40	%		9.10	%		9.77	%		9.54	%
Tier 1 leverage ratio*		9.22	%		9.64	%		8.48	%		9.02	%		8.24	%
Equity to assets ratio		7.16	%		7.74	%		9.12	%		10.17	%		8.35	%
Average equity (common and preferred) to average assets		7.61	%		8.49	%		9.52	%		8.94	%		8.81	%
Average common equity to average assets		7.61	%		7.83	%		8.72	%		7.99	%		7.85	%
Other Data:
Number of banking offices		9			9			9			7			7
Number of full time equivalent employees		81			80			83			74			61

(1)	Efficiency ratio is noninterest expense divided by the sum of net interest income and noninterest income.

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Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

The following is management’s discussion and analysis of the financial condition and results of operations of Carolina Trust BancShares, Inc. (the “Company”) as of and for the years ended December 31, 2017 and 2016. The purpose of this discussion is to focus on important factors affecting our financial condition and results of operations. The discussion should be read in conjunction with the audited financial statements and related notes included in this report to assist in the evaluation of our 2017 performance.

DESCRIPTION OF BUSINESS

Carolina Trust BancShares, Inc. is a North Carolina business corporation formed in 2016 to become the bank holding company for Carolina Trust Bank (the “Bank”). On August 16, 2016, the Company announced that it had consummated the 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 ratio. The Company operates as a registered bank holding company under the Bank Holding Company Act of 1956. The Bank is the only subsidiary of the Company.

The Bank commenced operations on December 8, 2000 in Lincolnton, North Carolina. We moved into our permanent headquarters in June 2001. We opened our first de novo branch in West Lincolnton in September 2002, and purchased a branch in Vale, ten miles west of Lincolnton, in March 2003. In September 2004, we expanded our market area by opening a de novo branch in Denver, fifteen miles east of Lincolnton adjacent to Lake Norman, a rapidly growing and upscale commuter corridor for the Charlotte area. In 2007, we opened a loan production office in Forest City, NC in Rutherford County and a de novo branch in Boger City on the east side of Lincolnton. In October 2009, we acquired Carolina Commerce Bank, which had one office in Gastonia, NC. We merged Carolina Commence Bank with and into our bank, and their former headquarters is now operated as a full-service branch of Carolina Trust Bank. In February 2012, the Bank opened a loan production office in Hickory, NC in Catawba County. In August 2013, the loan production office in Forest City was converted into a full-service branch. In November 2014, the Bank opened a loan production office in Mooresville, NC. In March 2015, the Bank opened a de novo branch in Lake Lure, NC in Rutherford County and converted the loan production office in Hickory into a full-service branch. In March 2017, the Boger City branch was consolidated into the nearby main office (headquarters). In November 2017, the Bank opened a loan production office in Salisbury, NC in Rowan County.

We are the only independent publicly held bank, headquartered in Lincoln County, which is adjacent to the Charlotte/Concord/Gastonia Metropolitan Statistical Area. Our headquarters and Denver (Lake Norman) offices are both approximately twenty-five miles northwest of Charlotte’s Douglas International Airport.

Our executive and lending officers and some of our directors have many years of experience in commercial banking and insurance in the Lincoln County market as well as Gastonia and Gaston County to the immediate south, Hickory and Catawba County to the immediate north and Cleveland and Rutherford Counties to the west. Our President and Chief Executive Officer, Jerry L. Ocheltree, was formerly the President and Chief Executive Officer for First Bank in Southern Pines, North Carolina, and was chair of the North Carolina Bankers Association from 2012-2013. He currently serves as a member of the board of the Charlotte Branch of the Federal Reserve Bank of Richmond. Richard M. Rager, our Executive Vice President and Chief Credit Officer, has been involved in bank lending since 1981, including service with the Federal Deposit Insurance Corporation in the evaluation of problem loans.

The primary purpose of the Company is to serve the banking needs of individuals and businesses in our market areas. We emphasize personalized service, access to decisionmakers, and a quick response on lending decisions. We have been, and intend to remain, a community-focused financial institution offering a full range of financial services to small and medium-sized businesses, professionals, and individual consumers in our community. The Company offers a wide range of banking services including checking and savings accounts; commercial, installment, mortgage, and personal loans; safe deposit boxes; and other associated services.

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Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

Our website is located at http://www.carolinatrust.com. The Bank is a member of the Federal Home Loan Bank of Atlanta and its deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. The address of our headquarters is 901 East Main Street, Lincolnton, North Carolina 28092, and our telephone number is (704) 735-1104.

CRITICAL ACCOUNTING POLICIES

General

The Company’s financial statements are prepared in accordance with U.S. generally accepted accounting principles “GAAP” and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates, which in the case of the determination of our allowance for loan losses, deferred tax assets, and foreclosed assets have been critical to the determination of our financial position and results of operations.

Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements.

Allowance for Loan and Lease Losses

The most critical estimate concerns the Company’s allowance for loan losses. The Company records provisions 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 formula allowance for the remainder of the portfolio.

The Company considers the allowance for loan and lease losses of $3,599,000 appropriate to cover losses inherent in the loan and lease portfolio as of December 31, 2017. However, no assurance can be given that the Company will not, in any particular period, sustain loan and lease losses that exceed the amount reserved, or that subsequent evaluations of the loan and lease portfolio, in light of factors then prevailing, including economic conditions, the Company’s ongoing credit review process or regulatory requirements, will not require significant changes in the allowance for loan and lease losses. Among other factors, a prolonged economic slowdown and/or a decline in commercial or residential real estate values in the Company’s market area may have an adverse impact on the current adequacy of the allowance for loan and lease losses by increasing credit risk and the risk of potential loss.

The total allowance for loan and lease losses is generally available to absorb losses from any segment of the portfolio. The allocation of the Company’s allowance for loan and lease losses disclosed in the asset quality table presented in this report is subject to change based on the changes in criteria used to evaluate the allowance and is not necessarily indicative of the trend or future losses in any particular portfolio.

The discussion and analysis included in this section contains detailed information regarding the Company’s allowance for loan and lease losses, net charge-offs, non-performing assets, past due loans and leases and potential problem loans and leases. Included in this data are numerous portfolio ratios that must be carefully reviewed in relation to the nature of the underlying loan and lease portfolios before appropriate conclusions can be reached regarding the Company or for purposes of making comparisons to other companies. Most of the Company’s non-performing loans and past due loans are secured by real estate. Given the nature of these assets and the related mortgage foreclosure and property sale, it can take 12 months or longer for a loan to migrate from initial delinquency to final disposition. This resolution process generally takes much longer for loans secured by real estate than for unsecured loans or loans secured by other property primarily due to state real estate foreclosure laws.

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Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

Deferred Taxes

The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance may be established. Management considers the determination of this valuation allowance to be a critical accounting policy due to the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed on a continual basis as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carry backs decline, or if we project lower levels of future taxable income. If such a valuation allowance is deemed necessary in the future, it would be established through a charge to income tax expense that would adversely affect our operating results.

Foreclosed Assets

Foreclosed assets represent properties and equipment acquired through foreclosure or physical repossession. Appraisals are obtained at the time of foreclosure and any necessary write-downs to fair value, less selling costs, at the time of transfer to foreclosed assets are charged to the allowance for loan losses. Subsequent to foreclosure, we periodically evaluate the value of foreclosed assets held for sale and record an impairment charge for any subsequent declines in fair value less selling costs. Subsequent declines in value are charged to operations. Fair value is based on our assessment of information available to us at the end of a reporting period and depends upon a number of factors, including our historical loss experience, economic conditions, and issues specific to individual properties. Our evaluation of these factors involves subjective estimates and judgments that may change.

FINANCIAL CONDITION

At December 31, 2017, the Company’s total assets were $406,618,000, total loans stood at $348,679,000, total investment securities were $31,112,000, total deposits were $340,653,000 and total shareholders’ equity was $29,119,000. Compared with December 31, 2016, total assets increased $31,701,000 or 8.5%, total loans increased $40,187,000 or 13.0%, total investment securities increased $4,049,000 or 15.0%, total deposits increased $21,988,000 or 6.9% and total shareholders’ equity attributable to common shareholders increased $86,000 or 0.3%.

Capital for the Bank exceeded “well-capitalized” requirements for each of the four primary capital ratios monitored by state and federal regulators. As of December 31, 2017, the Bank’s common equity tier 1 capital ratio and tier 1 risk-based capital ratio were both 10.10%; total risk-based capital ratio was 11.08%; and the tier 1 leverage ratio was 9.22%.

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Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

RESULTS OF OPERATIONS

The Company is reporting net income available to common shareholders of $404,000, or $0.09 per diluted common share for the year ended December 31, 2017, a decrease of $715,000 or 63.9% as compared to the year ended December 31, 2016. Excluding the increase in income tax expense of $936,000 due to the revaluation of our deferred tax asset necessitated by the enactment of the Tax Cuts and Jobs Act on December 22, 2017, which lowered the federal corporate income tax rate from 34% to 21%, net income available to common shareholders, as adjusted was $1,340,000 or $0.28 per diluted common share for the year ended December 31, 2017. Pre-tax net income decreased $220,000 or 9.9% for the year ended December 31, 2017 as compared to the same prior year period. Return on average total assets was 0.10% and return on average shareholders’ equity was 1.36% for the year ended December 31, 2017.

Select financial highlights for 2017:

Increase in total loans outstanding of $40,187,000 or 13.0% over the prior year.

Increase in total deposits outstanding of $21,988,000 or 6.9%.

Increase in net interest income of $620,000 or 4.6% as compared to the prior year.

Total nonperforming assets (“NPAs”) decreased $351,000 from $3,886,000 at December 31, 2016 to $3,535,000 at December 31, 2017. This resulted in a 17 basis point reduction in the Bank’s NPAs as a percentage of total assets, from 1.04% at December 31, 2016 to 0.87% at December 31, 2017.

The ratio of Allowance for Loan and Lease Losses (“ALLL”) to total loans decreased from 1.10% at December 31, 2016 to 1.03% at December 31, 2017 due to continued improvement in credit quality as demonstrated by the reduction in NPAs.

Net Interest Income

Like most financial institutions, the primary component of earnings for the Company is net interest income. Net interest income is the difference between interest income, principally from the loan and investment securities portfolios, and interest expense, principally on customer deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, volume refers to the average dollar level of interest-earning assets and interest-bearing liabilities, spread refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities, and margin refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as by levels of non-interest-bearing liabilities and capital.

Net interest income was $13,970,000 for the year ended December 31, 2017, an increase of $620,000 or 4.6% as compared to December 31, 2016. Average interest-earning assets for 2017 were $366,581,000; an increase of $15,619,000 from 2016. For 2017, loans and investment securities represented 88.96% and 7.75% respectively of average total interest earning assets for the year. Comparatively, 2016 loans and investment securities represented 85.08% and 7.82% respectively of average total interest-earning assets for the year. The average yield on total interest-earning assets increased by 14 basis points to 4.76% in 2016 compared to 4.62% for 2016 and the average rate of interest paid on interest-bearing liabilities increased by 14 basis points to 1.11% in 2017, compared to 0.97% in 2016. For the years ended December 31, 2017 and December 31, 2016, the net interest spread was 3.65%. The net interest margin was 3.81% for the year ended December 31, 2017 compared to 3.80% for the year ended December 31, 2016, an increase of 1 basis point.

- 9 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

Asset Quality

We continue to make improvement in our nonperforming and classified loan categories which has allowed us to reduce the balance of our overall allowance for loan and lease losses during the fiscal years ended December 31, 2017 and 2016. The Company’s ratio of non-performing assets as a percentage of total assets decreased 17 basis points to 0.87% as compared to the 1.04% reported at December 31, 2016. In comparison to the prior year, nonaccrual loans increased $36,000, accruing loans 90 days or more past due decreased by $165,000, and foreclosed assets decreased $222,000. There were net loan charge-offs of $498,000 and $303,000 in 2017 and 2016, respectively.

The Bank recorded a $704,000 provision for loan losses in 2017 as compared to a recovery of loan losses of $27,000 in 2016. The ratio of allowance for loan and lease losses as a percentage of total loans decreased from 1.10% at December 31, 2016 to 1.03% at December 31, 2017. The $731,000 increase in the provision was due to an increase in the amount of loans outstanding and to expanding the period for calculating the historical loss factors that are applied to pools of performing loans in 2017. The ratios of net charge-offs (recoveries) to average gross loans were 0.15%, 0.10% and 0.00% for 2017, 2016, and 2015, respectively.

At December 31, 2017, the Bank’s total reserves amounted to $3,599,000; of which $248,000 are specific reserves on impaired loans and $3,351,000 are general reserves to cover inherent risks in the loan portfolio. Comparatively, at December 31, 2016, the total reserves amounted to $3,393,000, including specific reserves of $914,000 and general reserves of $2,479,000. Total reserves represented 135% of non-accrual loan balances as of December 31, 2017 as compared to 129% reported at December 31, 2016.

Noninterest Income

For the year ended December 31, 2017, noninterest income was $1,376,000, a $147,000 or 12.0% increase when compared to the prior year. Income from bank owned life insurance increased $146,000 or 276.8% due to the purchase of $5.5 million in additional bank owned life insurance in February of 2017. Interchange fee income increased $39,000 or 8.8% as a result of deposit growth and promotions related to debit card usage. Overdraft fees on deposits increased $36,000 or 9.1% year over year. Slightly offsetting the improvements seen in non-interest income was a change in the income from the sales of investment securities. The Bank recorded a $55,000 gain on the sale of an investment security in 2016. The Bank did not sell any investment securities for gains in 2017. Management remains focused on business development efforts to generate additional sources of non-interest income.

Noninterest Expense

Noninterest expense for the year ended December 31, 2017 totaled $12,644,000, up $256,000 or 2.1% as compared to the $12,388,000 recorded for the year ended December 31, 2016. Specific items to note are as follows:

Compensation expense increased $249,000 or 3.6% in comparison to 2016 as the result of staff additions over the past 12 months, merit increases and performance incentive award increases.

Data processing expense increased $139,000 or 17.2% due to an increase in the number of customer accounts and also due to expenses for conversion of our core products that was completed in the second quarter of 2017.

Net foreclosed asset expenses declined by $212,000 or 43.0% in comparison to 2016. The decrease is due to the decrease in write-downs on foreclosed real estate properties in 2017.

