Carolina Trust BancShares, Inc. (Form: 10-Q, Received: 05/14/2019 17:26:40)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2019

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)

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 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 ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of exchange on which registered
Common stock, par value $2.50 per share		CART		The Nasdaq Stock Market LLC

The number of shares of the registrant’s common stock outstanding as of May 13, 2019 was 9,296,977.

TABLE OF CONTENTS

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets March 31, 2019 and December 31, 2018	2

		Condensed Consolidated Statements of Operations Three Months Ended March 31, 2019 and 2018	3

		Condensed Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2019 and 2018	4

		Condensed Consolidated Statements of Changes in Stockholders’ Equity Three Months Ended March 31, 2019 and 2018	5

		Condensed Consolidated Statements of Cash Flows Three Months Ended March 31, 2019 and 2018	6

		Notes to Condensed Consolidated Financial Statements	7

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37

Item 4 -	Controls and Procedures		46

Part II.	OTHER INFORMATION

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 6 -	Exhibits		47

Table of Contents

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

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

	March 31, 2019			December 31, 2018*
Assets
Cash and due from banks	$	13,528		$	10,918
Interest-earning deposits with banks		28,731			21,022
Cash and cash equivalents		42,259			31,940

Certificates of deposit with banks		2,838			1,498
Investment securities available for sale, at fair value (amortized cost $68,812 and $32,677)		68,978			31,960
Equity securities		751			617
Federal Home Loan Bank stock		1,226			1,050
Loans		474,239			393,282
Less: Allowance for loan losses		(4,068	)		(3,978	)
Net Loans		470,171			389,304

Bank-owned life insurance		10,966			7,393
Accrued interest receivable		1,840			1,259
Bank premises, equipment and software		8,935			6,093
Foreclosed assets		2,190			1,157
Goodwill		5,355			-
Core deposit intangibles, net of accumulated amortization of $905 and $744 at March 31, 2019 and December 31, 2018, respectively		3,039			40
Other assets		2,731			2,793
Total Assets	$	621,279		$	475,104

Liabilities and Stockholders’ Equity
Noninterest-earning demand deposits	$	101,274		$	61,120
Interest-earning demand deposits		193,830			142,899
Savings		39,637			22,693
Time deposits		188,649			168,437
Total deposits		523,390			395,149

Finance lease obligation		123			141
Federal Home Loan Bank advances		16,100			16,100
Long term subordinated debt		9,773			9,753
Accrued interest payable		680			421
Other liabilities		3,835			3,279
Total liabilities		553,901			424,843

Common stock warrant		-			426
Common stock, $2.50 par value; 10,000,000 shares authorized; 9,296,977 and 7,156,987 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		23,242			17,892
Additional paid-in capital		36,392			25,211
Retained earnings		7,618			7,281
Accumulated other comprehensive income (loss)		126			(549	)
Total stockholders’ equity		67,378			50,261
Total Liabilities and Stockholders’ Equity	$	621,279		$	475,104

*Derived from Carolina Trust BancShares, Inc.’s audited financial statements included in its 2018 Annual Report on Form 10-K

See accompanying notes to Condensed Consolidated Financial Statements.

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CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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

	Three Months Ended March 31,
	2019		2018
Interest Income
Interest on investment securities	$	510	$	207
Interest and fees on loans		6,420		4,578
Other interest income		150		42
Total interest income		7,080		4,827

Interest Expense
Interest expense non-maturity deposits		341		146
Interest expense time deposits		809		608
Interest expense borrowed funds		76		110
Interest expense on subordinated debt		192		191
Interest expense, other		4		5
Total interest expense		1,422		1,060
Net interest income		5,658		3,767
Provision for loan losses		77		252
Net interest income after loan loss provision		5,581		3,515

Noninterest income
Overdraft fees on deposits		200		140
Interchange fee income, net		80		46
Service charges on deposits		37		15
Mortgage fee income		125		15
Customer service fees		22		15
ATM income		8		6
Bank-owned life insurance income		66		49
Unrealized gain on equity securities		68		38
Other income		14		6
Total noninterest income		620		330

Noninterest expense
Salaries & benefits expense		2,419		1,863
Occupancy expense		231		228
Furniture, fixture & equipment expense		204		157
Data processing expense		245		202
Office supplies expense		36		20
Professional fees		112		111
Advertising and marketing		46		32
Insurance		36		94
Foreclosed asset expense, net		23		26
Loan expense		81		28
Stockholder expense		45		34
Directors fees and expenses		107		74
Telephone expense		97		71
Amortization of core deposit intangibles		161		9
Merger expenses		1,722		-
Other operating expense		226		147
Total noninterest expense		5,791		3,096
Pre-tax income		410		749
Income tax expense		73		168
Net income	$	337	$	581

Earnings per share
Basic earnings per common share	$	0.04	$	0.12
Diluted earnings per common share	$	0.04	$	0.12
Weighted average common shares outstanding		9,290,811		4,660,325
Diluted average common shares outstanding		9,366,831		4,764,274

See accompanying notes to Condensed Consolidated Financial Statements.

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CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019			2018

Net income	$	337		$	581

Other comprehensive income (loss):
Unrealized gain (loss) on investment securities:
Unrealized holding gains (losses) arising during period		882			(440	)
Deferred income tax benefit (expense)		(207	)		103
Total other comprehensive income (loss)		675			(337	)

Total comprehensive income	$	1,012		$	244

See accompanying notes to Condensed Consolidated Financial Statements.

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CAROLINA TRUST BANCSHARES, INC.

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

(Dollars in thousands)

				Common Stock
	Warrant			Shares		Amount		Additional paid-in capital		Retained earnings			Accumulated other comprehensive income (loss)			Total

Balances at December 31, 2017	$	426			4,657,880	$	11,645	$	13,008	$	4,772		$	(732	)	$	29,119
Net income		-			-		-		-		581			-			581
Exercise of stock options		-			3,107		7		8		-			-			15
Stock based compensation		-			-		-		1		-			-			1
Reclassification of certain tax effects		-			-		-		-		(443	)		443			-
Other comprehensive loss		-			-		-		-		-			(337	)		(337	)
Balance at March 31, 2018	$	426			4,660,987	$	11,652	$	13,017	$	4,910		$	(626	)	$	29,379

Balances at December 31, 2018	$	426			7,156,987	$	17,892	$	25,211	$	7,281		$	(549	)	$	50,261
Net income		-			-		-		-		337			-			337
Exercise of stock options		-			2,257		6		-		-			-			6
Acquisition of Clover Community Bankshares, Inc.		-			2,123,858		5,310		10,789		-			-			16,099
Exercise of warrant		(426	)		13,875		35		391		-			-			-
Other comprehensive income		-			-		-		-		-			675			675
Balance at March 31, 2019	$	-			9,296,977	$	23,243	$	36,391	$	7,618		$	126		$	67,378

See accompanying notes to Condensed Consolidated Financial Statements.

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CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Three Months Ended March 31,
	2019			2018
Cash flows from operating activities
Net income	$	337		$	581
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:
Provision for loan losses		77			252
Depreciation and amortization of bank premises, equipment and software, and operating lease right-of-use assets		179			115
Acquired loan accretion		(117	)		(1	)
Accretion of time deposit discount and amortization of core deposit intangibles		173			9
Net amortization of bond premiums/discounts		87			33
Amortization of long-term subordinated debt issuance costs		20			19
Unrealized gain on equity securities		(68	)		(38	)
Stock compensation expense		-			1
Increase in value of bank-owned life insurance		(66	)		(49	)
Deferred tax provision		(143	)		(22	)
Decrease (increase) in other assets		(156	)		98
Increase in accrued interest receivable		(66	)		(14	)
Increase in accrued interest payable		22			209
Decrease in other liabilities		(1,535	)		(222	)
Net cash and cash equivalents provided by (used in) operating activities		(1,256	)		971

Cash flows from investing activities
Net cash received from acquisition		8,740			-
Net increase in loans		(16,786	)		(19,856	)
Net purchases of bank premises, equipment and software		(93	)		(9	)
Proceeds from maturities, calls and pay-downs of available for sale securities		3,302			814
Purchase of Federal Home Loan Bank stock		(176	)		(219	)
Net cash and cash equivalents used in investing activities		(5,013	)		(19,270	)

Cash flows from financing activities
Increase in deposits		16,600			32,249
Increase in Federal Home Loan Bank advances		-			4,500
Finance lease payments		(18	)		(16	)
Issuance of long term debt		-			2,993
Net proceeds from stock option exercises		6			15
Net cash and cash equivalents provided by financing activities		16,588			39,741
Net increase in cash and cash equivalents		10,319			21,442

Cash and cash equivalents, beginning		31,940			9,056
Cash and cash equivalents, ending	$	42,259		$	30,498

Supplemental disclosure of cash flow information
Cash paid during the period for taxes	$	-		$	70
Cash paid during the period for interest	$	1,401		$	851

Noncash financing and investing activities
Unrealized gain (loss) on investment securities available-for-sale, net of taxes	$	675		$	(337	)
Transfer of loans to foreclosed assets	$	73		$	1,426
Fair value of assets acquired	$	115,503		$	-
Fair value of liabilities assumed	$	113,500		$	-
Initial recognition of operating lease right-of-use assets	$	457		$	-
Initial recognition of operating lease liabilities	$	443		$	-

See accompanying notes to Condensed Consolidated Financial Statements.

