Attached files
file | filename |
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EX-32 - EXHIBIT 32 - Carolina Trust BancShares, Inc. | ex32.htm |
EX-31.2 - EXHIBIT 31.2 - Carolina Trust BancShares, Inc. | ex31_2.htm |
EX-31.1 - EXHIBIT 31.1 - Carolina Trust BancShares, Inc. | ex31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2018
COMMISSION FILE NUMBER 000-55683
CAROLINA TRUST BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
NORTH CAROLINA
(State or other jurisdiction of incorporation or organization)
81-2019652
(I.R.S. Employer Identification No.)
901 EAST MAIN STREET
LINCOLNTON, NORTH CAROLINA 28092
(Address of Principal Executive Offices) (Zip Code)
(704) 735-1104
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
|
(Former name, former address and former fiscal year, if changed since last report)
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
|
☐
|
Accelerated Filer
|
☐
|
Non-accelerated Filer
|
☐
|
Smaller Reporting Company
|
☒
|
Emerging Growth Company
|
☐
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as
defined in rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock outstanding as of November 9, 2018 was 7,156,987.
Part I.
|
FINANCIAL INFORMATION
|
||
Item 1 -
|
Financial Statements (Unaudited)
|
||
2
|
|||
3
|
|||
|
|||
4
|
|||
|
|||
5
|
|||
|
|||
6
|
|||
7
|
|||
8
|
|||
9
|
|||
Item 2 -
|
38
|
||
Item 4 -
|
47
|
||
Part II.
|
OTHER INFORMATION
|
||
Item 6 -
|
48
|
Part I. FINANCIAL INFORMATION
Item 1 – Financial Statements
CAROLINA TRUST BANCSHARES, INC.
(Dollars in thousands, except share and per share data)
September 30,
2018
|
December 31,
2017*
|
|||||||
Assets
|
||||||||
Cash and due from banks
|
$
|
9,000
|
$
|
5,409
|
||||
Interest-earning deposits with banks
|
26,416
|
3,647
|
||||||
Cash and cash equivalents
|
35,416
|
9,056
|
||||||
Certificates of deposit with banks
|
1,498
|
1,498
|
||||||
Investment securities available for sale, at fair value (amortized cost $31,180 and $32,067)
|
29,992
|
31,112
|
||||||
Equity securities
|
749
|
-
|
||||||
Federal Home Loan Bank stock, at cost
|
1,050
|
1,341
|
||||||
Loans
|
380,746
|
348,679
|
||||||
Less: Allowance for loan and lease losses
|
(3,925
|
)
|
(3,599
|
)
|
||||
Net Loans
|
376,821
|
345,080
|
||||||
Bank-owned life insurance
|
7,344
|
7,197
|
||||||
Accrued interest receivable
|
1,210
|
1,078
|
||||||
Bank premises, equipment and software
|
6,154
|
6,466
|
||||||
Foreclosed assets
|
1,782
|
789
|
||||||
Core deposit intangible, net of accumulated amortization of $737 and $711 at September 30, 2018 and December
31, 2017, respectively
|
47
|
73
|
||||||
Other assets
|
3,108
|
2,928
|
||||||
Total Assets
|
$
|
465,171
|
$
|
406,618
|
||||
Liabilities and Stockholders’ Equity
|
||||||||
Noninterest-earning demand deposits
|
$
|
66,796
|
$
|
49,199
|
||||
Interest-earning demand deposits
|
123,586
|
115,396
|
||||||
Savings
|
23,441
|
22,066
|
||||||
Time deposits
|
172,674
|
153,992
|
||||||
Total deposits
|
386,497
|
340,653
|
||||||
Capital lease obligation
|
158
|
207
|
||||||
Federal Home Loan Bank advances
|
16,100
|
23,600
|
||||||
Long term subordinated debt
|
9,733
|
9,676
|
||||||
Accrued interest payable
|
578
|
292
|
||||||
Other liabilities
|
3,151
|
3,071
|
||||||
Total liabilities
|
416,217
|
377,499
|
||||||
Common stock warrant
|
426
|
426
|
||||||
Common stock, $2.50 par value; 10,000,000 shares authorized; 7,156,987 and 4,657,880 shares issued and
outstanding
|
17,892
|
11,645
|
||||||
Additional paid-in capital
|
25,212
|
13,008
|
||||||
Retained earnings
|
6,335
|
4,772
|
||||||
Accumulated other comprehensive loss
|
(911
|
)
|
(732
|
)
|
||||
Total stockholders’ equity
|
48,954
|
29,119
|
||||||
Total Liabilities and Stockholders’ Equity
|
$
|
465,171
|
$
|
406,618
|
*Derived from Carolina Trust BancShares, Inc.’s audited financial statements included in its 2017 Annual Report on Form 10-K
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
(Dollars in thousands, except share and per share data)
Three Months Ended September 30,
|
||||||||
2018
|
2017
|
|||||||
Interest Income
|
||||||||
Interest on investment securities and cash
|
$
|
383
|
$
|
219
|
||||
Interest and fees on loans
|
5,036
|
4,215
|
||||||
Total interest income
|
5,419
|
4,434
|
||||||
Interest Expense
|
||||||||
Interest expense non-maturity deposits
|
188
|
131
|
||||||
Interest expense time deposits
|
733
|
509
|
||||||
Interest expense borrowed funds
|
58
|
60
|
||||||
Interest expense capital lease
|
3
|
4
|
||||||
Interest expense debt
|
2
|
-
|
||||||
Interest expense on subordinated debt
|
192
|
190
|
||||||
Total interest expense
|
1,176
|
894
|
||||||
Net interest income
|
4,243
|
3,540
|
||||||
Loan loss provision
|
75
|
340
|
||||||
Net interest income after loan loss provision
|
4,168
|
3,200
|
||||||
Noninterest income
|
||||||||
Overdraft fees on deposits
|
131
|
117
|
||||||
Interchange fee income, net
|
67
|
33
|
||||||
Service charges on deposits
|
18
|
16
|
||||||
Mortgage fee income
|
44
|
32
|
||||||
Customer service fees
|
14
|
13
|
||||||
ATM income
|
8
|
7
|
||||||
Bank-owned life insurance income
|
49
|
55
|
||||||
Unrealized gain on equity securities
|
35
|
-
|
||||||
Other income
|
8
|
9
|
||||||
Total noninterest income
|
374
|
282
|
||||||
Noninterest expense
|
||||||||
Salaries & benefits expense
|
1,799
|
1,762
|
||||||
Occupancy expense
|
193
|
212
|
||||||
Furniture, fixture & equipment expense
|
214
|
142
|
||||||
Data processing expense
|
198
|
201
|
||||||
Office supplies expense
|
1
|
16
|
||||||
Professional fees
|
105
|
91
|
||||||
Advertising and marketing
|
31
|
33
|
||||||
Insurance
|
83
|
77
|
||||||
Foreclosed asset expense, net
|
127
|
22
|
||||||
Loan expense
|
75
|
55
|
||||||
Stockholder expense
|
45
|
26
|
||||||
Directors fees and expenses
|
51
|
59
|
||||||
Telephone expense
|
101
|
76
|
||||||
Core deposit intangible amortization expense
|
9
|
12
|
||||||
Merger expenses
|
157
|
-
|
||||||
Other operating expense
|
138
|
177
|
||||||
Total noninterest expense
|
3,327
|
2,961
|
||||||
Pre-tax income
|
1,215
|
521
|
||||||
Income tax expense
|
300
|
170
|
||||||
Net income
|
$
|
915
|
$
|
351
|
||||
Earnings per share
|
||||||||
Basic earnings per common share
|
$
|
0.13
|
$
|
0.08
|
||||
Diluted earnings per common share
|
$
|
0.13
|
$
|
0.07
|
||||
Weighted average common shares outstanding
|
7,156,987
|
4,654,880
|
||||||
Diluted average common shares outstanding
|
7,243,875
|
4,740,660
|
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
(Dollars in thousands, except share and per share data)
2018
|
2017
|
|||||||
Interest Income
|
||||||||
Interest on investment securities and cash
|
$
|
984
|
$
|
686
|
||||
Interest on loans
|
14,460
|
12,091
|
||||||
Total interest income
|
15,444
|
12,777
|
||||||
Interest Expense
|
||||||||
Interest expense non-maturity deposits
|
500
|
311
|
||||||
Interest expense time deposits
|
2,043
|
1,515
|
||||||
Interest expense borrowed funds
|
248
|
156
|
||||||
Interest expense capital lease
|
10
|
13
|
||||||
Interest expense debt
|
16
|
-
|
||||||
Interest expense on subordinated debt
|
574
|
568
|
||||||
Total interest expense
|
3,391
|
2,563
|
||||||
Net interest income
|
12,053
|
10,214
|
||||||
Loan loss provision
|
415
|
555
|
||||||
Net interest income after loan loss provision
|
11,638
|
9,659
|
||||||
Noninterest income
|
||||||||
Overdraft fees on deposits
|
412
|
294
|
||||||
Interchange fee income, net
|
165
|
96
|
||||||
Service charges on deposits
|
49
|
41
|
||||||
Mortgage fee income
|
86
|
73
|
||||||
Customer service fees
|
43
|
40
|
||||||
ATM income
|
21
|
20
|
||||||
Bank-owned life insurance income
|
147
|
146
|
||||||
Unrealized gain on equity securities
|
123
|
-
|
||||||
Other income
|
24
|
22
|
||||||
Total noninterest income
|
1,070
|
732
|
||||||
Noninterest expense
|
||||||||
Salaries & benefits expense
|
5,496
|
5,279
|
||||||
Occupancy expense
|
607
|
636
|
||||||
Furniture, fixture & equipment expense
|
524
|
435
|
||||||
Data processing expense
|
588
|
738
|
||||||
Office supplies expense
|
42
|
59
|
||||||
Professional fees
|
328
|
333
|
||||||
Advertising and marketing
|
90
|
104
|
||||||
Insurance
|
269
|
223
|
||||||
Foreclosed asset expense, net
|
453
|
283
|
||||||
Loan expense
|
161
|
146
|
||||||
Stockholder expense
|
114
|
138
|
||||||
Directors fees and expenses
|
191
|
198
|
||||||
Telephone expense
|
241
|
222
|
||||||
Core deposit intangible amortization expense
|
26
|
35
|
||||||
Merger expenses
|
480
|
-
|
||||||
Other operating expense
|
433
|
436
|
||||||
Total noninterest expense
|
10,043
|
9,265
|
||||||
Pre-tax income
|
2,665
|
1,126
|
||||||
Income tax expense
|
659
|
368
|
||||||
Net income
|
$
|
2,006
|
$
|
758
|
||||
Earnings per share
|
||||||||
Basic earnings per common share
|
$
|
0.33
|
$
|
0.16
|
||||
Diluted earnings per common share
|
$
|
0.32
|
$
|
0.16
|
||||
Weighted average common shares outstanding
|
6,118,461
|
4,654,717
|
||||||
Diluted average common shares outstanding
|
6,211,670
|
4,732,557
|
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
(Dollars in thousands)
Three Months Ended September 30,
|
||||||||
2018
|
2017
|
|||||||
Net income
|
$
|
915
|
$
|
351
|
||||
Other comprehensive loss:
|
||||||||
Unrealized loss on investment securities:
|
||||||||
Unrealized holding losses arising during period
|
(208
|
)
|
(256
|
)
|
||||
Deferred income tax benefit
|
48
|
92
|
||||||
Total other comprehensive loss
|
(160
|
)
|
(164
|
)
|
||||
Total comprehensive income
|
$
|
755
|
$
|
187
|
See accompanying notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
Nine Months Ended September 30,
|
||||||||
2018
|
2017
|
|||||||
Net income
|
$
|
2,006
|
$
|
758
|
||||
Other comprehensive loss:
|
||||||||
Unrealized loss on investment securities:
|
||||||||
Unrealized holding losses arising during period
|
(812
|
)
|
(78
|
)
|
||||
Deferred income tax benefit
|
190
|
26
|
||||||
Total other comprehensive loss
|
(622
|
)
|
(52
|
)
|
||||
Total comprehensive income
|
$
|
1,384
|
$
|
706
|
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
(Dollars in thousands)
2018 Shares
Outstanding
|
September 30,
2018
|
2017 Shares
Outstanding
|
September 30,
2017
|
|||||||||||||
Common stock warrant
|
$
|
426
|
$
|
426
|
||||||||||||
Common stock, $2.50 par value
|
||||||||||||||||
Balance, beginning of year
|
4,657,880
|
$
|
11,645
|
4,650,808
|
$
|
11,627
|
||||||||||
Exercise of stock options
|
3,107
|
7
|
-
|
-
|
||||||||||||
Restricted stock vesting
|
-
|
-
|
3,334
|
8
|
||||||||||||
Sale of common stock
|
2,496,000
|
6,240
|
738
|
2
|
||||||||||||
Balance, end of period
|
7,156,987
|
$
|
17,892
|
4,654,880
|
$
|
11,637
|
||||||||||
Additional paid-in capital
|
||||||||||||||||
Balance, beginning of year
|
$
|
13,008
|
$
|
12,988
|
||||||||||||
Stock-based compensation
|
1
|
23
|
||||||||||||||
Exercise of stock options
|
8
|
1
|
||||||||||||||
Restricted stock vesting
|
-
|
(8
|
)
|
|||||||||||||
Sale of common stock
|
12,195
|
-
|
||||||||||||||
Balance, end of period
|
$
|
25,212
|
$
|
13,004
|
||||||||||||
Retained earnings
|
||||||||||||||||
Balance, beginning of year
|
$
|
4,772
|
$
|
4,241
|
||||||||||||
Net income
|
2,006
|
758
|
||||||||||||||
Reclassification of loss on equity securities
|
(443
|
)
|
-
|
|||||||||||||
Balance, end of period
|
$
|
6,335
|
$
|
4,999
|
||||||||||||
Accumulated other comprehensive loss
|
||||||||||||||||
Balance, beginning of year
|
$
|
(732
|
)
|
$
|
(249
|
)
|
||||||||||
Reclassification of loss on equity securities
|
443
|
-
|
||||||||||||||
Other comprehensive loss
|
(622
|
)
|
(52
|
)
|
||||||||||||
Balance, end of period
|
$
|
(911
|
)
|
$
|
(301
|
)
|
||||||||||
Total stockholders’ equity
|
$
|
48,954
|
$
|
29,765
|
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
(Dollars in thousands)
Nine Months Ended September 30,
|
||||||||
2018
|
2017
|
|||||||
Cash flows from operating activities
|
||||||||
Net income
|
$
|
2,006
|
$
|
758
|
||||
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:
|
||||||||
Provision for loan losses
|
415
|
555
|
||||||
Depreciation and amortization of bank premises, equipment and software
|
346
|
327
|
||||||
Accretion of loan fair value adjustments related to acquisition
|
(5
|
)
|
(6
|
)
|
||||
Net amortization of bond premiums/discounts
|
104
|
112
|
||||||
Amortization of long term subordinated debt issuance costs
|
57
|
53
|
||||||
Unrealized gain on equity securities
|
(123
|
)
|
-
|
|||||
Amortization of core deposit intangible
|
26
|
35
|
||||||
Stock compensation expense
|
1
|
23
|
||||||
Increase in value of life insurance contracts
|
(147
|
)
|
(146
|
)
|
||||
Net losses and impairment write-downs on foreclosed assets
|
295
|
217
|
||||||
Deferred tax provision
|
27
|
685
|
||||||
Increase in other assets
|
(17
|
)
|
(56
|
)
|
||||
Increase in accrued interest receivable
|
(132
|
)
|
(30
|
)
|
||||
Increase in accrued interest payable
|
286
|
163
|
||||||
Increase (decrease) in other liabilities
|
80
|
(419
|
)
|
|||||
Net cash and cash equivalents provided by operating activities
|
3,219
|
2,271
|
||||||
Cash flows from investing activities
|
||||||||
Net increase in loans
|
(33,769
|
)
|
(32,262
|
)
|
||||
Proceeds from sale of foreclosed assets
|
330
|
523
|
||||||
Net purchases of bank premises, equipment and software
|
(34
|
)
|
(472
|
)
|
||||
Purchase of Bank owned life insurance
|
-
|
(5,500
|
)
|
|||||
Purchase of available-for-sale securities
|
(3,034
|
)
|
(4,832
|
)
|
||||
Proceeds from maturities, calls and pay-downs of available-for-sale securities
|
2,612
|
3,371
|
||||||
Redemptions (purchases) of Federal Home Loan Bank stock
|
291
|
(249
|
)
|
|||||
Net cash and cash equivalents used in investing activities