Provision for Income Taxes

The Company recorded income tax expense of $1,594,000 in 2017 resulting in an effective tax rate of 79.8%, as compared to an income tax expense of $877,000 in 2016 which represented an effective tax rate of 39.5%. The effective tax rate for 2017 was elevated due to additional tax expenses totaling $936,000 when deferred tax assets were revalued. The revaluation was attributed to the Tax Cuts and Jobs Act of 2017, enacted on December 22, 2017, that decreased the Company’s federal income tax rate from 34% to 21%.The Company also had a reduction of approximately $80,000 in the deferred tax asset in 2016 due to the State of North Carolina reducing its corporate tax rate to 3%. We expect the 2018 effective tax rate to be approximately 22% based on current 2018 projections. The actual effective tax rate for 2018 will depend upon the tax effects of transactions made and also the nature and amount of future income and expenses.

- 10 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

NET INTEREST INCOME

Average Balances and Average Rates Earned and Paid. The following table sets forth, for the years ended December 31, 2017, 2016 and 2015, information with regard to average balances of assets and liabilities, as well as the total dollar amounts of interest income from interest-earning assets and interest expense on interest-bearing liabilities, resultant yields or costs, net interest income, net interest spread, net interest margin and ratio of average interest-earning assets to average interest-bearing liabilities. Non-accrual loans have been included in determining average loans and did not have a material impact on net interest income.

	For the Years Ended December 31,
	# Average Balance			Interest Income/ Expense		Average Interest Rate(1)			# Average Balance			Interest Income/ Expense		Average Interest Rate(1)			# Average Balance			Interest Income/ Expense		Average Interest Rate(1)
	(Dollars in thousands)

Interest-earning assets:
Loans(2)	$	326,103		$	16,534		5.07	%	$	298,600		$	15,213		5.09	%	$	271,404		$	13,897		5.12	%
Investment securities available for sale		28,419			783		2.76	%		27,447			815		2.97	%		24,358			948		3.89	%
Other interest-earning assets		12,059			132		1.09	%		24,915			194		0.78	%		4,379			60		1.37	%
Total interest-earning assets		366,581			17,449		4.76	%		350,962			16,222		4.62	%		300,141			14,905		4.97	%
Other assets		24,266								18,324								20,813

Total Assets	$	390,847							$	369,286							$	320,954

Interest-bearing liabilities
Deposits:
Interest-earning demand deposits and savings	$	131,072		$	442		0.34	%	$	110,981		$	278		0.25	%	$	95,899		$	210		0.22	%
Time deposits $250,000 or more		31,106			443		1.42	%		39,041			567		1.45	%		36,348			479		1.32	%
Other time deposits		122,329			1,596		1.30	%		127,581			1,665		1.31	%		108,801			1,437		1.32	%
Capital lease obligation		240			17		7.08	%		299			21		7.02	%		352			25		7.10	%
Other interest-bearing liabilities		27,817			981		3.53	%		18,250			341		1.87	%		13,958			160		1.15	%
Total interest-bearing liabilities		312,564			3,479		1.11	%		296,152			2,872		0.97	%		255,358			2,311		0.91	%

Non-interest bearing deposits		45,362								38,662								30,428
Other liabilities		3,183								3,102								4,616
Stockholders' equity		29,738								31,370								30,552

Total liabilities and stockholders' equity	$	390,847							$	369,286							$	320,954

Net interest income andinterest rate spread (3)				$	13,970		3.65	%				$	13,350		3.65	%				$	12,594		4.06	%

Net yield on average interest-earning assets (4)							3.81	%							3.80	%							4.20	%

Ratio of interest-earning assets to interest-bearing liabilities		117.28	%							118.51	%							117.54	%

⁽¹⁾ All rates/yields are annualized based on average daily balances.

⁽²⁾ Interest income on loans and average rates are affected by accretion of fair value discounts in each period reported.

⁽³⁾ Represents the difference between the yield on total average earning assets and the cost of total interest-bearing liabilities.

⁽⁴⁾ Represents the ratio of net interest-earnings to the average balance of interest earning assets.

- 11 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

RATE/VOLUME ANALYSIS

The following table analyzes the dollar amount of changes in interest income and interest expense for major components of interest-earning assets and interest-bearing liabilities. The table distinguishes between (i) changes attributable to volume (changes in volume multiplied by the prior period’s rate), (ii) changes attributable to rate (changes in rate multiplied by the prior period’s volume), and (iii) net change (the sum of the previous columns). The change attributable to both rate and volume (changes in rate multiplied by changes in volume) has been allocated equally to both the changes attributable to volume and the changes attributable to rate. Interest income on loans is affected by accretion of fair value discounts in 2017 and 2016.

	Years Ended December 31, 2017 vs. 2016
	Increase (Decrease) Due to
In thousands	Volume			Rate			Net

Interest income:
Loans	$	1,401		$	(80	)	$	1,321
Investment securities		29			(61	)		(32	)
Other interest-earning assets		(100	)		38			(62	)

Total interest income		1,330			(103	)		1,227

Interest expense:
Deposits:
Savings, NOW and money market deposits		50			114			164
Time deposits $250,000 or more		(115	)		(9	)		(124	)
Other time deposits		(69	)		-			(69	)
Capital lease obligation		(4	)		-			(4	)
Other interest-bearing liabilities		179			461			640

Total interest expense		41			566			607

Net interest income increase (decrease)	$	1,289		$	(669	)	$	620

- 12 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

INTEREST RATE SENSITIVITY

The Company’s results of operations depend substantially on its net interest income. Like most financial institutions, the Company’s interest income and cost of funds are affected by general economic conditions and by competition in the marketplace.

The purpose of asset/liability management is to provide stable net interest income growth by protecting the Company’s earnings from undue interest rate risk, which arises from changes in interest rates and the balance sheet mix, and by managing the risk/return relationships between liquidity, interest rate risk, market risk, and capital adequacy. The Company maintains, and has complied with, a board-approved asset/liability management policy that provides guidelines for controlling exposure to interest rate risk by utilizing the following ratios and trend analyses: liquidity, equity, volatile-liability dependence, portfolio maturities, maturing assets and maturing liabilities. The Company’s policy is to control the exposure of its earnings to changing interest rates by generally endeavoring to maintain a position within a narrow range around an “earnings neutral position,” which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.

When suitable lending opportunities are not sufficient to utilize available funds, the Company has generally invested such funds in securities, primarily securities issued by governmental agencies and government sponsored enterprises. The securities portfolio contributes to the Company’s profits and plays an important part in overall interest rate management. However, management of the securities portfolio alone cannot balance overall interest rate risk. The securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the securities portfolio are safety, liquidity, yield, asset/liability management (interest rate risk), and investing in securities that can be pledged for public deposits.

In reviewing the needs of the Company with regard to proper management of its asset/liability program, the Company’s management estimates its future needs, taking into consideration estimated loan and deposit increases (due to increased demand through marketing) and forecasted interest rate changes.

The analysis of an institution’s interest rate gap (the difference between the re-pricing of interest-earning assets and interest-bearing liabilities during a given period of time) is a standard tool for the measurement of exposure to interest rate risk. The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2017, which are projected to re-price or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which re-price or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period, except for those loans that have set repricing dates, which are included in the period in which they adjust. Included in adjustable rate loans are loans currently at floor rates. These floored loans will not have rate adjustments until the floor plus the index (e.g. Wall Street Journal prime rate) exceed the floor rates. For example, an adjustable rate loan with a rate index based on prime, currently 4.50%, plus a spread of 0.50% would normally have a current rate of 5.00% and would adjust when the prime rate adjusts. However, if the loan agreement includes a 5.50% floor rate, the prime rate would have to increase from 4.50% to 5.00% before that loan rate would be able to adjust above the current rate, 5.50%. Money market deposit accounts and negotiable order of withdrawal or other transaction accounts are assumed to be subject to immediate re-pricing and depositor availability and have been placed in the shortest period. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates have been used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments, which will be received throughout the lives of mortgage-backed investment securities. The interest rate sensitivity of the Company’s assets and liabilities illustrated in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

- 13 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

The following table presents the Bank’s interest sensitivity gap between interest-earning assets and interest-bearing liabilities for the period indicated.

	Terms to repricing at December 31, 2017
Dollars in thousands	Within 3 Months			4 to 12 Months			1 Year to 5 Years			Over 5 Years			Total

INTEREST-EARNING ASSETS:
Loans receivable:
Adjustable rate	$	101,763		$	451		$	28,437		$	2,849		$	133,500
Fixed rate		6,012			9,744			172,093			27,330			215,179
Investment securities available for sale		1,657			2			7,135			22,318			31,112
Interest-earning deposits in other banks		3,647			-			-			-			3,647
Certificate of deposit with banks		-			-			748			750			1,498
Stock in FHLB of Atlanta		-			-			-			1,341			1,341

Total interest-earning assets	$	113,079		$	10,197		$	208,413		$	54,588		$	386,277

INTEREST-BEARING LIABILITIES:
Deposits:
Interest-earning demand deposits and savings	$	137,462		$	-		$	-		$	-		$	137,462
Time deposits $250,000 or more		3,514			16,952			18,750			-			39,216
Other time deposits		22,380			34,004			58,392			-			114,776
Capital lease obligation		16			50			141			-			207
Long Term – Subordinated Debt		-			-			9,676			-			9,676
Advances from FHLB		9,500			-			12,100			2,000			23,600

Total interest-bearing liabilities	$	172,872		$	51,006		$	99,059		$	2,000		$	324,937

Interest sensitivity gap per period	$	(59,793	)	$	(40,809	)	$	109,354		$	52,588		$	61,340

Cumulative interest sensitivity gap	$	(59,793	)	$	(100,602	)	$	8,752		$	61,340		$	61,340

Cumulative gap as a percentage of total interest-earning assets		(52.88	%)		(81.61	%)		2.64	%		15.88	%		15.88	%

Cumulative interest-earning assets as a percentage of interest-bearing liabilities		65.41	%		55.06	%		102.71	%		118.88	%		118.88	%

CAPITAL RESOURCES

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

- 14 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

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 Company and the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. These are the initial capital requirements, which will be phased in over a four-year period. When fully phased in on January 1, 2019, the rules will require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

The capital conservation buffer requirement began January 1, 2016, at 0.625% of risk-weighted assets and will increase by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

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

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

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

	At December 31, 2017
	Actual Ratio			Minimum Requirement			Well-Capitalized Requirement

Common equity tier 1 capital ratio		10.10	%		4.50	%		6.50	%
Total risk-based capital ratio		11.08	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		10.10	%		6.00	%		8.00	%
Tier 1 leverage ratio		9.22	%		4.00	%		5.00	%

- 15 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

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 deposits with banks, federal funds sold and investment securities classified as available for sale, represented 10.25% and 14.59% of total assets at December 31, 2017 and December 31, 2016, respectively.

Should the need arise, management believes the Bank would have the capability to sell securities classified as available for sale or to borrow funds as necessary. The Bank has established credit lines with other financial institutions to purchase up to $14 million in federal funds and to borrow up to $10 million under a reverse repurchase agreement. There were no borrowings outstanding against these credit lines at December 31, 2017 or at December 31, 2016. The Bank has also established a credit line with the Federal Home Loan Bank of Atlanta. The credit line is secured by a portion of the Bank’s loan portfolio that qualifies under FHLB guidelines as eligible collateral. Total availability, based on collateral pledged at December 31, 2017 was $68.3 million, of which $23.6 million was advanced and $5.0 million is used for a letter of credit.

Total deposits were $340,653,000 and $318,665,000 at December 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 45.20% and 50.19% of total deposits at December 31, 2017 and December 31, 2016 respectively. Time deposits of $250,000 or more represented 11.51% and 11.47% of the Bank’s total deposits at December 31, 2017 and December 31, 2016, respectively. At December 31, 2017 and December 31, 2016 the Bank had brokered time deposits of $23,579,000 and $25,439,000 respectively. Management accepts time deposits from outside the Bank’s local market areas when such funding sources are useful to supplement funding and to add liquidity. Management believes most time deposits are relationship-oriented. While the Bank expects it 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 Bank anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

The principal source of cash revenues for the Company is dividends from the Bank. The relevant federal and state regulatory agencies have authority to prohibit a state bank or bank holding company, which would include the Company and the Bank, from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. The payment of dividends could, depending upon the financial condition of a bank, be deemed to constitute an unsafe or unsound practice in conducting its business.

North Carolina commercial banks, such as the Bank, are subject to legal limitations on the amounts of dividends they are permitted to pay. Specifically, an insured depository institution, such as the Bank, is prohibited from making capital distributions, including the payment of dividends, if, after making such distribution, the institution would become “undercapitalized” (as such term is defined in the applicable law and regulations).

The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve, the Federal Reserve may prohibit a bank holding company from paying any dividends if any of the holding company’s bank subsidiaries are classified as undercapitalized.

- 16 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

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

ASSET QUALITY

Summary of Allowance for Loan and Lease Losses

The allowance for loan and lease 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. Provisions for loan losses are made to maintain the balance of the allowance for loan losses at a level that is appropriate in light of the risk inherent in the Company’s loan portfolio. 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.

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 recorded loan loss provisions totaling $704,000 for the year ended December 31, 2017 and recorded a recovery of loan loss totaling $27,000 for the year ended December 31, 2016. More recent improved loss experience as shown in the table below reduced the required reserve for performing loans. Management realizes that general economic trends greatly affect loan losses, and no assurances can be made that future charges to the loan loss allowance 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 believes the level of 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 represents the Company’s activity in its allowance for loan losses:

Analysis of the Allowance For Loan Losses

Dollars in thousands	2017			2016			2015			2014			2013
Balance at January 1	$	3,393		$	3,723		$	4,002		$	4,066		$	4,773
Recoveries:
Commercial real estate		153			95			141			276			112
Commercial		50			17			95			23			43
Residential mortgage		18			-			-			1			34
Consumer and home equity lines		16			25			12			6			8
Total Recoveries		237			137			248			306			197
Charged-off loans:
Commercial real estate		(208	)		(71	)		(108	)		(226	)		(1,331	)
Commercial		(369	)		(301	)		-			(18	)		(1,546	)
Residential mortgage		(66	)		-			(132	)		-			(62	)
Consumer and home equity lines		(92	)		(68	)		(17	)		(46	)		(250	)
Total Charge-offs		(735	)		(440	)		(257	)		(290	)		(3,189	)
Net charge-offs		(498	)		(303	)		(9	)		16			(2,992	)
Provision for (recovery of) loan losses		704			(27	)		(270	)		(80	)		2,285
Balance at December 31	$	3,599		$	3,393		$	3,723		$	4,002		$	4,066

Ratio of allowance to total loans outstanding at end of year		1.03	%		1.10	%		1.27	%		1.64	%		1.82	%
Ratio of net charge-offs to average loans outstanding during the period		0.15	%		0.10	%		0.00	%		(0.01	%)		1.36	%

The allowance as a percentage of loans decreased during 2017 when compared to 2016 due to the following:

Decrease in classified loans.

