Item 1. Financial Statements
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED
BALANCE SHEETS (Unaudited)
(Dollars in thousands, except share and per share data)
*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.
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS (Unaudited)
(Dollars in thousands, except share and per share data)
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except share and per share data)
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands)
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
(Dollars in thousands)
See accompanying notes to Condensed Consolidated Financial Statements.
CAROLINA TRUST BANCSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS (Unaudited)
(Dollars in thousands)
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
Net income
|
|
$
|
3,582
|
|
|
$
|
2,006
|
|
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
|
116
|
|
|
|
415
|
|
Depreciation and amortization of bank premises, equipment and software, and operating lease right-of-use assets
|
|
|
558
|
|
|
|
346
|
|
Acquired loan accretion
|
|
|
(447
|
)
|
|
|
(5
|
)
|
Accretion of time deposit discount and amortization of core deposit intangibles
|
|
|
452
|
|
|
|
26
|
|
Net amortization of bond premiums/discounts
|
|
|
242
|
|
|
|
104
|
|
Amortization of long-term subordinated debt issuance costs
|
|
|
61
|
|
|
|
57
|
|
Unrealized gain on equity securities
|
|
|
(96
|
)
|
|
|
(123
|
)
|
Stock compensation expense
|
|
|
-
|
|
|
|
1
|
|
Increase in value of bank-owned life insurance
|
|
|
(199
|
)
|
|
|
(147
|
)
|
Net losses and impairment write-downs on foreclosed assets
|
|
|
49
|
|
|
|
295
|
|
Deferred tax provision
|
|
|
592
|
|
|
|
27
|
|
Increase in other assets
|
|
|
(649
|
)
|
|
|
(17
|
)
|
Decrease (increase) in accrued interest receivable
|
|
|
48
|
|
|
|
(132
|
)
|
Increase in accrued interest payable
|
|
|
306
|
|
|
|
286
|
|
Increase (decrease) in other liabilities
|
|
|
(1,349
|
)
|
|
|
80
|
|
Net cash and cash equivalents provided by operating activities
|
|
|
3,266
|
|
|
|
3,219
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Net cash received from acquisition
|
|
|
8,741
|
|
|
|
-
|
|
Net increase in loans
|
|
|
(25,710
|
)
|
|
|
(33,769
|
)
|
Maturities of certificates of deposit with banks
|
|
|
593
|
|
|
|
-
|
|
Proceeds from the sale of foreclosed assets
|
|
|
1,159
|
|
|
|
330
|
|
Purchase of available for sale securities
|
|
|
(532
|
)
|
|
|
(3,034
|
)
|
Net purchases of bank premises, equipment and software
|
|
|
(377
|
)
|
|
|
(34
|
)
|
Proceeds from maturities, calls and pay-downs of available for sale securities
|
|
|
9,957
|
|
|
|
2,612
|
|
Redemptions (purchases) of Federal Home Loan Bank stock
|
|
|
(350
|
)
|
|
|
291
|
|
Net cash and cash equivalents used in investing activities
|
|
|
(6,519
|
)
|
|
|
(33,604
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Increase in deposits
|
|
|
9,326
|
|
|
|
45,844
|
|
Increase (decrease) in Federal Home Loan Bank advances
|
|
|
4,100
|
|
|
|
(7,500
|
)
|
Finance lease payments
|
|
|
(53
|
)
|
|
|
(49
|
)
|
Issuance of long term debt
|
|
|
-
|
|
|
|
3,000
|
|
Repayment of long term debt
|
|
|
-
|
|
|
|
(3,000
|
)
|
Net proceeds from the issuance of common stock
|
|
|
34
|
|
|
|
18,450
|
|
Net cash and cash equivalents provided by financing activities
|
|
|
13,407
|
|
|
|
56,745
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
10,154
|
|
|
|
26,360
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning
|
|
|
31,940
|
|
|
|
9,056
|
|
Cash and cash equivalents, ending
|
|
$
|
42,094
|
|
|
$
|
35,416
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
Cash paid during the period for taxes
|
|
$
|
339
|
|
|
$
|
631
|
|
Cash paid during the period for interest
|
|
$
|
4,482
|
|
|
$
|
3,105
|
|
|
|
|
|
|
|
|
|
|
Noncash financing and investing activities
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on investment securities available-for-sale, net of taxes
|
|
$
|
1,487
|
|
|
$
|
(622
|
)
|
Transfer of loans to foreclosed assets
|
|
$
|
202
|
|
|
$
|
1,618
|
|
Fair value of assets acquired
|
|
$
|
115,141
|
|
|
$
|
-
|
|
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.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated 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 operates as a registered bank holding company under the Bank Holding Company Act of 1956. The Bank is the only subsidiary of the Company.