|
(33,604
|
)
|
(39,421
|
)
|
||||
Cash flows from financing activities
|
||||||||
Net increase in deposits
|
45,844
|
18,923
|
||||||
Increase (decrease) in Federal Home Loan Bank advances
|
(7,500
|
)
|
6,000
|
|||||
Payment of capital lease obligation
|
(49
|
)
|
(46
|
)
|
||||
Issuance of long term debt
|
3,000
|
-
|
||||||
Repayment of long term debt
|
(3,000
|
)
|
-
|
|||||
Net proceeds from issuance of common stock
|
18,450
|
3
|
||||||
Net cash and cash equivalents provided by financing activities
|
56,745
|
24,880
|
||||||
Net increase (decrease) in cash and cash equivalents
|
26,360
|
(12,270
|
)
|
|||||
Cash and cash equivalents, beginning
|
9,056
|
26,149
|
||||||
Cash and cash equivalents, ending
|
$
|
35,416
|
$
|
13,879
|
||||
Supplemental disclosure of cash flow information
|
||||||||
Cash paid during the period for taxes
|
$
|
631
|
$
|
15
|
||||
Cash paid during the period for interest
|
$
|
3,105
|
$
|
2,400
|
||||
Noncash financing and investing activities
|
||||||||
Unrealized loss on investment securities available-for-sale, net of taxes
|
$
|
(622
|
)
|
$
|
(52
|
)
|
||
Transfer of loans to foreclosed assets
|
$
|
(1,618
|
)
|
$
|
(196
|
)
|
See accompanying notes to Condensed Consolidated Financial Statements.
(1)
|
Presentation of Financial Statements
|
The consolidated financial statements include the accounts of Carolina Trust BancShares, Inc. (the “Company”), its subsidiary, Carolina
Trust Bank (the “Bank”), and the Bank’s wholly owned subsidiary, Western Carolina Holdings, LLC, which owns certain Bank assets. All significant intercompany balances and transactions have been eliminated in consolidation. On August 16, 2016, the
Company announced that it had consummated a statutory share exchange pursuant to which it became the parent company of the Bank. Shares of the Bank’s common stock were exchanged for shares of the Company’s common stock at a one-for-one exchange
rate. The Company is a North Carolina business corporation that is operating as a registered bank holding company under the Bank Holding Company Act of 1956. The Bank is the only subsidiary of the Company.
In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring
adjustments) necessary for fair presentation of the financial information as of September 30, 2018, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended
September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.
Information regarding the organization and business of the Company, accounting policies followed by the Company and other information
are contained in the notes to the consolidated financial statements filed as part of the Company’s 2017 Annual Report on Form 10-K. This quarterly report should be read in conjunction with the Annual Report.
(2)
|
Recent Accounting Pronouncements
|
In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments - Overall, Subtopic 825-10 (“ASU 2016-01”) to address certain aspects of recognition, measurement, presentation, and disclosure of
financial instruments. The fair value measurement based on an exit price assumes that an asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date
under current market conditions. A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability, or (2) in the absence of a principal
market, in the most advantageous market for the asset or liability. The company has adopted the standard and applied the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the 2018 fiscal year. The
amendments related to equity securities without readily determinable fair values were applied prospectively to equity investments that existed as of January 1, 2018. The Company is now reporting unrealized gains and losses of its marketable
equity securities in income as compared to the previous method of reporting through other comprehensive income. The nonmarketable equity securities that do not have readily determinable values were previously recorded at cost. Following
implementation, these securities, primarily Federal Home Loan Bank, or FHLB, stock, are recorded at cost less any impairment, plus or minus any observable changes in price resulting from transactions for similar or identical investments of the
same issuer. The unrealized loss on equity securities in accumulated other comprehensive income in the amount of $443,000 was reclassified to retained earnings on January 1, 2018.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers, Topic 606 (“ASU 2014-09”). The new standard’s
core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In
doing so, companies need to use more judgment and make more estimates than under existing guidance. This analysis may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the
transaction price and allocating the transaction price to each separate performance obligation. As a result of the deferral, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within
that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company
adopted this standard in 2018 using the full retrospective approach. The majority of the Company’s revenues are generated from financial instruments which are not within the scope of this standard. Management has evaluated the impact for its
various other revenue streams including the following: deposit account fees and service charges; other fees such as wire services and check cashing services; ATM surcharges; card related fees; and gains and losses from sales of foreclosed
properties and fixed assets. This evaluation led management to conclude that this standard does not materially impact its financial statements. Additionally, based on underlying contracts, this standard requires the Company to report costs
associated with debit card and ATM transactions netted against the related fees from such transactions. Previously, such costs were reported as check card expenses. For the three and nine months ended September 30, 2018, gross interchange fees
totaled $145,000 and $397,000, respectively, and related costs totaled $78,000 and $232,000, respectively. In the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018, we reported on
a net basis $67,000 and $165,000, respectively, as interchange fee income. For the three and nine months ended September 30, 2017, gross interchange fees totaled $118,000 and $361,000, respectively, and related costs totaled $85,000 and $265,000,
respectively. In the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017, we reported on a net basis $33,000 and $96,000, respectively, as interchange fee income.
In February 2016, the FASB issued ASU 2016-02, Leases,
which amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after
December 15, 2018, includ-ing interim periods within those fiscal years. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. Currently
the Company has several multi-year property leases for which reporting will be impacted by this standard. At the end of 2017, four of our locations have operating leases that expire in 2019 with aggregate payments totaling $157,000. If the new
standard were in effect, an asset and a liability for the present value of payments would be recognized. Similarly, other property leases expire in 2020 and 2021 that have payments totaling $126,000 and $159,000, respectively.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
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 August 2018, the FASB issued ASU 2018-13, Fair
Value Measurement (Topic 820) – Changes to the Disclosure Requirements for Fair Value Measurement. These amendments remove the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value
measurement methodologies, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in
other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable
inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop
Level 3 fair value measurements. ASU 2018-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact this standard will
have on its disclosures.
Other accounting standards that have been issued by the FASB or other standards-setting bodies are not expected to have a material
impact on the Company’s financial position, results of operations or cash flows.
(3)
|
Earnings Per Share
|
Basic Earnings per Common Share
Basic earnings per common share is computed by dividing net income to common stockholders by the weighted average number of common
shares outstanding during the period, after giving retroactive effect to stock splits and dividends.
Diluted Earnings per Common Share
The computation of diluted earnings per common share is similar to the computation of basic earnings per common share except that the
denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. These additional common shares would include employee equity share options, nonvested
shares and similar equity instruments granted to employees, as well as the shares associated with the common stock warrants issued to the U.S. Treasury Department as part of the preferred stock transaction completed in February 2009. Diluted earnings per common share are based upon the actual number of options
or shares granted and not yet forfeited unless doing so would be antidilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
In June 2013, the U.S. Treasury sold the warrant to private investors in a Dutch auction process. Following the reorganization of the
Bank into the Company, the right to acquire up to 86,957 shares of Bank common stock at a price of $6.90 per share was converted to the right to purchase the same number of shares of the Company’s common stock. The warrant book value, $426,000 is
recognized as the Company’s stockholders’ equity. The warrant expires February 6, 2019.
The following table summarizes earnings per share and the shares utilized in the computations for the three and nine months ended
September 30, 2018 and 2017, respectively:
Dollars in thousands, except per share data
|
Net Income
Available to
Common
Shareholders
|
Weighted
Average
Common
Shares
|
Per Share
Amount
|
|||||||||
Three months ended September 30, 2018
|
||||||||||||
Basic earnings per common share
|
$
|
915
|
7,156,987
|
$
|
0.13
|
|||||||
Effect of dilutive stock options
|
72,609
|
|||||||||||
Effect of dilutive stock warrants
|
14,279
|
|||||||||||
Diluted earnings per common share
|
$
|
915
|
7,243,875
|
$
|
0.13
|
|||||||
Three months ended September 30, 2017
|
||||||||||||
Basic earnings per common share
|
$
|
351
|
4,654,880
|
$
|
0.08
|
|||||||
Effect of dilutive stock options
|
73,545
|
|||||||||||
Effect of dilutive stock warrants
|
12,235
|
|||||||||||
Diluted earnings per common share
|
$
|
351
|
4,740,660
|
$
|
0.07
|
Net Income
Available to
Common
Shareholders
|
Weighted
Average
Common
Shares
|
Per Share
Amount
|
||||||||||
Dollars in thousands, except per share data
|
||||||||||||
Nine months ended September 30, 2018
|
||||||||||||
Basic earnings per common share
|
$
|
2,006
|
6,118,461
|
$
|
0.33
|
|||||||
Effect of dilutive stock options
|
75,598
|
|||||||||||
Effect of dilutive stock warrants
|
17,611
|
|||||||||||
Diluted earnings per common share
|
$
|
2,006
|
6,211,670
|
$
|
0.32
|
|||||||
Nine months ended September 30, 2017
|
||||||||||||
Basic earnings per common share
|
$
|
758
|
4,654,717
|
$
|
0.16
|
|||||||
Effect of dilutive stock options
|
69,168
|
|||||||||||
Effect of dilutive stock warrants
|
8,672
|
|||||||||||
Diluted earnings per common share
|
$
|
758
|
4,732,557
|
$
|
0.16
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
For the three and nine months ended September 30, 2018, there were no shares that were anti-dilutive. For the three and nine months
ended September 30, 2017, there were 35,981 shares related to stock options that were anti-dilutive because the exercise price exceeded the average market price for the period. Therefore, they were omitted from the calculation of diluted earnings
per share for their respective periods.
(4)
|
Fair Value Measurements
|
The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the
balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at each reporting date, based on relevant market information and information about the financial instruments. Fair value estimates are intended
to represent the price an asset could be sold at or the price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made
estimates of many of these fair values which are subjective in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated
values. The methodologies for financial assets and financial liabilities are discussed below:
Cash and Due from Banks and Interest-Earning Deposits with Banks
The carrying amounts for cash and due from banks and interest-earning deposits with banks approximate fair value because of the short
maturities of those instruments.
Certificates of Deposit with Banks
The fair value of certificates of deposit with banks is estimated by discounting expected cash flows using the rates currently offered
for instruments of similar remaining maturities.
Investment and Equity Securities
Fair value for investment and equity securities equals the quoted market price if such information is available. If a quoted market
price is not available in active markets for identical securities (level 1), fair value may be estimated using observable inputs such as quoted prices for similar securities, interest rates and yield curves, implied volatilities and credit spreads
(level 2). Otherwise, unobservable inputs such as independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating on similar securities, prepayment
assumptions and other factors such as credit loss assumptions (level 3). The fair value would be based on an exit price between market participants that may include adjustments for liquidity and credit.