Decrease in loans 30-89 days past due.

Strong loan growth in 2017.

- 17 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which management has concerns about the ability of an obligor to continue to comply with repayment terms, because of the obligor’s potential operating or financial difficulties. Management monitors these loans closely and reviews their performance on a regular basis. These loans do not meet the standards for, and are therefore not included in, non-performing assets. A summary of potential problem loans follows:

Potential Problem Loans

	December 31, 2017				December 31, 2016
Category Dollars in thousands	Number		Balance		Number		Balance
Commercial real estate		12	$	2,663		15	$	3,492
Commercial		10		639		3		22
Residential mortgage		7		472		14		2,121
Consumer and home equity lines		14		1,727		14		1,765
Total		43	$	5,501		46	$	7,400

The following table summarizes the allocation for loan losses for the past five years ended December 31. The percentage in the table below refers to the percentage of loans outstanding in each category to total loans at the years ended, which is provided as a means to compare whether the allocation for loan losses for a category of loans is consistent with that category’s share of total loans.

Dollars in thousands	2017			2016			2015			2014			2013
		$	%		$	%		$	%		$	%		$	%

Commercial real estate*		2,260	61.18		1,607	58.55		2,302	56.66		2,456	53.14		2,498	51.15
Commercial		634	14.01		1,171	14.19		570	14.78		705	15.21		517	14.09
Residential mortgage		505	14.07		427	14.49		505	16.21		464	18.48		546	20.27
Home equity lines		177	9.66		175	11.38		336	10.97		361	11.70		501	12.62
Consumer – other		23	1.08		13	1.39		10	1.38		16	1.46		4	1.87
Balance at December 31		3,599	100.00		3,393	100.00		3,723	100.00		4,002	100.00		4,066	100.00

*Note: Commercial real estate loans in the table above include construction loans and multi-family housing loans

Non-Performing Assets (“NPAs”)

Non-performing assets include nonaccrual loans, loans past due 90 days or more and still accruing, and foreclosed assets. A loan will be placed on nonaccrual status when collection of all principal or interest is deemed unlikely. A loan will be placed on nonaccrual status automatically when principal or interest is past due 90 days or more, unless the loan is both well-secured and in the process of being collected. In this case, the loan will continue to accrue interest despite its past due status.

Foreclosed assets represent properties and equipment acquired through foreclosure or physical possession. Appraisals are obtained at the time of foreclosure and any necessary write-downs to fair value at the time of transfer to foreclosed assets are charged to the allowance for loan losses.

Under generally accepted accounting standards for receivables, a loan is impaired when, based on current information and events, it is likely that a creditor will be unable to collect all amounts due, including both principal and interest, according to the contractual terms of the loan agreement.

The Company’s ratio of NPAs to total assets decreased 17 basis points to 0.87% as compared to 1.04% reported at December 31, 2016. In comparison to the prior year, nonaccrual loans increased $36,000, loans past due 90 days or more and still accruing interest decreased $165,000 and foreclosed assets decreased $222,000.

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Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

Non-performing assets for the five years ended December 31, 2017 are detailed as follows:

Dollars in thousands	2017			2016			2015			2014			2013
Nonaccrual loans	$	2,664		$	2,628		$	2,047		$	3,991		$	3,286
Past due 90 days and accruing interest		82			247			117			175			517
Total non-performing loans	$	2,746		$	2,875		$	2,164		$	4,166		$	3,803
Foreclosed assets		789			1,011			1,994			2,048			3,908
Total non-performing assets	$	3,535		$	3,886		$	4,158		$	6,214		$	7,711

Non-performing assets to total assets		0.87	%		1.04	%		1.24	%		2.12	%		2.89	%

Interest income recognized on non-performing loans	$	22		$	64		$	42		$	134		$	145
Interest income foregone on non-performing loans	$	200		$	127		$	93		$	214		$	215

Troubled Debt Restructurings

A restructured loan is a loan in which the original contract terms have been modified due to a borrower’s financial condition or there has been a transfer of assets in full or partial satisfaction of the loan. A modification of original contractual terms is generally a concession to a borrower that a lending institution would not normally consider. One troubled debt restructuring in the amount of $765,000 is included in the loans on nonaccrual status for 2017 and one troubled debt restructuring in the amount of $376,000 is included in the loans on nonaccrual status for 2016.

Accruing troubled debt restructurings for the five years ending December 31, 2017 are as follows:

Dollars in thousands		2017				2016				2015				2014				2013
Accruing troubled debt restructurings		$	3,398			$	4,616			$	4,725			$	4,242			$	2,840

Loan Portfolio

Our total gross loans were $348,679,000 at December 31, 2017, an increase of $40,187,000 or 13.03% from the $308,492,000 reported one year earlier. The loan portfolio primarily consists of real estate (including real estate term loans, construction loans and other loans secured by real estate), commercial, and loans to individuals for household, family and other consumer purposes. We adjust the mix of lending and the terms of our loan programs according to economic and market conditions, asset/liability management considerations and other factors. Loans typically are made to businesses and individuals within our primary market area, most of whom maintain deposit accounts with the Bank. There is no concentration of loans exceeding 10% of total loans that is not disclosed in the financial statements and the notes to the financial statements contained in this annual report or discussed below.

The following table summarizes the loan portfolio by category for the five years ended December 31, 2017:

Dollars in thousands	2017		2016		2015		2014		2013

Commercial real estate	$	213,322	$	180,617	$	165,662	$	130,015	$	114,514
Commercial		48,867		43,780		43,207		37,202		31,554
Residential mortgage		49,059		44,698		47,388		45,217		45,393
Home equity lines of credit		33,672		35,119		32,083		28,632		28,251
Consumer		3,759		4,278		4,022		3,580		4,179
Total loans	$	348,679	$	308,492	$	292,362	$	244,646	$	223,891

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Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

The following table presents maturity information (based upon interest rate repricing dates) on the loan portfolio based upon scheduled repayments at December 31, 2017.

Dollars in thousands	Due within one year		Due one to five years		Due after five years		Total
Commercial real estate	$	43,425	$	141,769	$	28,128	$	213,322
Commercial		25,210		22,563		1,094		48,867
Residential real estate		13,481		34,676		902		49,059
Home equity lines of credit		33,672		-		-		33,672
Consumer - other		2,182		1,522		55		3,759
Total	$	117,970	$	200,530	$	30,179	$	348,679

The following table presents maturity information based upon contractual terms and scheduled repayments at December 31, 2017.

Dollars in thousands	Due within one year		Due one to five years		Due after five years		Total
Fixed	$	15,756	$	172,093	$	27,330	$	215,179
Variable		29,110		30,215		74,175		133,500
Total	$	44,866	$	202,308	$	101,505	$	348,679

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

Asset Quality – Loan Portfolio Analysis

	As of December 31, 2017
	Loans Outstanding		Nonaccrual Loans		Nonaccrual Loans to Loans Outstanding			Allowance for Loan Losses		ALLL to Loans Outstanding

Dollars in thousands
Commercial real estate:
Residential ADC	$	7,242	$	-		0.00	%	$	62		0.86	%
Commercial ADC		24,364		5		0.02	%		210		0.86	%
Farmland		5,392		-		0.00	%		7		0.13	%
Multifamily		11,967		-		0.00	%		46		0.38	%
Owner occupied		84,808		2,031		2.39	%		977		1.15	%
Non-owner occupied		79,549		28		0.04	%		958		1.20	%
Total commercial real estate		213,322		2,064		0.97	%		2,260		1.06	%
Commercial:
Commercial and industrial		47,032		25		0.05	%		631		1.34	%
Agriculture		415		-		0.00	%		1		0.24	%
Other		1,420		-		0.00	%		2		0.14	%
Total commercial		48,867		25		0.05	%		634		1.30	%
Residential mortgage:
First lien, closed-end		47,936		86		0.18	%		424		0.88	%
Junior lien, closed-end		1,123		455		40.52	%		81		7.21	%
Total residential mortgage		49,059		541		1.10	%		505		1.03	%
Home equity lines		33,672		34		0.10	%		177		0.53	%
Consumer – other		3,759		-		0.00	%		23		0.61	%
Total gross loans	$	348,679	$	2,664		0.76	%	$	3,599		1.03	%

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Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

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

In thousands	December 31, 2017			December 31, 2016
Balance, beginning of period	$	1,011		$	1,994
Additions		520			609
Proceeds from sales		(523	)		(1,165	)
Valuation adjustments		(195	)		(373	)
Losses from sales		(24	)		(54	)
Balance, end of period	$	789		$	1,011

OFF-BALANCE SHEET ARRANGEMENTS

The Company is a party to financial instruments with off-balance sheet 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 financial instruments whose contract amounts represent the Company’s exposure to off-balance sheet credit risk for the periods indicated is as follows:

	December 31, 2017		December 31, 2016
Dollars in thousands
Undisbursed lines of credit	$	67,109	$	49,853
Commercial letters of credit		609		697
Total	$	67,718	$	50,550

The Company does not have any outstanding commitments to any classified borrowers.

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Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

INVESTMENT ACTIVITIES

The Company’s portfolio of investment securities, all of which are available for sale, consists of U.S. Government and federal agency, mortgage-backed securities, municipal securities, and equity securities.

Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value with any unrealized gains or losses reflected as an adjustment to stockholders’ equity. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks.

The following table summarizes the amortized costs, gross unrealized gains and losses and the resulting market value of investment securities:

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

December 31, 2016
U.S. Government and federal agency	$	6,664	$	17	$	(138	)	$	6,543
Mortgage-backed securities *		18,841		101		(284	)		18,658
Corporate debt securities		750		-		-			750
Equity securities		1,204		-		(92	)		1,112
	$	27,459	$	118	$	(514	)	$	27,063

December 31, 2015
U.S. Government and federal agency	$	15,935	$	17	$	(409	)	$	15,543
Mortgage-backed securities *		5,391		212		(1	)		5,602
Corporate debt securities		750		-		-			750
Equity securities		1,204		-		(166	)		1,038
	$	23,280	$	229	$	(576	)	$	22,933

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

- 22 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

The following table summarizes the amortized cost and recorded market values of investment securities (excluding marketable equity securities) at December 31, 2017, by contractual maturity groups:

	Amortized Cost		Fair Value		Book Yield

Dollars in thousands
U.S. Government Sponsored
Mortgage-backed Securities
Due within one year	$	3	$	3		2.57	%
Due after one but within five years		236		241		2.49	%
Due after five but within ten years		2,446		2,437		2.21	%
Due after ten years		16,457		16,234		2.33	%
		19,142		18,915		2.32	%
U.S. Government Sponsored
Agency Securities
Due within one year		-		-		-
Due after one but within five years		6,977		6,894		1.93	%
Due after five but within ten years		4,447		4,382		2.40	%
Due after ten years		-		-		-
		11,424		11,276		2.11	%

Municipal Securities
Due within one year		-		-		-
Due after one but within five years		-		-		-
Due after five but within ten years		297		295		3.18	%
Due after ten years		-		-		-
		297		295		3.18	%

Total investment securities
Due within one year		3		3		2.57	%
Due after one but within five years		7,213		7,135		1.95	%
Due after five but within ten years		7,190		7,114		2.37	%
Due after ten years		16,457		16,234		2.33	%
	$	30,863	$	30,486		2.25	%

- 23 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

DEPOSIT ACTIVITIES

The Bank provides a range of deposit services, including non-interest bearing checking accounts, interest bearing checking and savings accounts, money market accounts and certificates of deposit. These accounts generally earn interest at rates established by management based on competitive market factors and the desire to increase or decrease certain types or maturities of deposits.

The Bank periodically uses brokered deposits consistent with asset and liability management policies. At December 31, 2017 the Company had $27,368,000 in brokered deposits. Brokered deposits are available to banks that are well capitalized under regulatory guidelines. Historically, we have not placed much emphasis on municipal deposits which can be very rate sensitive and require pledging assets or letters of credit to collateralized amounts exceeding the deposit insurance limit. In the fourth quarter of 2017, after thoughtful analysis, we developed deposit products to offer to local government units in our market area. We plan to begin promoting these products in early 2018.

The Bank offers a variety of deposit programs to individuals and to small-to-medium size businesses and other organizations at interest rates generally competitive with local market conditions. The following table sets forth the average balances and rates for each of the deposit categories for the periods indicated:

	For the Years Ended December 31,
	2017					2016					2015
	Average Balance		Average Interest Rate			Average Balance		Average Interest Rate			Average Balance		Average Interest Rate
Dollars in thousands
Savings, NOW and money market deposits	$	131,072		0.34	%	$	110,981		0.25	%	$	95,899		0.22	%
Time deposits $250,000 or more		31,106		1.42	%		39,041		1.45	%		36,348		1.32	%
Other time deposits		122,329		1.30	%		127,581		1.31	%		108,801		1.32	%
Total interest bearing deposits		284,507		0.87	%		277,603		0.90	%		241,048		0.88	%
Demand and other non-interest bearing deposits		45,362		-			38,662		-			30,428		-
Total average deposits	$	329,869		0.75	%	$	316,265		0.79	%	$	271,476		0.78	%

The following table indicates the amount of the Bank’s certificates of deposit by interest rate and by time remaining until maturity as of December 31, 2017.

	Three months or less				More than three months to six months				More than six months to one year				More than one year				Total
Dollars in thousands
Certificates of $100,000 or greater	$	20,606	1.19	%	$	13,916	1.18	%	$	23,425	1.33	%	$	56,350	1.63	%	$	114,297	1.43	%
Certificates of less than $100,000		5,288	0.91	%		3,472	0.94	%		10,143	1.10	%		20,792	1.35	%		39,695	1.19	%

Total	$	25,894	1.13	%	$	17,388	1.13	%	$	33,568	1.26	%	$	77,142	1.56	%	$	153,992	1.37	%

- 24 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

BORROWINGS

Borrowed funds consist of advances from the Federal Home Loan Bank of Atlanta (“FHLB”), federal funds purchased, obligations under a capitalized lease for the Company’s main office facility, and long term subordinated debt. The following table summarizes balance and rate information for borrowed funds as of the dates and for the periods indicated.