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

(1)	Presentation of Financial Statements

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

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for fair presentation of the financial information as of March 31, 2019, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019.

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 2018 Annual Report on Form 10-K. This quarterly report should be read in conjunction with the Annual Report.

(2)	Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , which amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. ASU 2016-02 was effective for the Company on January 1, 2019. The standard provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. The Company has elected to apply the standard as of the beginning of the period of adoption (January 1, 2019) and did not restate comparative periods. The Company has adopted all the optional practical expedients available under ASU 2016-02.

The operating leases of the Company relate to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use (“ROU”) asset of $457,000 and an operating lease liability of $443,000 on January 1, 2019, with no impact on net income or stockholders’ equity. The ROU asset and operating lease liability are recorded in bank premises, equipment and software and other liabilities, respectively, in the consolidated balance sheet as of March 31, 2019. See Note 12 - Leases for additional information.

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

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

Acquisition of Clover Community Bankshares, Inc.

On January 1, 2019 the Company acquired Clover Community Bankshares, Inc. (“Clover”), the parent holding company for Clover Community Bank, Clover, South Carolina. Pursuant to the Agreement and Plan of Merger and Reorganization between the Company and Clover dated June 14, 2018, Clover merged with and into the Company, with the Company being the surviving corporation in the merger. Immediately following the parent merger, Clover Community Bank was merged with and into the Bank, also effective January 1, 2019. Pursuant to the merger agreement, each share of Clover capital stock was converted into either 2.7181 shares of the Company’s common stock or $22.00 in cash and subject to a prescribed allocation in the merger agreement that provided that of 80% of Clover shares would be converted to the stock consideration and 20% of Clover shared converted into the cash consideration. Overall, the Company issued 2,123,858 shares of Company common stock for 80% of the Clover shares and paid $3,008 in lieu of fractional shares that would otherwise have been issued. The cash merger consideration paid for 20% of the Clover shares totaled $4,298,360. The stock consideration was valued at $7.58 per share, based on the most recent closing price reported on The Nasdaq Stock Market for a share of Company common stock on the date immediately preceding the merger date. In accordance with the merger agreement, cash in lieu of fractional shares was valued at a rate of $7.63 per share, based on the 20-day average closing price for a share of Company common stock for the 20-trading days immediately preceding the merger date. The total purchase price paid was $20.4 million.

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

The transaction was accounted for using the purchase method of accounting for business combinations. Under the purchase method of accounting, the assets and liabilities of Clover were recorded based on estimates of fair values as of January 1, 2019.

The following table summarizes the allocation of the purchase price to the assets acquired and the liabilities assumed based on their estimated fair value:

(Dollars in thousands)	As Recorded by Clover			Fair Value Adjustments			As Recorded by the Company
Assets
Cash and cash equivalents	$	13,042		$	-		$	13,042
Certificates of deposit with banks		1,340			-			1,340
Securities		39,637			(45	)		39,592
Loans		66,343			(2,218	)		64,125
Allowance for loan losses		(1,452	)		1,452			-
Bank premises, equipment and software		1,827			644			2,471
Core deposit intangible		-			3,160			3,160
Other assets		5,854			(1,039	)		4,815
Total	$	126,591		$	1,954		$	128,545

Liabilities
Deposits	$	111,675		$	(46	)	$	111,629
Other liabilities		1,438			433			1,871
Total	$	113,113		$	387		$	113,500

Net identifiable assets acquired							$	15,045

Total cost of acquisition
Value of stock issued				$	16,099
Cash paid in the acquisition					4,301
Total cost of acquisition								20,400

Goodwill recorded							$	5,355

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

The following table presents the purchased credit impaired (“PCI”) and non-PCI loans receivable at the acquisition date. The amounts include principal only and do not reflect accrued interest as of the date of the acquisition or beyond:

Dollars in thousands	PCI loans			Non-PCI loans			Total loans acquired
January 1, 2019
Gross contractual amount receivable	$	5,246		$	61,097		$	66,343
Fair value adjustments		(1,311	)		(907	)		(2,218	)
Fair value of loans receivable	$	3,935		$	60,190		$	64,125

Goodwill recorded for Clover represents future revenues to be derived, including efficiencies that will result from combining operations, and other non-identifiable intangible assets. None of the goodwill is expected to be deductible for tax purposes.

The following pro forma financial information presents the combined results of the Company and Clover as if the acquisition had occurred as of January 1, 2018. The pro forma results are adjusted for acquisition-related expense and are not necessarily indicative of the results of operations that would have occurred had the acquisition actually taken place on January 1, 2018, nor of future results of operations.

Pro forma income statement line items	Three Months Ended March 31,
	2019			2018
Dollars in thousands
Net interest income	$	5,641		$	5,112
Noninterest income		620			635
Total revenue		6,261			5,747

Net income available to common shareholders	$	1,663	*	$	819

Earnings per common share
Basic	$	0.18		$	0.11
Diluted		0.18			0.11

*Pro forma net income for the three months ended March 31, 2019 excludes nonrecurring merger related expenses that were recognized during the period. Pro forma net income has been adjusted to exclude $1,722,000 of merger related expenses, or $1,328,000, net of tax, that was recognized for the three months ended March 31, 2019. Merger related expenses include payments to Clover employees for severance contracts, data processing conversion expenses, investment banker fees, consulting and auditing fees.

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

(4)	Earnings Per Share

Basic Earnings per Common Share

Basic earnings per common share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period, after giving retroactive effect to stock splits and dividends.

Diluted Earnings per Common Share

The computation of diluted earnings per common share is similar to the computation of basic earnings per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if dilutive potential common shares had been issued. These additional common shares would include employee equity share options, nonvested shares and similar equity instruments granted to employees, as well as the shares associated with the common stock warrants issued to the U.S. Treasury Department as part of the preferred stock transaction completed in February 2009. Diluted earnings per common share are based upon the actual number of options or shares granted and not yet forfeited unless doing so would be antidilutive. The numerator is adjusted for any changes in income or loss that would result from the assumed conversion of those potential common shares.

In June 2013, the U.S. Treasury sold the warrant to a private investor 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 was exercised on February 5, 2019. In accordance with the warrant provisions, the warrant holder received 13,875 shares in a cashless exercise. Payment of the warrant exercise price (i.e. 86,957 shares x $6.90/share = $600,003, the exercise price) was made by withholding, from the number of shares that would otherwise be delivered to the warrant holder upon such exercise, shares based on the closing market price of the Company’s common stock on February 1, 2019, which was $8.21 per share. Thus, 73,082 shares (i.e. $600,003 / $8.21/share) were withheld as payment for the warrant exercise, which resulted in 13,875 shares (i.e. 86,957 shares minus 73,082 shares) being issued to the warrant holder.

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

The following table summarizes earnings per share and the shares utilized in the computations for the three months ended March 31, 2019 and 2018, respectively:

Dollars in thousands, except per share data	Net Income		Weighted Average Common Shares		Per Share Amount
Three months ended March 31, 2019
Basic earnings per common share	$	337		9,290,811	$	0.04
Effect of dilutive stock securities		-		70,801
Effect of dilutive stock warrants		-		5,219
Diluted earnings per common share	$	337		9,366,831	$	0.04

Three months ended March 31, 2018
Basic earnings per common share	$	581		4,660,325	$	0.12
Effect of dilutive stock securities		-		80,735
Effect of dilutive stock warrants		-		23,214
Diluted earnings per common share	$	581		4,764,274	$	0.12

For the three months ended March 31, 2019, there were no anti-dilutive shares. For the three months ended March 31, 2018, there were 500 shares related to stock options that were anti-dilutive because the exercise price exceeded the average market price of the Company’s common stock for the period. Therefore, they were omitted from the calculation of diluted earnings per share for their respective periods.

