TABLE OF CONTENTS

Part I.	FINANCIAL INFORMATION

Item 1 -	Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets September 30, 2018 and December 31, 2017	2

		Condensed Consolidated Statements of Operations Three Months Ended September 30, 2018 and 2017	3

		Condensed Consolidated Statements of Operations Nine Months Ended September 30, 2018 and 2017	4

		Condensed Consolidated Statements of Comprehensive Income Three Months Ended September 30, 2018 and 2017	5

		Condensed Consolidated Statements of Comprehensive Income Nine Months Ended September 30, 2018 and 2017	6

		Condensed Consolidated Statements of Changes in Stockholders’ Equity Nine Months Ended September 30, 2018 and 2017	7

		Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2018 and 2017	8

		Notes to Condensed Consolidated Financial Statements	9

Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		38

Item 4 -	Controls and Procedures		47

Part II.	OTHER INFORMATION

Item 6 -	Exhibits		48

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)

	September 30, 2018			December 31, 2017*
Assets
Cash and due from banks	$	9,000		$	5,409
Interest-earning deposits with banks		26,416			3,647
Cash and cash equivalents		35,416			9,056

Certificates of deposit with banks		1,498			1,498
Investment securities available for sale, at fair value (amortized cost $31,180 and $32,067)		29,992			31,112
Equity securities		749			-
Federal Home Loan Bank stock, at cost		1,050			1,341
Loans		380,746			348,679
Less: Allowance for loan and lease losses		(3,925	)		(3,599	)
Net Loans		376,821			345,080

Bank-owned life insurance		7,344			7,197
Accrued interest receivable		1,210			1,078
Bank premises, equipment and software		6,154			6,466
Foreclosed assets		1,782			789
Core deposit intangible, net of accumulated amortization of $737 and $711 at September 30, 2018 and December 31, 2017, respectively		47			73
Other assets		3,108			2,928
Total Assets	$	465,171		$	406,618

Liabilities and Stockholders’ Equity
Noninterest-earning demand deposits	$	66,796		$	49,199
Interest-earning demand deposits		123,586			115,396
Savings		23,441			22,066
Time deposits		172,674			153,992
Total deposits		386,497			340,653

Capital lease obligation		158			207
Federal Home Loan Bank advances		16,100			23,600
Long term subordinated debt		9,733			9,676
Accrued interest payable		578			292
Other liabilities		3,151			3,071
Total liabilities		416,217			377,499

Common stock warrant		426			426
Common stock, $2.50 par value; 10,000,000 shares authorized; 7,156,987 and 4,657,880 shares issued and outstanding		17,892			11,645
Additional paid-in capital		25,212			13,008
Retained earnings		6,335			4,772
Accumulated other comprehensive loss		(911	)		(732	)
Total stockholders’ equity		48,954			29,119
Total Liabilities and Stockholders’ Equity	$	465,171		$	406,618

*Derived from Carolina Trust BancShares, Inc.’s audited financial statements included in its 2017 Annual Report on Form 10-K

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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

	Three Months Ended September 30,
	2018		2017
Interest Income
Interest on investment securities and cash	$	383	$	219
Interest and fees on loans		5,036		4,215
Total interest income		5,419		4,434

Interest Expense
Interest expense non-maturity deposits		188		131
Interest expense time deposits		733		509
Interest expense borrowed funds		58		60
Interest expense capital lease		3		4
Interest expense debt		2		-
Interest expense on subordinated debt		192		190
Total interest expense		1,176		894
Net interest income		4,243		3,540
Loan loss provision		75		340
Net interest income after loan loss provision		4,168		3,200

Noninterest income
Overdraft fees on deposits		131		117
Interchange fee income, net		67		33
Service charges on deposits		18		16
Mortgage fee income		44		32
Customer service fees		14		13
ATM income		8		7
Bank-owned life insurance income		49		55
Unrealized gain on equity securities		35		-
Other income		8		9
Total noninterest income		374		282

Noninterest expense
Salaries & benefits expense		1,799		1,762
Occupancy expense		193		212
Furniture, fixture & equipment expense		214		142
Data processing expense		198		201
Office supplies expense		1		16
Professional fees		105		91
Advertising and marketing		31		33
Insurance		83		77
Foreclosed asset expense, net		127		22
Loan expense		75		55
Stockholder expense		45		26
Directors fees and expenses		51		59
Telephone expense		101		76
Core deposit intangible amortization expense		9		12
Merger expenses		157		-
Other operating expense		138		177
Total noninterest expense		3,327		2,961
Pre-tax income		1,215		521
Income tax expense		300		170
Net income	$	915	$	351