	December 31, At or for the Year Ended
	2017			2016			2015
Dollars in thousands
AMOUNTS OUTSTANDING AT END OF PERIOD:

Advances from the FHLB
Amount	$	23,600		$	14,100		$	13,000
Weighted average rate		1.32	%		1.19	%		0.72	%

Federal Funds Purchased and Repurchase Agreements
Amount		-			-			2,335
Weighted average rate		-			-			1.25	%

Capital lease obligation
Amount		207			268			326
Weighted average rate		7.09	%		7.09	%		7.09	%

Long Term Subordinated Debt
Amount		9,676			9,605			-
Weighted average rate		7.91	%		7.91	%		-

MAXIMUM AMOUNT OUTSTANDING AT ANY MONTH-END:

Advances from the FHLB		23,600			26,000			23,000
Federal Funds Purchased and Repurchase Agreements		-			240			2,355
Capitalized lease obligation		263			321			369
Long Term Subordinated Debt		9,676			9,605			-

AVERAGES DURING THE PERIOD:

Advances from the FHLB
Average balance		18,088			16,072			13,757
Weighted average rate		1.22	%		1.08	%		1.15	%

Federal Funds Purchased and Repurchase Agreements
Average balance		91			62			201
Weighted average rate		1.43	%		1.59	%		0.93	%

Capitalized lease obligation
Average balance		240			299			351
Weighted average rate		7.12	%		7.10	%		7.10	%

Long Term Subordinated Debt
Average balance		9,638			2,115			-
Weighted average rate		7.88	%		7.87	%		-

- 25 -

Carolina Trust BancShares, Inc.

Management’s Discussion and Analysis

Pursuant to collateral agreements with the FHLB, advances are secured by all of the Bank’s FHLB stock and a blanket lien on qualifying loans. This agreement with the FHLB provides for a line of credit up to 25% of the Bank’s assets. The unused portion of the lendable collateral value of pledged loans is $39.7 million as of December 31, 2017.

The Bank also has unused lines of credit totaling $14.0 million from correspondent banks at December 31, 2017.

CONTRACTUAL OBLIGATIONS

The following table reflects the contractual obligations of the Company outstanding as of December 31, 2017.

	Payments due by period
In thousands	On demand or less than 1 Year		1 - 3 Years		4 - 5 Years		After 5 Years		Total

Advances from FHLB	$	9,500	$	12,100	$	-	$	2,000	$	23,600
Long term – subordinated debt		-		-		10,000		-		10,000
Capital lease obligation		66		141		-		-		207
Operating leases		226		220		34		-		480
Total contractual obligations, excluding deposits		9,792		12,461		10,034		2,000		34,287
Deposits		263,511		57,990		19,152		-		340,653
Total contractual obligations, including deposits	$	273,303	$	70,451	$	29,186	$	2,000	$	374,940

It has been the experience of the Company that deposit withdrawals are generally replaced with new deposits, thus not requiring any material long-term net cash outflow. Based on that assumption, management believes that it can meet its contractual cash obligations from normal operations.

REGULATORY MATTERS

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956. The Company is also regulated by the North Carolina Commissioner of Banks (“Commissioner”) under the North Carolina Bank Holding Company Act of 1984. As a registered bank holding company, the Company is subject to the supervision, examination and reporting requirements by the Board of Governors of the Federal Reserve System.

The Bank is a federally insured, North Carolina state-chartered bank. The deposits of the Bank are insured up to applicable limits under the Deposit Insurance Fund, or DIF, of the FDIC, and the Bank is subject to supervision and examination by, and the regulations and reporting requirements of, the FDIC and the Commissioner. The FDIC and the Commissioner are the Bank’s primary federal and state banking regulators, respectively. The Bank is not a member of the Federal Reserve System.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note B to the Consolidated Financial Statements for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

- 26 -

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Carolina Trust BancShares, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of Carolina Trust BancShares, Inc. (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2017, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ Dixon Hughes Goodman LLP

We have served as the Company’s auditor since 2001.

Charlotte, North Carolina

March 27, 2018

- 27 -

CAROLINA TRUST BANCSHARES, INC.

CONSOLIDATED BALANCE SHEETS

December 31, 2017 and 2016

(In thousands, except share and per share data)

	December 31, 2017			December 31, 2016
Assets
Cash and due from banks	$	5,409		$	8,063
Interest-earning deposits with banks		3,647			18,086
Cash and cash equivalents		9,056			26,149

Certificates of deposits with banks		1,498			1,498
Investment securities available for sale, at fair value (amortized cost $32,067 and $27,459)		31,112			27,063
Federal Home Loan Bank stock, at cost		1,341			942
Loans		348,679			308,492
Less: Allowance for loan and lease losses		(3,599	)		(3,393	)
Net Loans		345,080			305,099

Bank owned life insurance		7,197			1,498
Accrued interest receivable		1,078			945
Bank premises, equipment and software		6,466			6,388
Foreclosed assets		789			1,011
Core deposit intangible, net of accumulated amortization of $711 and $667		73			117
Other assets		2,928			4,207
Total Assets	$	406,618		$	374,917

Liabilities and Stockholders’ Equity
Non-interest-earning demand deposits	$	49,199		$	38,593
Interest-earning demand deposits		115,396			99,084
Savings		22,066			21,059
Time deposits		153,992			159,929
Total deposits		340,653			318,665

Capital lease obligation		207			268
Federal Home Loan Bank advances		23,600			14,100
Long term subordinated debt		9,676			9,605
Accrued interest payable		292			287
Other liabilities		3,071			2,959
Total liabilities		377,499			345,884

Common stock warrant		426			426
Common stock, $2.50 par value; 10,000,000 shares authorized; 4,657,880 and 4,650,808 shares issued and outstanding		11,645			11,627
Additional paid-in capital		13,008			12,988
Retained earnings		4,772			4,241
Accumulated other comprehensive loss		(732	)		(249	)
Total stockholders’ equity		29,119			29,033

Total Liabilities and Stockholders’ Equity	$	406,618		$	374,917

See accompanying notes to the consolidated financial statements.

- 28 -

CAROLINA TRUST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2017 and 2016

(In thousands, except share and per share data)

	2017		2016
Interest Income
Interest on investment securities and cash	$	915	$	1,009
Interest and fees on loans		16,534		15,213
Total interest income		17,449		16,222

Interest Expense
Interest expense non-maturity deposits		442		278
Interest expense time deposits		2,039		2,232
Interest expense borrowed funds		222		175
Interest expense capital lease		17		21
Interest expense on subordinated debt		759		166
Total interest expense		3,479		2,872
Net interest income	$	13,970	$	13,350
Loan loss provision/(recovery)		704		(27	)
Net interest income after loan loss provision/(recovery)	$	13,266	$	13,377

Noninterest income
Overdraft fees on deposits	$	431	$	395
Interchange fee income		482		443
Service charges on deposits		56		55
Mortgage fee income		95		102
Customer service fees		54		59
ATM income		27		27
Bank-owned life insurance income		199		53
Gain on the sale of securities		-		55
Other income		32		40
Total noninterest income		1,376		1,229

Noninterest expense
Salaries & benefits expense	$	7,071	$	6,822
Occupancy expense		859		875
Furniture, fixture & equipment expense		585		527
Data processing expense		948		809
Office supplies expense		81		64
Professional fees		473		607
Advertising and marketing		132		147
Insurance		306		340
Foreclosed asset expense, net		281		493
Check card expense		343		365
Loan expense		219		164
Stockholder expense		172		122
Directors fees and expenses		256		225
Telephone expense		288		244
Core deposit intangible amortization expense		44		56
Other operating expense		586		528
Total noninterest expense		12,644		12,388
Pre-tax income	$	1,998	$	2,218
Income tax expense		1,594		877
Net income	$	404	$	1,341
Less income attributable to noncontrolling interest		-		222
Net income attributable to Carolina Trust BancShares	$	404	$	1,119

Earnings per share
Basic earnings per common share	$	0.09	$	0.24
Diluted earnings per common share	$	0.09	$	0.24
Weighted average common shares outstanding		4,655,369		4,649,405
Diluted average common shares outstanding		4,737,874		4,697,765

See accompanying notes to the consolidated financial statements.

- 29 -

CAROLINA TRUST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Years Ended December 31, 2017 and 2016

(In thousands)

	December 31, 2017			December 31, 2016

Net income	$	404		$	1,341

Other comprehensive loss:
Unrealized loss on investment securities:
Reclassification of securities gains recognized in non-interest income		-			(55	)
Income tax effect		-			20
Unrealized holding gains (losses) arising during period		(559	)		5
Deferred income tax benefit (expense)		203			(3	)
Total other comprehensive loss		(356	)		(33	)

Total comprehensive income	$	48		$	1,308

See accompanying notes to the consolidated financial statements.

- 30 -

CAROLINA TRUST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Years Ended December 31, 2017 and 2016

(Dollars In thousands)

	2017 Shares outstanding		December 31, 2017			2016 Shares outstanding		December 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		3,738		10			1,250		3
Restricted stock vesting		3,334		8			3,333		8
Balance, end of year		4,657,880	$	11,645			4,650,808	$	11,627

Additional paid-in capital
Balance, beginning of year			$	12,988				$	12,936
Stock-based compensation				24					60
Exercise of stock options				4					-
Restricted stock vesting				(8	)				(8	)
Balance, end of year			$	13,008				$	12,988

Retained earnings
Balance, beginning of year			$	4,241				$	3,122
Reclassification of certain tax effects				127					-
Net income				404					1,341
Dividends declared on preferred stock				-					(222	)
Balance, end of year			$	4,772				$	4,241

Accumulated other comprehensive loss
Balance, beginning of year			$	(249	)			$	(216	)
Other comprehensive loss				(356	)				(33	)
Reclassification of certain tax effects				(127	)				-
Balance, end of year			$	(732	)			$	(249	)

Noncontrolling interest
Balance, beginning of year			$	-				$	2,580
Redemption of preferred stock in noncontrolling interest				-					(2,580	)
				-					-

Total stockholders’ equity			$	29,119				$	29,033

See accompanying notes to the consolidated financial statements.

- 31 -

CAROLINA TRUST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2017 and 2016

(in thousands)

	December 31, 2017			December 31, 2016
Cash flows from operating activities
Net income	$	404		$	1,341
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Provision for (recovery of) loan losses		704			(27	)
Depreciation and amortization of bank premises, equipment and software		441			361
Accretion of loan fair value adjustments related to acquisition		(7	)		(9	)
Net amortization of bond premiums/discounts		144			128
Accretion of long term subordinated debt issuance costs		71			15
Gain on the sale of investment securities		-			(55	)
Amortization of core deposit intangible		44			56
Stock compensation expense		24			60
Increase in value of life insurance contracts		(199	)		(53	)
Net losses and impairment write-downs on foreclosed assets		219			427
Deferred tax provision		1,373			843
Increase in other assets		109			(11	)
Decrease (increase) in accrued interest receivable		(133	)		41
Increase in accrued interest payable		5			229
Increase (decrease) in other liabilities		112			(77	)
Net cash and cash equivalents provided by operating activities	$	3,311		$	3,269

Cash flows from investing activities
Net increase in loans	$	(41,198	)	$	(17,032	)
Proceeds from sale of foreclosed assets		523			1,165
Net purchases of bank premises, equipment and software		(519	)		(1,039	)
Purchase of bank owned life insurance		(5,500	)		-
Purchase of available-for-sale securities		(8,918	)		(22,460	)
Proceeds from maturities, calls and pay-downs of available for sale securities		4,166			17,406
Proceeds from the sale of available for sale securities		-			802
Purchase of Federal Home Loan Bank stock		(399	)		(126	)
Net cash and cash equivalents used in investing activities	$	(51,845	)	$	(21,284	)

Cash flows from financing activities
Increase in deposits	$	21,988		$	33,872
Increase in Federal Home Loan Bank advances		9,500			1,100
Payment of capital lease obligation		(61	)		(57	)
Decrease in federal funds purchased		-			(2,355	)
Issuance of subordinated debt		-			9,590
Dividends paid on preferred stock		-			(222	)
Redemption of preferred stock		-			(2,580	)
Net proceeds from issuance of common stock		14			3
Net cash and cash equivalents provided by financing activities	$	31,441		$	39,351
Net (decrease) increase in cash and cash equivalents	$	(17,093	)	$	21,336

Cash and cash equivalents, beginning	$	26,149		$	4,813
Cash and cash equivalents, ending	$	9,056		$	26,149

Supplemental disclosure of cash flow information
Cash paid during the period for taxes	$	15		$	16
Cash paid during the period for interest	$	3,474		$	2,644

Noncash financing and investing activities
Unrealized gain (loss) on investment securities available-for-sale, net	$	(356	)	$	2
Transfer of loans to foreclosed assets	$	520		$	609

See accompanying notes to the consolidated financial statements.

- 32 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE A - ORGANIZATION AND OPERATIONS

Carolina Trust BancShares, Inc. (the “Company”) was incorporated in 2016 for the purpose of becoming the holding company for Carolina Trust Bank (the “Bank”). On August 16, 2016, the Company announced that it had consummated the statutory share exchange pursuant to which it became the parent company of the Bank. Shares of the Bank’s common stock were exchanged for shares of the Company’s common stock at a one-for-one exchange rate. The Company is a North Carolina business corporation that is operating as a registered bank holding company under the Bank Holding Company Act of 1956. The Bank is the only subsidiary of the Company.

The Bank was incorporated November 27, 2000 and began banking operations on December 8, 2000. The Bank is engaged in general commercial and retail banking in the counties of Lincoln, Gaston, Rutherford, Iredell, and Catawba, North Carolina and surrounding areas, operating under the banking laws of North Carolina and the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank undergoes periodic examinations by those regulatory authorities.

The consolidated financial statements include the accounts of the Company, 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.

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for loan losses, the valuation of other real estate owned, and the realization of deferred tax assets.

Cash and Cash Equivalents

For the purpose of presentation in the statement of cash flows, cash and cash equivalents include cash and due from banks, interest-earning deposits with banks with original maturities of three months or less and federal funds sold.

Interest-Earning Deposits and Certificate of Deposits with Banks

Certificates of deposit with banks totaled $1,498,000 at December 31, 2017 and at December 31, 2016. These certificates typically have an original maturity of ten years or less and currently bear interest at rates ranging from 2.45% to 3.00% with an overall weighted average rate of 2.66%. There are also non-maturity deposits that totaled $3,647,000 at December 31, 2017 and $18,086,000 at December 31, 2016.

Investment Securities Available for Sale

Investment securities available for sale are reported at fair value and consist of debt instruments that are not classified as either trading securities or as held to maturity securities. Unrealized holding gains and losses, net of deferred income tax, on available for sale securities are reported as a net amount in other comprehensive income. Gains and losses on the sale of investment securities available for sale are determined using the specific identification method and are recognized on a trade-date basis. Declines in the fair value of individual investment securities available for sale below their cost that are other than temporary would result in write-downs of the individual securities to their fair value.