Loans
The fair value of loans is estimated based on exit price. These cash flows include assumptions for prepayment estimates over each loan’s
remaining life, considerations for the current interest rate environment compared to the weighted average rate of each portfolio and a credit risk component based on the historical and expected performance of each portfolio. The calculation also
includes market liquidity and credit adjustments. These valuations are not comparable with the fair values disclosed for December 31, 2017 which were based on an entrance price basis.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
Accrued Interest Receivable and Payable
The carrying amount is a reasonable estimate of fair value.
Deposits
The fair value of demand deposits, savings, money market and negotiable order of withdrawal (NOW) accounts is the amount payable on
demand at the reporting date. The fair value of time deposits is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities.
Capital Lease Obligation, Federal Home Loan Bank Advances and Long Term Subordinated Debt
The fair value of borrowings is based upon discounted expected cash flows using current rates at which borrowings of similar maturity
could be obtained.
Financial Instruments with Off-Balance Sheet Risk
With regard to commitments to extend credit discussed in Note 9, the fair value amounts are not material.
The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are
as follows at September 30, 2018 and December 31, 2017:
Fair Value Measurements at September 30, 2018 using
|
||||||||||||||||||||
Quoted Prices in
Active Markets for
Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
||||||||||||||||||
Dollars in thousands
|
Carrying
Value
|
Level 1
|
Level 2
|
Level 3
|
Total Fair
Value
|
|||||||||||||||
ASSETS
|
||||||||||||||||||||
Cash and due from banks
|
$
|
9,000
|
$
|
9,000
|
$
|
-
|
$
|
-
|
$
|
9,000
|
||||||||||
Interest-earning deposits with banks
|
26,416
|
26,416
|
-
|
-
|
26,416
|
|||||||||||||||
Certificates of deposit with banks
|
1,498
|
-
|
1,474
|
-
|
1,474
|
|||||||||||||||
Federal Home Loan Bank stock
|
1,050
|
-
|
1,050
|
-
|
1,050
|
|||||||||||||||
Investment securities available-for-sale
|
29,992
|
-
|
29,992
|
-
|
29,992
|
|||||||||||||||
Equity securities
|
749
|
749
|
-
|
-
|
749
|
|||||||||||||||
Net loans
|
376,821
|
-
|
-
|
365,056
|
365,056
|
|||||||||||||||
Accrued interest receivable
|
1,210
|
-
|
1,210
|
-
|
1,210
|
|||||||||||||||
LIABILITIES
|
||||||||||||||||||||
Deposits
|
$
|
386,497
|
$
|
-
|
$
|
375,220
|
$
|
-
|
$
|
375,220
|
||||||||||
Capital lease obligation
|
158
|
-
|
158
|
-
|
158
|
|||||||||||||||
Federal Home Loan Bank advances
|
16,100
|
-
|
16,008
|
-
|
16,008
|
|||||||||||||||
Long term subordinated debt
|
9,733
|
-
|
9,716
|
-
|
9,716
|
|||||||||||||||
Accrued interest payable
|
578
|
-
|
578
|
-
|
578
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
Fair Value Measurements at December 31, 2017 using
|
||||||||||||||||||||
|
Quoted Prices in
Active Markets for
Identical Assets
|
Significant
Other
Observable
Inputs
|
Significant
Unobservable
Inputs
|
|||||||||||||||||
Dollars in thousands
|
Carrying
Value
|
Level 1
|
Level 2
|
Level 3
|
Total Fair
Value
|
|||||||||||||||
ASSETS
|
||||||||||||||||||||
Cash and due from banks
|
$
|
5,409
|
$
|
5,409
|
$
|
-
|
$
|
-
|
$
|
5,409
|
||||||||||
Interest-earning deposits with banks
|
3,647
|
3,647
|
-
|
-
|
3,647
|
|||||||||||||||
Certificates of deposit with banks
|
1,498
|
-
|
1,519
|
-
|
1,519
|
|||||||||||||||
Federal Home Loan Bank stock
|
1,341
|
-
|
1,341
|
-
|
1,341
|
|||||||||||||||
Investment securities available-for-sale
|
31,112
|
626
|
30,486
|
-
|
31,112
|
|||||||||||||||
Net loans
|
345,080
|
-
|
-
|
345,370
|
345,370
|
|||||||||||||||
Accrued interest receivable
|
1,078
|
-
|
1,078
|
-
|
1,078
|
|||||||||||||||
LIABILITIES
|
||||||||||||||||||||
Deposits
|
$
|
340,653
|
$
|
-
|
$
|
330,672
|
$
|
-
|
$
|
330,672
|
||||||||||
Capital lease obligation
|
207
|
-
|
207
|
-
|
207
|
|||||||||||||||
Federal Home Loan Bank advances
|
23,600
|
-
|
23,495
|
-
|
23,495
|
|||||||||||||||
Long term subordinated debt
|
9,676
|
-
|
9,619
|
-
|
9,619
|
|||||||||||||||
Accrued interest payable
|
292
|
-
|
292
|
-
|
292
|
The Company utilizes fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair
value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis. These nonrecurring fair
value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.
Fair Value Hierarchy
The Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are
traded and the reliability of the assumptions used to determine fair value.
Level 1 |
Valuation based upon quoted prices for identical instruments traded in active markets.
|
Level 2 |
Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and
model-based valuation techniques for which all significant assumptions are observable in the market.
|
Level 3 |
Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect
estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.
Investment Securities Available-for-Sale and Equity Securities
Investment securities available-for-sale and equity securities are recorded at fair value on a recurring basis. Fair value measurement
is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the
security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by
dealers or brokers in an active over-the-counter market. Level 2 securities include U.S. government agency securities, mortgage-backed securities issued by government-sponsored enterprises and municipal bonds. There have been no changes in
valuation techniques during 2018. Valuation techniques are consistent with techniques used in prior periods.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The table below presents the recorded amount of assets and liabilities measured on a recurring basis.
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Dollars in thousands
|
||||||||||||||||
September 30, 2018
|
||||||||||||||||
Available-for-Sale Securities
|
||||||||||||||||
U.S. Government and federal agency
|
$
|
10,612
|
$
|
-
|
$
|
10,612
|
$
|
-
|
||||||||
Mortgage-backed securities*
|
19,095
|
-
|
19,095
|
-
|
||||||||||||
Municipal securities
|
285
|
-
|
285
|
-
|
||||||||||||
Total available-for-sale securities
|
|
29,992
|
|
-
|
|
29,992
|
|
-
|
||||||||
Equity securities
|
749
|
749
|
-
|
-
|
||||||||||||
Total
|
$
|
30,741
|
$
|
749
|
$
|
29,992
|
$
|
-
|
||||||||
December 31, 2017
|
||||||||||||||||
U.S. Government and federal agency
|
$
|
11,276
|
$
|
-
|
$
|
11,276
|
$
|
-
|
||||||||
Mortgage-backed securities*
|
18,915
|
-
|
18,915
|
-
|
||||||||||||
Municipal securities
|
295
|
-
|
295
|
-
|
||||||||||||
Equity securities
|
626
|
626
|
-
|
-
|
||||||||||||
Total
|
$
|
31,112
|
$
|
626
|
$
|
30,486
|
$
|
-
|
*All of the Company’s mortgage-backed securities are issued either by the U.S. Government, which includes GNMA pools, or by government-sponsored
enterprises such as FNMA and FHLMC.
The Company did not have any transfers of assets between Levels 1, 2 or 3 during the periods ended September 30, 2018 and
December 31, 2017.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
Impaired Loans
The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an
allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as
individually impaired, management measures it for impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, a loan’s observable market price and discounted cash flows. Those impaired loans
not requiring an allowance represent loans for which the fair value exceeds the recorded investments in such loans. At September 30, 2018, the discounted cash flows method was used in determining the fair value of nine loans totaling $1.7 million
and the fair value of the collateral method was used in the other twenty-three loans totaling $2.5 million. At December 31, 2017, the discounted cash flows method was used in determining the fair value of nine loans totaling $1.9 million and the
fair value of the collateral method was used in the other twenty-nine loans totaling $4.2 million. Impaired loans where an allowance is established based on the fair value of collateral and also when written down with the discounted cash flow
method require classification in the fair value hierarchy. The fair value of the collateral for an impaired loan is classified as Level 3. Although appraisals of these properties are frequently based on comparable properties, they are not
identical. Significant unobservable inputs will need to be used in assessing the value. When the discounted cash flows method is used, the Company records the impaired loan as nonrecurring Level 3. There have been no changes in valuation
techniques for the period ended September 30, 2018. Valuation techniques are consistent with techniques used in prior periods.
The following table presents impaired loans that were re-measured and reported at fair value through a specific
valuation allowance allocation of the allowance for loan losses and a write-down based upon the fair value of the underlying collateral or discounted cash flows during the nine months ended September 30, 2018 and 2017.
September 30, 2018
|
September 30, 2017
|
|||||||||||||||
Dollars in thousands
|
Level 2
|
Level 3
|
Level 2
|
Level 3
|
||||||||||||
Carrying value of impaired loans before allocations
|
$
|
-
|
$
|
1,354
|
-
|
$
|
1,812
|
|||||||||
Specific valuation allowance allocations
|
-
|
(233
|
)
|
-
|
(251
|
)
|
||||||||||
Carrying value of impaired loans after allocations
|
$
|
-
|
$
|
1,121
|
-
|
$
|
1,561
|
Foreclosed Assets
Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently,
foreclosed assets are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. The fair value of
foreclosed assets are classified as Level 3. Although appraisals of these properties are frequently based on comparable properties, they are not identical. Significant unobservable inputs will need to be used in assessing the value.
The carrying value of foreclosed assets is periodically reviewed and written down to fair value. Any loss is included
in earnings. For the three months ended September 30, 2018, there were no assets that were written down prior to foreclosure. For the nine months ended September 30, 2018, foreclosed assets in the amount of $1,158,000 were written down by $180,000
to $978,000 prior to foreclosure. For the three months ended September 30, 2018, foreclosed assets with a carrying value of $640,000 were written down by $53,000 to $587,000 subsequent to foreclosure and for the nine months ended September 30,
2018, $1,618,000 were written down by $301,000 to $1,317,000 subsequent to foreclosure. For the three and nine months ended September 30, 2017, there were no assets written down subsequent to foreclosure.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
Assets measured at fair value on a nonrecurring basis are included in the table below.
Total
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
Dollars in thousands
|
||||||||||||||||
September 30, 2018
|
||||||||||||||||
Foreclosed assets
|
$
|
1,317
|
$
|
-
|
$
|
-
|
$
|
1,317
|
||||||||
Impaired loans
|
1,121
|
-
|
-
|
1,121
|
||||||||||||
Total
|
$
|
2,438
|
$
|
-
|
$
|
-
|
$
|
2,438
|
||||||||
December 31, 2017
|
||||||||||||||||
Foreclosed assets
|
$
|
324
|
$
|
-
|
$
|
-
|
$
|
324
|
||||||||
Impaired loans
|
1,621
|
-
|
-
|
1,621
|
||||||||||||
Total
|
$
|
1,945
|
$
|
-
|
$
|
-
|
$
|
1,945
|
Quantitative Information About Level 3 Fair Value Measurements:
Fair
Value
|
Valuation
Technique
|
Unobservable
Input
|
Range
|
Weighted
Average
|
|||||||||||
Dollars in thousands
|
|||||||||||||||
September 30, 2018
|
|||||||||||||||
Impaired loans
|
$
|
1,121
|
Discounted cash flows
|
Discount rate
|
4.75% - 8.50
|
%
|
7.18
|
%
|
|||||||
Foreclosed assets
|
1,317
|
Discounted appraisals
|
Appraisal adjustments
|
6.00% -8.00
|
%
|
7.12
|
%
|
||||||||
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
|
%
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
(5)
|
Investment Securities
|
The amortized cost and fair value of available-for-sale securities, with gross unrealized gains and losses, is as follows:
In thousands
|
Amortized
Cost
|
Unrealized
Gains
|
Unrealized
Losses
|
Fair
Value
|
||||||||||||
September 30, 2018
|
||||||||||||||||
U.S. Government and federal agency
|
$
|
11,076
|
$
|
4
|
$
|
(468
|
)
|
$
|
10,612
|
|||||||
Mortgage-backed securities *
|
19,811
|
15
|
(731
|
)
|
19,095
|
|||||||||||
Municipal securities
|
293
|
-
|
(8
|
)
|
285
|
|||||||||||
$
|
31,180
|
$
|
19
|
$
|
(1,207
|
)
|
$
|
29,992
|
||||||||
December 31, 2017
|
||||||||||||||||
U.S. Government and federal agency
|
$
|
11,424
|
$
|
11
|
$
|
(159
|
)
|
$
|
11,276
|
|||||||
Mortgage-backed securities *
|
19,142
|
61
|
(288
|
)
|
18,915
|
|||||||||||
Municipal securities
|
297
|
-
|
(2
|
)
|
295
|
|||||||||||
Equity securities
|
1,204
|
-
|
(578
|
)
|
626
|
|||||||||||
$
|
32,067
|
$
|
72
|
$
|
(1,027
|
)
|
$
|
31,112
|
*All mortgage-backed securities are issued either by the U.S. Government through GNMA or by government sponsored enterprises FNMA or FHLMC.
The amortized cost and fair values of securities available-for-sale at September 30, 2018 by contractual maturity are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
Cost
|
Fair Value
|
|||||||
Dollars in thousands
|
||||||||
Due within one year
|
$
|
-
|
$
|
-
|
||||
Due after one but within five years
|
8,351
|
8,043
|
||||||
Due after five but within ten years
|
6,740
|
6,439
|
||||||
Due after ten years
|
16,089
|
15,510
|
||||||
$
|
31,180
|
$
|
29,992
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
The following table details unrealized losses and related fair values in the Company’s investment security portfolio. This information is aggregated by the length of
time that individual securities have been in a continuous unrealized loss position as of September 30, 2018 and December 31, 2017, respectively.