Earnings per share
Basic earnings per common share	$	0.13	$	0.08
Diluted earnings per common share	$	0.13	$	0.07
Weighted average common shares outstanding		7,156,987		4,654,880
Diluted average common shares outstanding		7,243,875		4,740,660

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

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

	Nine Months Ended September 30,
	2018		2017
Interest Income
Interest on investment securities and cash	$	984	$	686
Interest on loans		14,460		12,091
Total interest income		15,444		12,777

Interest Expense
Interest expense non-maturity deposits		500		311
Interest expense time deposits		2,043		1,515
Interest expense borrowed funds		248		156
Interest expense capital lease		10		13
Interest expense debt		16		-
Interest expense on subordinated debt		574		568
Total interest expense		3,391		2,563
Net interest income		12,053		10,214
Loan loss provision		415		555
Net interest income after loan loss provision		11,638		9,659

Noninterest income
Overdraft fees on deposits		412		294
Interchange fee income, net		165		96
Service charges on deposits		49		41
Mortgage fee income		86		73
Customer service fees		43		40
ATM income		21		20
Bank-owned life insurance income		147		146
Unrealized gain on equity securities		123		-
Other income		24		22
Total noninterest income		1,070		732

Noninterest expense
Salaries & benefits expense		5,496		5,279
Occupancy expense		607		636
Furniture, fixture & equipment expense		524		435
Data processing expense		588		738
Office supplies expense		42		59
Professional fees		328		333
Advertising and marketing		90		104
Insurance		269		223
Foreclosed asset expense, net		453		283
Loan expense		161		146
Stockholder expense		114		138
Directors fees and expenses		191		198
Telephone expense		241		222
Core deposit intangible amortization expense		26		35
Merger expenses		480		-
Other operating expense		433		436
Total noninterest expense		10,043		9,265
Pre-tax income		2,665		1,126
Income tax expense		659		368
Net income	$	2,006	$	758

Earnings per share
Basic earnings per common share	$	0.33	$	0.16
Diluted earnings per common share	$	0.32	$	0.16
Weighted average common shares outstanding		6,118,461		4,654,717
Diluted average common shares outstanding		6,211,670		4,732,557

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Three Months Ended September 30,
	2018			2017

Net income	$	915		$	351

Other comprehensive loss:
Unrealized loss on investment securities:
Unrealized holding losses arising during period		(208	)		(256	)
Deferred income tax benefit		48			92
Total other comprehensive loss		(160	)		(164	)

Total comprehensive income	$	755		$	187

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2018			2017

Net income	$	2,006		$	758

Other comprehensive loss:
Unrealized loss on investment securities:
Unrealized holding losses arising during period		(812	)		(78	)
Deferred income tax benefit		190			26
Total other comprehensive loss		(622	)		(52	)

Total comprehensive income	$	1,384		$	706

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)

(Dollars in thousands)

	2018 Shares Outstanding		September 30, 2018			2017 Shares Outstanding		September 30, 2017
Common stock warrant			$	426				$	426

Common stock, $2.50 par value
Balance, beginning of year		4,657,880	$	11,645			4,650,808	$	11,627
Exercise of stock options		3,107		7			-		-
Restricted stock vesting		-		-			3,334		8
Sale of common stock		2,496,000		6,240			738		2
Balance, end of period		7,156,987	$	17,892			4,654,880	$	11,637

Additional paid-in capital
Balance, beginning of year			$	13,008				$	12,988
Stock-based compensation				1					23
Exercise of stock options				8					1
Restricted stock vesting				-					(8	)
Sale of common stock				12,195					-
Balance, end of period			$	25,212				$	13,004

Retained earnings
Balance, beginning of year			$	4,772				$	4,241
Net income				2,006					758
Reclassification of loss on equity securities				(443	)				-
Balance, end of period			$	6,335				$	4,999

Accumulated other comprehensive loss
Balance, beginning of year			$	(732	)			$	(249	)
Reclassification of loss on equity securities				443					-
Other comprehensive loss				(622	)				(52	)
Balance, end of period			$	(911	)			$	(301	)