(5)	Fair Value Measurements

The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair value. These fair value estimates are made at each reporting 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.

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

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.

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.

Finance 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 10, the fair value amounts are not material.

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

The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at March 31, 2019 and December 31, 2018:

			Fair Value Measurements at March 31, 2019 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	$	13,528	$	13,528	$	-	$	-	$	13,528
Interest-earning deposits with banks		28,731		28,731		-		-		28,731
Certificates of deposit with banks		2,838		-		2,824		-		2,824
Federal Home Loan Bank stock		1,226		-		1,226		-		1,226
Investment securities available for sale		68,978		-		68,013		965		68,978
Equity securities		751		751		-		-		751
Net loans		470,171		-		-		457,171		457,171
Accrued interest receivable		1,840		-		1,840		-		1,840

LIABILITIES
Deposits	$	523,390	$	-	$	512,674	$	-	$	512,674
Finance lease obligation		123		-		123		-		123
Federal Home Loan Bank Advances		16,100		-		16,099		-		16,099
Long term subordinated debt		9,773		-		9,644		-		9,644
Accrued interest payable		680		-		680		-		680

			Fair Value Measurements at December 31, 2018 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Dollars in thousands	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
ASSETS
Cash and due from banks	$	10,918	$	10,918	$	-	$	-	$	10,918
Interest-earning deposits with banks		21,022		21,022		-		-		21,022
Certificates of deposit with banks		1,498		-		1,484		-		1,484
Federal Home Loan Bank stock		1,050		-		1,050		-		1,050
Investment securities available for sale		31,960		-		31,960		-		31,960
Equity securities		617		617		-		-		617
Net loans		389,304		-		-		378,675		378,675
Accrued interest receivable		1,259		-		1,259		-		1,259

LIABILITIES
Deposits	$	395,149	$	-	$	389,493	$	-	$	389,493
Capital lease obligation		141		-		141		-		141
Federal Home Loan Bank Advances		16,100		-		16,053		-		16,053
Long term subordinated debt		9,753		-		9,946		-		9,946
Accrued interest payable		421		-		421		-		421

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

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

Fair Value Hierarchy

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

Level 1

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

Level 2

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

Level 3

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

Following is a description of valuation methodologies used for assets and liabilities recorded at fair value.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The table below presents the recorded amount of assets and liabilities measured on a recurring basis.

	Total		Level 1		Level 2		Level 3
Dollars in thousands
March 31, 2019
Available-for-Sale Securities
U.S. Government and federal agency	$	19,659	$	-	$	19,659	$	-
Mortgage-backed securities*		30,459		-		30,459		-
Municipal securities		17,895		-		17,895		-
Corporate debt securities		965		-		-		965
Total available-for-sale securities		68,978		-		68,013		965
Equity securities		751		751		-		-
Total	$	69,729	$	751	$	68,013	$	965

December 31, 2018
Available-for-Sale Securities
U.S. Government and federal agency	$	10,789	$	-	$	10,789	$	-
Mortgage-backed securities*		20,541		-		20,541		-
Municipal securities		630		-		630		-
Total available-for-sale securities		31,960		-		31,960		-
Equity securities		617		617		-		-
Total	$	32,577	$	617	$	31,960	$	-

*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.

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

The Company did not have any transfers of assets between Levels 1, 2 or 3 during the periods ended March 31, 2019 and December 31, 2018.

The tables below present the changes during the three months ended March 31, 2019 in the amount of Level 3 assets measured on a recurring basis.

	March 31, 2019
Dollars in thousands
Balance, beginning of period	$	-
Additions		956
Change in valuation recognized in OCI		9
Balance, end of period	$	965

The Company did not have any Level 3 assets as of March 31, 2018.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures it for impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, a loan’s observable market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value exceeds the recorded investments in such loans. At March 31, 2019, 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-six loans totaling $2.4 million. At December 31, 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-two loans totaling $2.4 million. Impaired loans where an allowance is established based on the fair value of collateral and also when written down with the discounted cash flow method require classification in the fair value hierarchy. The fair value of the collateral for an impaired loan is classified as Level 3. Although appraisals of these properties are frequently based on comparable properties, they are not identical. Significant unobservable inputs will need to be used in assessing the value. When the discounted cash flows method is used, the Company records the impaired loan as nonrecurring Level 3. There have been no changes in valuation techniques for the period ended March 31, 2019. Valuation techniques are consistent with techniques used in prior periods.

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

The following table presents impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral or discounted cash flows during the three months ended March 31, 2019 and 2018.

	March 31
Dollars in thousands	2019			2018
Carrying value of impaired loans before allocations	$	1,687		$	1,873
Specific valuation allowance allocations		(231	)		(255	)
Carrying value of impaired loans after allocations	$	1,456		$	1,618

Foreclosed Assets

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

The carrying value of foreclosed assets is periodically reviewed and written down to fair value. Any loss is included in earnings. For the period ended March 31, 2019 foreclosed assets in the amount of $145,000 were written down by $72,000 to $73,000 prior to foreclosure. For the period ended March 31, 2018, foreclosed assets in the amount of $1,158,000 were written down by $180,000 to $978,000 prior to foreclosure. For the periods ended March 31, 2019 and 2018, there were no re-measurements of foreclosed assets subsequent to foreclosure.

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

	Total		Level 1		Level 2		Level 3
Dollars in thousands
March 31, 2019
Foreclosed assets	$	73	$	-	$	-	$	73
Impaired loans		1,456		-		-		1,456
Total	$	1,529	$	-	$	-	$	1,529

December 31, 2018
Foreclosed assets	$	942	$	-	$	-	$	942
Impaired loans		1,487		-		-		1,487
Total	$	2,429	$	-	$	-	$	2,429

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

Quantitative information about level 3 fair value measurements:

	Fair Value		Valuation Technique	Unobservable Input	Range			Weighted Average
Dollars in thousands
March 31, 2019
Impaired loans	$	1,456	Discounted cash flows	Discount rate		4.75% - 8.50	%		7.08	%
Foreclosed assets		73	Discounted appraisals	Appraisal adjustments		8.00	%		8.00	%

December 31, 2018
Impaired loans	$	122	Discounted appraisals	Appraisal adjustments		15.00	%		15.00	%
		1,365	Discounted cash flows	Discount rate		4.75 – 8.50	%		7.05	%

Foreclosed assets		942	Discounted appraisals	Appraisal adjustments		8.00% - 15.00	%		9.68	%

(6)	Investment Securities

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

In thousands	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
March 31, 2019
Available-for-sale:
U.S. Government and federal agency	$	19,714	$	104	$	(159	)	$	19,659
Mortgage-backed securities *		30,520		247		(308	)		30,459
Municipal securities		17,622		276		(3	)		17,895
Corporate debt securities		956		9		-			965
Total available-for-sale securities		68,812		636		(470	)		68,978
Equity securities		1,271		-		(520	)		751
Total	$	70,083	$	636	$	(990	)	$	69,729

December 31, 2018
Available-for-sale:
U.S. Government and federal agency	$	11,036	$	6	$	(253	)	$	10,789
Mortgage-backed securities *		21,010		36		(505	)		20,541
Municipal securities		631		1		(2	)		630
Total available-for-sale securities		32,677		43		(760	)		31,960
Equity securities		1,204		-		(587	)		617
Total	$	33,881	$	43	$	(1,347	)	$	32,577

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

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

The amortized cost and fair values of securities available for sale at March 31, 2019 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Dollars in thousands
Due within one year	$	1,003	$	1,004
Due after one but within five years		12,337		12,322
Due after five but within ten years		17,040		17,119
Due after ten years		38,432		38,533
	$	68,812	$	68,978

The following table details unrealized losses and related fair values in the Company’s available for sale investment security portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2019 and December 31, 2018, 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
March 31, 2019

U.S. Government and federal agency	$	3,716	$	(24	)	$	9,711	$	(135	)	$	13,427	$	(159	)
Mortgage-backed securities *		274		(10	)		13,282		(298	)		13,556		(308	)
Municipal Securities		400		(3	)		-		-			400		(3	)
Total temporarily impaired securities	$	4,390	$	(37	)	$	22,993	$	(433	)	$	27,383	$	(470	)

December 31, 2018

U.S. Government and federal agency	$	-	$	-		$	10,657	$	(253	)	$	10,657	$	(253	)
Mortgage-backed securities *		2,885		(10	)		13,644		(495	)		16,529		(505	)
Municipal Securities		-		-			290		(2	)		290		(2	)
Total temporarily impaired securities	$	2,885	$	(10	)	$	24,591	$	(750	)	$	27,476	$	(760	)

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

Management considers the nature of the investment, the underlying causes of the decline in the market value and the severity and duration of the decline in market value in determining if impairment is other than temporary. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of March 31, 2019 management believes that it is more likely than not that the Bank will not have to sell any such securities before a recovery of cost. The unrealized losses are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or repricing date or if market yields for such investments decline.