Temporarily Impaired Securities in Available-for-Sale Portfolio
|
||||||||||||||||||||||||
Less than 12 Months
|
Greater than 12 Months
|
Total
|
||||||||||||||||||||||
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
Dollars in thousands
|
||||||||||||||||||||||||
September 30, 2018
|
||||||||||||||||||||||||
Available for sale securities
|
||||||||||||||||||||||||
U.S. Government and federal agency
|
$
|
1,917
|
$
|
(73
|
)
|
$
|
8,554
|
$
|
(395
|
)
|
$
|
10,471
|
$
|
(468
|
)
|
|||||||||
Mortgage-backed securities *
|
5,567
|
(89
|
)
|
11,892
|
(642
|
)
|
17,459
|
(731
|
)
|
|||||||||||||||
Municipal Securities
|
-
|
-
|
285
|
(8
|
)
|
285
|
(8
|
)
|
||||||||||||||||
Total temporarily impaired securities
|
$
|
7,484
|
$
|
(162
|
)
|
$
|
20,731
|
$
|
(1,045
|
)
|
$
|
28,215
|
$
|
(1,207
|
)
|
|||||||||
December 31, 2017
|
||||||||||||||||||||||||
U.S. Government and federal agency
|
$
|
7,101
|
$
|
(88
|
)
|
$
|
2,008
|
$
|
(71
|
)
|
$
|
9,109
|
$
|
(159
|
)
|
|||||||||
Mortgage-backed securities *
|
5,472
|
(38
|
)
|
10,560
|
(250
|
)
|
16,032
|
(288
|
)
|
|||||||||||||||
Municipal securities
|
295
|
(2
|
)
|
-
|
-
|
295
|
(2
|
)
|
||||||||||||||||
Equity securities
|
626
|
(577
|
)
|
-
|
(1
|
)
|
626
|
(578
|
)
|
|||||||||||||||
Total temporarily impaired securities
|
$
|
13,494
|
$
|
(705
|
)
|
$
|
12,568
|
$
|
(322
|
)
|
$
|
26,062
|
$
|
(1,027
|
)
|
*All mortgage-backed securities are issued either by the U.S. Government through GNMA or by government-sponsored enterprises FNMA or FHLMC.
Management considers the nature of the investment, the underlying causes of the decline in the market value and the severity and duration of the decline
in market value in determining if impairment is other than temporary. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the
issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of September 30, 2018, management believes that it is more likely
than not that the Company will not have to sell any such securities before a recovery of cost. The unrealized losses on debt securities are largely due to increases in market interest rates over the yields available at the time the underlying
securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or re-pricing date or if market yields for such investments decline. Management analyzed the issuer data from public filings, reviewed
transcripts of earnings discussions, and assessed whether the decline in value was other than temporary.
Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality for the debt securities. Accordingly,
as of September 30, 2018, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s net income.
Securities with a fair value of $926,000 at September 30, 2018 were pledged to secure public funds. The Company had no sales of securities during the
three and nine month periods ended September 30, 2018 and September 30, 2017.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
(6)
|
Loans
|
The following is a summary of loans at September 30, 2018 and December 31, 2017:
September 30, 2018
|
December 31, 2017
|
|||||||||||||||
Dollars in thousands
|
Amount
|
Percent of
Total
|
Amount
|
Percent of
Total
|
||||||||||||
Commercial real estate
|
||||||||||||||||
Residential ADC
|
$
|
4,610
|
1.21
|
%
|
$
|
7,242
|
2.08
|
%
|
||||||||
Commercial ADC
|
23,293
|
6.12
|
%
|
24,364
|
6.99
|
%
|
||||||||||
Farmland
|
5,322
|
1.40
|
%
|
5,392
|
1.55
|
%
|
||||||||||
Multifamily
|
16,099
|
4.23
|
%
|
11,967
|
3.43
|
%
|
||||||||||
Owner occupied
|
97,982
|
25.73
|
%
|
84,808
|
24.32
|
%
|
||||||||||
Non-owner occupied
|
94,769
|
24.89
|
%
|
79,549
|
22.81
|
%
|
||||||||||
Total commercial real estate
|
242,075
|
63.58
|
%
|
213,322
|
61.18
|
%
|
||||||||||
Commercial
|
||||||||||||||||
Commercial and industrial
|
46,767
|
12.28
|
%
|
47,032
|
13.49
|
%
|
||||||||||
Agriculture
|
296
|
0.08
|
%
|
415
|
0.12
|
%
|
||||||||||
Other
|
1,603
|
0.42
|
%
|
1,420
|
0.40
|
%
|
||||||||||
Total commercial
|
48,666
|
12.78
|
%
|
48,867
|
14.01
|
%
|
||||||||||
Residential mortgage
|
||||||||||||||||
First lien, closed-end
|
51,240
|
13.46
|
%
|
47,936
|
13.75
|
%
|
||||||||||
Junior lien, closed-end
|
703
|
0.18
|
%
|
1,123
|
0.32
|
%
|
||||||||||
Total residential mortgage
|
51,943
|
13.64
|
%
|
49,059
|
14.07
|
%
|
||||||||||
Home equity lines
|
34,110
|
8.96
|
%
|
33,672
|
9.66
|
%
|
||||||||||
Consumer – other
|
3,952
|
1.04
|
%
|
3,759
|
1.08
|
%
|
||||||||||
Total loans
|
$
|
380,746
|
100.00
|
%
|
$
|
348,679
|
100.00
|
%
|
Loans are primarily originated for customers residing in Lincoln, Gaston, Rutherford, Catawba, Iredell, and Rowan Counties in North Carolina. Real estate
loans can be affected by the condition of the local real estate market. Commercial and industrial loans can be affected by the local economic conditions.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
Non-Accrual and Past Due Loans
Non-accrual loans, segregated by category, were as follows:
September 30,
2018
|
December 31,
2017
|
|||||||
Dollars in thousands
|
||||||||
Commercial real estate
|
||||||||
Commercial ADC
|
$
|
3
|
$
|
5
|
||||
Owner occupied
|
944
|
2,031
|
||||||
Non-owner occupied
|
5
|
28
|
||||||
Total commercial real estate
|
952
|
2,064
|
||||||
Commercial
|
||||||||
Commercial and industrial
|
-
|
25
|
||||||
Total commercial
|
-
|
25
|
||||||
Residential mortgage:
|
||||||||
First lien, closed end
|
62
|
86
|
||||||
Junior lien, closed end
|
5
|
455
|
||||||
Total residential mortgage
|
67
|
541
|
||||||
Home equity lines
|
29
|
34
|
||||||
Consumer – other
|
9
|
-
|
||||||
Total non-accrual loans
|
$
|
1,057
|
$
|
2,664
|
Interest foregone on non-accrual loans was approximately $22,000 and $59,000 for the three and nine months ended September 30, 2018 and $48,000 and
$85,000 for the three and nine months ended September 30, 2017.
An analysis of past due loans, segregated by class, was as follows:
In thousands
|
Loans
30-89
Days
Past Due
|
Loans
90 or more
Days
Past Due
|
Total Past
Due Loans |
Current
Loans |
Total
Loans |
Accruing
Loans 90
or More
Days
Past Due
|
||||||||||||||||||
September 30, 2018
|
||||||||||||||||||||||||
Commercial real estate:
|
||||||||||||||||||||||||
Residential ADC
|
$
|
-
|
$
|
-
|
$
|
-
|
|
$
|
4,610
|
$
|
4,610
|
|
$
|
-
|
||||||||||
Commercial ADC
|
41
|
-
|
41
|
23,252
|
23,293
|
-
|
||||||||||||||||||
Farmland
|
-
|
-
|
-
|
5,322
|
5,322
|
-
|
||||||||||||||||||
Multifamily
|
-
|
-
|
-
|
16,099
|
16,099
|
-
|
||||||||||||||||||
Owner occupied
|
329
|
938
|
1,267
|
96,715
|
97,982
|
-
|
||||||||||||||||||
Non-owner occupied
|
5
|
-
|
5
|
94,764
|
94,769
|
-
|
||||||||||||||||||
Total commercial real estate
|
375
|
938
|
1,313
|
240,762
|
242,075
|
-
|
||||||||||||||||||
Commercial:
|
||||||||||||||||||||||||
Commercial and industrial
|
128
|
-
|
128
|
46,639
|
46,767
|
-
|
||||||||||||||||||
Agriculture
|
-
|
-
|
-
|
296
|
296
|
-
|
||||||||||||||||||
Other
|
-
|
-
|
-
|
1,603
|
1,603
|
-
|
||||||||||||||||||
Total commercial
|
128
|
-
|
128
|
48,538
|
48,666
|
-
|
||||||||||||||||||
Residential mortgage:
|
||||||||||||||||||||||||
First lien, closed end
|
161
|
37
|
198
|
51,042
|
51,240
|
-
|
||||||||||||||||||
Junior lien, closed-end
|
-
|
-
|
-
|
703
|
703
|
-
|
||||||||||||||||||
Total residential mortgage
|
161
|
37
|
198
|
51,745
|
51,943
|
-
|
||||||||||||||||||
Home equity lines
|
86
|
86
|
34,024
|
34,110
|
-
|
|||||||||||||||||||
Consumer – other
|
10
|
7
|
17
|
3,935
|
3,952
|
-
|
||||||||||||||||||
Total loans
|
$
|
760
|
$
|
982
|
$
|
1,742
|
|
$
|
379,004
|
$
|
380,746
|
|
$
|
-
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
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
|
At September 30, 2018 there were no loans past due 90 days or more, which were still accruing interest. There were two loans totaling $82,000 past due
90 days or more and still accruing interest at December 31, 2017.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
Impaired loans
Impaired loans are set forth in the following tables.
September 30, 2018
|
||||||||||||||||
In thousands
|
Unpaid
Contractual
Principal
Balance
|
Recorded
Investment
With No
Allowance
|
Recorded
Investment
With
Allowance
|
Related
Allowance
|
||||||||||||
Commercial real estate
|
||||||||||||||||
Commercial ADC
|
$
|
4
|
$
|
4
|
$
|
-
|
$
|
-
|
||||||||
Owner occupied
|
2,441
|
2,441
|
-
|
-
|
||||||||||||
Non-owner occupied
|
5
|
5
|
-
|
-
|
||||||||||||
Total commercial real estate
|
2,450
|
2,450
|
-
|
-
|
||||||||||||
Commercial
|
||||||||||||||||
Commercial and industrial
|
648
|
278
|
370
|
103
|
||||||||||||
Residential mortgage
|
||||||||||||||||
First lien, closed-end
|
894
|
62
|
773
|
47
|
||||||||||||
Junior lien, closed- end
|
425
|
215
|
210
|
82
|
||||||||||||
Total residential mortgage
|
1,319
|
277
|
983
|
129
|
||||||||||||
Home equity lines
|
132
|
87
|
-
|
-
|
||||||||||||
Consumer – other
|
8
|
7
|
1
|
1
|
||||||||||||
Total loans
|
$
|
4,557
|
$
|
3,099
|
$
|
1,354
|
$
|
233
|
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
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
3 months ended
September 30, 2018
|
3 months ended
September 30, 2017
|
|||||||||||||||
In thousands
|
Average
Recorded
Investment
|
Interest
Income
Recognized
|
Average
Recorded
Investment
|
Interest
Income
Recognized
|
||||||||||||
Commercial real estate
|
||||||||||||||||
Commercial ADC
|
$
|
1
|
$
|
-
|
$
|
746
|
$
|
-
|
||||||||
Farmland
|
-
|
-
|
30
|
-
|
||||||||||||
Multifamily
|
-
|
147
|
-
|
|||||||||||||
Owner occupied
|
619
|
20
|
3,482
|
40
|
||||||||||||
Non-owner occupied
|
1
|
-
|
222
|
-
|
||||||||||||
Total commercial real estate
|
621
|
20
|
4,627
|
40
|
||||||||||||
Commercial
|
||||||||||||||||
Commercial and industrial
|
171
|
11
|
1,005
|
13
|
||||||||||||
Residential mortgage
|
||||||||||||||||
First lien, closed-end
|
216
|
16
|
1,461
|
13
|
||||||||||||
Junior lien, closed- end
|
107
|
5
|
890
|
3
|
||||||||||||
Total residential mortgage
|
323
|
21
|
2,351
|
16
|
||||||||||||
Home equity lines
|
22
|
1
|
119
|
1
|
||||||||||||
Consumer – other
|
1
|
-
|
-
|
-
|
||||||||||||
Total loans
|
$
|
1,138
|
$
|
53
|
$
|
8,102
|
$
|
70
|
9 months ended
September 30, 2018
|
9 months ended
September 30, 2017
|
|||||||||||||||
In thousands
|
Average
Recorded
Investment
|
Interest
Income
Recognized
|
Average
Recorded
Investment
|
Interest
Income
Recognized
|
||||||||||||
Commercial real estate
|
||||||||||||||||
Commercial ADC
|
$
|
7
|
$
|
-
|
$
|
1,061
|
$
|
-
|
||||||||
Farmland
|
-
|
-
|
31
|
-
|
||||||||||||
Multifamily
|
57
|
-
|
124
|
-
|
||||||||||||
Owner occupied
|
2,658
|
10
|
2,284
|
94
|
||||||||||||
Non-owner occupied
|
12
|
-
|
91
|
-
|
||||||||||||
Total commercial real estate
|
2,734
|
10
|
3,591
|
94
|
||||||||||||
Commercial
|
||||||||||||||||
Commercial and industrial
|
711
|
18
|
1,271
|
45
|
||||||||||||
Residential mortgage
|
||||||||||||||||
First lien, closed-end
|
892
|
96
|
1,196
|
44
|
||||||||||||
Junior lien, closed- end
|
519
|
16
|
336
|
9
|
||||||||||||
Total residential mortgage
|
1,411
|
112
|
1,532
|
53
|
||||||||||||
Home equity lines
|
96
|
2
|
111
|
5
|
||||||||||||
Consumer – other
|
6
|
17
|
1
|
-
|
||||||||||||
Total loans
|
$
|
4,958
|
$
|
159
|
$
|
6,506
|
$
|
197
|
Troubled Debt Restructurings
As of September 30, 2018, eleven loans totaling $3,925,000 were identified as troubled debt restructurings and considered impaired, none of which had
unfunded commitments. Ten loans totaling $4,163,000 were identified as troubled debt restructurings and considered impaired at December 31, 2017, none of which had unfunded commitments.