Total stockholders’ equity			$	48,954				$	29,765

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30,
	2018			2017
Cash flows from operating activities
Net income	$	2,006		$	758
Adjustments to reconcile net income to cash and cash equivalents provided by operating activities:
Provision for loan losses		415			555
Depreciation and amortization of bank premises, equipment and software		346			327
Accretion of loan fair value adjustments related to acquisition		(5	)		(6	)
Net amortization of bond premiums/discounts		104			112
Amortization of long term subordinated debt issuance costs		57			53
Unrealized gain on equity securities		(123	)		-
Amortization of core deposit intangible		26			35
Stock compensation expense		1			23
Increase in value of life insurance contracts		(147	)		(146	)
Net losses and impairment write-downs on foreclosed assets		295			217
Deferred tax provision		27			685
Increase in other assets		(17	)		(56	)
Increase in accrued interest receivable		(132	)		(30	)
Increase in accrued interest payable		286			163
Increase (decrease) in other liabilities		80			(419	)
Net cash and cash equivalents provided by operating activities		3,219			2,271

Cash flows from investing activities
Net increase in loans		(33,769	)		(32,262	)
Proceeds from sale of foreclosed assets		330			523
Net purchases of bank premises, equipment and software		(34	)		(472	)
Purchase of Bank owned life insurance		-			(5,500	)
Purchase of available-for-sale securities		(3,034	)		(4,832	)
Proceeds from maturities, calls and pay-downs of available-for-sale securities		2,612			3,371
Redemptions (purchases) of Federal Home Loan Bank stock		291			(249	)
Net cash and cash equivalents used in investing activities		(33,604	)		(39,421	)

Cash flows from financing activities
Net increase in deposits		45,844			18,923
Increase (decrease) in Federal Home Loan Bank advances		(7,500	)		6,000
Payment of capital lease obligation		(49	)		(46	)
Issuance of long term debt		3,000			-
Repayment of long term debt		(3,000	)		-
Net proceeds from issuance of common stock		18,450			3
Net cash and cash equivalents provided by financing activities		56,745			24,880
Net increase (decrease) in cash and cash equivalents		26,360			(12,270	)

Cash and cash equivalents, beginning		9,056			26,149
Cash and cash equivalents, ending	$	35,416		$	13,879

Supplemental disclosure of cash flow information
Cash paid during the period for taxes	$	631		$	15
Cash paid during the period for interest	$	3,105		$	2,400

Noncash financing and investing activities
Unrealized loss on investment securities available-for-sale, net of taxes	$	(622	)	$	(52	)
Transfer of loans to foreclosed assets	$	(1,618	)	$	(196	)

See accompanying notes to Condensed Consolidated Financial Statements.

Table of Contents

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

(1)	Presentation of Financial Statements

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

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for fair presentation of the financial information as of September 30, 2018, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2018.

Information regarding the organization and business of the Company, accounting policies followed by the Company and other information are contained in the notes to the consolidated financial statements filed as part of the Company’s 2017 Annual Report on Form 10-K. This quarterly report should be read in conjunction with the Annual Report.

(2)	Recent Accounting Pronouncements

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-01, Financial Instruments - Overall, Subtopic 825-10 (“ASU 2016-01”) to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The fair value measurement based on an exit price assumes that an asset or liability is exchanged in an orderly transaction between market participants to sell the asset or transfer the liability at the measurement date under current market conditions. A fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place either: (a) in the principal market for the asset or liability, or (2) in the absence of a principal market, in the most advantageous market for the asset or liability. The company has adopted the standard and applied the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the 2018 fiscal year. The amendments related to equity securities without readily determinable fair values were applied prospectively to equity investments that existed as of January 1, 2018. The Company is now reporting unrealized gains and losses of its marketable equity securities in income as compared to the previous method of reporting through other comprehensive income. The nonmarketable equity securities that do not have readily determinable values were previously recorded at cost. Following implementation, these securities, primarily Federal Home Loan Bank, or FHLB, stock, are recorded at cost less any impairment, plus or minus any observable changes in price resulting from transactions for similar or identical investments of the same issuer. The unrealized loss on equity securities in accumulated other comprehensive income in the amount of $443,000 was reclassified to retained earnings on January 1, 2018.

Table of Contents

CAROLINA TRUST BANCSHARES, INC.