In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for fair presentation of the
financial information as of September 30, 2019, in conformity with accounting principles generally accepted in the United States of America. Operating results for the nine months ended September 30, 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.
In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 September 30, 2019. See Note 12 - Leases for additional information.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. The new standard introduces an approach based on expected losses to
estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale (AFS) debt securities and provides for a simplified accounting model for purchased financial assets with credit
deterioration since their origination. ASU 2016-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. The Company is
currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. The Company has formed a management committee including those responsible for credit analysis
and review, accounting and finance, information technology and lending to develop an understanding of the requirements and plan implementation. The Company has adopted a software model for the ALLL model that has add-on functionality for
compliance with the new standard and has contracted with a vendor to help with the development of the ALLL model for the new standard. The Company has also selected the methodologies to be used with the different loan segments and has ran
different scenarios. Notwithstanding the effective dates described above, at its October 16, 2019 meeting, the FASB approved its August 2019 proposal to grant private companies, not-for-profit organizations, and certain small public companies
various effective date delays. The implementation date for the Company, which is defined as a smaller reporting company by the SEC will be for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
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.
Acquisition of Clover Community Bankshares, Inc.
On January 1, 2019 the Company acquired by merger 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 80% of Clover’s shares would be converted to the stock consideration and 20% of Clover’s shares would be converted into the cash consideration. Overall, the
Company issued 2,123,858 shares of its common stock in exchange 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 the Company’s 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 the Company’s common stock for the 20-trading days immediately preceding the
merger date. The total purchase price paid was $20.4 million.
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. In the second quarter of 2019, there were some additional adjustments to the fair value of assets acquired. An increase in the amount of $76,000 was made to the fair value adjustments of loans acquired due to a correction on the valuation
of interest only loans. A decrease of $330,000 to Core deposit intangible was recorded due to correction of the FHLB offering rates used in the valuation calculation. An offsetting entry was made to the deferred tax asset, which is included in
other assets, for $96,000. The remaining $310,000 was recorded as an increase to goodwill. In the third quarter of 2019, there was one adjustment to the fair value of assets acquired. A decrease of $68,000 was made to other assets due to the
decrease in the value of a foreclosed asset. An offsetting entry was made to the deferred tax asset, which is included in other assets, for $16,000. The remaining $52,000 was recorded as an increase to goodwill.
The following table summarizes the allocation of the purchase price to the assets acquired and the liabilities assumed based on their estimated fair value:
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:
Goodwill recorded for Clover represents future revenues to be derived, including efficiencies that are expected to 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 net income for the three months and nine months ended September 30, 2019 excludes $50,000 and $1,821,000 respectively, in merger related expenses that were recognized during the
periods. Net of tax, the amounts excluded for the three months and nine months ended September 30, 2019 were $38,000 and $1,407,000, respectively. Merger related expenses include payments to Clover employees for severance contracts, data
processing conversion expenses, investment banker fees, consulting and auditing fees.
Proposed Merger with Carolina Financial
As previously reported, on July 15, 2019, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Carolina Financial Corporation (“CARO”), the
holding company for CresCom Bank, Charleston, South Carolina. Under the Merger Agreement, it is proposed that the Company will merge with and into CARO (the “Merger”), and the Bank will merge with and into CresCom Bank. Subject to the terms
and conditions of the Merger Agreement, the Company’s shareholders would receive 0.3000 shares of CARO common stock or $10.57 in cash for each share of the Company’s common stock, subject to election and proration such that the aggregate
consideration will consist of 90% CARO common stock and 10% cash. The closing of the proposed Merger is subject to the required approval of the Company’s shareholders, requisite regulatory approvals, and other customary closing conditions.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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.
The following table summarizes earnings per share and the shares utilized in the computations for the three and nine months ended September 30, 2019 and 2018, respectively:
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Dollars in thousands, except per share data
|
|
Net Income
|
|
|
Weighted
Average
Common
Shares
|
|
|
Per Share
Amount
|
|
Nine months ended September 30, 2019
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
3,582
|
|
|
|
9,297,383
|
|
|
$
|
0.39
|
|
Effect of dilutive stock securities
|
|
|
-
|
|
|
|
70,962
|
|
|
|
(0.01
|
)
|
Effect of dilutive stock warrants
|
|
|
-
|
|
|
|
2,283
|
|
|
|
-
|
|
Diluted earnings per common share
|
|
$
|
3,582
|
|
|
|
9,370,628
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
2,006
|
|
|
|
6,118,461
|
|
|
$
|
0.33
|
|
Effect of dilutive stock securities
|
|
|
-
|
|
|
|
75,598
|
|
|
|
(0.01
|
)
|
Effect of dilutive stock warrants
|
|
|
-
|
|
|
|
17,611
|
|
|
|
-
|
|
Diluted earnings per common share
|
|
$
|
2,006
|
|
|
|
6,211,670
|
|
|
$
|
0.32
|
|
For the three and nine months ended September 30, 2019 and September 30, 2018, there were no anti-dilutive shares.