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality. Accordingly, as of March 31, 2019, 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 $6.6 million were pledged to secure public funds. The Company had no sales of securities during the first quarter of 2019.

(7)

Loans

Loans are summarized in the following table which include $3.3 million at March 31, 2019 of PCI loans resulting from the acquisition of Clover on January 1, 2019; loans purchased with evidence of credit deterioration since origination and for which it is probable that all contractually required payments will not be collected are considered PCI loans.

	March 31, 2019								December 31, 2018
Dollars in thousands	Loans - excluding PCI		PCI Loans		Total Loans		Loans - excluding PCI		PCI Loans		Total Loans
Commercial real estate
Residential ADC	$	7,645	$	-	$	7,645	$	4,650	$	-	$	4,650
Commercial ADC		29,843		12		29,855		20,790		-		20,790
Farmland		5,563		-		5,563		4,833		-		4,833
Multifamily		19,156		-		19,156		18,537		-		18,537
Owner occupied		124,824		1,605		126,429		103,983		-		103,983
Non-owner occupied		107,254		-		107,254		97,034		-		97,034
Total commercial real estate		294,285		1,617		295,902		249,827		-		249,827

Commercial
Commercial and industrial		58,797		907		59,704		49,499		-		49,499
Agriculture		250		-		250		262		-		262
Other		3,873		-		3,873		1,573		-		1,573
Total commercial		62,920		907		63,827		51,334		-		51,334

Residential mortgage
First lien, closed-end		66,102		710		66,812		53,395		-		53,395
Junior lien, closed-end		1,401		3		1,404		812		-		812
Total residential mortgage		67,503		713		68,216		54,207		-		54,207

Home equity lines		39,697		-		39,697		33,968		-		33,968
Consumer – other		6,508		89		6,597		3,946		-		3,946
Total loans	$	470,913	$	3,326	$	474,239	$	393,282	$		$	393,282

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

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

Non-Accrual and Past Due Loans

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

	March 31, 2019		December 31, 2018
Dollars in thousands
Commercial real estate
Commercial ADC	$	38	$	42
Owner occupied		894		932
Non-owner occupied		4		4
Total commercial real estate		936		978
Commercial
Commercial and industrial		33		-
Total commercial		33		-
Residential mortgage:
First lien, closed end		51		57
Junior lien, closed end		3		4
Total residential mortgage		54		61
Home equity lines		-		-
Consumer – other		11		7
Total non-accrual loans	$	1,034	$	1,046

Interest foregone on non-accrual loans was approximately $23,000 for the three months ended March 31, 2019 and $15,000 for the three months ended March 31, 2018.

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

In thousands	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
March 31, 2019
Commercial real estate:
Residential ADC	$	-	$	-	$	-	$	7,645	$	7,645	$	-
Commercial ADC		-		-		-		29,855		29,855		-
Farmland		-		-		-		5,563		5,563		-
Multifamily		-		-		-		19,156		19,156		-
Owner occupied		13		891		904		125,525		126,429		-
Non-owner occupied		-		4		4		107,250		107,254		-
Total commercial real estate		13		895		908		294,375		295,902		-
Commercial:
Commercial and industrial		450		34		484		59,220		59,704		-
Agriculture		-		-		-		250		250		-
Other		-		-		-		3,873		3,873		-
Total commercial		450		34		484		63,337		63,827		-
Residential mortgage:
First lien, closed end		281		29		310		66,502		66,812		-
Junior lien, closed-end		-		-		-		1,404		1,404		-
Total residential mortgage		281		29		310		67,906		68,216		-
Home equity lines		56		-		56		39,641		39,697		-
Consumer – other		12		9		21		6,576		6,597		1
Total loans	$	812	$	967	$	1,779	$	472,460	$	474,239	$	1

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

In thousands	Loans 30-89 Days Past Due		Loans 90 or More Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
December 31, 2018
Commercial real estate:
Residential ADC	$	-	$	-	$	-	$	4,650	$	4,650	$	-
Commercial ADC		39		-		39		20,751		20,790		-
Farmland		-		-		-		4,833		4,833		-
Multifamily		-		-		-		18,537		18,537		-
Owner occupied		-		927		927		103,056		103,983		-
Non-owner occupied		-		4		4		97,030		97,034		-
Total commercial real estate		39		931		970		248,857		249,827		-
Commercial:
Commercial and industrial		126		-		126		49,373		49,499		-
Agriculture		-		-		-		262		262		-
Other		-		-		-		1,573		1,573		-
Total commercial		126		-		126		51,208		51,334		-
Residential mortgage:
First lien, closed end		247		33		280		53,115		53,395		-
Junior lien, closed-end		-		-		-		812		812		-
Total residential mortgage		247		33		280		53,927		54,207
Home equity lines		85		-		85		33,883		33,968		-
Consumer – other		-		13		13		3,933		3,946		5
Total loans	$	497	$	977	$	1,474	$	391,808	$	393,282	$	5

At March 31, 2019 there was one loan in the amount of $1,000 past due 90 days or more, which was still accruing interest. There was one loan in the amount of $5,000 past due 90 days or more and still accruing interest at December 31, 2018.

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

Impaired loans

Impaired loans are set forth in the following tables.

March 31, 2019
In thousands	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
Commercial real estate
Commercial ADC	$	38	$	38	$	-	$	-
Owner occupied		2,350		2,214		136		1
Non-owner occupied		4		4		-		-
Total commercial real estate		2,392		2,256		136		1
Commercial
Commercial and industrial		623		33		590		109
Residential mortgage
First lien, closed-end		859		50		749		40
Junior lien, closed- end		473		267		206		75
Total residential mortgage		1,332		317		955		115
Home equity lines		-		-		-		-
Consumer – other		11		5		6		6
Total loans	$	4,358	$	2,611	$	1,687	$	231

December 31, 2018
In thousands	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
Commercial real estate
Commercial ADC	$	42	$	42	$	-	$	-
Owner occupied		2,409		2,269		140		17
Non-owner occupied		5		5		-		-
Total commercial real estate		2,456		2,316		140		17
Commercial
Commercial and industrial		624		-		624		111
Residential mortgage
First lien, closed-end		876		56		760		42
Junior lien, closed- end		478		270		208		75
Total residential mortgage		1,354		326		968		117
Home equity lines		-		-		-		-
Consumer – other		7		7		-		-
Total loans	$	4,441	$	2,649	$	1,732	$	245

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

	3 months ended March 31, 2019				3 months ended March 31, 2018
In thousands	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate
Commercial ADC	$	40	$	-	$	2	$	-
Farmland		-		-		-		-
Multifamily		-		-		-		-
Owner occupied		2,379		19		1,531		23
Non-owner occupied		4		-		9		-
Total commercial real estate		2,423		19		1,542		23
Commercial
Commercial and industrial		614		13		370		12
Residential mortgage
First lien, closed-end		809		13		463		18
Junior lien, closed- end		475		5		329		7
Total residential mortgage		1,284		18		792		25
Home equity lines		-		-		52		1
Consumer – other		8		-		2		-
	$	4,329	$	50	$	2,758	$	61

Troubled Debt Restructurings

As of March 31, 2019, nine loans totaling $3,755,000 were identified as troubled debt restructurings and considered impaired, none of which had unfunded commitments. Ten loans totaling $3,856,000 were identified as troubled debt restructurings and considered impaired at December 31, 2018, none of which had unfunded commitments. Of the nine loans identified as troubled debt restructurings at March 31, 2019, eight loans totaling $3,070,000 were accruing interest. Of the ten loans identified as troubled debt restructurings at December 31, 2018, nine loans totaling $3,140,000 were accruing interest.

For the three months ended March 31, 2019, there were no concessions made on newly restructured loans.

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

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

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.

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

There were no loans that were modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three quarters ended March 31, 2019 and March 31, 2018.

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.

There were no loans that were modified as troubled debt restructurings within the previous 12 months as of March 31, 2019. The following table presents the successes and failures of the types of modifications within the previous 12 months as of March 31, 2018.