Notes to Condensed Consolidated Financial Statements(Unaudited)

In August 2015, the FASB deferred the effective date of ASU 2014-09, Revenue from Contracts with Customers, Topic 606 (“ASU 2014-09”). The new standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies need to use more judgment and make more estimates than under existing guidance. This analysis may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. As a result of the deferral, ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this new guidance recognized at the date of initial application. The Company adopted this standard in 2018 using the full retrospective approach. The majority of the Company’s revenues are generated from financial instruments which are not within the scope of this standard. Management has evaluated the impact for its various other revenue streams including the following: deposit account fees and service charges; other fees such as wire services and check cashing services; ATM surcharges; card related fees; and gains and losses from sales of foreclosed properties and fixed assets. This evaluation led management to conclude that this standard does not materially impact its financial statements. Additionally, based on underlying contracts, this standard requires the Company to report costs associated with debit card and ATM transactions netted against the related fees from such transactions. Previously, such costs were reported as check card expenses. For the three and nine months ended September 30, 2018, gross interchange fees totaled $145,000 and $397,000, respectively, and related costs totaled $78,000 and $232,000, respectively. In the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018, we reported on a net basis $67,000 and $165,000, respectively, as interchange fee income. For the three and nine months ended September 30, 2017, gross interchange fees totaled $118,000 and $361,000, respectively, and related costs totaled $85,000 and $265,000, respectively. In the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2017, we reported on a net basis $33,000 and $96,000, respectively, as interchange fee income.

In February 2016, the FASB issued ASU 2016-02, Leases, which amended the Leases topic of the Accounting Standards Codification to revise certain aspects of recognition, measurement, presentation, and disclosure of leasing transactions. The amendments will be effective for fiscal years beginning after December 15, 2018, includ-ing interim periods within those fiscal years. The Company is currently evaluating the effect that implementation of the new standard will have on its financial position, results of operations, and cash flows. Currently the Company has several multi-year property leases for which reporting will be impacted by this standard. At the end of 2017, four of our locations have operating leases that expire in 2019 with aggregate payments totaling $157,000. If the new standard were in effect, an asset and a liability for the present value of payments would be recognized. Similarly, other property leases expire in 2020 and 2021 that have payments totaling $126,000 and $159,000, respectively.

Table of Contents

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

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Changes to the Disclosure Requirements for Fair Value Measurement. These amendments remove the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 fair value measurement methodologies, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. It also adds a requirement to disclose changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 measurements. For certain unobservable inputs, entities may disclose other quantitative information in lieu of the weighted average if the other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The Company is evaluating the impact this standard will have on its disclosures.

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

(3)	Earnings Per Share

Basic Earnings per Common Share

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

Diluted Earnings per Common Share

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

Table of Contents

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

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

The following table summarizes earnings per share and the shares utilized in the computations for the three and nine months ended September 30, 2018 and 2017, respectively:

Dollars in thousands, except per share data	Net Income Available to Common Shareholders		Weighted Average Common Shares		Per Share Amount
Three months ended September 30, 2018
Basic earnings per common share	$	915		7,156,987	$	0.13
Effect of dilutive stock options				72,609
Effect of dilutive stock warrants				14,279
Diluted earnings per common share	$	915		7,243,875	$	0.13

Three months ended September 30, 2017
Basic earnings per common share	$	351		4,654,880	$	0.08
Effect of dilutive stock options				73,545
Effect of dilutive stock warrants				12,235
Diluted earnings per common share	$	351		4,740,660	$	0.07

	Net Income Available to Common Shareholders		Weighted Average Common Shares		Per Share Amount
Dollars in thousands, except per share data
Nine months ended September 30, 2018
Basic earnings per common share	$	2,006		6,118,461	$	0.33
Effect of dilutive stock options				75,598
Effect of dilutive stock warrants				17,611
Diluted earnings per common share	$	2,006		6,211,670	$	0.32

Nine months ended September 30, 2017
Basic earnings per common share	$	758		4,654,717	$	0.16
Effect of dilutive stock options				69,168
Effect of dilutive stock warrants				8,672
Diluted earnings per common share	$	758		4,732,557	$	0.16

Table of Contents

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

For the three and nine months ended September 30, 2018, there were no shares that were anti-dilutive. For the three and nine months ended September 30, 2017, there were 35,981 shares related to stock options that were anti-dilutive because the exercise price exceeded the average market price for the period. Therefore, they were omitted from the calculation of diluted earnings per share for their respective periods.

(4)	Fair Value Measurements

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

Cash and Due from Banks and Interest-Earning Deposits with Banks

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

Certificates of Deposit with Banks

The fair value of certificates of deposit with banks is estimated by discounting expected cash flows using the rates currently offered for instruments of similar remaining maturities.