- 33 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Stock in Federal Home Loan Bank of Atlanta

As a requirement for membership, the Company invests in stock of the Federal Home Loan Bank of Atlanta (“FHLB”). This investment is carried at cost. Because of the redemption provisions of the FHLB, the Company estimates that fair value equals cost for this investment and that it was not impaired at December 31, 2017.

Loans

Loans in the Company’s portfolio are grouped into classes and segments. Classes are generally disaggregation of a segment. The Company’s segments are: commercial real estate, commercial, residential mortgage, home equity lines, and other consumer loans. The classes within the commercial real estate segment are: residential ADC (acquisition, development and construction), commercial ADC, farmland, multifamily, owner occupied and non-owner occupied. The classes within the commercial segment are: commercial and industrial, agriculture, and other commercial. The classes within the residential mortgage segment are: first-lien and junior-lien loans. The home equity lines and other consumer loan segments are not further segregated into classes.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity are reported at their outstanding principal, adjusted for any charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.

Loan origination fees and certain direct origination costs are capitalized and recognized as an adjustment of the yield of the related loan. The accrual of interest on loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when the loan is 90 days delinquent on a contractual basis. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received. In all cases, loans are placed on nonaccrual status or charged off at an earlier date if collection of principal or interest is considered doubtful.

Nonaccrual and Past due Loans – All loan classes are considered past due when the contractual amounts due with respect to principal and interest are not received within 30 days of the contractual due date. When the Company cannot reasonably expect full and timely repayment of its loan or when the principal or interest is in default for 90 days or more, the loan is placed on nonaccrual status. Under certain circumstances there is sufficient documentation to conclude that the loan is well-secured and in the process of collection and, therefore, the loan is not placed on nonaccrual status. A debt is “well-secured” if collateralized by liens on or pledges of real or personal property, including securities that have a realizable value sufficient to discharge the debt in full; or by the guarantee of a financially responsible party. A debt is “in process of collection” if collection is proceeding in due course either through legal action, including judgment enforcement procedures, or, in appropriate circumstances, through collection efforts not involving legal action which are reasonably expected to result in repayment of the debt or its restoration to a current status. The Company may calculate forgone interest on a monthly basis, but does not recognize the income.

Loans that are less delinquent may also be placed on nonaccrual status due to deterioration in the financial condition of the borrower that increases the possibility of less than full repayment.

- 34 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

For all loan classes, a nonaccrual loan may be returned to accrual status when the Company can reasonably expect continued timely payments until payment in full. The loan can still be returned to accrual status if the following conditions are met: (1) All principal and interest amounts contractually due (including arrearage) are reasonably assured of repayment within a reasonable period; and (2) there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms involving payments of cash or cash equivalents.

At the time a loan is placed on nonaccrual status, all accrued, unpaid interest is charged-off, unless it is documented that repayment of all principal and presently accrued but unpaid interest is probable. Charge-offs of accrued and unpaid interest are made against the current year’s interest income. For all classes within all loan segments, cash receipts on non-accrual loans are applied entirely against principal until the loan or lease has been collected in full, after which time any additional cash receipts are recognized as interest income.

Charge-off of Uncollectable Loans - For all loan classes, as soon as any loan becomes uncollectable, the loan will be charged down or charged off as follows:

If unsecured, the loan must be charged off in full.

If secured, the outstanding principal balance of the loan should be charged down to the net liquidation value of the collateral.

Loans should be considered uncollectable when:

No regularly scheduled payment has been made within four months, or

The loan is unsecured, the borrower files for bankruptcy protection and there is no other (guarantor, etc.) support from an entity outside of the bankruptcy proceedings.

Based on a variety of credit, collateral and documentation issues, loans with lesser degrees of delinquency or obvious loss may also be deemed uncollectable.

Impaired Loans - An impaired loan is one for which the Company will not be repaid all principal and interest due per the terms of the original contract or within reasonably modified contracted terms. If the loan has been modified to provide a concession to a borrower experiencing financial difficulty, the loan is deemed to be a troubled debt restructuring and is considered impaired. All loans meeting the definition of doubtful are considered impaired.

When a loan in any class has been determined to be impaired, the amount of the impairment is measured using the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, the observable market price of the loan, or the fair value of the collateral if the loan is collateral dependent. When the present value of expected future cash flows is used, the effective interest rate is the original contractual interest rate of the loan adjusted for any premium or discount. When the contractual interest rate is variable, the effective interest rate of the loan changes over time. The Company uses the rate of the loan at the time it first became impaired as the discount rate. A specific reserve is established as a component of the Allowance for Loan Losses when a loan has been determined to be impaired. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows, or if actual cash flows are significantly different from the cash flows previously estimated, the Company recalculates the impairment and appropriately adjusts the specific reserve. Similarly, if the Company measures impairment based on the observable market price of an impaired loan or the fair value of the collateral of an impaired collateral-dependent loan, the Company will adjust the specific reserve if there is a significant change in either of those bases.

If receipt of principal and interest is in doubt when contractually due, interest income is not recognized for any class of impaired loans. Cash receipts received on non-accruing impaired loans within any class are generally applied entirely against principal until the loan has been collected in full, after which time any additional cash receipts are recognized as interest income. Cash receipts received on accruing impaired loans within any class are applied in the same manner as accruing loans that are not considered impaired.

- 35 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The Company accounts for impaired loans acquired in a purchase at fair value, which is the net present value of all cash flows expected to be collected over the life of the loan. These cash flows are determined on the date of purchase.

Allowance for Loan and Lease Losses (“ALLL”)

The allowance for loan and lease losses (ALLL), which is utilized to absorb actual losses in the loan portfolio, is maintained at a level consistent with management’s best estimate of probable loan losses incurred as of the balance sheet date. The Company’s allowance for loan and lease losses is assessed quarterly by management. This assessment includes a methodology that separates the total loan portfolio into homogeneous loan groups for purposes of evaluating risk. Management also analyzes the loan portfolio on an ongoing basis to evaluate current risk levels, and individual loan risk grades are adjusted accordingly. While management uses the best information available to make evaluations, future adjustments may be necessary, if economic or other conditions differ substantially from the assumptions used.

The methodology to analyze the ALLL includes the following:

identification of impaired loans;

calculation of a specific reserve - where required - for each impaired loan based on collateral and other objective and quantifiable evidence;

determination of an appropriate historical loss period for analysis;

identification of homogenous loan groups, further segmented by risk grade, and reduced by the impaired loans;

calculation of historical loss percentages based on the identified historical loss period;

identification of internal and external factors which might affect the current application of the historical loss percentages, and assessment of any impact;

adjustment of the historical loss percentages based on the factor assessment;

application of historical loss percentages to loan groups to determine the allowance allocation; and

determination of the need for any unallocated reserve.

The ALLL is divided into three allocation segments:

Individual Reserves. These are calculated against loans evaluated individually and identified as impaired. Management determines which loans will be considered for potential impairment review. This does not mean that an individual reserve will necessarily be calculated for each loan considered for impairment, only for those impaired loans identified during this process as having an estimated loss. Loans to be considered include:

All commercial loans classified substandard or worse

Any other loan in a non-accrual status

Any loan, consumer or commercial, which has already been modified such that it meets the definition of Troubled Debt Restructure (“TDR”)

- 36 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

The individual reserve must be verified at least quarterly, and recalculated whenever additional relevant information becomes available. All information related to the calculation of the individual reserve, including internal or external collateral valuations, assumptions, discounts, etc. must be documented.

For collateral dependent loans, individual reserve amounts may not be carried indefinitely as further non-performance will result in taking possession of the collateral. The collateral will be converted to cash or written off, or some combination. For loans valued under the discounted cash flow method, the reserve may continue for a longer period, depending on the length of time until there change in the level of certainty of loss.

When the amount of the actual loss becomes reasonably quantifiable, the loss is charged off against the ALLL, whether or not all liquidation and recovery efforts have been completed.

If the total amount of the individual reserve that will eventually be charged-off cannot yet be determined, but some portion of the individual reserve can be viewed as an imminent loss, that smaller portion is charged off against the ALLL and the individual reserve is reduced by a corresponding amount.

Formula Reserves. Formula reserves are held against performing loans evaluated collectively. The total performing loan portfolio is divided into homogeneous loan groups. Loss estimates are based on historical loss rates for each respective loan group, adjusted for appropriate environmental factors established by the Company.

Formula reserves represent the Company’s best estimate of losses that may be inherent, or embedded, within that group of performing loans, even if it is not apparent at this time which loans within any group represent those embedded losses.

Historical Loss Percentages: Historical loss data has been catalogued by the Company for each loan group. Historical loss recoveries are similarly entered and applied against the non-classified loan group according to the Call Report designations of the loans originally charged. The Company uses a 5-year weighted average of net charge-offs to determine the historical loss percentages.

Qualitative Loss Factors: The methodology incorporates various internal and external qualitative and environmental factors as described in the Interagency Policy Statement on the Allowance for Loan and Lease Losses dated December 2006. Input for these factors is determined on the basis of management observation, judgment, and experience. The factors identified by the Company to be evaluated for all homogenous loan groups are as follows:

Volume of Loans – Accounts for historical growth characteristics of the loan group over the identified loss period.

Trends in Delinquency – Reflects increased risk derived from higher delinquency rates.

Trends in Nonaccrual and Classified loans – Compares the current portfolio to the levels and trends over the historical loss period.

Levels of Actual Losses – Evaluates the current losses and the trends and averages over the two year loss period.

Concentration of Credit – Measures increased risk derived from concentration of credit exposure in particular loan segments or classes.

- 37 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Economic – Assesses the impact of general and local economic factors, including changes in collateral values, primarily real estate.

Watch list growth – measures increased risk in particular loan segments or classes that meet certain requirements including negative trends and increased levels in the watch or special mention rating.

These factors are evaluated and assigned a rating ranging from “significant negative impact to significant positive impact.” The rating translates to an adjustment to the historical loss percentage.

Calculation and Summary: A general reserve amount for each homogenous performing loan group is calculated by applying the adjusted historical loss percentage to the loan group outstanding balances, net of impaired loans.

3.	Unallocated Reserves. This segment is utilized to provide for losses which are expected but cannot be tied to any specific loan or group of loans, based on the judgment of management.

Reserve for Unfunded Commitments

The Reserve for unfunded commitments is calculated by determining the type of commitment and the remaining unfunded commitment for each loan. Based on the type of commitment, a utilization rate is established considering the funded balance of the loan. The utilization rate is multiplied by the credit conversion factor of 10% which is then multiplied by the unfunded amount and multiplied by the loss rates for the appropriate loan class as defined in the regular ALLL calculation to determine the appropriate level of reserve. The reserve for unfunded commitments was approximately $28,000 and $20,000 at December 31, 2017 and 2016, respectively and is included in other liabilities.

Fees from Mortgage Brokerage Services

The Bank is a broker for qualifying, single family residential first lien mortgage loans that are funded by other companies. The Company recognizes certain origination fees, which are included in non-interest income on the statements of income under the caption “Mortgage fee income”.

Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are to be sold and are initially recorded at fair value less anticipated cost to sell at the date of foreclosure establishing a new cost basis. After foreclosure, valuations are periodically performed by management and the asset is carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations and changes in the valuation allowance are included in foreclosed asset expense.

Other Intangibles

Intangible assets include core deposits. Intangible assets are subject to impairment testing whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Core deposit intangibles are amortized on the sum-of-years digits method over a period not to exceed 14 years.

- 38 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

	December 31, 2017					December 31, 2016
	Carrying Amount		Accumulated Amortization			Carrying Amount		Accumulated Amortization
Amortized intangible assets
Core deposit intangible	$	72,998	$	(711,607	)	$	117,442	$	(667,163	)

The Company’s projected amortization expense for the core deposit intangible for the years ending December 31:

2018	$	32,501
2019		20,572
2020		9,833
2021		5,264
2022		3,356
Thereafter		1,472
Total	$	72,998

The remaining weighted average amortization period is 1.56 years.

Bank Premises and Equipment

Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are 20 to 31.5 years for buildings. Leasehold improvements are amortized over the terms of the respective leases or the estimated useful lives of the improvements, whichever is shorter, 5 to 10 years for furniture and equipment and 3 to 5 years for computer equipment. Repairs and maintenance costs are charged to income as incurred and additions and improvements to premises and equipment are capitalized. Upon sale or retirement, the cost and related accumulated depreciation are removed from the accounts and any gains or losses are reflected in current income.

Advertising Costs

The company expenses all advertising and business promotion costs as incurred.

Income Taxes

Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Deferred tax assets are also recognized for operating loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which the temporary

differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that the tax benefits will not be realized.

The Company did not recognize any interest or penalties related to income tax during the years ended December 31, 2017 and 2016, and did not accrue any interest or penalties as of December 31, 2017 or 2016. The Company did not have an accrual for uncertain tax positions as deductions taken and benefits accrued are based on widely understood administrative practices and procedures, and are based on clear and unambiguous tax law. Tax returns, for years 2014 and thereafter are subject to possible future examinations by tax authorities.

- 39 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Comprehensive Income/(Loss)

The Company reports as comprehensive income/(loss) all changes in stockholders’ equity during the year from sources other than stockholders. Other comprehensive income/(loss) refers to all components (revenues, expenses, gains, and losses) of comprehensive income/(loss) that are excluded from net income/(loss). The Company’s only component of other comprehensive income/(loss) is unrealized gains and losses, net of income taxes, on investment securities available for sale.

Basic Earnings per Common Share

Basic earnings per common share is computed by dividing net income to common shareholders 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 originally issued to the U.S. Treasury Department 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.

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, 2017, other comprehensive loss included $486,000, pre-tax, and $311,000, after tax, for unrealized losses on marketable equity securities. If the standard had been adopted already, the unrealized loss 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 in the amount of $443,000 will be recorded in retained earnings when the standard is adopted.

- 40 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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. This analysis may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. As a result of the deferral, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company plans to adopt this standard in 2018 using the modified retrospective approach. The majority of the Company’s revenues are generated from financial instruments which are not within the scope of this standard. Management has evaluated the impact for its various other revenue streams including the following: deposit account fees and service charges; other fees such as wire services and check cashing services; ATM surcharges; card related fees; and gains and losses from sales of foreclosed properties and fixed assets. This evaluation led management to conclude that this standard will not materially impact its financial statements.

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

In March 2016, the FASB issued ASU 2016-09, Investments 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.