	Paid in full				Paying as restructured				Converted to non-accrual				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment
March 31, 2018	(Dollars in thousands)
Extended payment terms		-	$	-		1	$	2		-	$	-		-	$	-
Forgiveness of principal		-		-		2		426		-		-		-		-
Total		-	$	-		3	$	428		-	$	-		-	$	-

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.

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

•

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

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

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

Grade 9 – Loss . Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the loan even though partial recoveries may be realized in the future. Probable loss portions of doubtful assets should be charged against the allowance for loan losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.

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

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

March 31, 2019
Dollars in thousands	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial real estate:
Residential ADC	$	7,645	$	-	$	-	$	-	$	-
Commercial ADC		29,569		236		38		-		-
Farmland		5,563		-		-		-		-
Multifamily		19,156		-		-		-		-
Owner occupied		122,613		1,181		1,030		-		-
Non-owner occupied		107,129		-		125		-		-
Total commercial real estate		291,675		1,417		1,193		-		-
Commercial:
Commercial and industrial		57,517		896		384		-		-
Agriculture		250		-		-		-		-
Other		3,873		-		-		-		-
Total commercial		61,640		896		384		-		-
Residential mortgage:
First lien, closed-end		65,374		609		119		-		-
Junior lien, closed-end		928		412		61		-		-
Total residential mortgage		66,302		1,021		180		-		-
Home equity lines		39,066		631		-		-		-
Consumer – other		6,337		160		11		-		-
Purchased credit impaired loans		1,224		576		1,526		-		-
Total	$	466,244	$	4,701	$	3,294	$	-	$	-

December 31, 2018
Dollars in thousands	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial real estate:
Residential ADC	$	4,650	$	-	$	-	$	-	$	-
Commercial ADC		20,509		239		42		-		-
Farmland		4,833		-		-		-		-
Multifamily		18,537		-		-		-		-
Owner occupied		101,706		1,207		1,070		-		-
Non-owner occupied		96,907		-		127		-		-
Total commercial real estate		247,142		1,446		1,239		-		-
Commercial:
Commercial and industrial		48,157		981		361		-		-
Agriculture		262		-		-		-		-
Other		1,573		-		-		-		-
Total commercial		49,992		981		361		-		-
Residential mortgage:
First lien, closed-end		52,622		647		126		-		-
Junior lien, closed-end		334		416		62		-		-
Total residential mortgage		52,956		1,063		188		-		-
Home equity lines		33,198		770		-		-		-
Consumer – other		3,778		161		7		-		-
Total	$	387,066	$	4,421	$	1,795	$	-	$	-

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.

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

Based on this methodology, provisions for loan losses are made to maintain an adequate allowance for loan losses. The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance. The provision for loan losses is the amount necessary to adjust the allowance for loan losses to the amount that management has determined to be adequate to provide for probable losses inherent in the loan portfolio. The Company recorded provisions for loan losses of $77,000 and $252,000 for the quarters ended March 31, 2019 and 2018, respectively. Management realizes that general economic trends greatly affect loan losses, and no assurances can be made that future charges to the allowance for loan losses may not be significant in relation to the amount provided during a particular period, or that future evaluations of the loan portfolio based on conditions then prevailing will not require sizable additions to the allowance, thus necessitating similarly sizable charges to income.

Based on its best judgment, evaluation, and analysis of the loan portfolio, management considers the allowance for loan losses to be appropriate in light of the risk inherent in the Company’s loan portfolio for the reporting periods .

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 and 2018.

	Beginning Balance		Provision for (Recovery of) Loan Losses			Charge- offs			Recoveries		Ending Balance
Dollars in thousands
March 31, 2019
Commercial real estate	$	2,683	$	88		$	-		$	12	$	2,783
Commercial and industrial		596		39			-			1		636
Residential mortgage		520		(43	)		-			-		477
Consumer		179		(7	)		(8	)		8		172
Total	$	3,978	$	77		$	(8	)	$	21	$	4,068

March 31, 2018
Commercial real estate	$	2,260	$	246		$	(50	)	$	3	$	2,459
Commercial and industrial		634		(14	)		(25	)		2		597
Residential mortgage		505		22			-			-		527
Consumer		200		(2	)		(4	)		3		197
Total	$	3,599	$	252		$	(79	)	$	8	$	3,780

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

The allocation of the allowance for loan losses for March 31, 2019 and December 31, 2018 is presented in the table below.

	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total
Dollars in thousands
March 31, 2019
Commercial real estate	$	1	$	2,782	$	2,783
Commercial and industrial		109		527		636
Residential mortgage		115		362		477
Consumer		6		166		172
Total	$	231	$	3,837	$	4,068

December 31, 2018
Commercial real estate	$	17	$	2,666	$	2,683
Commercial and industrial		111		485		596
Residential mortgage		117		403		520
Consumer		-		179		179
Total	$	245	$	3,733	$	3,978

The Company’s recorded investment in loans as of March 31, 2019 and December 31, 2018 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the Company’s impairment methodology was as follows:

	March 31, 2019						December 31, 2018
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		PCI		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment
Dollars in thousands
Commercial real estate	$	2,392	$	291,893	$	1,617	$	2,456	$	247,371
Commercial and industrial		623		62,297		907		624		50,710
Residential mortgage		1,272		66,231		713		1,294		52,912
Consumer and home equity lines		11		46,194		89		7		37,907
Total	$	4,298	$	466,615	$	3,326	$	4,381	$	388,900

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

In conjunction with the acquisition of Clover on January 1, 2019, the loan portfolio was accounted for at fair value as follows:

	PCI loans			Non-PCI loans
Dollars in thousands
Contractual principal and interest at acquisition	$	6,121		$	61,097
Nonaccretable difference		(1,670	)		-
Expected cash flows at acquisition		4,451			61,097
Accretable yield		(516	)		(907	)
Basis in PCI loans at acquisition – estimated fair value	$	3,935		$	60,190

A summary of changes in the recorded investment of acquired loans for the three months ended March 31, 2019 was as follows:

	PCI loans			Non-PCI loans
Dollars in thousands
Recorded investment, beginning of period	$	-		$	-
Fair value of loans acquired during the period		3,935			60,190
Accretion		(57	)		(59	)
Reduction for payments, sales and foreclosures		(552	)		(5,139	)
Recorded investment, end of period	$	3,326		$	54,992
Outstanding principal balance, end of period	$	4,000		$	55,798

The Company did not have any investment in PCI loans for the three months ended March 31, 2018.

A summary of changes in the accretable yield for PCI loans for the three-months ended March 31, 2019 was as follows:

	March 31, 2019
Dollars in thousands
Accretable yield, beginning of period	$	-
Addition from acquisition		516
Accretion		(57	)
Reclassification from nonaccretable difference		-
Other changes, net		-
Accretable yield, end of period	$	459

At March 31, 2019, the Company had pre-approved but unused lines of credit totaling $91.3 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.

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

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

A summary of related party loan activity as of March 31, 2019 and 2018 is as follows:

	March 31, 2019			March 31, 2018
Dollars in thousands
Balance, beginning of year	$	393		$	1,740
Loan disbursements		565			70
Loan repayments		(1,024	)		(1,143	)
Changes in related parties		562			-
Balance, end of quarter	$	496		$	667

At March 31, 2019 and 2018, the Company had pre-approved but unused lines of credit totaling $857,000 and $286,000, respectively, to executive officers, directors and their related interests. Related party deposits totaled $4,030,000 and $2,603,000 at March 31, 2019 and 2018, respectively.

(8)	Foreclosed Assets

The following table summarizes the activity in foreclosed assets for the three month periods ended March 31, 2019 and 2018:

	March 31, 2019		March 31, 2018
Dollars in thousands
Balance, beginning of year	$	1,157	$	789
Acquired from Clover		960		-
Additions		73		1,426
Proceeds from sale		-		-
Valuation adjustments		-		-
Losses on sales		-		-
Balance, end of quarter	$	2,190	$	2,215

The Company has three foreclosed residential real estate properties totaling $788,000 as of March 31, 2019.

The Company did not have any consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process as of March 31, 2019.

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

(9)	Stock Option Plans

The Company has six share-based compensation plans in effect at March 31, 2019 and March 31, 2018. There was no compensation cost charged against income for those plans for the three months ended March 31, 2019 and the compensation cost charged against income for those plans was approximately $1,000 for the three months ended March 31, 2018.