Of the eleven loans identified as troubled debt restructurings at September 30, 2018, nine loans totaling $3,200,000 were accruing interest. Of the ten
loans identified as troubled debt restructurings at December 31, 2017, nine loans totaling $3,398,000 were accruing interest.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
For the three and nine months ended September 30, 2018 and 2017, the following table presents a breakdown of the types of concessions made by loan class.
Three months ended September 30, 2018
|
Nine months ended September 30, 2018
|
|||||||||||||||||||||||
Number of
loans
|
Unpaid
Principal
Pre-Modification
|
Post-Modification
Outstanding
Recorded
Investment
|
Number of
loans
|
Unpaid
Principal
Pre-Modification
|
Post Modification
Outstanding
Recorded
Investment
|
|||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||
Extended Payment Terms
|
||||||||||||||||||||||||
Consumer - other
|
-
|
$
|
-
|
$
|
-
|
1
|
$
|
1
|
$
|
1
|
||||||||||||||
Total
|
-
|
$
|
-
|
$
|
-
|
1
|
$
|
1
|
$
|
1
|
||||||||||||||
Grand Total
|
-
|
$
|
-
|
$
|
-
|
1
|
$
|
1
|
$
|
1
|
Three months ended September 30, 2017
|
Nine months ended September 30, 2017
|
|||||||||||||||||||||||
Number of
loans
|
Unpaid
Principal
Pre-Modification
|
Post-Modification
Outstanding
Recorded
Investment
|
Number of
loans
|
Unpaid
Principal
Pre-Modification
|
Post Modification
Outstanding
Recorded
Investment
|
|||||||||||||||||||
(dollars in thousands)
|
||||||||||||||||||||||||
Forgiveness of Principal Residential Mortgage:
|
||||||||||||||||||||||||
Junior lien, closed end
|
-
|
$
|
-
|
$
|
-
|
2
|
$
|
636
|
$
|
433
|
||||||||||||||
Total residential mortgage
|
-
|
-
|
-
|
2
|
636
|
433
|
||||||||||||||||||
Total
|
-
|
$
|
-
|
$
|
-
|
2
|
$
|
636
|
$
|
433
|
||||||||||||||
Grand Total
|
-
|
$
|
-
|
$
|
-
|
2
|
$
|
636
|
$
|
433
|
Qualitative factors are calculated for each segment of the loan portfolio. Factors include economic, concentrations, trends in terms of volume and mix,
interest rate movement, and delinquency. If a restructured loan is delinquent, it is addressed in the delinquency factor for that segment. Because the number and dollar amounts of restructured loans represent a relatively small percentage (1%)
of the total loan balances there is no specific qualitative factor tied to restructured loans.
There were no loans that were modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the
three and nine months ended September 30, 2018.
The following table presents loans that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment
default during the three and nine months ended September 30, 2017. The type labeled other includes concessions made to capitalize interest and extend interest only periods.
Three months ended
September 30, 2017
|
Three months ended
September 30, 2017
|
|||||||||||||||
Number of
loans
|
Recorded
Investment
|
Number of
loans
|
Recorded
Investment
|
|||||||||||||
Other
|
||||||||||||||||
Commercial:
|
||||||||||||||||
Commercial and industrial
|
-
|
$
|
-
|
1
|
$
|
136
|
||||||||||
Total commercial
|
- | $ |
- |
1
|
$ |
136
|
||||||||||
Grand Total
|
-
|
$
|
-
|
1
|
$
|
136
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
If a restructured loan defaults after being restructured, the loan is liquidated or charged off. Defaults of restructured loans are addressed in the
qualitative factor of the delinquency component.
The following table presents the successes and failures of the types of modifications within the previous 12 months as of September 30, 2018 and 2017.
Paid in full
|
Paying as restructured
|
Converted to non-accrual
|
Foreclosure/Default
|
|||||||||||||||||||||||||||||
Number of
loans
|
Recorded
Investment
|
Number of
loans
|
Recorded
Investment
|
Number of
loans
|
Recorded
Investment
|
Number of
loans
|
Recorded
Investment
|
|||||||||||||||||||||||||
September 30, 2018
|
(Dollars in thousands)
|
|||||||||||||||||||||||||||||||
Extended payment terms
|
-
|
$
|
- |
1
|
$
|
1 |
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||||||||||||
Forgiveness of principal
|
-
|
- | - |
-
|
-
|
-
|
-
|
|||||||||||||||||||||||||
Total
|
-
|
$
|
-
|
1 |
$
|
1
|
-
|
$
|
-
|
-
|
$ |
-
|
Paid in full
|
Paying as restructured
|
Converted to non-accrual
|
Foreclosure/Default
|
|||||||||||||||||||||||||||||
Number of
loans
|
Recorded
Investment
|
Number of
loans
|
Recorded
Investment
|
Number of
loans
|
Recorded
Investment
|
Number of
loans
|
Recorded
Investment
|
|||||||||||||||||||||||||
September 30, 2017
|
(Dollars in thousands)
|
|||||||||||||||||||||||||||||||
Forgiveness of principal
|
-
|
$
|
-
|
2
|
$
|
433
|
-
|
$
|
-
|
-
|
$
|
-
|
||||||||||||||||||||
Other
|
-
|
-
|
-
|
-
|
-
|
-
|
1
|
136
|
||||||||||||||||||||||||
Total
|
-
|
$ |
-
|
2 | $ | 433 |
-
|
$
|
-
|
1
|
$
|
136
|
Credit Quality Indicators
As part of the on-going monitoring of credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including
trends related to (i) the local, state and national economic outlook, (ii) concentrations of credit, (iii) interest rate movements, (iv) volume, mix and size of loans, and (v) delinquencies. The Company also has an internal Loan Review Officer
that monitors risk grades on an on-going basis.
The Company utilizes a risk-grading matrix to assign a risk grade to each of its commercial and consumer loans. Loans are graded on a scale of 1-9. Risk
grades 1-5 represent pass rated loans. The general characteristics of the 9 risk grades are broken down into commercial and consumer and described below:
Loan Portfolio Risk Grades
Pass credits are grades 1-5 and represent credits with above average risk characteristics that are in
accordance with loan policy guidelines regarding repayment ability, loan to value, and credit history. These types of credits have very few exceptions to policy.
Grade 6 – Watch List or Special
Mention. The loans in this category include the following characteristics:
· |
Loans with one or more major exceptions with no mitigating factors.
|
· |
Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the
Company’s position at some future date. Potential weaknesses are the result of deviations from prudent lending practice.
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
· |
Loans where adverse economic conditions that develop subsequent to the loan origination that do not jeopardize liquidation of the debt but do substantially increase the
level of risk may also warrant this rating.
|
Grade 7 – Substandard. A substandard loan is
inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard must have a well-defined weakness or weaknesses that jeopardize the liquidation of the
debt. These loans are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans
consistently not meeting the repayment schedule should be downgraded to substandard. Loans in this category are characterized by deterioration in quality exhibited by any number of well-defined weaknesses requiring corrective action. The
weaknesses may include, but are not limited to (i) high debt to worth ratios, (ii) declining or negative earnings trends, (iii) declining or inadequate liquidity, (iv) improper loan structure, (v) questionable repayment sources, (vi) lack of
well-defined secondary repayment source and (vii) unfavorable competitive comparisons.
Grade 8 – Doubtful. Loans classified
Doubtful have all the weaknesses inherent in loans classified Substandard, plus the added characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values highly
questionable and improbable. However, these loans are not yet rated as loss because certain events may occur which would salvage the debt. Among these events are injection of capital, alternative financing and liquidation of assets or the
pledging of additional collateral. The ability of the borrower to service the debt is extremely weak, overdue status is constant, the debt has been placed on non-accrual status, and no definite repayment schedule exists. Doubtful is a temporary
grade where a loss is expected but is presently not quantified with any degree of accuracy. Once the loss position is determined, the amount is charged off.
Grade 9 – Loss. Loans classified Loss are
considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or
desirable to defer writing off the loan even though partial recoveries may be realized in the future. Probable loss portions of doubtful assets should be charged against the allowance for loan losses. Loans may reside in this classification for
administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
The following table presents the credit risk profile by internally assigned risk grades.
September 30, 2018
|
||||||||||||||||||||
Dollars in thousands
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
|||||||||||||||
Commercial real estate:
|
||||||||||||||||||||
Residential ADC
|
$
|
4,610
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Commercial ADC
|
23,047
|
243
|
3
|
-
|
-
|
|||||||||||||||
Farmland
|
5,322
|
-
|
-
|
-
|
-
|
|||||||||||||||
Multifamily
|
16,099
|
-
|
-
|
-
|
-
|
|||||||||||||||
Owner occupied
|
95,916
|
984
|
1,082
|
-
|
-
|
|||||||||||||||
Non-owner occupied
|
93,824
|
814
|
131
|
-
|
-
|
|||||||||||||||
Total commercial real estate
|
238,818
|
2,041
|
1,216
|
-
|
-
|
|||||||||||||||
Commercial:
|
||||||||||||||||||||
Commercial and industrial
|
45,332
|
1,065
|
370
|
-
|
-
|
|||||||||||||||
Agriculture
|
296
|
-
|
-
|
-
|
-
|
|||||||||||||||
Other
|
1,603
|
-
|
-
|
-
|
-
|
|||||||||||||||
Total commercial
|
47,231
|
1,065
|
370
|
-
|
-
|
|||||||||||||||
Residential mortgage:
|
||||||||||||||||||||
First lien, closed-end
|
50,448
|
660
|
132
|
-
|
-
|
|||||||||||||||
Junior lien, closed-end
|
279
|
419
|
5
|
-
|
-
|
|||||||||||||||
Total residential mortgage
|
50,727
|
1,079
|
137
|
-
|
-
|
|||||||||||||||
Home equity lines
|
33,235
|
788
|
87
|
-
|
-
|
|||||||||||||||
Consumer – other
|
3,787
|
156
|
9
|
-
|
-
|
|||||||||||||||
Total
|
$
|
373,798
|
$
|
5,129
|
$
|
1,819
|
$
|
-
|
$
|
-
|
December 31, 2017
|
||||||||||||||||||||
Dollars in thousands
|
Pass
|
Special Mention
|
Substandard
|
Doubtful
|
Loss
|
|||||||||||||||
Commercial real estate:
|
||||||||||||||||||||
Residential ADC
|
$
|
7,242
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||||||
Commercial ADC
|
23,883
|
477
|
4
|
-
|
-
|
|||||||||||||||
Farmland
|
5,392
|
-
|
-
|
-
|
-
|
|||||||||||||||
Multifamily
|
11,967
|
-
|
-
|
-
|
-
|
|||||||||||||||
Owner occupied
|
81,584
|
1,049
|
2,175
|
-
|
-
|
|||||||||||||||
Non-owner occupied
|
78,531
|
855
|
163
|
-
|
-
|
|||||||||||||||
Total commercial real estate
|
208,599
|
2,381
|
2,342
|
-
|
-
|
|||||||||||||||
Commercial:
|
||||||||||||||||||||
Commercial and industrial
|
45,480
|
1,130
|
422
|
-
|
-
|
|||||||||||||||
Agriculture
|
415
|
-
|
-
|
-
|
-
|
|||||||||||||||
Other
|
1,420
|
-
|
-
|
-
|
-
|
|||||||||||||||
Total commercial
|
47,315
|
1,130
|
422
|
-
|
-
|
|||||||||||||||
Residential mortgage:
|
||||||||||||||||||||
First lien, closed-end
|
47,257
|
513
|
166
|
-
|
-
|
|||||||||||||||
Junior lien, closed-end
|
239
|
-
|
884
|
-
|
-
|
|||||||||||||||
Total residential mortgage
|
47,496
|
513
|
1,050
|
-
|
-
|
|||||||||||||||
Home equity lines
|
32,005
|
1,543
|
124
|
-
|
-
|
|||||||||||||||
Consumer – other
|
3,596
|
162
|
1
|
-
|
-
|
|||||||||||||||
Total
|
$
|
339,011
|
$
|
5,729
|
$
|
3,939
|
$
|
-
|
$
|
-
|
Allowance for Loan Losses
The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable losses inherent in the loan portfolio.
Management determines the allowance for loan losses based on a number of factors, including a review and evaluation of the Company’s loan portfolio and current and projected economic conditions locally and nationally. The allowance is monitored
and analyzed in conjunction with the Company’s loan analysis and grading program. The look-back period is a weighted twenty quarter period.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
Based on this methodology, provisions for loan losses are made to maintain an adequate allowance for loan losses. The allowance for loan losses is
created by direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the
allowance. The provision for loan losses is the amount necessary to adjust the allowance for loan losses to the amount that management has determined to be adequate to provide for probable losses inherent in the loan portfolio. The Company
recorded provisions for loan losses of $75,000 and $415,000 for the three and nine months ended September 30, 2018. The Company recorded provisions for loan losses for the both the three and nine months ended September 30, 2017 that totaled
$340,000 and $555,000, respectively. Management realizes that general economic trends greatly affect loan losses, and no assurances can be made that future charges to the allowance for loan losses may not be significant in relation to the amount
provided during a particular period, or that future evaluations of the loan portfolio based on conditions then prevailing will not require sizable additions to the allowance, thus necessitating similarly sizable charges to income.