The Company is required to disclose the estimated fair value of financial instruments, both assets and liabilities on and off the balance sheet, for which it is practicable to estimate fair
value. These fair value estimates are made at each reporting date, based on relevant market information and information about the financial instruments. Fair value estimates are intended to represent the price an asset could be sold at or the
price a liability could be settled for. However, given there is no active market or observable market transactions for many of the Company’s financial instruments, the Company has made estimates of many of these fair values which are subjective
in nature, involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated values. The methodologies for financial assets and financial
liabilities are discussed below:
Cash and Due from Banks and Interest-Earning Deposits with Banks
The carrying amounts for cash and due from banks and interest-earning deposits with banks approximate fair value because of the short maturities of those instruments.
Certificates of Deposit with Banks
The fair value of certificates of deposit with banks is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities.
Investment and Equity Securities
Fair value for investment and equity securities equals the quoted market price if such information is available. If a quoted market price is not available in active markets for identical
securities (Level 1), fair value may be estimated using observable inputs such as quoted prices for similar securities, interest rates and yield curves, implied volatilities and credit spreads (Level 2). Otherwise, unobservable inputs such as
independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating on similar securities, prepayment assumptions and other factors such as credit loss
assumptions (Level 3). The fair value would be based on an exit price between market participants that may include adjustments for liquidity and credit.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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.
The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at September 30, 2019 and December 31, 2018:
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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.
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.
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.
*All of the Company’s mortgage-backed securities are issued either by the U.S. Government, which includes GNMA pools, or by government-sponsored enterprises such as FNMA and FHLMC.
The Company did not have any transfers of assets between Levels 1, 2 or 3 during the periods ended September 30, 2019 and December 31, 2018.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The tables below present the changes during the three and nine months ended September 30, 2019 in the amount of Level 3 assets measured on a recurring basis.
The Company did not have any Level 3 assets measured on a recurring basis as of September 30, 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 September 30, 2019, the discounted cash flows method was used in determining the fair value of eight loans totaling $0.8 million and the fair value of the collateral method was used in the other sixteen loans
totaling $2.3 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 three- or nine-month period ended September 30, 2019. Valuation
techniques are consistent with techniques used in prior periods.
The following table presents impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses
based upon the fair value of the underlying collateral or discounted cash flows during the nine months ended September 30, 2019 and 2018.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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 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.
The carrying value of foreclosed assets is periodically reviewed and written down to fair value. Any loss is included in earnings. For the three months ended September 30, 2019 and 2018, there were no assets that were written down prior to
foreclosure. For the nine months ended September 30, 2019 there were no assets that were written down prior to foreclosure. Comparatively, for the nine months ended September 30, 2018, foreclosed assets in the amount of $1,158,000 were written
down by $180,000 to $978,000 prior to foreclosure. For the three months ended September 30, 2019, foreclosed assets with a carrying value of $592,000 were written down by $68,000 to $524,000 subsequent to foreclosure and for the nine months
ended September 30, 2019, foreclosed assets with a carrying value of $823,000 were written down by $105,000 to $718,000 subsequent to foreclosure. For the three months ended September 30, 2018, foreclosed assets with a carrying value of
$640,000 were written down by $53,000 to $587,000 subsequent to foreclosure and for the nine months ended September 30, 2018, $1,618,000 were written down by $301,000 to $1,317,000 subsequent to foreclosure.
Assets measured at fair value on a nonrecurring basis are included in the table below.
Quantitative information about Level 3 fair value measurements for each category of assets as of the dates indicated is summarized in the following table:
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The amortized cost and fair value of investment securities, with gross unrealized gains and losses, as of the dates indicated was as follows:
* All mortgage-backed securities are issued either by the U.S. Government through GNMA or by government sponsored enterprises FNMA or FHLMC.
**Gains/losses on equity securities have been “recognized” instead of unrealized.
The amortized cost and fair values of securities available for sale at September 30, 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.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
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 September 30, 2019 and December 31, 2018, respectively.
* 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 September 30, 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.
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 September 30, 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 $8.0 million were pledged to secure public funds at September 30, 2019. The Company had no sales of
securities during the three or nine month periods ended September 30, 2019 and September 30, 2018.
Loans are summarized in the following table which includes $3.2 million at September 30, 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.
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.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Non-Accrual and Past Due Loans
Non-accrual loans, segregated by category, were as follows:
Interest foregone on non-accrual loans was approximately $32,000 and $73,000 for the three and nine months ended September 30, 2019 and $22,000 and $59,000 for the three and nine months ended September 30, 2018.