Investment and Equity Securities

Fair value for investment and equity securities equals the quoted market price if such information is available. If a quoted market price is not available in active markets for identical securities (level 1), fair value may be estimated using observable inputs such as quoted prices for similar securities, interest rates and yield curves, implied volatilities and credit spreads (level 2). Otherwise, unobservable inputs such as independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating on similar securities, prepayment assumptions and other factors such as credit loss assumptions (level 3). The fair value would be based on an exit price between market participants that may include adjustments for liquidity and credit.

Loans

The fair value of loans is estimated based on exit price. These cash flows include assumptions for prepayment estimates over each loan’s remaining life, considerations for the current interest rate environment compared to the weighted average rate of each portfolio and a credit risk component based on the historical and expected performance of each portfolio. The calculation also includes market liquidity and credit adjustments. These valuations are not comparable with the fair values disclosed for December 31, 2017 which were based on an entrance price basis.

Table of Contents

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

Accrued Interest Receivable and Payable

The carrying amount is a reasonable estimate of fair value.

Deposits

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

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

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

Financial Instruments with Off-Balance Sheet Risk

With regard to commitments to extend credit discussed in Note 9, the fair value amounts are not material.

The carrying amounts and estimated fair values of the Company’s financial instruments, none of which are held for trading purposes, are as follows at September 30, 2018 and December 31, 2017:

			Fair Value Measurements at September 30, 2018 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Dollars in thousands	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
ASSETS
Cash and due from banks	$	9,000	$	9,000	$	-	$	-	$	9,000
Interest-earning deposits with banks		26,416		26,416		-		-		26,416
Certificates of deposit with banks		1,498		-		1,474		-		1,474
Federal Home Loan Bank stock		1,050		-		1,050		-		1,050
Investment securities available-for-sale		29,992		-		29,992		-		29,992
Equity securities		749		749		-		-		749
Net loans		376,821		-		-		365,056		365,056
Accrued interest receivable		1,210		-		1,210		-		1,210

LIABILITIES
Deposits	$	386,497	$	-	$	375,220	$	-	$	375,220
Capital lease obligation		158		-		158		-		158
Federal Home Loan Bank advances		16,100		-		16,008		-		16,008
Long term subordinated debt		9,733		-		9,716		-		9,716
Accrued interest payable		578		-		578		-		578

Table of Contents

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

			Fair Value Measurements at December 31, 2017 using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
Dollars in thousands	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
ASSETS
Cash and due from banks	$	5,409	$	5,409	$	-	$	-	$	5,409
Interest-earning deposits with banks		3,647		3,647		-		-		3,647
Certificates of deposit with banks		1,498		-		1,519		-		1,519
Federal Home Loan Bank stock		1,341		-		1,341		-		1,341
Investment securities available-for-sale		31,112		626		30,486		-		31,112
Net loans		345,080		-		-		345,370		345,370
Accrued interest receivable		1,078		-		1,078		-		1,078

LIABILITIES
Deposits	$	340,653	$	-	$	330,672	$	-	$	330,672
Capital lease obligation		207		-		207		-		207
Federal Home Loan Bank advances		23,600		-		23,495		-		23,495
Long term subordinated debt		9,676		-		9,619		-		9,619
Accrued interest payable		292		-		292		-		292

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

Fair Value Hierarchy

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

Level 1

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

Level 2

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

Level 3

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

Table of Contents

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

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

Investment Securities Available-for-Sale and Equity Securities

Investment securities available-for-sale and equity securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange, such as the New York Stock Exchange and U.S. Treasury securities that are traded by dealers or brokers in an active over-the-counter market. Level 2 securities include U.S. government agency securities, mortgage-backed securities issued by government-sponsored enterprises and municipal bonds. There have been no changes in valuation techniques during 2018. Valuation techniques are consistent with techniques used in prior periods.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

	Total		Level 1		Level 2		Level 3
Dollars in thousands
September 30, 2018
Available-for-Sale Securities
U.S. Government and federal agency	$	10,612	$	-	$	10,612	$	-
Mortgage-backed securities*		19,095		-		19,095		-
Municipal securities		285		-		285		-
Total available-for-sale securities		29,992		-		29,992		-
Equity securities		749		749		-		-
Total	$	30,741	$	749	$	29,992	$	-

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

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

The Company did not have any transfers of assets between Levels 1, 2 or 3 during the periods ended September 30, 2018 and December 31, 2017.