During 2001 the Company adopted, with shareholder approval, an Incentive Stock Option Plan (the “2001 Employee Plan”) and a Non-statutory Stock Option Plan (the “2001 Director Plan”). Each plan makes available options to purchase 100,771 shares of the Company’s common stock, for an aggregate number of common shares reserved for options under these plans of 201,542. The exercise price of all options granted to date under these plans is $3.14. The options granted in 2006 through 2011 under the 2001 Director Plan and the 2001 Employee Plan vest over a four-year period. The options granted in 2005 under the 2001 Director Plan and the 2001 Employee Plan vest over a three-year period. All unexercised options expire ten years after the year of the grant or earlier in certain circumstances. The fair market value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The 2001 Employee Plan and the 2001 Director Plan expired in 2011 in accordance with their terms and no further options may be granted under these plans.

During 2005 the Company adopted, with shareholder approval, an Incentive Stock Option Plan (the “2005 Employee Plan”) and a Non-statutory Stock Option Plan (the “2005 Director Plan”). The 2005 Employee Plan makes available options to purchase 72,389 shares of the Company’s common stock and the 2005 Director Plan makes available 73,527 shares of the Company’s common stock, for an aggregate number of common shares reserved under these plans of 145,916. The exercise price of all options granted to date under these plans range from $2.13 to $5.44. The options granted in 2005 under the 2005 Director Plan and the 2005 Employee Plan vest over a three-year period. The options granted in 2006 through 2015 under the 2005 Employee Plan vest over a four-year period. All unexercised options expire ten years after the date of grant. The fair market value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The 2005 Employee Plan and the 2005 Director Plan expired in 2015 in accordance with their terms and no further options may be granted under these plans. As a result of the 2009 merger with Carolina Commerce Bank, Carolina Trust Bank assumed all outstanding options of Carolina Commerce under the existing terms and at the conversion rate of 0.625 shares of Carolina Trust stock for each share of Carolina Commerce stock. All options assumed became fully vested at the merger date. As of March 31, 2019, there were 79,845 options outstanding from the converted plans with exercise prices ranging from $2.13 to $10.40.

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

There was no stock-based compensation recognized as expense on our consolidated statement of income for the three months ended March 31, 2019. Total stock-based compensation recognized as compensation expense on our consolidated statement of income for the three months ended March 31, 2018 was as follows:

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

A summary of option activity under the stock option plans as of March 31, 2019 and changes during the three-month period ended March 31, 2019 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, December 31, 2018		135,566		$	3.83	4.71 years
Exercised		(2,257	)		2.42
Expired		-			-
Forfeited		-			-
Granted		-			-
Outstanding, March 31, 2019		133,309		$	3.86	4.48 years	$	578,780

Exercisable, March 31, 2019		133,309		$	3.86		$	578,780

There were no options vested or granted during the three months ended March 31, 2019. As of March 31, 2019 there was no unrecognized compensation cost related to non-vested options granted under all of the Company’s equity compensation plans.

There was no restricted stock granted or vested during the three months ended March 31, 2019.

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.

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

(10)	Off-Balance Sheet Risk and Commitments

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

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

A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of March 31, 2019 is as follows:

Financial instruments whose contract represents credit risk

	March 31, 2019
Dollars in thousands
Undisbursed lines of credit	$	91,291
Letters of credit		1,609
	$	92,900

(11)	Preferred Stock

Our articles of incorporation authorize us to issue up to 1,000,000 shares of one or more series of preferred stock. Our board of directors, in its sole discretion, has the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series, the designation of such series, and the dividend rate for each series, without any further vote or action by our shareholders. Our preferred stock may be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. There were no shares of preferred stock outstanding as of March 31, 2019.

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

(12)

Leases

Operating leases in which the Company is the lessee are recorded as operating lease right-of-use (“ROU”) assets and operating lease liabilities, included in bank premises, equipment and software and other liabilities, respectively, on our consolidated balance sheet as of March 31, 2019. The Bank leases its main office facility under a lease with an initial term of twenty years. The portion of the lease applicable to the building is being accounted for as a finance lease.

Operating lease ROU assets represent our right to use an underlying asset during the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents our incremental collateralized borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy expense in the consolidated statements of operations for the three months ended March 31, 2019.

Our leases relate to office space and bank branches with remaining lease terms of 1 to 5 years. Certain lease arrangements contain extension options which typically range from 1 to 5 years at the then-fair market rental rates. These extension options are not included in the lease term as they are not generally considered reasonably certain of exercise. As of March 31, 2019, operating lease ROU assets and liabilities were $416,000 and $403,000, respectively. Operating lease cost for the quarter ended March 31, 2019 was $44,000.

The table below summarizes other information related to our operating leases:

	Three months ended March 31, 2019
Dollars in thousands except for percent and period data
Cash paid for amounts included in the measurement of lease liabilities
Operating cash outflows for operating leases	$	42
Right-of-use assets obtained in exchange for new operating lease liabilities		-
Weighted-average remaining lease term – operating leases, in years		2.8
Weighted-average discount rate – operating leases		2.8	%

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CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements

The table below summarizes the maturity of remaining lease liabilities as of March 31, 2019:

	Operating Leases			Finance Lease
Dollars in thousands
2019	$	129		$	59
2020		171			72
2021		104			-
2022		13			-
2023		-			-
2024 and thereafter		-			-
Total lease payments		417			131
Less: interest		(14	)		(8	)
Present value of lease liabilities	$	403		$	123

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

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

Important Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements generally relate to the 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:

☐

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;

☐

the effect of any mergers, acquisitions, or other transactions to which the Company may from time to time be a party, including management’s ability to successfully integrate any businesses acquired;

☐

the costs, effects, and outcomes of existing or future litigation, including any litigation related to our acquisition activities;

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

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

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

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

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

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changes in political and economic conditions;

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the Company’s ability to comply with any requirements imposed on it by regulators, and the potential negative consequences that may result; and

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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.

Note Regarding Use of Non-GAAP Financial Measures

This report presents certain non-GAAP financial measures including, without limitation, adjusted net income. Non-GAAP financial measures include numerical measures of a company’s historical financial performance, financial position, or cash flows that exclude (or include) amounts, or that are subject to adjustments that have the effect of excluding (or including) amounts, that are included (or, as applicable, excluded) in the most directly comparable measures calculated and presented in accordance with GAAP. The Company has presented the adjustments to reconcile from the applicable GAAP financial measures to the non-GAAP financial measures where applicable. The Company considers these adjustments to the GAAP financial measures to be relevant to ongoing operating results. The Company believes that excluding the amounts associated with these adjustments to present the non-GAAP financial measures provides a meaningful base for the period-to-period comparisons, which will assist investors and analysts in analyzing the operating results or financial position of the Company. The non-GAAP financial measures are used by management to assess the performance of the Company’s business, including for presentations of Company performance to investors. The Company further believes that presenting the non-GAAP financial measures will permit investors and analysts to assess the performance of the Company on the same basis as that applied by management. Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied, and are not audited. Although non-GAAP financial measures are frequently used by investors to evaluate a company, they have limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of results reported under GAAP. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures are included with this report.

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Completion of Merger with Clover Community Bankshares, Inc.

On January 1, 2019, the Company completed its previously announced merger with Clover Community Bankshares, Inc. (“Clover”), parent company of Clover Community Bank. Also under the merger agreement, Clover Community Bank merged with the Bank. Pursuant to the merger agreement, each share of Clover common stock and preferred stock was converted into the right to receive, at the election of each Clover shareholder, either 2.7181 shares of Company common stock or $22.00 in cash, subject to proration procedures that resulted in an aggregate 80% stock and 20% cash consideration mix. Total consideration was $20.4 million in stock and cash. Overall, the Company issued 2,123,858 shares of common stock in exchange for 80% of Clover’s shares and paid $3,008 in lieu of fractional Company shares. Cash consideration paid in exchange for 20% of Clover’s shares totaled $4,298,360. The stock consideration was valued at $7.58 per share, the most recent closing price at the effective time of the merger. In accordance with the merger agreement, cash paid in lieu of fractional shares was valued at a rate of $7.6305 per share, the average of the closing sales prices of the Company’s common stock as reported on Nasdaq for the twenty consecutive full trading days ending on the trading day immediately prior to the closing date of the merger. The fair market value of loans and deposits acquired on the merger date was $64.1 million and $111.6 million, respectively. The Bank recorded $5.4 million in goodwill, reflecting the amount of consideration given in excess of the fair market value of net assets acquired. In addition, the Bank recognized $3.2 million in core deposit intangible, the premium recognized for Clover Community Bank’s deposits, which is amortized over the estimated life of those deposits.