An analysis of past due loans, segregated by class, at September 30, 2019 and December 31, 2018 is shown below:
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Impaired loans
Information regarding the Company’s impaired loans is set forth in the following tables.
September 30, 2019
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
December 31, 2018
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Troubled Debt Restructurings
As of September 30, 2019, eight loans totaling $2,620,000 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 eight loans identified as troubled debt restructurings at September 30, 2019, seven loans totaling $1,989,000
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- and nine-month periods ended September 30, 2019, there were no concessions made on newly restructured loans.
For the three months ended September 30, 2018, there were no concessions made on newly restructured loans. For the nine months ended September 30, 2018, the following table presents a breakdown of the types of
concessions made by loan class.
Qualitative factors are calculated for each segment of the loan portfolio. Factors include economic, concentrations, trends in terms of volume and mix, interest rate movement, and delinquency. If a restructured
loan is delinquent, it is addressed in the delinquency factor for that segment. Because the number and dollar amounts of restructured loans represent a relatively small percentage (1%) of the total loan balances, there is no specific qualitative
factor tied to restructured loans.
There were no loans that were modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three and nine months ended September 30, 2019 and September 30,
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 September 30, 2019. The following table presents the successes and failures of the types of modifications
within the previous 12 months as of September 30, 2018.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Credit Quality Indicators
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.
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:
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.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Grade 9 – Loss. Loans classified Loss are considered uncollectable and of such little value that their continuance as bankable assets is not
warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to
defer writing off the loan even though partial recoveries may be realized in the future. Probable loss portions of doubtful assets should be charged against the allowance for loan
losses. Loans may reside in this classification for administrative purposes for a period not to exceed the earlier of thirty (30) days or calendar quarter-end.
The following table presents the credit risk profile of the Company’s loan portfolio by internally assigned risk grades.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Allowance for Loan Losses
The allowance for loan losses represents management's estimate of an amount adequate to provide for probable losses inherent in the loan portfolio. Management determines the allowance for loan losses
based on a number of factors, including a review and evaluation of the Company's loan portfolio and current and projected economic conditions locally and nationally. The allowance is monitored and analyzed in conjunction with the
Company's loan analysis and grading program. The look-back period is a weighted twenty-quarter period.
Based on this methodology, provisions for loan losses are made to maintain an adequate allowance for loan losses. The allowance for loan losses is created by direct charges to operations. Losses on loans
are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance. The provision for loan losses is the
amount necessary to adjust the allowance for loan losses to the amount that management has determined to be adequate to provide for probable losses inherent in the loan portfolio. The Company recorded a recovery of loan losses of
$37,000 for the three months ended September 30, 2019 and recorded a provision for loan losses of $116,000 for the nine months ended September 30, 2019. The Company recorded provisions for loan losses for the three and nine months
ended September 30, 2018 that totaled $75,000 and $415,000, respectively. Management realizes that general economic trends greatly affect loan losses, and no assurances can be made that future charges to the allowance for loan losses
may not be significant in relation to the amount provided during a particular period, or that future evaluations of the loan portfolio based on conditions then prevailing will not require sizable additions to the allowance, thus
necessitating similarly sizable charges to income.
Based on its best judgment, evaluation, and analysis of the loan portfolio, management considers the allowance for loan losses to be appropriate in light of the risk inherent in the Company’s loan
portfolio for the reporting periods.
The following table details activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2019 and 2018.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2019 and 2018.
The allocation of the allowance for loan losses for September 30, 2019 and December 31, 2018 is presented in the table below.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The Company’s recorded investment in loans as of September 30, 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:
In conjunction with the acquisition of Clover on January 1, 2019, the acquired loan portfolio was accounted for at fair value as follows:
A summary of changes in the recorded investment of acquired loans for the three and nine months ended September 30, 2019 was as follows:
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The Company did not have any investment in PCI loans for the three or nine months ended September 30, 2018.
A summary of changes in the accretable yield for PCI loans for the three and nine months ended September 30, 2019 was as follows:
At September 30, 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.
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 September 30, 2019 and 2018 is as follows:
At September 30, 2019 and 2018, the Company had pre-approved but unused lines of credit totaling $864,000 and $145,000, respectively, to executive officers, directors and their related interests. Related
party deposits totaled $3,537,000 and $2,689,000 at September 30, 2019 and 2018, respectively.
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The following table summarizes the activity in foreclosed assets for the nine-month periods ended September 30, 2019 and 2018:
The Company has three foreclosed residential real estate properties totaling $720,000 as of September 30, 2019.
The Company has two consumer mortgage loan secured by residential real estate property totaling $198,000 for which formal foreclosure proceedings are in process as of September 30, 2019.