Table of Contents

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

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management measures it for impairment. The fair value of impaired loans is estimated using one of several methods, including collateral value, a loan’s observable market price and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value exceeds the recorded investments in such loans. At September 30, 2018, the discounted cash flows method was used in determining the fair value of nine loans totaling $1.7 million and the fair value of the collateral method was used in the other twenty-three loans totaling $2.5 million. At December 31, 2017, the discounted cash flows method was used in determining the fair value of nine loans totaling $1.9 million and the fair value of the collateral method was used in the other twenty-nine loans totaling $4.2 million. Impaired loans where an allowance is established based on the fair value of collateral and also when written down with the discounted cash flow method require classification in the fair value hierarchy. The fair value of the collateral for an impaired loan is classified as Level 3. Although appraisals of these properties are frequently based on comparable properties, they are not identical. Significant unobservable inputs will need to be used in assessing the value. When the discounted cash flows method is used, the Company records the impaired loan as nonrecurring Level 3. There have been no changes in valuation techniques for the period ended September 30, 2018. Valuation techniques are consistent with techniques used in prior periods.

The following table presents impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses and a write-down based upon the fair value of the underlying collateral or discounted cash flows during the nine months ended September 30, 2018 and 2017.

	September 30, 2018					September 30, 2017
Dollars in thousands	Level 2		Level 3			Level 2		Level 3
Carrying value of impaired loans before allocations	$	-	$	1,354			-	$	1,812
Specific valuation allowance allocations		-		(233	)		-		(251	)
Carrying value of impaired loans after allocations	$	-	$	1,121			-	$	1,561

Foreclosed Assets

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

The carrying value of foreclosed assets is periodically reviewed and written down to fair value. Any loss is included in earnings. For the three months ended September 30, 2018, there were no assets that were written down prior to foreclosure. For the nine months ended September 30, 2018, foreclosed assets in the amount of $1,158,000 were written down by $180,000 to $978,000 prior to foreclosure. For the three months ended September 30, 2018, foreclosed assets with a carrying value of $640,000 were written down by $53,000 to $587,000 subsequent to foreclosure and for the nine months ended September 30, 2018, $1,618,000 were written down by $301,000 to $1,317,000 subsequent to foreclosure. For the three and nine months ended September 30, 2017, there were no assets written down subsequent to foreclosure.

Table of Contents

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

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

	Total		Level 1		Level 2		Level 3
Dollars in thousands
September 30, 2018
Foreclosed assets	$	1,317	$	-	$	-	$	1,317
Impaired loans		1,121		-		-		1,121
Total	$	2,438	$	-	$	-	$	2,438

December 31, 2017
Foreclosed assets	$	324	$	-	$	-	$	324
Impaired loans		1,621		-		-		1,621
Total	$	1,945	$	-	$	-	$	1,945

Quantitative Information About Level 3 Fair Value Measurements:

	Fair Value		Valuation Technique	Unobservable Input	Range			Weighted Average
Dollars in thousands
September 30, 2018
Impaired loans	$	1,121	Discounted cash flows	Discount rate		4.75% - 8.50	%		7.18	%
Foreclosed assets		1,317	Discounted appraisals	Appraisal adjustments		6.00% -8.00	%		7.12	%

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

Foreclosed assets		324	Discounted appraisals	Appraisal adjustments		15.00	%		15.00	%

Table of Contents

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

(5)	Investment Securities

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

In thousands	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2018
U.S. Government and federal agency	$	11,076	$	4	$	(468	)	$	10,612
Mortgage-backed securities *		19,811		15		(731	)		19,095
Municipal securities		293		-		(8	)		285
	$	31,180	$	19	$	(1,207	)	$	29,992

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

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

The amortized cost and fair values of securities available-for-sale at September 30, 2018 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
Dollars in thousands
Due within one year	$	-	$	-
Due after one but within five years		8,351		8,043
Due after five but within ten years		6,740		6,439
Due after ten years		16,089		15,510
	$	31,180	$	29,992

Table of Contents

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

The following table details unrealized losses and related fair values in the Company’s investment security portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2018 and December 31, 2017, respectively.