Based on its best judgment, evaluation, and analysis of the loan portfolio, management
considers the allowance for loan losses to be appropriate in light of the risk inherent in the Company’s loan portfolio for the reporting periods.
The following table details activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2018 and 2017.
Beginning
Balance
|
Provision
for
(Recovery
of) Loan
Losses
|
Charge-
offs
|
Recoveries
|
Ending
Balance
|
||||||||||||||||
Dollars in thousands
|
||||||||||||||||||||
September 30, 2018
|
||||||||||||||||||||
Commercial real estate
|
$
|
2,504
|
$
|
76
|
$
|
-
|
$
|
3
|
$
|
2,583
|
||||||||||
Commercial and industrial
|
608
|
4
|
-
|
3
|
615
|
|||||||||||||||
Residential mortgage
|
532
|
-
|
-
|
-
|
532
|
|||||||||||||||
Consumer
|
200
|
(5
|
)
|
(3
|
)
|
3
|
195
|
|||||||||||||
Total
|
$
|
3,844
|
$
|
75
|
$
|
(3
|
)
|
$
|
9
|
$
|
3,925
|
|||||||||
September 30, 2017
|
||||||||||||||||||||
Commercial real estate
|
$
|
1,954
|
$
|
133
|
$
|
(134
|
)
|
$
|
140
|
$
|
2,093
|
|||||||||
Commercial and industrial
|
501
|
241
|
(136
|
)
|
-
|
606
|
||||||||||||||
Residential mortgage
|
524
|
(13
|
)
|
-
|
-
|
511
|
||||||||||||||
Consumer
|
234
|
(21
|
)
|
(8
|
)
|
8
|
213
|
|||||||||||||
Total
|
$
|
3,213
|
$
|
340
|
$
|
(278
|
)
|
$
|
148
|
$
|
3,423
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2018 and 2017.
Beginning
Balance
|
Provision
for
(Recovery
of) Loan
Losses
|
Charge-
offs
|
Recoveries
|
Ending
Balance
|
||||||||||||||||
Dollars in thousands
|
||||||||||||||||||||
September 30, 2018
|
||||||||||||||||||||
Commercial real estate
|
$
|
2,260
|
$
|
340
|
$
|
(50
|
)
|
$
|
33
|
$
|
2,583
|
|||||||||
Commercial and industrial
|
634
|
(2
|
)
|
(25
|
)
|
8
|
615
|
|||||||||||||
Residential mortgage
|
505
|
77
|
(50
|
)
|
-
|
532
|
||||||||||||||
Consumer
|
200
|
-
|
(13
|
)
|
8
|
195
|
||||||||||||||
Total
|
$
|
3,599
|
$
|
415
|
$
|
(138
|
)
|
$
|
49
|
$
|
3,925
|
|||||||||
September 30, 2017
|
||||||||||||||||||||
Commercial real estate
|
$
|
1,607
|
$
|
546
|
$
|
(208
|
)
|
$
|
148
|
$
|
2,093
|
|||||||||
Commercial and industrial
|
1,171
|
(214
|
)
|
(369
|
)
|
18
|
606
|
|||||||||||||
Residential mortgage
|
427
|
139
|
(66
|
)
|
11
|
511
|
||||||||||||||
Consumer
|
188
|
84
|
(73
|
)
|
14
|
213
|
||||||||||||||
Total
|
$
|
3,393
|
$
|
555
|
$
|
(716
|
)
|
$
|
191
|
$
|
3,423
|
The allocation of the allowance for loan losses for September 30, 2018 and December 31, 2017 is presented in the table below.
Loans
Individually
Evaluated for
Impairment
|
Loans
Collectively
Evaluated for
Impairment
|
Total
|
||||||||||
Dollars in thousands
|
||||||||||||
September 30, 2018
|
||||||||||||
Commercial real estate
|
$
|
-
|
$
|
2,583
|
$
|
2,583
|
||||||
Commercial and industrial
|
103
|
512
|
615
|
|||||||||
Residential mortgage
|
129
|
403
|
532
|
|||||||||
Consumer
|
1
|
194
|
195
|
|||||||||
Total
|
$
|
233
|
$
|
3,692
|
$
|
3,925
|
||||||
December 31, 2017
|
||||||||||||
Commercial real estate
|
$
|
-
|
$
|
2,260
|
$
|
2,260
|
||||||
Commercial and industrial
|
144
|
490
|
634
|
|||||||||
Residential mortgage
|
103
|
402
|
505
|
|||||||||
Consumer
|
1
|
199
|
200
|
|||||||||
Total
|
$
|
248
|
$
|
3,351
|
$
|
3,599
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
The Company’s recorded investment in loans as of September 30, 2018 and December 31, 2017 related to each balance in the allowance for loan losses by
portfolio segment and disaggregated on the Company’s impairment methodology was as follows:
September 30, 2018
|
December 31, 2017
|
|||||||||||||||
Loans
Individually
Evaluated for
Impairment
|
Loans
Collectively
Evaluated for
Impairment
|
Loans
Individually
Evaluated for
Impairment
|
Loans
Collectively
Evaluated for
Impairment
|
|||||||||||||
Dollars in thousands
|
||||||||||||||||
Commercial real estate
|
$
|
2,450
|
$
|
239,625
|
$
|
3,623
|
$
|
209,699
|
||||||||
Commercial and industrial
|
648
|
48,018
|
766
|
48,101
|
||||||||||||
Residential mortgage
|
1,260
|
50,683
|
1,861
|
47,198
|
||||||||||||
Consumer and home equity lines
|
95
|
37,967
|
107
|
37,324
|
||||||||||||
Total
|
$
|
4,453
|
$
|
376,293
|
$
|
6,357
|
$
|
342,322
|
At September 30, 2018, the Company had pre-approved but unused lines of credit totaling $74.9 million. In management’s opinion, these unused lines of
credit represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.
The Company has entered into loan transactions with certain of its directors and executive officers. Such loans were made in the ordinary course of
business and on substantially the same terms and collateral as those for comparable transactions prevailing at the time and did not involve more than the normal risk of collectability or present other unfavorable features.
A summary of related party loan activity for the nine months ended September 30, 2018 and 2017 is as follows:
September 30,
2018
|
September 30,
2017
|
|||||||
Dollars in thousands
|
||||||||
Balance, beginning of year
|
$
|
1,740
|
$
|
2,043
|
||||
Loan disbursements
|
236
|
84
|
||||||
Loan repayments
|
(1,505
|
)
|
(345
|
)
|
||||
Balance, end of quarter
|
$
|
471
|
$
|
1,782
|
At September 30, 2018 and 2017, the Company had pre-approved but unused lines of credit totaling $145,000 and $374,000, respectively, to executive
officers, directors and their related interests. Related party deposits totaled $2,689,000 and $1,912,000 at September 30, 2018 and 2017, respectively.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
(7)
|
Foreclosed Assets
|
The following table summarizes the activity in foreclosed assets for the nine month periods ended September 30, 2018 and 2017:
September 30, 2018
|
September 30, 2017
|
|||||||
Dollars in thousands
|
||||||||
Balance, beginning of year
|
$
|
789
|
$
|
1,011
|
||||
Additions
|
1,618
|
196
|
||||||
Proceeds from sale
|
(330
|
)
|
(523
|
)
|
||||
Valuation adjustments
|
(317
|
)
|
(193
|
)
|
||||
Gains/(losses) on sales
|
22
|
(24
|
)
|
|||||
Balance, end of quarter
|
$
|
1,782
|
$
|
467
|
The Company has two foreclosed residential real estate properties totaling $794,000 as of September 30, 2018.
The company did not have any consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in
process as of September 30, 2018.
(8)
|
Stock Option Plans
|
The Company has six share-based compensation plans in effect at September 30, 2018 and September 30, 2017. There were no compensation cost charged
against income for the three months ended September 30, 2018 and $1,000 charged against income for those plans for the nine months ended September 30, 2018. The compensation cost charged against income for those plans for the three and nine
months ended September 30, 2017 was $5,000 and $23,000, respectively.
During 2001, the Company adopted, with shareholder approval, an Incentive Stock Option Plan (the “2001 Employee Plan”) and a Non-statutory Stock Option
Plan (the “2001 Director Plan”). Each plan makes available options to purchase 100,771 shares of the Company’s common stock, for an aggregate number of common shares reserved for options under these plans of 201,542. The exercise price of all
options granted to date under these plans is $3.14.
The options granted in 2006 through 2011 under the 2001 Director Plan and the 2001 Employee Plan vested over a four-year period. The options granted in
2005 under the 2001 Director Plan and the 2001 Employee Plan vested over a three-year period. All unexercised options expire ten years after the 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 made available options to purchase 72,389 shares of the Company’s common stock and the 2005 Director Plan made available 73,527 shares of the Company’s common stock, for an aggregate number
of common shares reserved under these plans of 145,916. The exercise price of all options granted to date under these plans range from $2.13 to $12.25.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
The options granted in 2005 under the 2005 Director Plan and the 2005 Employee Plan vested over a three-year period. The options granted in 2006 through
2015 under the 2005 Employee Plan vest over a four-year period. All unexercised options expire ten years after the date of grant. The fair market value of each option award is estimated on the date of grant using the Black-Scholes option-pricing
model. The 2005 Employee Plan and the 2005 Director Plan expired in 2015 in accordance with their terms and no further options may be granted under these plans. Additionally, the Company granted 10,000 shares of restricted stock under the 2005
Employee Plan in 2014. The shares vested over a 3-year period, fully vesting in January 2017.
As a result of the merger with Carolina Commerce Bank, Carolina Trust Bank assumed all outstanding options of Carolina Commerce under the existing terms
and at the conversion rate of 0.625 shares of Carolina Trust stock for each share of Carolina Commerce stock. All options assumed became fully vested at the merger date. As of September 30, 2018, there were 76,845 options outstanding from the
converted plans with exercise prices ranging from $2.13 to $10.40.
Total stock-based compensation recognized as compensation expense on our consolidated statement of income for the three and nine months ended September
30, 2018 and 2017 is as follows:
Three months
ended
September 30,
2018
|
Three months
ended
September 30,
2017
|
|||||||
Dollars in thousands
|
||||||||
Option Grants
|
$
|
-
|
$
|
5
|
||||
Restricted Stock Grants
|
-
|
-
|
||||||
Total compensation expense
|
$
|
-
|
$
|
5
|
Nine months
ended
September 30,
2018
|
Nine months
ended
September 30,
2017
|
|||||||
Dollars in thousands
|
||||||||
Option Grants
|
$
|
1
|
$
|
23
|
||||
Restricted Stock Grants
|
-
|
-
|
||||||
Total compensation expense
|
$
|
1
|
$
|
23
|
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
A summary of option activity under the stock option plans as of September 30, 2018 and changes during the period ended September 30, 2018 is presented
below:
Shares
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining
Contractual
Term
|
Aggregate
Intrinsic
Value
|
||||||||||
Outstanding, December 31, 2017
|
151,173
|
$
|
4.54
|
5.27 years
|
|||||||||
Exercised
|
(3,107
|
)
|
4.84
|
||||||||||
Expired
|
(12,000
|
)
|
12.22
|
||||||||||
Outstanding, September 30, 2018
|
136,066
|
$
|
3.85
|
4.94 years
|
$
|
594,586
|
|||||||
Exercisable, September 30, 2018
|
136,066
|
$
|
3.85
|
$
|
594,586
|
There were 958 options vested and no options granted during the nine months ended September 30, 2018. As of September 30, 2018 there was no unrecognized
compensation cost related to non-vested options granted under all of the Company’s equity compensation plans.
There was no restricted stock granted or vested during the three and nine months ended September 30, 2018.
A summary of restricted stock activity during the three and nine months ended September 30, 2017 is presented below:
Three Months Ended
September 30, 2017
|
Nine Months Ended
September 30, 2017
|
|||||||||||||||
Non-Vested
Restricted
Stock
Outstanding
|
Weighted
Average
Grant Date
Fair Value
|
Non-Vested
Restricted
Stock
Outstanding
|
Weighted
Average
Grant Date
Fair Value
|
|||||||||||||
Beginning balance outstanding
|
-
|
-
|
3,334
|
$
|
3.31
|
|||||||||||
Granted
|
-
|
-
|
||||||||||||||
Vested
|
-
|
(3,334
|
)
|
|||||||||||||
Ending balance outstanding
|
-
|
-
|
-
|
-
|
Upon exercise of the options, the Company issues shares from authorized but unissued shares. The Company does not typically purchase shares on the open
market to fulfill obligations of the equity compensation plans.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
(9)
|
Off-Balance Sheet Risk and Commitments
|
The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the
borrower. Collateral obtained varies but may include real estate, stocks, bonds, and certificates of deposit.
A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of September 30, 2018 is as follows:
Financial instruments whose contract represents credit risk
|
||||
September 30,
2018
|
||||
Dollars in thousands
|
||||
Undisbursed lines of credit
|
$
|
74,864
|
||
Letters of credit
|
546
|
|||
$
|
75,410
|
(10)
|
Preferred Stock
|
Our articles of incorporation authorize us to issue up to 1,000,000 shares of one or more series of preferred stock. Our board of directors, in its sole
discretion, has the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series, the designation of such series, and the dividend rate for each
series, without any further vote or action by our shareholders. Our preferred stock may be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. There were no shares of preferred stock outstanding
as of September 30, 2018.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements(Unaudited)
Notes to Condensed Consolidated Financial Statements(Unaudited)
(11)
|
Mergers and Acquisitions
|
Proposed Merger with Clover Community Bankshares, Inc.