The Company has six share-based compensation plans in effect at September 30, 2019 and September 30, 2018. Information regarding these plans is contained in the notes to the consolidated financial
statements filed as part of the Company’s 2018 Annual Report on Form 10-K. There was no compensation cost charged against income for those plans for the three and nine months ended September 30, 2019 and the three months ended September
30, 2018. The compensation cost charged against income for those plans was approximately $1,000 for the nine months ended September 30, 2018.
A summary of option activity under the stock option plans as of September 30, 2019 and changes during the nine-month period ended September 30, 2019 is presented below:
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
There were no options vested or granted during the three or nine months ended September 30, 2019. As of September 30, 2019 there was no unvested grants and no remaining unrecognized compensation expense under any of the Company’s
equity compensation plans.
There was no restricted stock granted or vested during the three or nine months ended September 30, 2019.
Upon exercise of stock options, the Company issues shares from authorized but unissued shares. The Company does not typically purchase shares on the open market to fulfill obligations under its equity compensation plans.
The Company is a party to financial instruments with off-balance sheet credit risk in the normal course of business to meet the financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional
amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company
evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company, upon extension of credit is based on management’s credit evaluation of the borrower. Collateral
obtained varies but may include real estate, stocks, bonds, and certificates of deposit.
A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of September 30, 2019 is as follows:
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
Our articles of incorporation authorize us to issue up to 1,000,000 shares of one or more series of preferred stock. Our board of directors, in its sole discretion, has the authority to determine the
preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series, the designation of such series, and the dividend rate for each series, without any further vote or action
by our shareholders. Our preferred stock may be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. There were no shares of preferred stock outstanding as of September 30, 2019.
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 September 30, 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 includes 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 condensed consolidated statements of operations for the three and nine months ended September 30, 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 September 30, 2019, operating lease ROU assets and liabilities were
$333,000 and $322,000, respectively. Operating lease costs for the three and nine months ended September 30, 2019 were $44,000 and $131,000, respectively.
The table below summarizes other information related to our operating leases:
CAROLINA TRUST BANCSHARES, INC.
Notes to Condensed Consolidated Financial Statements
The table below summarizes the maturity of remaining lease liabilities as of September 30, 2019:
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management’s discussion and analysis is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of Carolina Trust BancShares, Inc. (the
“Company”). The Company conducts its business operations primarily through its wholly owned subsidiary, Carolina Trust Bank, a North Carolina-chartered commercial bank (which we refer to herein as the “Bank”)
Important Note Regarding Forward-Looking Statements
This quarterly report on Form 10-Q contains statements that management believes are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements
generally relate to the Company’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking terminology, such as “believes,” “expects,” or
“are expected to,” “plans,” “projects,” “goals,” “estimates,” “will,” “may,” “should,” “could,” “would,” “continues,” “intends to,” “outlook” or “anticipates,” or variations of these and similar words, or by discussions of strategies
that involve risks and uncertainties. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to those described in this quarterly report on Form 10-Q. When
considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements management may make. Moreover, you should treat these statements as speaking only as of the date
they are made and based only on information actually known to the Company at the time. Management undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or
otherwise. Forward-looking statements contained in this report are based on current expectations, estimates and projections about the Company’s business, management’s beliefs and assumptions made by management. These statements are not
guarantees of the Company’s future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted
in the forward-looking statements. These risks, uncertainties and assumptions include, without limitation:
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our ability to obtain shareholder approval or satisfy the other closing conditions for our recently announced merger with Carolina Financial Corporation on the timelines expected or at all;
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that the proposed merger may distract management or otherwise adversely impact our day-to-day operations;
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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 quarterly report presents certain non-GAAP (Generally Accepted Accounting Principles) 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.
Recent Developments
On July 15, 2019, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”) with Carolina Financial Corporation (“Carolina Financial”), the holding company for
CresCom Bank, Charleston, South Carolina. Under the Merger Agreement, it is proposed that the Company will merge with and into Carolina Financial, and the Bank will merge with and into CresCom Bank. Subject to the terms and
conditions of the Merger Agreement, the Company’s shareholders would receive 0.3000 shares of Carolina Financial common stock or $10.57 in cash for each share of the Company’s common stock, subject to election and proration such that
the aggregate merger consideration will consist of 90% Carolina Financial common stock and 10% cash. The Company has called a special meeting of shareholders for December 18, 2019, to vote on approval of the Merger Agreement.
On January 1, 2019, the Company completed its previously announced merger with Clover Community Bankshares, Inc. (“Clover”), parent company of Clover Community Bank, Clover, South Carolina. The fair
market value of loans and deposits acquired on the merger date was $64.0 million and $111.6 million, respectively. For additional discussion of the Company’s acquisition of Clover, see “Note 3 – Business Combination” in the Company’s
Notes to Condensed Consolidated Financial Statements included under Part 1 – Item 1 of this Quarterly Report.