	Temporarily Impaired Securities in Available-for-Sale Portfolio

	Less than 12 Months					Greater than 12 Months					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
Dollars in thousands
September 30, 2018
Available for sale securities
U.S. Government and federal agency	$	1,917	$	(73	)	$	8,554	$	(395	)	$	10,471	$	(468	)
Mortgage-backed securities *		5,567		(89	)		11,892		(642	)		17,459		(731	)
Municipal Securities		-		-			285		(8	)		285		(8	)
Total temporarily impaired securities	$	7,484	$	(162	)	$	20,731	$	(1,045	)	$	28,215	$	(1,207	)

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

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

Management considers the nature of the investment, the underlying causes of the decline in the market value and the severity and duration of the decline in market value in determining if impairment is other than temporary. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As of September 30, 2018, management believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The unrealized losses on debt securities are largely due to increases in market interest rates over the yields available at the time the underlying securities were purchased. The fair value is expected to recover as the bonds approach their maturity date or re-pricing date or if market yields for such investments decline. Management analyzed the issuer data from public filings, reviewed transcripts of earnings discussions, and assessed whether the decline in value was other than temporary.

Management does not believe such securities are other-than-temporarily impaired due to reasons of credit quality for the debt securities. Accordingly, as of September 30, 2018, management believes the impairments detailed in the table above are temporary, and no impairment loss has been realized in the Company’s net income.

Securities with a fair value of $926,000 at September 30, 2018 were pledged to secure public funds. The Company had no sales of securities during the three and nine month periods ended September 30, 2018 and September 30, 2017.

Table of Contents

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

(6)

Loans

The following is a summary of loans at September 30, 2018 and December 31, 2017:

	September 30, 2018					December 31, 2017
Dollars in thousands	Amount		Percent of Total			Amount		Percent of Total
Commercial real estate
Residential ADC	$	4,610		1.21	%	$	7,242		2.08	%
Commercial ADC		23,293		6.12	%		24,364		6.99	%
Farmland		5,322		1.40	%		5,392		1.55	%
Multifamily		16,099		4.23	%		11,967		3.43	%
Owner occupied		97,982		25.73	%		84,808		24.32	%
Non-owner occupied		94,769		24.89	%		79,549		22.81	%
Total commercial real estate		242,075		63.58	%		213,322		61.18	%

Commercial
Commercial and industrial		46,767		12.28	%		47,032		13.49	%
Agriculture		296		0.08	%		415		0.12	%
Other		1,603		0.42	%		1,420		0.40	%
Total commercial		48,666		12.78	%		48,867		14.01	%

Residential mortgage
First lien, closed-end		51,240		13.46	%		47,936		13.75	%
Junior lien, closed-end		703		0.18	%		1,123		0.32	%
Total residential mortgage		51,943		13.64	%		49,059		14.07	%

Home equity lines		34,110		8.96	%		33,672		9.66	%
Consumer – other		3,952		1.04	%		3,759		1.08	%

Total loans	$	380,746		100.00	%	$	348,679		100.00	%

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

Table of Contents

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

Non-Accrual and Past Due Loans

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

	September 30, 2018		December 31, 2017
Dollars in thousands
Commercial real estate
Commercial ADC	$	3	$	5
Owner occupied		944		2,031
Non-owner occupied		5		28
Total commercial real estate		952		2,064
Commercial
Commercial and industrial		-		25
Total commercial		-		25
Residential mortgage:
First lien, closed end		62		86
Junior lien, closed end		5		455
Total residential mortgage		67		541
Home equity lines		29		34
Consumer – other		9		-
Total non-accrual loans	$	1,057	$	2,664

Interest foregone on non-accrual loans was approximately $22,000 and $59,000 for the three and nine months ended September 30, 2018 and $48,000 and $85,000 for the three and nine months ended September 30, 2017.

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

In thousands	Loans 30-89 Days Past Due		Loans 90 or more Days Past Due		Total Past Due Loans		Current Loans		Total Loans		Accruing Loans 90 or More Days Past Due
September 30, 2018
Commercial real estate:
Residential ADC	$	-	$	-	$	-	$	4,610	$	4,610	$	-
Commercial ADC		41		-		41		23,252		23,293		-
Farmland		-		-		-		5,322		5,322		-
Multifamily		-		-		-		16,099		16,099		-
Owner occupied		329		938		1,267		96,715		97,982		-
Non-owner occupied		5		-		5		94,764		94,769		-
Total commercial real estate		375		938		1,313		240,762		242,075		-
Commercial:
Commercial and industrial		128		-		128		46,639		46,767		-
Agriculture		-		-		-		296		296		-
Other		-		-		-		1,603		1,603		-
Total commercial		128		-		128		48,538		48,666		-
Residential mortgage:
First lien, closed end		161		37		198		51,042		51,240		-
Junior lien, closed-end		-		-		-		703		703		-
Total residential mortgage		161		37		198		51,745		51,943		-
Home equity lines		86				86		34,024		34,110		-
Consumer – other		10		7		17		3,935		3,952		-
Total loans	$	760	$	982	$	1,742	$	379,004	$	380,746	$	-