- 41 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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

In February of 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance requires a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (Tax Act), which was enacted on December 22, 2017. The Tax Act included a reduction to the corporate income rate from 34% to 21% effective January 1, 2018. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21% corporate income tax rate. The guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The Company has chosen to early adopt the new standard. Deferred taxes within AOCI of $127,000 were reclassified to retained earnings in 2017.

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.

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

December 31, 2016
U.S. Government and federal agency	$	6,664	$	17	$	(138	)	$	6,543
Mortgage-backed securities *		18,841		101		(284	)		18,658
Corporate debt securities		750		-		-			750
Equity securities		1,204		-		(92	)		1,112
	$	27,459	$	118	$	(514	)	$	27,063

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

- 42 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE C - INVESTMENT SECURITIES (continued)

The amortized cost and fair values of securities available for sale (excluding marketable equity securities) at December 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	$	3	$	3
Due after one but within five years		7,213		7,135
Due after five but within ten years		7,190		7,114
Due after ten years		16,457		16,234
	$	30,863	$	30,486

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

December 31, 2016
U.S. Government and federal agency	$	5,332	$	(138	)	$	-	$	-		$	5,332	$	(138	)
Mortgage-backed securities *		14,965		(282	)		140		(2	)		15,105		(284	)
Equity securities		1,203		(91	)		1		(1	)		1,204		(92	)
Total temporarily impaired securities	$	21,500	$	(511	)	$	141	$	(3	)	$	21,641	$	(514	)

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

Management considers the nature of the investment, the underlying causes of the decline in the market value and the severity and duration of the decline in market value in determining if impairment is other than temporary. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of December 31, 2017, management believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.

- 43 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE C - INVESTMENT SECURITIES (continued)

Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality. Accordingly, as of December 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.

The Company did not have any securities pledged at December 31, 2017 to secure public funds. The company had no sales of securities during 2017. For 2016, proceeds from the sales of securities amounted to $802,000 and gross realized gains on these securities were $55,000. The cost of the security sold was determined based on specific identification method.

- 44 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D - LOANS

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

	December 31, 2017					December 31, 2016
Dollars in thousands	Amount		Percent of Total			Amount		Percent of Total
Commercial real estate
Residential ADC	$	7,242		2.08	%	$	2,463		0.80	%
Commercial ADC		24,364		6.99	%		24,583		7.97	%
Farmland		5,392		1.55	%		3,826		1.24	%
Multifamily		11,967		3.43	%		11,980		3.88	%
Owner occupied		84,808		24.32	%		69,686		22.59	%
Non-owner occupied		79,549		22.81	%		68,079		22.07	%
Total commercial real estate		213,322		61.18	%		180,617		58.55	%

Commercial
Commercial and industrial		47,032		13.49	%		41,935		13.59	%
Agriculture		415		0.12	%		209		0.07	%
Other		1,420		0.40	%		1,636		0.53	%
Total commercial		48,867		14.01	%		43,780		14.19	%

Residential mortgage
First lien, closed-end		47,936		13.75	%		43,811		14.20	%
Junior lien, closed-end		1,123		0.32	%		887		0.29	%
Total residential mortgage		49,059		14.07	%		44,698		14.49	%

Home equity lines		33,672		9.66	%		35,119		11.38	%

Consumer – other		3,759		1.08	%		4,278		1.39	%

Total loans	$	348,679		100.00	%	$	308,492		100.00	%

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

- 45 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D – LOANS (Continued)

Non-Accrual and Past Due Loans

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

	December 31, 2017		December 31, 2016
In thousands
Commercial real estate:
Commercial ADC	$	5	$	1,022
Farmland		-		43
Multi-family		-		153
Owner occupied		2,031		55
Non-owner occupied		28		37
Total commercial real estate		2,064		1,310
Commercial:
Commercial and industrial		25		1,139
Total commercial		25		1,139
Residential mortgage:
First lien, closed-end		86		179
Junior lien, closed end		455		-
Total residential mortgage		541		179
Home equity lines		34		-
Total non-accrual loans	$	2,664	$	2,628

Interest foregone on non-accrual loans was approximately $200,000 and $127,000 for the years ended December 31, 2017 and 2016, respectively.

An analysis of past due loans segregated by class, was as follows:

In thousands	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
December 31, 2017
Commercial real estate:
Residential ADC	$	-	$	-	$	-	$	7,242	$	7,242	$	-
Commercial ADC		-		-		-		24,364		24,364		-
Farmland		-		-		-		5,392		5,392		-
Multifamily		-		-		-		11,967		11,967		-
Owner occupied		254		2,018		2,272		82,536		84,808		-
Non-owner occupied		144		-		144		79,405		79,549		-
Total commercial real estate		398		2,018		2,416		210,906		213,322		-
Commercial:
Commercial and industrial		-		25		25		47,007		47,032		-
Agriculture		-		-		-		415		415		-
Other		-		-		-		1,420		1,420		-
Total commercial		-		25		25		48,842		48,867		-
Residential mortgage:
First lien, closed end		50		135		185		47,751		47,936		79
Junior lien, closed-end		-		449		449		674		1,123		-
Total residential mortgage		50		584		634		48,425		49,059		79
Home equity lines		200		3		203		33,469		33,672		3
Consumer – other		10		-		10		3,749		3,759		-
Total loans	$	658	$	2,630	$	3,288	$	345,391	$	348,679	$	82

- 46 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D – LOANS (Continued)

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

Impaired loans

Impaired loans are set forth in the following tables.

December 31, 2017

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

- 47 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D – LOANS (Continued)

December 31, 2016
In thousands	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
Commercial real estate
Commercial ADC	$	2,920	$	2,253	$	-	$	-
Farmland		43		43		-		-
Multifamily		153		153		-		-
Owner occupied		2,159		2,006		152		35
Non-owner occupied		37		37		-		-
Total commercial real estate		5,312		4,492		152		35
Commercial
Commercial and industrial		2,243		130		1,865		840
Residential mortgage
First lien, closed-end		1,117		226		812		39
Home equity lines		338		338		-		-
Total loans	$	9,010	$	5,186	$	2,829	$	914

	Year ended December 31, 2017				Year ended December 31, 2016
In thousands	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate
Commercial ADC	$	1,049	$	-	$	2,307	$	54
Farmland		32		-		19		1
Multifamily		163		-		119		1
Owner occupied		3,614		102		2,178		114
Non-owner occupied		133		-		41		-
Total commercial real estate		4,991		102		4,664		170
Commercial
Commercial and industrial		1,580		57		1,405		84
Residential mortgage
First lien, closed-end		1,619		55		1,179		23
Junior lien, closed- end		669		12		-		-
Total residential mortgage		2,288		67		1,179		23
Home equity lines		143		4		260		18
Consumer – other		1		-		39		-
Total loans	$	9,003	$	230	$	7,547	$	295

At December 31, 2017 there were two loans totaling $82,000 past due 90 days or more, which were still accruing interest. There were two loans totaling $247,000 past due 90 days or more, which were still accruing interest at December 31, 2016.

Troubled Debt Restructures

As of December 31, 2017, ten loans totaling $4,163,000 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 December 31, 2017, nine loans totaling $3,398,000 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.

- 48 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D – LOANS (Continued)

For the years ended December 31, 2017 and 2016, the following tables present a breakdown of the types of concessions made by loan class. The type labeled other includes concessions made to capitalize interest and extend interest only periods.

	Year ended December 31, 2017
Dollars in thousands	Number of loans		Pre-Modification Outstanding Recorded Investment			Post-Modification Outstanding Recorded Investment

Forgiveness of principal
Residential mortgage:
Junior Lien, closed end		2		$	633		$	430
Total residential mortgage		2			633			430
Total		2		$	633		$	430

Grand Total		2		$	633		$	430

	Year ended December 31, 2016
Dollars in thousands	Number of loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment

Other
Commercial:
Commercial and industrial		1	$	376	$	376
Total commercial		1		376		376
Total		1	$	376	$	376

Grand Total		1	$	376	$	376

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

There were no loans that were modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the years ended December 31, 2017 or 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 tables present the successes and failures of the types of modifications within the previous 12 months as of December 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
December 31, 2017		(dollars in thousands)

Forgiveness of principal		-	$	-		2	$	430		-	$	-		-	$	-
Total		-	$	-		2	$	430		-	$	-		-	$	-

- 49 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D – LOANS (Continued)

		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
December 31, 2016	(dollars in thousands)

Other		-	$	-		1	$	376		-	$	-		-	$	-
Total		-	$	-		1	$	376		-	$	-		-	$	-

Credit Quality Indicators

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

Loan Portfolio Risk Grades

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

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

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

Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Bank’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.

- 50 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D – LOANS (Continued)

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.

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

December 31, 2017

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

Total	$	339,011	$	5,729	$	3,939	$	-	$	-

- 51 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D – LOANS (Continued)

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	$	-	$	-

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable losses inherent in the loan portfolio. Management determines the allowance for loan losses based on a number of factors, including a review and evaluation of the Company’s loan portfolio and current and projected economic conditions locally and nationally. The allowance is monitored and analyzed in conjunction with the Company’s loan analysis and grading program. In the second quarter of 2017, the allowance methodology used in the analysis was modified by expanding the look-back period for average loss rates to a weighted twenty quarter period instead of the twelve quarter period used previously. The impact of the change was a $240,000 increase to the allowance.

Based on this methodology, provisions for loan losses are made to maintain an adequate allowance for loan losses. The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance. The provision for loan losses is the amount necessary to adjust the allowance for loan losses to the amount that management has determined to be adequate to provide for probable losses inherent in the loan portfolio. The Company recorded provisions for loan losses for the year ended December 31, 2017 of $704,000 and recorded a recovery of loan loss provision of ($27,000) for the year ended December 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.

- 52 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D – LOANS (Continued)

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 years ended December 31, 2017 and 2016:

	Beginning Balance		Provision for (Recovery) of Loan Losses			Charge- offs			Recoveries		Ending Balance
Dollars in thousands
December 31, 2017
Commercial real estate	$	1,607	$	708		$	(208	)	$	153		2,260
Commercial		1,171		(218	)		(369	)		50		634
Residential mortgage		427		126			(66	)		18		505
Consumer and home equity lines		188		88			(92	)		16		200
Total	$	3,393	$	704		$	(735	)	$	237	$	3,599

December 31, 2016
Commercial real estate	$	2,173	$	(590	)	$	(71	)	$	95		1,607
Commercial		542		913			(301	)		17		1,171
Residential mortgage		482		(55	)		-			-		427
Consumer and home equity lines		328		(97	)		(68	)		25		188
Unallocated		198		(198	)		-			-		-
Total	$	3,723	$	(27	)	$	(440	)	$	137	$	3,393

Year End Amount Allocation:

	Loans Individually Evaluated For Impairment		Loans Collectively Evaluated for Impairment		Total
Dollars in thousands
December 31, 2017
Commercial real estate	$	-	$	2,260	$	2,260
Commercial		144		490		634
Residential mortgage		103		402		505
Consumer and home equity lines		1		199		200
Total	$	248	$	3,351	$	3,599

December 31, 2016
Commercial real estate	$	35	$	1,572	$	1,607
Commercial		840		331		1,171
Residential mortgage		39		388		427
Consumer and home equity lines		-		188		188
Total	$	914	$	2,479	$	3,393

- 53 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE D – LOANS (Continued)

The Company’s recorded investment in loans as of December 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:

		December 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	$	3,623		$	209,699		$	4,644		$	175,973
Commercial		766			48,101			1,995			41,785
Residential mortgage		1,861			47,198			1,038			43,660
Consumer and home equity lines		107			37,324			338			39,059
Total	$	6,357		$	342,322		$	8,015		$	300,477

At December 31, 2017 the Company had pre-approved but unused lines of credit totaling $67.1 million. In management’s opinion these unused lines of credit represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

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

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

	December 31, 2017			December 31, 2016
Dollars in thousands
Balance, beginning of year	$	2,043		$	2,347
Loan disbursements		102			279
Loan repayments		(405	)		(583	)
Balance, end of year	$	1,740		$	2,043

At December 31, 2017 and 2016 the Company had pre-approved but unused lines of credit totaling $404,000 and $322,000, respectively, to executive officers, directors and their related interests. Related party deposits totaled $1,825,000 and $1,838,000 at December 31, 2017 and 2016, respectively.

- 54 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE E – FORECLOSED ASSETS

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

	December 31, 2017			December 31, 2016
Dollars in thousands
Balance, beginning of year	$	1,011		$	1,994
Additions		520			609
Proceeds from sale		(523	)		(1,165	)
Valuation adjustments		(195	)		(373	)
Losses on sales		(24	)		(54	)
Balance, end of year	$	789		$	1,011

The Company has one foreclosed residential real estate property held in the amount of $196,000 as of December 31, 2017.

The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process totaled $449,000 for December 31, 2017.

NOTE F – EARNINGS PER SHARE

Basic earnings per share are based upon the weighted average number of common shares outstanding during the period. The weighted average common shares outstanding for the diluted earnings per share computations were adjusted to reflect the assumed conversion of shares available under stock options and restricted stock. The following tables summarize earnings per share and the shares utilized in the computations for the twelve months ended December 31, 2017 and 2016, respectively:

	Net Income Available to Common Shareholders		Weighted Average Common Shares		Per Share Amount
Dollars in thousands, except share and per share data
December 31, 2017
Basic earnings per common share	$	404		4,655,369	$	0.09
Effect of dilutive options		-		71,225
Effect of dilutive stock warrants		-		11,280
Diluted earnings per common share	$	404		4,737,874	$	0.09

December 31, 2016
Basic earnings per common share	$	1,119		4,649,405	$	0.24
Effect of dilutive options		-		48,360
Effect of dilutive stock warrants		-		-
Diluted earnings per common share	$	1,119		4,697,765	$	0.24

- 55 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE F – EARNINGS PER SHARE (Continued)

For the year ended December 31, 2017, there were 12,500 shares related to stock options that were anti-dilutive because the exercise price exceeded the average market price for the period. For the year ended December 31, 2016, there were 55,314 shares related to stock options and 86,957 shares related to the 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.

NOTE G - BANK PREMISES, EQUIPMENT AND SOFTWARE

Following is a summary of Bank premises, equipment and software at December 31, 2017 and 2016:

	December 31, 2017			December 31, 2016
Dollars in thousands
Land, buildings and leasehold improvements	$	8,358		$	7,423
Computer Equipment		1,151			1,086
Furniture and equipment		1,580			1,280
Work in progress		-			788
Total		11,089			10,577
Less accumulated depreciation		(4,623	)		(4,189	)
Total	$	6,466		$	6,388

Depreciation and amortization amounting to $441,000 and $361,000 for the years ended December 31, 2017 and 2016, respectively, is included in occupancy and equipment expense.