Discussion of Financial Condition at March 31, 2019 and December 31, 2018

During the period from December 31, 2018 to March 31, 2019, total assets increased by approximately $146.2 million, or 30.77%. The increase was mostly attributed to the acquisition of Clover Communty Bankshares, Inc. (“Clover”), on January 1, 2019, and was reflected primarily in cash and due from banks, interest-earning deposits with banks, and loans. The increase in total assets was funded by an increase in deposits. Interest-earning deposits with banks, and investment securities including investment securities available for sale and equity securities at March 31, 2019 totaled $98.5 million compared to $53.6 million at December 31, 2018.

The Company’s investment securities portfolio as of March 31, 2019 totaled $69.7 million, an increase of $37.2 million when compared to the $32.6 million reported at December 31, 2018. This increase included $39.6 million acquired from Clover. At March 31, 2019, the Company had a net unrealized gain on available-for-sale securities of $127,000, net of tax, as compared to a net unrealized loss of $549,000, net of tax, at December 31, 2018. On January 1, 2018 the Company adopted the FASB ASU 2016-01 in which there was an initial adjustment of accumulated other comprehensive loss in the amount of $443,000 recorded in retained earnings for the loss on equity securities.

At March 31, 2019, net loans constituted 75.68% of the Company’s total assets. Net loans increased by $80.9 million from December 31, 2018 to March 31, 2019. The increase in loans since December 31, 2018 included $64.1 million acquired from Clover on the effective date of the merger, January 1, 2019, and $17.1 million in additional growth. Of all of the portfolio segments that increased during the first three months of 2019 including the loans acquired from Clover, commercial real estate experienced the largest amount of growth at $46.1 million or 18.4%. 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 who monitors risk grades on an ongoing basis. Furthermore, the Company employs a third party contractor to perform an annual loan review. The scope of the review is typically 50 – 60% of the loan portfolio.

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At March 31, 2019 and December 31, 2018 impaired loans, which consisted primarily of troubled debt restructurings and non-accrual loans, were $4.3 million and $4.4 million, respectively. The Company also had $3.3 million of purchased credit impaired, or PCI, loans at March 31, 2019. Recorded investment in impaired loans of $1.7 million had related allowances for loan losses totaling $231,000 and $245,000 at March 31, 2019 and December 31, 2018, respectively. There were $2.6 million of impaired loans without a specific allowance at March 31, 2019 and December 31, 2018. Impaired loans at March 31, 2019 and December 31, 2018 consisted primarily of commercial real estate, commercial and industrial and residential mortgage loans. At March 31, 2019, there were nine loans totaling approximately $3.8 million, which were restructured to facilitate the borrowers’ ability to repay the outstanding balances. These nine restructured loans are considered troubled debt restructurings at March 31, 2019 and have specific reserves amounting to approximately $224,000. Of these nine loans, eight loans totaling $3.1 million were accruing interest at March 31, 2019. At December 31, 2018, there were ten loans totaling $3.9 million which were restructured to facilitate the borrowers’ ability to repay the outstanding balance, and of these ten loans, nine loans totaling $3.1 million were accruing interest. Reserves for loans not considered impaired were approximately $3.8 million and $3.7 million at March 31, 2019 and December 31, 2018, respectively. The allowance for loan losses at both March 31, 2019 and December 31, 2018 was 0.86% and 1.01%, respectively, 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 $27.4 million at March 31, 2019 compared to $21.0 million at December 31, 2018. The increase is attributed mostly to the increase in cash and due from banks of $2.6 million, or 23.91%, increase in bank premises, equipment and software of $2.8 million or 46.64%, and to an increase in foreclosed assets of $1.0 million or 89.28%. At March 31, 2019, foreclosed assets consisted of seven properties valued at $2.2 million. Of these seven properties, two properties valued at $960,000 were acquired from Clover.

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 $128.2 million, or 32.45%, for the three months ended March 31, 2019. Of this growth, $111.6 million is due to the acquisition of Clover. The additional $16.6 million was organic growth. The total increase includes increases in noninterest-earning demand deposits of $40.2 million, or 65.70%, interest-earning demand deposits of $50.9 million, or 35.64%, savings deposits of $16.9 million or 74.67%, and time deposits of $20.2 million or 12.00%.

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Federal Home Loan Bank advances totaled $16.1 million at March 31, 2019 and December 31, 2018.

Stockholders’ equity amounted to $67.4 million, or 10.85% of total assets at March 31, 2019, compared to $50.3 million, or 10.58% of total assets at December 31, 2018.

Discussion of Results of Operations

For the three months ended March 31, 2019 and 2018

Net Income

Net income for the three months ended March 31, 2019 was $337,000 compared to $581,000 for the first quarter of 2018, a decrease of $244,000. Common and diluted earnings per common share was $0.04 for the three months ended March 31, 2019 compared to $0.12 for the first quarter of 2018. During the first quarter of 2019 the Company incurred $1,722,000 in merger-related expenses. If the merger expenses, and certain other income statement items including accretion of discounts recorded on loans and deposits and amortization of the core deposit intangibles, net of tax, were excluded, net income for first quarter 2019 would have been $1,710,000, which is a non-GAAP (Generally Accepted Accounting Principles) measurement. Please refer to “Note Regarding Use of non-GAAP Financial Measures” and the non-GAAP reconciliation table below for additional information.

Net Interest Income

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

Net interest income for the quarter ended March 31, 2019 totaled $5,658,000 compared to $3,767,000 for the quarter ended March 31, 2018. The Company’s net interest spread was approximately 3.81% and 3.62% for the quarters ended March 31, 2019 and 2018, respectively. Net interest margin on average interest earning assets was 4.09% and 3.79% for the quarters ended March 31, 2019 and 2018, respectively. Net interest spread increased by 19 basis points, and net interest margin increased by 30 basis points. The yield on earning assets increased by 25 basis points from 4.86% for the quarter ended March 31, 2018 to 5.11% for the quarter ended March 31, 2019. Comparatively, the cost of funds, including deposits, borrowings and holding company debt, was flat at 1.08% from the first quarter of 2019 compared to the first quarter of 2018. The improvement in the yield on earning assets and the net interest margin was softened by the shift in the earning asset mix, as the ratio of average loans to average earning assets declined from 89% in the quarter ended March 31, 2018 to 83% in the quarter ended March 31, 2019. The additional liquidity maintained in interest earning cash and securities resulted in those categories increasing from 11% to 17% as a percentage of earning assets for the same periods.

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The margin and asset yield increases were attributed primarily to the 45 basis point increase in loan yield from 5.15% in the first quarter of 2018 to 5.60% in the first quarter of 2019. Loan yields were positively impacted by prime rate increases of 25 basis points each in March 2018, June 2018, September 2018, and December 2018. The loan yields also benefited from accretion of the discounts on purchased loans and were partially offset by accretion of the discounts on acquired time deposits. The net of loan and deposit accretion added 8 basis points to the net interest margin.

Provision for Loan Losses

The Company recorded a provision for loan losses of $77,000 for the quarter ended March 31, 2019 and $252,000 for the quarter ended March 31, 2018. This decrease of $175,000 in the provision for loan losses is due to continued improvement in credit quality. The ratio of the allowance for loan and lease losses as a percentage of total loans was 0.86% and 1.01% at March 31, 2019 and December 31, 2018, respectively. The decrease of 17 basis points is due primarily to the addition of the Clover loan portfolio and no additional allowance recorded since the discount credit marks are currently sufficient. 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. The non-performing loans exclude PCI loans.

	Loans Outstanding		Non- Performing Loans		Net Charge-offs (Recoveries)			Allowance for Loan Losses
	(Dollars in thousands)
March 31, 2019	$	474,239	$	1,035	$	(13	)	$	4,068
December 31, 2018		393,282		1,051		(133	)		3,978
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
June 30, 2015		278,305		3,335		68			3,886
March 31, 2015		257,919		3,562		48			3,954
December 31, 2014		244,646		4,166		162			4,002
September 30, 2014		227,933		3,081		(22	)		4,165

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Non-interest Income

Non-interest income for the quarter ended March 31, 2019 totaled $620,000, an increase of $290,000 over the $330,000 reported for the quarter ended March 31, 2018. The primary factors contributing to the overall increase were the increase in mortgage fee income of $110,000, the increase in overdraft fees on deposits of $60,000, the increase in interchange fee income, net of $34,000, and the increase in unrealized gain on equity securities of $30,000 for the quarter ended March 31, 2019 .