Discussion of Financial Condition at September 30, 2019 and December 31, 2018
During the period from December 31, 2018 to September 30, 2019, total assets increased by approximately $147.4 million, or 31.03%. The increase was mostly attributable to the acquisition of Clover on
January 1, 2019, and was reflected primarily in cash and due from banks, investment securities available for sale, and loans. The increase in total assets was funded by an increase in deposits and an increase in advances from the
Federal Home Loan Bank. Interest-earning deposits with banks, and investment securities including investment securities available for sale and equity securities at September 30, 2019 totaled $92.8 million compared to $53.6 million at
December 31, 2018.
The Company’s investment securities portfolio as of September 30, 2019 totaled $64.5 million, an increase of $31.9 million when compared to the $32.6 million reported at December 31, 2018. This increase included $39.6 million
acquired from Clover that was partially offset by decreases from called bonds and principal paydowns of amortizing securities. At September 30, 2019, the Company had a net unrealized gain on available-for-sale securities of $938,000,
net of tax, as compared to a net unrealized loss of $549,000, net of tax, at December 31, 2018.
At September 30, 2019, net loans constituted 76.97% of the Company’s total assets. Net loans increased by $89.9 million from December 31, 2018 to September 30, 2019. The increase in loans since December
31, 2018 included $64.0 million acquired from Clover on the effective date of the merger, January 1, 2019, and $25.9 million in additional growth. Commercial real estate experienced the largest amount of growth in 2019 at $57.3 million
or 22.92%. 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 a Senior Credit 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 in any given year.
At September 30, 2019 and December 31, 2018 impaired loans, which consisted primarily of troubled debt restructurings and non-accrual loans, were $3.1 million and $4.4 million, respectively. The Company
also had $3.2 million of PCI loans at September 30, 2019. See Notes 3 and 7 of the Notes to Condensed Consolidated Financial Statements for additional discussion of PCI loans. Recorded investment in impaired loans of $0.5 million and
$1.7 million had related allowances for loan losses totaling $26,000 and $245,000 at September 30, 2019 and December 31, 2018, respectively. There were $2.6 million of impaired loans without a specific allowance at both September 30,
2019 and December 31, 2018. Impaired loans at September 30, 2019 and December 31, 2018 consisted primarily of commercial real estate, commercial and industrial and residential mortgage loans. At September 30, 2019, there were eight
loans totaling approximately $2.6 million, which were restructured to facilitate the borrowers’ ability to repay the outstanding balances. These eight restructured loans are considered troubled debt restructurings at September 30,
2019 and have specific reserves amounting to approximately $26,000 at such date. Of these eight loans, seven loans totaling $2.0 million were accruing interest at September 30, 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 $3.9 million and $3.7 million at September 30, 2019 and December 31, 2018, respectively. The allowance for loan losses at September 30, 2019 and December 31, 2018 was 0.82% and 1.01%, respectively, of gross
loans outstanding. The decrease in the allowance for loan losses as a percentage of gross loans is mainly due to the addition of the Clover loan portfolio and improved credit quality.
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 $26.0 million at September 30, 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 $2.9 million, or 27.00% and the increase in bank premises, equipment and software of $2.7 million or 45.08%. At
September 30, 2019, foreclosed assets consisted of five properties with an aggregate value of $1.0 million. Of these five properties, one property with a value of $524,000 was acquired in the Clover merger.
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
$121.0 million, or 30.62%, for the nine months ended September 30, 2019. Of this growth, $111.6 million is due to the acquisition of Clover and the additional $9.4 million was organic growth. The total increase includes increases in
noninterest-earning demand deposits of $31.4 million, or 51.30%, interest-earning demand deposits of $49.1 million, or 34.36%, savings deposits of $14.6 million, or 62.63%, and time deposits of $25.2 million, or 14.97%.
Federal Home Loan Bank advances increased $4.1 million to $20.2 million at September 30, 2019 up from the $16.1 million reported at December 31, 2018.