NOTE H - LEASES

Capital Lease Obligation

The Bank leases its main office facility under a lease with an initial term of twenty years. The portion of the lease applicable to the building is being accounted for as a capitalized lease. Leases that meet the criteria for capitalization are recorded as Bank premises and equipment and the related obligations are reflected as capital lease obligations on the accompanying balance sheets. Amortization of property under the capital lease is included in depreciation expense. Included in Bank premises and equipment at December 31, 2017 and 2016 is $120,000 and $155,000 respectively, as the amortized cost of the Bank’s main office.

At December 31, 2017, aggregate future minimum lease payments due under this capital lease obligation are $79,000 for 2018, $79,000 for 2019 and $72,000 for 2020. The amount of these payments representing interest is $23,000 and the present value of net minimum lease payments at December 31, 2017 is $207,000.

- 56 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE H – LEASES (Continued)

The land portion of the Bank’s main office facility lease is being accounted for as an operating lease with a twenty-year term. In addition, the Bank has entered into three-year leases at its Lincolnton, West, Forest City and Lake Lure branch facilities, a five-year lease for its Vale branch , a three-year lease for its Mooresville office (which was renewed for 2 years), and a two year lease for its Salisbury Loan Production Office. Generally, operating leases contain renewal options on substantially the same basis as current rental terms. The operating lease for the West branch facility has five renewal options, each for a three-year term; the operating lease for the Vale branch has two renewal options, each for a five-year term; the operating lease for the Forest City branch has four renewal options, each for a three-year term; the operating lease for the Mooresville branch has no renewal options; the Lake Lure branch has two renewal options, each with a three-year term and the Salisbury office has one renewal option with a one year term. The Boger City branch lease expires in April 2018, and the lease will not be renewed. All of the operating leases are accounted for on a straight line basis, including renewal terms.

Future minimum rental payments under these leases are as follows:

	December 31, 2017
Dollars in thousands
2018	$	226
2019		143
2020		77
2021		34
	$	480

Total rent expense under operating leases was approximately $309,000 and $345,000 for the years ended December 31, 2017 and 2016, respectively.

NOTE I - DEPOSITS

The aggregate amount of time deposits in denominations of $250,000 or more at December 31, 2017 and 2016 was $39.2 million and $36.6 million, respectively. Interest expense on such deposits amounted to $443,000 and $567,000 in 2017 and 2016, respectively. At December 31, 2017, the scheduled maturities of certificates of deposit are as follows:

In thousands	Less than $250,000		$250,000 or more		Total
2018	$	56,384		20,466		76,850
2019		23,476		8,903		32,379
2020		18,622		6,989		25,611
2021		9,254		1,249		10,503
2022		7,040		1,609		8,649
Total	$	114,776		39,216		153,992

- 57 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE I – DEPOSITS (Continued)

The Bank periodically uses brokered deposits consistent with asset and liability management policies. At December 31, 2017 and 2016 the Bank had $27,368,000 and $29,485,000, respectively, in brokered deposits. The Bank reclassifies overdrafts on deposit accounts to loan balances. For the years ended December 31, 2017 and 2016, the reclassified amounts were $53,000 and $45,000 respectively.

NOTE J - LINES OF CREDIT AND FHLB ADVANCES

At December 31, 2017, the Bank had available three unsecured federal funds lines of credit totaling $14,000,000 borrowing capacity on a short term basis. There were no borrowings outstanding against these credit lines at December 31, 2017 and December 31, 2016. These lines are subject to annual renewals and have varying interest rates. The Bank also has a $10,000,000 reverse repurchase agreement available. The Bank has available with The Federal Home Loan Bank of Atlanta (“FHLB”), a line of credit equal to 25% of the Bank’s total assets. This credit line is secured by loans secured by real estate and FHLB stock. Rates and terms may be fixed or variable and are determined at the time advances on the credit line are made. At December 31, 2017 and December 31, 2016 the Bank had outstanding advances and a letter of credit of $28,600,000 and $14,100,000 respectively. Some advances have call features, which may be exercised on specific dates at the discretion of the FHLB. The letter of credit was established in 2017 to pledge as collateral for public deposits that exceed the limits insured by the Federal Deposit Insurance Corporation. In previous years, the Company pledged its investment securities as collateral for these public deposits. Pursuant to collateral agreements with the FHLB at December 31, 2017, advances and letters of credit are secured by loans with a carrying amount of approximately $99,489,000, from which the FHLB provides a total credit line of $68,344,000.

At December 31, the scheduled maturities of advances from the FHLB are as follows:

				Dollars in thousands
Maturity Date	Interest Rates		December 31, 2017		December 31, 2016
2/21/2017		0.63%	$	-	$	2,100
1/29/2018		1.41%		3,500		-
2/05/2018		1.27%		4,000		-
3/29/2018		1.88%		2,000		2,000
2/22/2019		1.17%		10,000		10,000
4/23/2019		1.75%		2,100		-
8/23/2027		0.99%		2,000		-
	Total		$	23,600	$	14,100

The letter of credit from the FHLB in the amount of $5 million matures on December 19, 2018. As of December 31, 2017, the letter of credit has not been funded.

NOTE K - INCOME TAXES

The approximate amount of significant components of the provision for income taxes for the years ended December 31, 2017 and 2016 are as follows:

	December 31, 2017		December 31, 2016
Dollars in thousands
Current tax provision	$	221	$	34
Deferred tax provision		1,373		843
Provision for income taxes	$	1,594	$	877

- 58 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

The difference between the provision for income taxes and the amounts computed by applying the statutory federal income tax rate of 34% to income before income taxes is summarized below:

	December 31, 2017			December 31, 2016
Dollars in thousands
Tax computed at the statutory rate	$	679		$	754
Increase (decrease) resulting from:
State income taxes, net of federal tax effect		57			128
Effect of rate revaluation		936			-
Other permanent differences		(78	)		(5	)
Provision for income taxes	$	1,594		$	877

The Company recognized income tax expense of $1,594,000, for an effective tax rate of 79.8%, in 2017 compared to $877,000, for an effective tax rate of 39.5%, in 2016. The effective income tax rates differed from the U.S. statutory federal income tax rate of 34% during the comparable periods primarily due to the effect of tax-exempt income from loans, securities and life insurance policies and changes in enacted tax rates.

The effective tax rate for 2017 was impacted by the adjustment of our deferred tax assets and liabilities related to the reduction in the U.S. federal statutory income tax rate to 21% under the Tax Cuts and Jobs Act enacted on December 22, 2017, as more fully discussed below. Under ASC 740, Income Taxes, the effect of income tax law changes on deferred taxes should be recognized as a component of income tax expense related to continuing operations in the period in which the law is enacted. This requirement applies not only to items initially recognized in continuing operations, but also to items initially recognized in other comprehensive income.

Tax Cuts and Jobs Act. The Tax Cuts and Jobs Act (the “Tax Act”) was enacted on December 22, 2017. Among other things, the new law (i) establishes a new, flat corporate federal statutory income tax rate of 21%, (ii) eliminates the corporate alternative minimum tax and allows the use of any such carryforwards to offset regular tax liability for any taxable year, (iii) limits the deduction for net interest expense incurred by U.S. corporations, (iv) allows businesses to immediately expense, for tax purposes, the cost of new investments in certain qualified depreciable assets, (v) eliminates or reduces certain deductions related to meals and entertainment expenses, (vi) modifies the limitation on excessive employee remuneration to eliminate the exception for performance-based compensation and clarifies the definition of a covered employee and (vii) limits the deductibility of deposit insurance premiums. The Tax Act also significantly changes U.S. tax law related to foreign operations, however, such changes do not currently impact us. Tax expense was increased in the fourth quarter by a provisional $936,000 to reflect the Tax Act changes. The ultimate impact may differ from this provisional amount due to additional analysis, changes in interpretations and assumptions and additional regulatory guidance that may be issued. The provisional amount is expected to be finalized when the 2017 U.S. Corporate income tax return is filed in 2018.

- 59 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE K - INCOME TAXES (continued)

Significant components of deferred taxes at December 31, 2017 and 2016 are as follows:

	December 31, 2017			December 31, 2016
Dollars in thousands
Deferred tax assets relating to:
Allowance for loan losses	$	556		$	628
Stock options		15			23
Amortization of intangibles		1			7
Foreclosed asset basis differences		18			207
Unrealized loss on AFS securities		223			148
SERP liability		521			795
Nonaccrual loan interest		65			156
Net operating/economic loss carryforwards		811			1,984
Other		423			217

Total deferred tax assets	$	2, 633		$	4,165

Deferred tax liabilities relating to:
Prepaid expenses	$	(55	)	$	(124	)
Fixed assets		(326	)		(444	)
Fair value acquisition adjustments, net		(125	)		(291	)
Total deferred tax liabilities		(506	)		(859	)
Net recorded deferred tax asset	$	2,127		$	3,306

The Company evaluated the realization of the remaining gross deferred tax asset of $2.6 million and determined that it was more likely than not that the Company could recognize that asset in the future.

As of December 31, 2017, the Company had a total Net Operating Loss (NOL) carryforward of $3,425,000. The NOL originated in 2009 and can be carried forward for 20 years. It will begin expiring in 2029. As of December 31, 2017, the Bank had a total Net Economic Loss (NEL) carryforward of $3,875,000. The NEL originated in 2009 and can be carried forward for 15 years. It will begin expiring in 2024.

NOTE L - REGULATORY MATTERS

The Company is organized under the North Carolina Business Corporation Act, which prohibits the payment of a dividend if, after giving in effect, we would not be able to pay our debts as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved, to satisfy the preferential rights of any preferred stockholders. In addition, because the Company is a bank holding company, the Federal Reserve may impose restrictions on our ability to pay cash dividends.

The Bank, as a North Carolina banking corporation, may pay cash dividends only if the distribution will not reduce the Company’s capital below applicable capital requirements. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such limitation is in the public interest and is necessary to ensure the bank’s financial soundness.

- 60 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE L - REGULATORY MATTERS (continued)

The Company and Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional, discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Based on the most recent notification from its regulators, the Bank is well capitalized under the framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank’s category. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios, as prescribed by regulations, of total common equity Tier I and Tier I capital to risk-weighted assets and of Tier 1 capital to average assets.

Management believes, as of December 31, 2017 that the Company and the Bank meet all capital adequacy requirements to which they are subject.

The Bank’s capital amounts and ratios are presented in the following table at December 31, 2017 and 2016:

	Actual					Minimum required for capital adequacy purposes					Required in Order to Be Well Capitalized Under PCA
Dollars in thousands	Amount		Ratio			Amount		Ratio			Amount		Ratio
December 31, 2017
Common equity tier 1 capital to risk weighted assets	$	37,321		10.10	%	$	16,627		4.50	%	$	24,017		6.50	%
Total capital to risk weighted assets		40,948		11.08	%		29,560		8.00	%		39,950		10.00	%
Tier 1 capital to risk weighted assets		37,321		10.10	%		22,170		6.00	%		29,560		8.00	%
Tier 1 capital to average assets		37,321		9.22	%		16,196		4.00	%		20,245		5.00	%

December 31, 2016
Common equity tier 1 capital to risk weighted assets	$	36,636		11.40	%	$	14,458		4.50	%	$	20,884		6.50	%
Total capital to risk weighted assets		40,045		12.46	%		25,703		8.00	%		32,128		10.00	%
Tier 1 capital to risk weighted assets		36,636		11.40	%		19,277		6.00	%		25,703		8.00	%
Tier 1 capital to average assets		36,636		9.64	%		15,201		4.00	%		19,002		5.00	%

- 61 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE M - 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.

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

Financial instruments whose contract represents credit risk

	December 31, 2017
Dollars in thousands
Undisbursed lines of credit	$	67,109
Letters of credit		609
	$	67,718

NOTE N - 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:

- 62 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE N - FAIR VALUE MEASUREMENTS (Continued)

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

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

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

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

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

Financial Instruments with Off-Balance Sheet Risk

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

- 63 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE N - FAIR VALUE MEASUREMENTS (Continued)

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 December 31, 2017 and December 31 2016:

			Fair Value Measurements at December 31, 2017 using
Dollars in thousands	Carrying Value		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	$	5,409	$	5,409	$	-	$	-	$	5,409
Interest earning deposits with banks		3,647		3,647		-		-		3,647
Certificate of deposits with banks		1,498		-		1,519		-		1,519
Federal Home Loan Bank Stock		1,341		-		1,341		-		1,341
Securities available for sale		31,112		626		30,486		-		31,112
Net loans		345,080		-		-		345,370		345,370
Accrued interest receivable		1,078		-		1,078		-		1,078

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

			Fair Value Measurements at December 31, 2016 using
Dollars in thousands			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
Certificate of deposits with banks		1,498		-		1,498		-		1,498
Federal Home Loan Bank Stock		942		-		942		-		942
Securities available for sale		27,063		1,112		25,201		750		27,063
Net loans		305,099		-		-		305,714		305,714
Accrued interest receivable		945		-		945		-		945

LIABILITIES
Deposits	$	318,665	$	-	$	311,464	$	-	$	311,464
Capital lease obligation		268		-		268		-		268
FHLB Advances		14,100		-		14,115		-		14,115
Long term subordinated debt		9,605		-		9,616		-		9,616
Accrued interest payable		287		-		287		-		287

- 64 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE N - FAIR VALUE MEASUREMENTS (Continued)

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

Fair Value Hierarchy

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

Level 1 Valuation is 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 included 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 December 31, 2017. Valuation techniques are consistent with techniques used in prior periods.

- 65 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE N - FAIR VALUE MEASUREMENTS (Continued)

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

December 31, 2016
U.S. Government and federal agency	$	6,543	$	-	$	6,543	$	-
Mortgage-backed securities *		18,658		-		18,658		-
Corporate debt securities		750		-		-		750
Equity securities		1,112		1,112		-		-
Total	$	27,063	$	1,112	$	25,201	$	750

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

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

The tables below present the changes during the years ended December 31, 2017 and December 31, 2016 in the amount of Level 3 assets measured on a recurring basis.

	December 31, 2017			December 31, 2016
Dollars in thousands
Balance, beginning of year	$	750		$	750
Called securities		(750	)		-
Balance, end of year	$	-		$	750

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 December 31, 2017, the discounted cash flows method was used in determining the fair value of nine loans totaling $1.9 million and the fair value of the collateral method was used in the other twenty-nine loans totaling $4.2 million. 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 year ended December 31, 2017. Valuation techniques are consistent with techniques used in prior periods.