Interchange fees, or “swipe” fees, are charges that merchants pay to the Bank and other card-issuing banks for processing electronic payment transactions. Interchange fees consist of income from check card usage, point of sale income from PIN-based debit card transactions and ATM service fees. With the adoption of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) , in 2018, interchange fees are reported net of related costs. See Note 2 – Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Previously, such costs were reported as check card expense. Interchange fees for the three months ended March 31, 2019 and March 31, 2018 reported on a net basis totaled $80,000 and $46,000, respectively.

Non-interest Expense

Non-interest expenses for the March 31, 2019 and 2018 quarters totaled $5,791,000 and $3,096,000, respectively. The $2,695,000 increase was due in part to merger expenses of $1,722,000 related to the acquisition of Clover which was completed on January 1, 2019 . There were smaller increases in salaries and benefits, up $556,000 or 29.98%, and in amortization of core deposit intangibles, up $152,000 or 1,689%, both of which were attributed primarily to the acquisition of Clover. Merger expenses included $1,224,000 paid to former Clover employees in accordance with change-in-control agreements or severance packages and the related payroll taxes. The other merger expenses included $242,000 for data processing due to the system conversion to the Bank’s core system and processes and $173,000 due to various products and services including investment banking services, debit cards, a product brochure for former Clover customers, and training for former Clover employees. Salaries and wages were up by $463,000 or 36%, as new employees joined the Bank in conjunction with the acquisition of Clover. This increase included $52,000 for several employees whose employment ended as planned after conversion of Clover’s operating system to the Bank’s operating system in mid-February. Overtime salaries were up $21,000 or 141% from first quarter of 2018 to the first quarter of 2019, which was in part due to the effort to convert Clover to the Bank’s core system and processes.

Income Tax Expense

The Company recorded income tax expense of $73,000 for the three-months ended March 31, 2019 resulting in an effective tax rate of 18%. For the same period in 2018, the Company recorded income tax expense of $168,000 with an effective tax rate of 22%.

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 18.48% and 13.89% of total assets at March 31, 2019 and December 31, 2018, respectively.

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Should the need arise, management believes the Company would have the capability to sell securities classified as available-for-sale or to borrow funds as necessary to meet the Company’s cash flow demands. The Company has established credit lines with other financial institutions to purchase up to $14 million in federal funds and to borrow up to $10 million under a reverse repurchase agreement. There were no borrowings outstanding against these credit lines at March 31, 2019. The Company has also established a credit line with the Federal Home Loan Bank of Atlanta. The credit line is secured by a portion of the Company’s loan portfolio that qualifies under FHLB guidelines as eligible collateral. Total availability, based on collateral pledged at March 31, 2019 was $91.6 million, of which $16.1 million was advanced and $11 million was securing a letter of credit.

Total deposits were $523.4 million and $395.1 million at March 31, 2019 and December 31, 2018, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate-sensitive. Time deposits represented 36.04% and 42.63% of total deposits at March 31, 2019 and December 31, 2018, respectively. At March 31, 2019 and December 31, 2018, the Company had brokered time deposits of $15.5 million and $15.0 million, respectively. The Company also obtains time accounts by connecting with institutional depositors through an online listing service. At March 31, 2019 and December 31, 2018, respectively, the deposits attributed to the listing service were $7.3 million and $10.2 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 and the Bank’s capital is also monitored to ensure compliance with regulatory requirements. One of management’s primary objectives is to maintain a strong capital position in order to warrant confidence from customers, investors, bank regulators and stockholders. A measure of capital position is capital adequacy, defined as the amount of capital needed to maintain future asset growth and absorb unforeseen losses. Regulators consider a variety of factors in determining an institution’s capital adequacy, including quality and stability of earnings, asset quality, guidance and expertise and liquidity. Regulatory guidelines place an emphasis on stockholders’ equity in relationship to total assets adjusted for risk.

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In July 2013, the Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Act. The rules will require the Company and the Bank to maintain (i) a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% common equity Tier 1 ratio, effectively resulting in a minimum ratio of common equity Tier 1 to risk-weighted assets of at least 7.0%), (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, effectively resulting in a minimum Tier 1 capital ratio of 8.5%), (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, effectively resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets.

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

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

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

	At March 31, 2019
	Actual Ratio			Minimum Requirement			Well-Capitalized Requirement
Common equity tier 1 capital ratio		12.45	%		7.00	%		6.50	%
Total risk-based capital ratio		13.25	%		10.50	%		10.00	%
Tier 1 risk-based capital ratio		12.45	%		8.50	%		8.00	%
Tier 1 leverage ratio		10.64	%		4.00	%		5.00	%

Non-GAAP Reconciliation

The table below presents the Non-GAAP reconciliation for adjusted net income for the period.

	March 31, 2019
Dollars in thousands
Net income	$	337
Adjustments:
Merger expenses		1,722
Accretion of purchased loan discounts		(117	)
Accretion of purchased time deposit discounts		12
Amortization of core deposit intangible		161
Net tax effect of adjustments		(405	)
Adjusted net income	$	1,710

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Item 4 . - Controls and Procedures

(a)

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

(b)

Changes in Internal Control Over Financial Reporting. 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. During the quarter ended March 31, 2019, we implemented certain internal controls in connection with our adoption of ASC 842. There were no other changes in our internal control over financial reporting that occurred during the most recent fiscal quarter with respect to our operations, which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

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

(a)

Exercise of Common Stock Warrant. In February 2009, the Bank issued a warrant to purchase up to 86,957 shares of its common stock at an exercise price of $6.90 per share to the U.S. Department of the Treasury in connection with the Bank’s participation in the Treasury’s Capital Purchase Program. The Treasury subsequently told the warrant to a private investor on June 12, 2013. The warrant had an expiration date of February 6, 2019. In connection with our reorganization into the bank holding company form of organization in August 2016, the warrant was automatically converted into a warrant to acquire up to 86,957 shares of the Company’s common stock at the same per share exercise price and with the same expiration date and other terms as the Bank-level warrant.

On February 5, 2019, the warrant holder elected to exercise the warrant, and the Company issued 13,875 shares of its common stock in a cashless exercise of the warrant. Payment of the warrant exercise price (i.e. 86,957 shares x $6.90/share = $600,003, the exercise price) was made by withholding, from the number of shares that would otherwise be delivered to the warrant holder upon such exercise, shares based on the market price of the Company’s common stock on February 1, 2019, which was $8.21 per share. Thus, 73,082 shares (i.e. $600,003 / $8.21/share) were withheld as payment for the warrant exercise, which resulted in 13,875 shares (i.e. 86,957 shares minus 73,082 shares) being issued to the warrant holder. The warrant was canceled in the exchange.

The shares issued were exempt from registration under Section 3(a)(9) of the Securities Act of 1933 because the Company exchanged the shares with the warrant holder exclusively, and no commission or other remuneration was paid or given directly or indirectly for soliciting the exchange. The shares issued were also exempt from registration as a transaction by an issuer not involving a public offering under Section 4(a)(2) of the Securities Act of 1933.

Item 6. Exhibits

Exhibit #		Description

2.1		Agreement and Plan of Merger and Reorganization by and between Carolina Trust BancShares, Inc. and Clover Community Bankshares, Inc., dated as of June 14, 2018 (incorporated herein by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 20, 2018).
10.1*		Second Amendment to the 2014 Supplemental Executive Retirement Plan Agreement dated January 22, 2019, by and between Carolina Trust Bank and Jerry L. Ocheltree
31.1		Certification of Principal Executive Officer pursuant to Rule 13a-14(a)
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
32		Section 1350 Certification
101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets (Unaudited) as of March 31, 2019 and December 31, 2018; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2019 and 2018; (iii) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended March 31, 2019 and 2018; (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Three Months Ended March 31, 2019 and 2018; (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2019 and 2018; and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited)

*Compensatory plan

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CAROLINA TRUST BANCSHARES, INC.

Date: May 14, 2019	By:	/s/	Jerry L. Ocheltree
		Jerry L. Ocheltree
		President and Chief Executive Officer

Date: May 14, 2019	By:	/s/	Edwin E. Laws
		Edwin E. Laws
		Executive Vice President and Chief Financial Officer

EXECUTIVE :		BANK :

/s/ Jerry L. Ocheltree		/s/ Edwin E. Laws
By:	Jerry L. Ocheltree	By:	Edwin E. Laws
Title:	President and CEO	Title:	EVP and CFO