Stockholders’ equity amounted to $71.4 million, or 11.47%, of total assets at September 30, 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 September 30, 2019 and 2018
Net Income
Net income for the three months ended September 30, 2019 was $1,427,000 compared to $915,000 for the third quarter of 2018, an increase of $512,000. Basic and diluted earnings per common share were both $0.15 for the three months
ended September 30, 2019 compared to $0.13 for the third quarter of 2018. During the third quarter of 2019, the Company incurred $585,000 in merger-related expenses mainly due to the pending merger with Carolina Financial
Corporation. 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
third quarter 2019 would have been $2,009,000, which is a non-GAAP (Generally Accepted Accounting Principles) measurement. Please refer to “Note Regarding Use of non-GAAP Financial Measures” above 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 September 30, 2019 totaled $5,758,000 compared to $4,243,000 for the quarter ended September 30, 2018. The Company’s net interest spread was approximately 3.66%
and 3.53% for the quarters ended September 30, 2019 and 2018, respectively. Net interest margin on average interest earning assets was 3.97% and 3.82% for the quarters ended September 30, 2019 and 2018, respectively. Net interest
spread increased by 13 basis points, and net interest margin increased by 15 basis points. Accretion on the discount of purchased loans increased net interest margin by 5 basis points for the quarter ended September 30, 2019. The yield on earning assets increased by 22 basis points, from 4.87% for the quarter ended September 30, 2018 to 5.09% for the quarter ended September 30, 2019. Comparatively, the cost of funds, including
deposits, borrowings and holding company debt, was 1.18% at the end of the third quarter of 2019, an increase of 6 basis points when compared to 1.12% at the end of the third quarter of 2018. The
improvement in the yield on earning assets and the net interest margin was softened slightly by the shift in the earning asset mix, as the ratio of average loans to average earning assets declined from 85% in third quarter 2018 to
83% in the third quarter of 2019. The additional liquidity maintained in interest earning cash and securities resulted in those categories increasing from 15% to 17% as a percentage of earning assets for the same periods.
The margin and asset yield increases were attributed both to loan and investment yields which increased by 25 basis points and 23 basis points, respectively. For the quarter ending September 30, 2019,
average yield on loans and investments was 5.57% and 2.81%, respectively. Although loan yields were impacted by prime rate increases of 25 basis points in each of September 2018 and December 2018, the benefit was partially offset in
the third quarter of 2019 due to prime rate decreases of 25 basis points each on August 1, 2019 and on September 19, 2019. The loan yields also benefited from accretion of the discounts on purchased loans, while the cost of funds was
increased by the accretion of the discounts on acquired time deposits. The net impact of loan and deposit accretion added 5 basis points to the net interest margin.
Provision for Loan Losses
The Company records a 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.
The Company recorded a recovery of loan losses of ($37,000) for the quarter ended September 30, 2019 and a provision for loan losses of $75,000 for the quarter ended September 30, 2018. This decrease of $112,000 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 0.82% and 1.01% at September 30, 2019 and December 31, 2018, respectively. The
decrease of 19 basis points is due in part to the addition of the Clover loan portfolio. No additional allowance was recorded in connection with the Clover acquisition since the discount credit marks reflect management’s estimate of
an amount adequate to provide for probable losses inherent in the portfolio of acquired loans. The decrease is also due to a decrease in the historical loss factors of all the pools except for the commercial and industrial pool. 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.
Non-interest Income
Non-interest income for the quarter ended September 30, 2019 totaled $534,000, an increase of $160,000 over the $374,000 reported for the quarter ended September 30, 2018. The primary factors contributing to the overall
increase were the increase in mortgage fee income of $135,000, the increase in interchange fee income, net of $57,000, and the increase in overdraft fees on deposits of $61,000 for the quarter ended September 30, 2019. Offsetting these increases, was a $135,000 change in the value of equity investments from a gain of $35,000 for the quarter ended September 30, 2018 to a loss of $100,000 for the quarter ended
September 30, 2019. The growth in mortgage fee income was partially attributable to the addition of experienced mortgage specialists who are in
the South Carolina market and to a renewed emphasis by management on meeting the demand for mortgages in the Bank’s existing
markets. The interchange fees and overdraft fees on deposits increased as a result of an increase in the Bank’s checking account customer base for which the average total balance grew by 41% from September 30, 2018 to September
30, 2019, primarily due to the acquisition of Clover, and as a result of an overall increase in debit card usage. The unrealized losses in equity securities were driven by a decrease in the market value of the Bank’s investment
security holdings that trade in public markets.
Non-interest Expense
Non-interest expenses for the quarters ended September 30, 2019 and 2018 totaled $4,406,000 and $3,327,000, respectively. The $1.1 million increase was due in part to increases
in salaries and benefits, up $463,000, and in data processing expenses, up $80,000 due to the additional employees and customer accounts following the acquisition of Clover on January 1, 2019. Amortization of core deposit
intangibles increased by $129,000 due to the core deposit intangible recognized on January 1, 2019 from the valuation of Clover’s non-maturing deposits. Merger expenses increased by $428,000 due to the pending merger with Carolina
Financial Corporation.
Offsetting the impact of increases in other noninterest expenses that were mostly attributed to the growth from Clover acquisition were decreases in foreclosed asset expenses of $112,000 and insurance
expenses of $60,000 in the quarter ending September 30, 2019 as compared to the quarter ending September 30, 2018. The Bank’s foreclosed asset expenses have declined, as foreclosed assets have decreased over the past 12 months by
$739,000. The decrease in insurance expenses is mainly due to the application of the Small Bank Credit Balance on the FDIC Insurance assessment for June 30, 2019 that was due in September 2019.