- 66 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE N - FAIR VALUE MEASUREMENTS (Continued)

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 at December 31, 2017 and December 31, 2016.

	December 31, 2017					December 31, 2016
Dollars in thousands	Level 2		Level 3			Level 2		Level 3
Carrying value of impaired loans before allocations	$	-	$	1,768		$	-	$	2,829
Specific valuation allowance allocations		-		(248	)		-		(914	)
Carrying value of impaired loans after allocations	$	-	$	1,520		$	-	$	1,915

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.

The carrying value of foreclosed assets is periodically reviewed and written down to fair value. Any loss is included in earnings. For the year ended December 31, 2017, there were not any re-measurements of foreclosed assets subsequent to foreclosure. For the year ended December 31, 2016, foreclosed assets with a carrying value of $974,000 were written down by $268,000 to $706,000.

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

	Total		Level 1		Level 2		Level 3
Dollars in thousands
December 31, 2017
Foreclosed assets	$	324	$	-	$	-	$	324
Impaired loans		1,621		-		-		1,621
Total	$	1,945	$	-	$	-	$	1,945

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

Foreclosed assets		324	Discounted appraisals	Appraisal adjustments		15.00	%		15.00	%

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	%

- 67 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE O - EMPLOYEE AND DIRECTOR BENEFITS

Employment Contracts

The Company has entered into employment agreements with certain of the Company’s executive officers to ensure a stable and competent management base. The agreements provide for a term of two years, but the agreements may be extended. The agreements provide for benefits as specified in the contracts and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officer’s rights to receive certain vested rights, including compensation. In the event of a change in control of the Company and in certain other events, as defined in the agreements, the Company or any successor to the Company will be bound to the terms of the contracts.

Supplemental Executive Retirement Plan (SERP Plan)

In August of 2007, the Board of Directors adopted a SERP Plan for the purpose of retaining the employment of certain senior officers. In January of 2014, the Board of Directors adopted a SERP Plan for the purpose of retaining the employment of the Company’s President and CEO. Participants in the SERP Plans and their level of participation, is determined by the Board of Directors. The SERP Plans provide for benefits as specified in the plans and cannot be terminated by the Board of Directors, except for cause, without prejudicing the officer’s rights to receive certain vested rights, including compensation. Benefits of the 2007 plan vest over a ten year period and benefits of the 2014 plan vest over a five year period beginning on the participants’ date of employment and are deferred until separation from employment by the participant. In the event of a change in control of the Company and in certain other events, as defined in the SERP Plans, the Company or any successor to the Company will be bound to the terms of the SERP Plans. At December 31, 2017 and December 31, 2016 respectively, the Company had an accrued liability of $2,230,000 and $2,209,000 for participants’ vested benefits. The Company recorded expenses totaling $153,000 and $133,000 in 2017 and 2016, respectively.

401(k) Plan

The Company has a 401(k) Plan whereby substantially all employees participate in the Plan. The Company makes matching contributions equal to 100 percent of the first four percent of an employee’s compensation contributed to the Plan, with matching contributions vesting under an established vesting plan. For the years ended December 31, 2017 and 2016, matching employer contributions to the Plan amounted to approximately $190,000 and $179,000 respectively. Administrative fees were $3,000 in 2017 and 2016.

- 68 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE O - EMPLOYEE AND DIRECTOR BENEFITS (Continued)

Stock Option Plans

The Company has six share-based compensation plans in effect at December 31, 2017 and at December 31, 2016. The compensation cost charged against income for those plans was approximately $24,000 and $60,000 respectively for the years ended December 31, 2017 and December 31, 2016.

During 2001 the Company adopted, with shareholder approval, an Incentive Stock Option Plan (the “2001 Employee Plan”) and a Non-statutory Stock Option Plan (the “2001 Director Plan”). Each plan makes available options to purchase 100,771 shares of the Company’s common stock, for an aggregate number of common shares reserved for options under these plans of 201,542. The exercise price of all options granted to date under these plans is $3.14.

The options granted in 2006 through 2011 under the 2001 Director Plan and the 2001 Employee Plan 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 during the year ended December 31, 2014. The shares vested over a 3-year period.

As a result of the merger with Carolina Commerce Bank, Carolina Trust Bank assumed all outstanding options of Carolina Commerce under the existing terms and at the conversion rate of 0.625 shares of Carolina Trust stock for each share of Carolina Commerce stock. All options assumed became fully vested at the merger date. As of December 31, 2017, there were 79,845 options outstanding from the converted plans with exercise prices ranging from $2.13 to $19.20.

Total stock-based compensation recognized as compensation expense on our consolidated statement of income is as follows:

	December 31, 2017		December 31, 2016
Dollars in thousands
Option Grants	$	24	$	49
Restricted Stock Grants		-		11
Total Compensation Expense	$	24	$	60

- 69 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE O - EMPLOYEE AND DIRECTOR BENEFITS (Continued)

A summary of option activity under the stock option plans as of December 31, 2017 and changes during the year ended December 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		(3,738	)	$	3.36
Expired		(28,981	)	$	18.31
Forfeited		(1,000	)	$	4.91
Granted		-		$	-
Outstanding, December 31, 2017		151,173		$	4.54	5.27 years	$	790,199

Exercisable, December 31, 2017		150,215		$	4.53		$	786,232

The approximate fair value of options vested over the years ended December 31, 2017 and 2016, respectively, was $37,000 and $79,000.

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

	December 31, 2017					December 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

As of December 31, 2017 there was $1,000 of unrecognized compensation cost related to non-vested options granted under all of the Company equity compensation plans. That cost is expected to be recognized over a weighted average period of less than one year. The restricted stock cost was recognized in 2015, 2016 and 2017.

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.

- 70 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE P – 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.

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 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 Company common stock. The warrant book value, $426,000 is recognized as Company stockholders’ equity. The warrant expires February 6, 2019.

In December of 2016, the Bank redeemed all 2,600 shares of its outstanding preferred stock. 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.

- 71 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE Q –SUBORDINATED DEBT

On October 13, 2016, the Company entered into a Subordinated Note Purchase Agreement (the “Purchase Agreement”) with certain institutional accredited investors (the “Purchasers”) pursuant to which the Company issued and sold $10 million in aggregate principal amount of fixed-to-floating rate subordinated notes (the “Notes”). The Notes were issued by the Company to the Purchasers at a price equal to 100% of their face amount.

The Notes have a stated maturity of October 15, 2026 and bear interest at a fixed rate of 6.9% per year, from and including October 13, 2016, to but excluding October 15, 2021, computed on the basis of a 360-day year consisting of twelve 30-day months, payable semi-annually in arrears. From and including October 15, 2021, to but excluding the maturity date or early redemption date, the interest rate will reset quarterly to an interest rate per year equal to the then-current three-month LIBOR plus 571.8 basis points, computed on the basis of a 360-day year and the actual number of days elapsed, payable quarterly in arrears. The Notes are redeemable, in whole or in part, on or after October 13, 2021, and at any time upon the occurrence of certain events.

- 72 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE R – PARENT COMPANY FINANCIAL DATA

The following is a summary of the condensed financial statements of Carolina Trust BancShares, Inc.:

Condensed Balance Sheets

	December 31, 2017		December 31, 2016
Dollars in thousands
Assets
Cash and demand deposits	$	263	$	779
Investment in bank subsidiary		38,018		37,897
Other assets		667		12
Total assets		38,948		38,688

Liabilities and shareholders’ equity
Long term subordinated debt		9,676		9,605
Other liabilities		153		50
Total liabilities		9,829		9,655

Shareholders’ equity		29,119		29,033
Total liabilities and shareholders’ equity	$	38,948	$	38,688

Condensed Statements of Operations

	December 31, 2017			December 31, 2016
Dollars in thousands
Income:
Dividends from subsidiary	$	718		$	125
Total income		718			125

Expense
Interest expense		759			166
Other operating expense		390			164
Total expense		1,149			330
Loss before income taxes and equity in undistributed earnings Of subsidiary		(431	)		(205	)
Income tax benefit		(383	)		(121	)
Loss before equity in undistributed earnings of subsidiary		(48	)		(84	)
Equity in undistributed earnings of subsidiaries		452			1,425
Net income		404			1,341
Net income attributable to non-controlling interests		-			222
Net income available to common shareholders	$	404		$	1,119

- 73 -

CAROLINA TRUST BANCSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended December 31, 2017 and 2016

NOTE R – PARENT COMPANY FINANCIAL DATA (Continued)

Condensed Statements of Cash Flow

	December 31, 2017			December 31, 2016
Dollars in thousands
Cash flows from operating activities
Net income	$	404		$	1,341
Adjustments to reconcile net income to net cash used by operating activities:
Equity in undistributed earnings of subsidiary		(452	)		(1,425	)
Accretion of long term subordinated debt issuance costs		71			15
Increase in other assets		(656	)		(12	)
Increase in other liabilities		103			67
Net cash used in operating activities		(530	)		(14	)

Cash flows from investing activities
Investment in subsidiary		-			(8,800	)
Net cash used in investing activities		-			(8,800	)

Cash flows from financing activities
Net proceeds from issuance of common stock		14			3
Issuance of long-term subordinated debt		-			9,590
Net cash provided by financing activities		14			9,593
Net increase in cash and cash equivalents		(516	)		779
Cash and cash equivalents at beginning of year		779			-
Cash and cash equivalents at end of year	$	263		$	779

The share exchange of all of the Bank’s common stock for the Company’s common stock on August 16, 2016 was a non-cash investment in the Bank by the Company.

- 74 -

Carolina Trust BancShares, Inc.
General Corporate Information

Office Locations

Vale Branch	Main	West Branch
9584 Hwy 10 West	901 East Main Street	799 Hwy 27 West
Vale, North Carolina 28168	Lincolnton, North Carolina 28092	Lincolnton, North Carolina 28092

Triangle Branch	Forest City Branch	New Hope Branch
1293 Hwy 16 North	142 North Watkins Drive	534 South New Hope Road
Denver, North Carolina 28037	Forest City, North Carolina 28043	Gastonia, North Carolina 28054

Hickory Branch	Mooresville Branch	Lake Lure Branch
11 13^th Avenue NE	125 East Trade Court	103 Arcade Street
Hickory, North Carolina, 28601	Mooresville, North Carolina, 28117	Lake Lure, North Carolina 28746

	Salisbury Office
	350 Jake Alexander Boulevard West, Suite 102
	Salisbury, North Carolina 28147

Directors

Name		Principal Occupation

Bryan Elliott Beal		President and Chief Executive Officer, Carolina Mills, Inc., Maiden, NC (textile manufacturer).

Scott C. Davis		President, Gaston Electronics; President, Gaston County Dyeing Machine Company (manufacturing); both of Stanley, NC.

Jerry L. Ocheltree		President and Chief Executive Officer, Carolina Trust Bancshares, Inc. and Carolina Trust Bank, both of Lincolnton, NC.

Johnathan L. Rhyne, Jr.		Partner/Member, The Jonas Law Firm, P.L.L.C., Lincolnton, NC.

Frederick P. Spach, Jr.		President and Chief Executive Officer, Carolina Brush Company (manufacturer of brushes for commercial and industrial use), Gastonia, NC.

Ralph N. Strayhorn III		Managing Partner, Cape Point Advisory Partners, LLC (bank consulting firm), Charlotte, NC.

Jim R. Watson		Associate Professor, College of Education, University of North Carolina at Charlotte, Charlotte, NC; President, WSRR Consulting Group, LLC and Managing Partner, Silo Investors, LLC; both of Lincolnton, NC.

Executive Officers

Name		Principal Occupation
Jerry L. Ocheltree		President and Chief Executive Officer of the Company and the Bank.
Edwin E. Laws		Executive Vice President and Chief Financial Officer of the Company and the Bank.
Richard M. Rager		Executive Vice President and Chief Credit Officer of the Bank.

Common Stock

The Company had 4,660,987 shares of Common Stock outstanding which were held by approximately 1,410 holders of record (excluding shares held in street name) as of March 23, 2018. To date, the Company has not paid any cash dividends on common stock, and the Company does not currently anticipate that cash dividends will be declared and paid at any time in the foreseeable future. The Company can only pay dividends if the distribution will not reduce the Company’s capital below amounts required by law. For a more complete discussion of restrictions on our ability to declare and pay dividends, see Management’s Discussion and Analysis – Liquidity, beginning on page 16.

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Market for Common Stock

The Company’s common stock is traded on the NASDAQ Capital Market under the symbol CART. Certain sales have been facilitated by the Bank in 2017 and 2016. Stock prices for 2017 and 2016 are presented below.

Stock Transfer Agent

Broadridge Corporate Issuer Services Inc.

P.O. Box 1342

Brentwood, NY 11717

Regulatory and Securities Counsel

Wyrick Robbins Yates & Ponton LLP

4101 Lake Boone Trail, Suite 300

Raleigh, North Carolina 27607

(919) 781-4000 Telephone

(919) 781-4865 Facsimile

Independent Auditors

Dixon Hughes Goodman LLP

4350 Congress Street, Suite 900

Charlotte, North Carolina 28209

The table below presents the high and low sales prices for the Company’s (and formerly the Bank’s) stock for 2017 and 2016, as reported on Nasdaq:

	High		Low
2017
First quarter	$	12.00	$	6.30
Second quarter		7.94		6.90
Third quarter		8.45		7.31
Fourth quarter		9.77		8.07

2016
First quarter	$	6.39	$	5.75
Second quarter		6.32		5.60
Third quarter		6.29		5.85
Fourth quarter		6.68		6.00

Annual Shareholders Meeting

The Annual Meeting of the shareholders of Carolina Trust BancShares, Inc. will be held at 10:00 am, on May 2, 2018 at the The Lincoln Cultural Center, 403 East Main Street, Lincolnton, North Carolina, 28092.

Annual Report on Form 10-K

A copy of Carolina Trust BancShares, Inc.’s 2017 Annual Report on Form 10-K, as filed with the U.S. Securities and Exchange Commission, is available without charge to stockholders upon written request to Jerry L. Ocheltree, President and Chief Executive Officer, Carolina Trust BancShares, Inc., 901 East Main Street, P.O. Box 308, Lincolnton, NC 28093-0308.

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Carolina Trust BancShares, Inc. - FORM 10-K - EX-13 - EXHIBIT 13 - March 27, 2018

Attached files

Carolina Trust BancShares, Inc. Reports