The Company entered into an Agreement and Plan of Merger and Reorganization (the “Agreement”) dated as of June 14, 2018, with Clover Community
Bankshares, Inc. (“Clover”), the parent holding company for Clover Community Bank, Clover, SC. Pursuant to the terms of the Agreement, Clover will merge with and into the Company, with the Company being the surviving corporation in the merger.
In addition, following the merger of Clover with and into the Company, Clover Community Bank will be merged with and into the Bank with the Bank as the surviving bank in the bank merger.
The transaction is subject to various closing conditions, including the receipt of requisite shareholder approvals and required approvals of state and
federal banking regulators.
If the merger is completed, each share of Clover common stock issued and outstanding will be converted into the right to receive either $22.00 in cash or
2.7181 shares of the Company’s common stock. Clover shareholders will have the option to elect the type of consideration that they would prefer to receive, subject to required proration as provided in the Agreement. The merger consideration
will be prorated such that 20% of Clover’s common shares outstanding immediately prior to the closing of the merger will be converted to the cash consideration and 80% of Clover’s common shares outstanding immediately prior to the closing of the
merger will be converted to the stock consideration. Cash will be paid in lieu of fractional shares.
In accordance with Clover’s articles of incorporation, each outstanding share of Clover preferred stock will automatically convert into one share of
Clover common stock immediately prior to the closing of the merger. These shares of common stock will then be converted into the right to receive the merger consideration as described above.
Based on the Company’s 10-day volume weighted closing price of $8.23 per share as of November 2, 2018, the aggregate deal value is approximately $21.8
million.
Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of
operations of Carolina Trust BancShares, Inc. (the “Company”). The Company conducts its business operations primarily through its wholly owned subsidiary, Carolina Trust Bank, a North Carolina-chartered commercial bank (which we refer to herein
as the “Bank”)
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements, within the meaning of the Private
Securities Litigation Reform Act of 1995. These statements generally relate to caution regarding the financial condition of the Company, results of operations, plans, objectives, future performance or business. They usually can be identified by
the use of forward-looking terminology, such as “believes,” “expects,” or “are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or
variations of these and similar words, or by discussions of strategies that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to,
those described in this quarterly report on Form 10-Q. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat
these statements as speaking only as of the date they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of
new information, future events or otherwise. Forward-looking statements contained in this report are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management.
These statements are not guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed
or forecasted in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:
☐ |
the ability to obtain required regulatory and shareholder approvals and meet other closing conditions to the proposed merger with Clover (the “Pending Merger”);
|
☐ |
the ability to complete the Pending Merger as expected and within the expected timeframe;
|
☐ |
the possibility that (1) any of the anticipated benefits of the Pending Merger will not be realized or will not be realized within the expected time period, (2) the
businesses of the Company and Clover may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected, (3) the expected revenue synergies and cost savings from the Pending Merger may
not be fully realized or realized within the expected time frame, (4) revenues following the Pending Merger may be lower than expected, or (5) customer and employee relationships and business operations may be disrupted by the Pending
Merger;
|
☐ |
deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and other
adverse impacts to results of operations and financial condition;
|
☐ |
changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest-sensitive assets and
liabilities;
|
☐ |
the failure of assumptions underlying the establishment of reserves for possible loan and lease losses;
|
☐ |
the impact of liquidity needs on our results of operations and financial condition;
|
☐ |
risks related to the concentration in commercial real estate;
|
☐ |
declines in commercial and residential real estate;
|
☐ |
changes in loan underwriting, credit review or loss reserve policies associated with economic conditions, examination conclusions, or regulatory developments;
|
☐ |
a failure in or a breach of the Company’s operational or security systems or those of its third-party service providers;
|
☐ |
changes in financial market conditions, either internationally, nationally or locally in areas in which the Company conducts operations, including demand for the
Company’s products and services and commercial and residential real estate development and prices;
|
☐ |
changes in accounting principles, policies, and guidelines applicable to bank holding companies and banking;
|
☐ |
the effects of competition from other commercial banks, non-bank lenders, consumer finance companies, credit unions, and other financial institutions operating in the
Company’s market area and elsewhere, together with such competitors offering banking products and services by mail, telephone and the Internet;
|
☐ |
the Company’s ability to attract and retain key personnel;
|
☐ |
changes in governmental monetary and fiscal policies as well as other legislative and regulatory changes;
|
☐ |
changes in political and economic conditions;
|
☐ |
the Company’s ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result; and
|
☐ |
the success at managing the risks involved in the foregoing.
|
Except as otherwise disclosed, forward-looking statements do not reflect any changes in laws, regulations or regulatory interpretations after the date as
of which such statements are made. All forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any statement, to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated events.
Discussion of Financial Condition at September 30, 2018 and December 31, 2017
During the period from December 31, 2017 to September 30, 2018, total assets increased by approximately $58.6 million, or 14.40%. The increase, reflected
primarily in interest-earning deposits with banks and loans, was funded by an increase in deposits and capital. Interest-earning deposits with banks, securities available-for-sale and equity securities at September 30, 2018 totaled $57.2 million
compared to $34.8 million at December 31, 2017.
The Company’s investment securities portfolio as of September 30, 2018 totaled $30.7 million, a decrease of $372,000 when compared to the $31.1 million
reported at December 31, 2017. At September 30, 2018, the Company had a net unrealized loss on available-for-sale securities of $911,000, net of tax, as compared to a net unrealized loss of $732,000, net of tax, at December 31, 2017. On January
1, 2018 the Company adopted the FASB ASU 2016-01 in which there was an initial reclassification from accumulated other comprehensive income in the amount of $443,000 recorded to retained earnings for the loss on equity investments.
At September 30, 2018, net loans constituted 81.01% of the Company’s total assets. Net loans increased by $31.7 million from December 31, 2017 to
September 30, 2018. Of all of the portfolio segments that increased during the first nine months of 2018, commercial real estate experienced the largest amount of growth at $28.8 million or 13.48%. Management’s continued goal is to grow the loan
portfolio to provide maximum income proportionate with acceptable risks.
As part of the ongoing monitoring of credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends
related to (i) the local, state and national economic outlook, (ii) concentrations of credit, (iii) interest rate movements, (iv) volume, mix and size of loans, and (v) delinquencies. The Company also has an internal Loan Review Officer that
monitors risk grades on an on-going basis. Furthermore, the Company employs a third party contractor to perform an annual loan review. The scope of the review is typically 50 – 60% of the loan portfolio.
At September 30, 2018 and December 31, 2017 impaired loans, which consisted primarily of troubled debt restructurings and non-accrual loans, were $4.5
million and $6.4 million, respectively. Impaired loans of $1.4 million and $1.8 million had related allowances for loan losses totaling $233,000 and $248,000 at September 30, 2018 and December 31, 2017, respectively. There were $3.1 million and
$4.6 million of impaired loans without a specific allowance at September 30, 2018 and December 31, 2017, respectively. Impaired loans at September 30, 2018 and December 31, 2017 consisted primarily of commercial real estate, commercial and
industrial and residential mortgage loans. At September 30, 2018, there were eleven loans amounting to approximately $3.9 million, which were restructured to facilitate the borrowers’ ability to repay the outstanding balance. These eleven
restructured loans are considered troubled debt restructurings at September 30, 2018 and have specific reserves amounting to approximately $233,000. Of these eleven loans, nine loans totaling $3.2 million were accruing interest at September 30,
2018. At December 31, 2017, there were ten loans totaling $4.2 million which were restructured to facilitate the borrowers’ ability to repay the outstanding balance, and of these ten loans, nine loans totaling $3.4 million were accruing
interest. Reserves for loans not considered impaired were approximately $3.7 million and $3.4 million at September 30, 2018 and December 31, 2017, respectively. The allowance for loan losses at both September 30, 2018 and December 31, 2017 was
1.03% of gross loans outstanding.
The Company records provision for loan losses based upon known problem loans and estimated probable losses in the existing loan portfolio. The Company’s
methodology for assessing the appropriateness of the allowance for loan losses consists of two key components, which are a specific allowance for identified problem or impaired loans and a model estimating probable losses for the remainder of the
portfolio.
Identified problem and impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to
significant change. The adequacy of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan
products, collateral values, loan concentrations, changes in the mix and volume of the loan portfolio, trends in portfolio credit quality, including delinquency and charge-off rates and current economic conditions that may affect a borrower’s
ability to repay. Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the
current operating environment.
Non-interest earning assets consisting of cash and due from banks, bank premises, equipment and software, foreclosed assets and other assets increased to
$20.0 million at September 30, 2018 compared to $15.6 million at December 31, 2017. The increase is attributed mostly to the increase in cash and due from banks of $3.6 million, or 66.40% and to an increase in foreclosed assets of $1.0 million
or 125.83%. At September 30, 2018, foreclosed assets consisted of six properties valued at $1.8 million. At December 31, 2017, foreclosed assets consisted of five properties valued at $789,000.
Deposit accounts represent the Company’s primary funding source and consist of non-interest bearing demand deposits, interest-bearing demand deposits,
savings accounts and time deposits. Total deposits increased by approximately $45.8 million, or 13.46%, for the nine months ended September 30, 2018. The growth is due to the increases in noninterest-earning demand deposits of $17.6 million, or
35.77%, interest-earning demand deposits of $8.2 million, or 7.10%, savings deposits of $1.4 million or 6.23%, and time deposits of $18.7 million or 12.13%.
Federal Home Loan Bank advances totaled $16.1 million at September 30, 2018, a decrease of $7.5 million from the $23.6 million advanced at December 31,
2017.
On March 29, 2018, the Company entered into a Term Loan Agreement and a Security Agreement with, and executed and delivered a Promissory Note to
Community Bankers’ Bank, Midlothian, Virginia (the “Lender”). These documents provide for a $3 million secured term loan to the Company. The term loan accrues interest at the Wall Street Journal prime rate, which was 4.75% on the Promissory Note date, with a maximum rate of 18.0%. There is no penalty for voluntary prepayment of the Promissory Note, and on April 27th, the
Company repaid the outstanding balance.
Stockholders’ equity amounted to $49.0 million, or 10.52% of total assets at September 30, 2018, compared to $29.1 million, or 7.16% of total assets at
December 31, 2017.
Discussion of Results of Operations
For the three months ended September 30, 2018 and 2017
Net Income and Net Income Available to Common Shareholders
Net income for the three months ended September 30, 2018 was $915,000 compared to $351,000 for the third quarter of 2017, an increase of $564,000.
Diluted earnings per common share was $0.13 for the three months ended September 30, 2018 compared to $0.07 for the third quarter of 2017. The increase in net income is primarily due to an increase in interest income on loans of $821,000 as
average loans increased by $44 million from the third quarter of 2017 to the third quarter of 2018. The interest income was partially offset by an increase in interest expense of $282,000 due to an increase in total deposits outstanding and
merger expenses of $157,000 relating to the proposed acquisition of Clover Community Bankshares, Inc.
Net Interest Income
Net interest income is the primary source of earnings for the Company. Net interest income is the difference between interest income on earning assets
(primarily loans and investment securities) and the interest expense on deposits and other interest bearing liabilities. Net interest spread is the difference between the average yield on interest-earning assets and the average cost of
interest-bearing liabilities. Net interest margin is the ratio of net interest income to average earning assets for the period. Changes in net interest income result from changes in interest rates and the volume and mix of earning assets and
interest-bearing liabilities.
Net interest income for the quarter ended September 30, 2018 totaled $4,243,000 compared to $3,540,000 for the quarter ended September 30, 2017. The
Company’s net interest spread decreased by 11 basis points to 3.53% from 3.64% for the quarters ended September 30, 2018 and 2017, respectively. Net interest margin on average interest earning assets increased by 2 basis points to 3.82% from
3.80% for the quarters ended September 30, 2018 and 2017, respectively.
The decrease in net interest spread was primarily due to an increase in the percentage of average interest-earning cash with banks as a component of
total average earning assets. The yield on interest earning cash with banks is lower than the overall earning asset yield. So, increasing the percentage of interest earning cash with banks softened the overall increase in the earning asset
yield. The percentages of interest-earning cash with banks to total earning assets were 7.4% and 1.5%, for the quarters ended September 30, 2018 and 2017, respectively. The spread between the yield on loans and the cost of interest bearing
liabilities actually expanded by 6 basis points. Loan increased by 28 basis points to 5.32% while the cost of interest bearing liabilities increased by 22 basis points to 1.34%, comparing the quarters ended September 30, 2018 and 2017.
The slight increase in the net interest margin was due to an increase in the percentage of total funding (i.e. interest bearing liabilities plus
noninterest bearing deposits) from noninterest bearing deposits and to an increase in the yield on loans. The percentage of average noninterest bearing deposits to average total funding increased to 16.3% from 12.5% for the third quarters of
2018 and 2017, respectively.
Provision for Loan Losses
The Company recorded a provision for loan losses of $75,000 and $340,000 for the quarters ended September 30, 2018 and 2017. This decrease of $265,000
in the provision for loan losses is due to a decrease in the amount of impaired loans with an allowance. The ratio of the allowance for loan and lease losses as a percentage of total loans increased from 1.01% at September 30, 2017 to 1.03% at
September 30, 2018. The increase in this percentage is due to increase in the qualitative factor for nature and volume of the portfolio for Residential and Commercial acquisition, development and construction (“ADC”) loans, Commercial Real Estate
loans and Commercial and Industrial loans used in the model. The provision for loan losses is charged to operations to bring the allowance to a level deemed appropriate based on management’s evaluation of the adequacy of the allowance for loan
losses.
The following table sets forth information with respect to the asset quality of our loan portfolio as of the dates indicated.