Income Tax Expense
The Company recorded income tax expense of $496,000 for the three months ended September 30, 2019 resulting in an effective tax rate of 26%. For the same period in 2018, the Company recorded income tax
expense of $300,000 with an effective tax rate of 25%.
Discussion of Results of Operations for the Nine Months ended September 30, 2019 and 2018
Net Income and Net Income Available to Common Shareholders
Net income for the nine months ended September 30, 2019 was $3,582,000 compared to $2,006,000 for the nine months ended September 30, 2018, an increase of $1,576,000. Basic and diluted earnings per common
share were $0.39 and $0.38, respectively, for the nine months ended September 30, 2019 and $0.33 and $0.32, respectively, for the nine months ended September 30, 2018.
Net Interest Income
Net interest income for the nine months ended September 30, 2019 totaled $17,271,000 compared to $12,053,000 for the nine months ended September 30, 2018. The Company’s net interest spread was approximately 3.75% and 3.56% for the
nine months ended September 30, 2019 and 2018, respectively. Net interest margin on average interest earning assets was 4.05% and 3.79% for the nine months ended September 30, 2019 and 2018, respectively. The increase in net interest
spread was 19 basis points and the increase in net interest margin was 26 basis points. Accretion on the discount of purchased loans increased net interest margin by 8 basis points for the nine months ended September 30, 2019.
Provision for Loan Losses
The Company recorded provision for loan losses of $116,000 and $415,000 for the nine months ended September 30, 2019 and 2018, respectively. This decrease in the provision for loan losses is due to
continued improvement in credit quality and to a decrease in the historical loss factors of all the pools except for the commercial and industrial pool. The provision for loan losses is charged to operations to bring the allowance to a
level deemed appropriate based on management’s evaluation of the adequacy of the allowance for loan losses.
Non-interest Income
Non-interest income for the nine months ended September 30, 2019 and 2018 totaled $1,818,000 and $1,070,000, respectively. The increase of $748,000 consists of overdraft fees on deposits, interchange fee income, and mortgage fee
income. Overdraft fees on deposits increased by $130,000 and interchange fee income increased by $155,000 as a result of an increase in the Bank’s checking account customer base for which the average
total balance grew by 41% from September 30, 2018 to September 30, 2019 primarily due to the acquisition of Clover, and as a result of an overall increase in debit card usage. Mortgage fee income increased by $342,000 due in part to
the addition of experienced mortgage specialists in the South Carolina market and a renewed emphasis by management on meeting the demand for mortgages in
the Bank’s existing markets.
Non-interest Expense
Non-interest expenses for the nine months ended September 30, 2019 and 2018 totaled $14,305,000 and $10,043,000, respectively. The $4,262,000 increase was due in part to an increase of $1,876,000 in merger expenses related to the
Clover merger and the pending merger with Carolina Financial Corporation, an increase of $1,486,000 in compensation expense due to the addition of employees following the acquisition of Clover on January 1, 2019, and an increase of
$398,000 of amortization of core deposit intangibles due to the core deposit intangible recognized on January 1, 2019 from the valuation of Clover’s non-maturing deposits. Slightly offsetting these increases was a $336,000 decrease in
foreclosed asset expenses due to a decline in foreclosed assets over the past 12 months of $739,000.
Income Tax Expense
The Company recorded income tax expense of $1,086,000 for the nine months ended September 30, 2019, resulting in an effective tax rate of 23%. For the same period in 2018, the Company recorded income tax
expense of $659,000, with an effective tax rate of 25%.
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 interest rates, general 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 17.49% and 13.89% of total assets at September 30, 2019 and December 31, 2018, respectively.
Should the need arise, management believes the Company would have the capability to sell securities classified as available-for-sale or to borrow funds as necessary to meet the Company’s cash flow
demands. The Company has established credit lines with other financial institutions to purchase up to $38 million in federal funds and to borrow up to $10 million under a reverse repurchase agreement. There were no borrowings
outstanding against these credit lines at September 30, 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 September 30, 2019 was $106.4 million, of which $20.2 million was advanced and $15 million was securing a letter of credit.
Total deposits were $516.1 million and $395.1 million at September 30, 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 37.52% and 42.63% of total deposits at September 30, 2019 and December 31, 2018, respectively. At September 30, 2019 and December 31, 2018, the Company had brokered
time deposits of $14.1 million and $15.0 million, respectively. The Company also obtains time accounts by connecting with institutional depositors through an online listing service. At September 30, 2019 and December 31, 2018,
respectively, the deposits attributed to the listing service were $14.4 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 the 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.
Regulatory capital rules 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 as of the date indicated.
Non-GAAP Reconciliation
The table below presents the Non-GAAP reconciliation for adjusted net income for the period.
Item 4. - Controls and Procedures
Part II. OTHER INFORMATION
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.