Loans
Outstanding
|
Non-
Performing
Loans |
Net
Charge-offs (Recoveries)
|
Allowance
for Loan
Losses
|
|||||||||||||
(Dollars in thousands) | ||||||||||||||||
September 30, 2018
|
$
|
380,746
|
$
|
1,057
|
$
|
(6
|
)
|
$
|
3,925
|
|||||||
June 30, 2018
|
374,026
|
1,105
|
95
|
3,844
|
||||||||||||
March 31, 2018
|
367,039
|
1,125
|
71
|
3,780
|
||||||||||||
December 31, 2017
|
348,679
|
2,746
|
(26
|
)
|
3,599
|
|||||||||||
September 30, 2017
|
340,038
|
2,142
|
130
|
3,423
|
||||||||||||
June 30, 2017
|
324,349
|
2,896
|
322
|
3,213
|
||||||||||||
March 31, 2017
|
311,609
|
2,937
|
73
|
3,471
|
||||||||||||
December 31, 2016
|
308,492
|
2,875
|
(303
|
)
|
3,393
|
|||||||||||
September 30, 2016
|
301,420
|
3,579
|
56
|
3,687
|
||||||||||||
June 30, 2016
|
293,157
|
1,739
|
(20
|
)
|
3,541
|
|||||||||||
March 31, 2016
|
297,746
|
2,100
|
122
|
3,521
|
||||||||||||
December 31, 2015
|
292,362
|
2,164
|
2
|
3,723
|
||||||||||||
September 30, 2015
|
286,469
|
2,079
|
(109
|
)
|
3,825
|
Non-interest Income
Non-interest income for the quarter ended September 30, 2018 totaled $374,000, an increase of $92,000 over the $282,000 reported for the quarter ended
September 30, 2017. The primary factors contributing to the overall increase were the increase in interchange fees of $34,000 for the quarter ended September 30, 2018 when compared to the same period in 2017 and the unrealized gain on equity
securities of $35,000 for the quarter ended September 30, 2018. On January 1, 2018 the net unrealized loss on equity securities was reclassified from accumulated other comprehensive
income to retained earnings and from that date forward will be recorded on the income statement.
Interchange fees, or “swipe” fees, are charges that merchants pay to the Bank and other card-issuing banks for processing electronic payment
transactions. Interchange fees consist of income from check card usage, point of sale income from PIN-based debit card transactions and ATM service fees. With the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, in
2018, interchange fees are reported net of related costs. See Note 2 – Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Previously, such costs were reported as check
card expense. Interchange fees for the three months ended September 30, 2018 and September 30, 2017 reported on a net basis totaled $67,000 and $33,000, respectively.
Non-interest Expense
Non-interest expenses for the September 30, 2018 and 2017 quarters totaled $3,327,000 and $2,961,000, respectively. The $366,000 increase was due in part
to Merger expenses of $157,000 relating to the proposed acquisition of Clover Community Bank and an increase of foreclosed asset expenses in the amount of $105,000 due to the valuation adjustment of four properties and maintenance work completed
on another property. Furniture, fixture and equipment expenses also increased $72,000 mainly due to increased network monitoring and security costs.
Income Tax Expense
The Company recorded income tax expense of $300,000 for the three-months ended September 30, 2018 resulting in an effective tax rate of 25%. For the same
period in 2017, the Company recorded income tax expense of $170,000 with an effective tax rate of 33%. The Company’s federal income tax rate was lowered from 34% to 21% due to the enactment of the Tax Cuts and Jobs Act of 2017 on December 22,
2017. For 2018, the effective tax rate is higher than the statutory rate mainly due to the $242,000 in merger expenses that are non-deductible.
In June 2017, the North Carolina corporate tax rate was lowered from 3% to 2.5%, effective in 2019. Management has determined initially that the impact
of the rate change on deferred tax assets is not material and will continue to monitor the impact until the new tax rate is effective in 2019.
Discussion of Results of Operations
For the nine months ended September 30, 2018 and 2017
Net Income and Net Income Available to Common Shareholders
Net income for the nine months ended September 30, 2018 was $2,006,000 compared to $758,000 for the nine months ended September 30, 2017, an increase of
$1.2 million. Diluted earnings per common share was $0.32 for the nine months ended September 30, 2018 and $0.16 for the nine months ended September 30, 2017.
Net Interest Income
Net interest income for the nine months ended September 30, 2018 totaled $12,053,000 compared to $10,214,000 for the nine months ended September 30,
2017. The Company’s net interest spread was approximately 3.56% and 3.62% for the nine months ended September 30, 2018 and 2017, respectively. Net interest margin on average interest earning assets was 3.79% and 3.77% for the nine months ended
September 30, 2018 and 2017, respectively. The decrease in net interest spread was 0.06%, and the increase in net interest margin was 0.02%, respectively. These variances were attributed to the same causes that were provided in the discussion of
quarterly results above.
Provision for Loan Losses
The Company recorded provision for loan losses of $415,000 and $555,000 for the nine months ended September 30, 2018 and 2017, respectively. This
decrease in the provision for loan losses is due to a decrease in the amount of impaired loans with an allowance. The provision for loan losses is charged to operations to bring the allowance to a level deemed appropriate based on management’s
evaluation of the adequacy of the allowance for loan losses.
Non-interest Income
Non-interest income for the nine months ended September 30, 2018 and 2017 totaled $1,070,000 and $732,000, respectively. The increase of $338,000 is
comprised of overdraft fees on deposits and the unrealized gain on equity securities. Overdraft fees on deposits increased by $118,000 or 39.83% and the unrealized gain on equity
securities was $123,000. On January 1, 2018 the net unrealized loss on equity securities was reclassified from accumulated other comprehensive income to retained earnings and from that date forward will be recorded on the income statement.
Interchange fees, or “swipe” fees, are charges that merchants pay to the Bank and other card-issuing banks for processing electronic payment
transactions. Interchange fees consist of income from check card usage, point of sale income from PIN-based debit card transactions and ATM service fees. With the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, in
2018, interchange fees are reported net of related costs. See Note 2 – Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Previously, such costs were reported as check
card expense. Interchange fees for the nine months ended September 30, 2018 and September 30, 2017 reported on a net basis totaled $165,000 and $96,000, respectively.
Non-interest Expense
Non-interest expenses for the nine months ended September 30, 2018 and 2017 totaled $10,043,000 and $9,265,000, respectively. The $778,000 increase was
due in part to $480,000 of merger expenses for the proposed acquisition of Clover Community Bank and a $217,000, or 4.12%, increase in compensation expense due to salary and wage increases. The increase in salaries and wages was attributable to
annual raises and performance bonuses and a net addition of one full-time equivalent employee. Foreclosed asset expense also increased $170,000 due to the valuation adjustment of three properties and maintenance work completed on another
property. Slightly offsetting these increases was a $150,000 or 20.41% decrease in data processing expenses. During the first quarter of 2017, data processing expenses were higher due to the conversion of our core processing system that was
complete in April of that year.
Income Tax Expense
The Company recorded income tax expense of $659,000 for the nine months ended September 30, 2018 resulting in an effective tax rate of 25%. For the same
period in 2017, the Company recorded income tax expense of $368,000 with an effective tax rate of 33%. The Company’s federal income tax rate was lowered from 34% to 21% due to the enactment of the Tax Cuts and Jobs Act of 2017 on December 22,
2017. For 2018, the effective tax rate is higher than the statutory rate mainly due to the $242,000 in merger expenses that are non-deductible.
In June 2017, the North Carolina corporate tax rate was lowered from 3% to 2.5%, effective in 2019. Management has determined initially that the impact
of the rate change on deferred tax assets is not material and will continue to monitor the impact until the new tax rate is effective in 2019
Liquidity
The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost effective
manner. The Company’s principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid assets, and funds provided by operations. While scheduled loan
payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Liquid assets, which consist of cash and due
from banks, interest-earning deposits with banks, certificates of deposit with banks, investment securities classified as available-for-sale, and equity securities represented 14.54% and 10.25% of total assets at September 30, 2018 and December
31, 2017, respectively.
Should the need arise, management believes the Company would have the capability to sell securities classified as available-for-sale or to borrow funds
as necessary to meet the Company’s cash flow demands. The Company has established credit lines with other financial institutions to purchase up to $15.5 million in federal funds and to borrow up to $10 million under a reverse repurchase
agreement. There were no borrowings outstanding against these credit lines at September 30, 2018. The Company has also established a credit line with the Federal Home Loan Bank of Atlanta. The credit line is secured by a portion of the Company’s
loan portfolio that qualifies under FHLB guidelines as eligible collateral. Total availability, based on collateral pledged at September 30, 2018 was $80.9 million, of which $16.1 million was advanced and $7 million was securing a letter of
credit. The Company also has $3 million available in a loan agreement with the Community Bankers’ Bank as previously discussed in the Discussion of Financial Condition.
Total deposits were $386.5 million and $340.7 million at September 30, 2018 and December 31, 2017, respectively. Time deposits, which are the only
deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 44.68% and 45.20% of total deposits at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and
December 31, 2017, the Company had brokered time deposits of $17.2 million and $23.3 million, respectively. The Company also obtains time accounts by connecting with institutional depositors through an online listing service. At September 30,
2018 and December 31, 2017, respectively, the deposits attributed to the listing service were $11.0 million and $14.3 million, respectively. Management accepts time deposits from outside the Bank’s local market area when such funding sources are
necessary to fund growth and the rates paid are comparable to rates offered to retail customers or lower. Management believes most time deposits are relationship-oriented. While the Company will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company
anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.
Management believes that the Company’s current sources of funds provide adequate liquidity for its current cash flow needs.
Capital Resources
Future growth and expansion of the Company are dictated by the ability to create capital, which is generated principally by retained earnings. Adequacy
of the Company’s capital is also monitored to ensure compliance with regulatory requirements. One of management’s primary objectives is to maintain a strong capital position in order to warrant confidence from customers, investors, bank
regulators and stockholders. A measure of capital position is capital adequacy, defined as the amount of capital needed to maintain future asset growth and absorb unforeseen losses. Regulators consider a variety of factors in determining an
institution’s capital adequacy, including quality and stability of earnings, asset quality, guidance, expertise and liquidity. Regulatory guidelines place an emphasis on stockholders’ equity in relationship to total assets adjusted for risk.
In July 2013, the Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III
regulatory capital framework and meet certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules require 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. The rules also require the Bank to
maintain a capital conservation buffer. The capital conservation buffer requirement began January 1, 2016, at 0.625% of risk-weighted assets, and will increase by the same amount each year until fully implemented at 2.5% on January 1, 2019. The
capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face
constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.
When fully phased in on January 1, 2019, the rules will require the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets
of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least
7.0% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the 2.5% capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively
resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of total capital to risk-weighted assets of at least 8.0%, plus the 2.5% capital conservation buffer (which is added to the 8.0% total capital
ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.
Management considers the Bank to be well-capitalized and expects to be able to meet future needs caused by growth and expansion, as well as capital
requirements implemented by the regulatory agencies.
The Bank calculates regulatory capital under the U.S. Basel III Standardized Approach. As a small bank holding company with less than
$1 billion in total assets, the risk-based capital guidelines of the Federal Reserve do not apply to the Company on a consolidated basis.
The table below presents the regulatory capital ratios for the Bank.
At September 30, 2018 | ||||||||||||
Actual
Ratio
|
Minimum
Requirement
|
Well-Capitalized
Requirement
|
||||||||||
Common equity tier 1 capital ratio
|
12.21
|
%
|
4.50
|
%
|
6.50
|
%
|
||||||
Total risk-based capital ratio
|
13.19
|
%
|
8.00
|
%
|
10.00
|
%
|
||||||
Tier 1 risk-based capital ratio
|
12.21
|
%
|
6.00
|
%
|
8.00
|
%
|
||||||
Tier 1 leverage ratio
|
10.56
|
%
|
4.00
|
%
|
5.00
|
%
|
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-14.
Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective. No change in the Company’s internal control over financial reporting
occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II.
|
OTHER INFORMATION
|
Exhibit #
|
Description
|
|
Agreement and Plan of Merger Reorganization by and between Carolina Trust BancShares, Inc. and Clover Community Bankshares, Inc., dated as of
June 14, 2018 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 20, 2018)
|
||
2018 Supplemental Executive Retirement Plan Agreement dated August 31, 2018, with Edwin E. Laws (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K filed with the SEC on September 4, 2018)
|
||
2018 Supplemental Executive Retirement Plan Agreement dated August 31, 2018, with Jerry L. Ocheltree (incorporated by reference to Exhibit 10.2
to the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2018)
|
||
2018 Supplemental Executive Retirement Plan Agreement dated August 31, 2018, with Richard M. Rager (incorporated by reference to Exhibit 10.3 to
the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2018)
|
||
First Amendment to the 2014 Supplemental Executive Retirement Plan Agreement for Jerry L. Ocheltree dated August 31, 2018 (incorporated by
reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2018)
|
||
Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith)
|
||
Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith)
|
||
Section 1350 Certification (furnished herewith)
|
||
101
|
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2018 and
December 31, 2017; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2018 and 2017; (iii) Condensed Consolidated Statements of Operations (Unaudited) for the Nine Months Ended
September 30, 2018 and 2017; (iv) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended September 30, 2018 and 2017; (v) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for
the Nine Months Ended September 30, 2018 and 2017; (vi) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2018 and 2017; (vii) Condensed Consolidated Statements of
Cash Flows (Unaudited) for the Nine Months Ended September 30, 2018 and 2017; and (viii) Notes to Condensed Consolidated Financial Statements (Unaudited)
|
*Compensatory plan.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAROLINA TRUST BANCSHARES, INC.
|
|||
Date: November 9, 2018
|
By:
|
/s/
|
Jerry L. Ocheltree |
Jerry L. Ocheltree
|
|||
President and Chief Executive Officer
|
|||
Date: November 9, 2018
|
By:
|
/s/
|
Edwin E. Laws |
Edwin E. Laws
|
|||
Executive Vice President and Chief Financial Officer
|
49