Table of Contents

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

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

At September 30, 2018 there were no loans past due 90 days or more, which were still accruing interest. There were two loans totaling $82,000 past due 90 days or more and still accruing interest at December 31, 2017.

Table of Contents

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

Impaired loans

Impaired loans are set forth in the following tables.

September 30, 2018
In thousands	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
Commercial real estate
Commercial ADC	$	4	$	4	$	-	$	-
Owner occupied		2,441		2,441		-		-
Non-owner occupied		5		5		-		-
Total commercial real estate		2,450		2,450		-		-
Commercial
Commercial and industrial		648		278		370		103
Residential mortgage
First lien, closed-end		894		62		773		47
Junior lien, closed- end		425		215		210		82
Total residential mortgage		1,319		277		983		129
Home equity lines		132		87		-		-
Consumer – other		8		7		1		1
Total loans	$	4,557	$	3,099	$	1,354	$	233

December 31, 2017
In thousands	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance
Commercial real estate
Commercial ADC	$	4	$	4	$	-	$	-
Owner occupied		3,721		3,591		-		-
Non-owner occupied		28		28		-		-
Total commercial real estate		3,753		3,623		-		-
Commercial
Commercial and industrial		766		25		741		144
Residential mortgage
First lien, closed-end		1,040		165		811		24
Junior lien, closed- end		884		670		215		79
Total residential mortgage		1,924		835		1,026		103
Home equity lines		151		106		-		-
Consumer – other		1		-		1		1
Total loans	$	6,595	$	4,589	$	1,768	$	248

Table of Contents

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

	3 months ended September 30, 2018				3 months ended September 30, 2017
In thousands	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate
Commercial ADC	$	1	$	-	$	746	$	-
Farmland		-		-		30		-
Multifamily		-				147		-
Owner occupied		619		20		3,482		40
Non-owner occupied		1		-		222		-
Total commercial real estate		621		20		4,627		40
Commercial
Commercial and industrial		171		11		1,005		13
Residential mortgage
First lien, closed-end		216		16		1,461		13
Junior lien, closed- end		107		5		890		3
Total residential mortgage		323		21		2,351		16
Home equity lines		22		1		119		1
Consumer – other		1		-		-		-
Total loans	$	1,138	$	53	$	8,102	$	70

	9 months ended September 30, 2018				9 months ended September 30, 2017
In thousands	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Commercial real estate
Commercial ADC	$	7	$	-	$	1,061	$	-
Farmland		-		-		31		-
Multifamily		57		-		124		-
Owner occupied		2,658		10		2,284		94
Non-owner occupied		12		-		91		-
Total commercial real estate		2,734		10		3,591		94
Commercial
Commercial and industrial		711		18		1,271		45
Residential mortgage
First lien, closed-end		892		96		1,196		44
Junior lien, closed- end		519		16		336		9
Total residential mortgage		1,411		112		1,532		53
Home equity lines		96		2		111		5
Consumer – other		6		17		1		-
Total loans	$	4,958	$	159	$	6,506	$	197

Troubled Debt Restructurings

As of September 30, 2018, eleven loans totaling $3,925,000 were identified as troubled debt restructurings and considered impaired, none of which had unfunded commitments. Ten loans totaling $4,163,000 were identified as troubled debt restructurings and considered impaired at December 31, 2017, none of which had unfunded commitments.

Of the eleven loans identified as troubled debt restructurings at September 30, 2018, nine loans totaling $3,200,000 were accruing interest. Of the ten loans identified as troubled debt restructurings at December 31, 2017, nine loans totaling $3,398,000 were accruing interest.

Table of Contents

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

For the three and nine months ended September 30, 2018 and 2017, the following table presents a breakdown of the types of concessions made by loan class.

	Three months ended September 30, 2018						Nine months ended September 30, 2018
	Number of loans		Unpaid Principal Pre-Modification		Post-Modification Outstanding Recorded Investment		Number of loans		Unpaid Principal Pre-Modification		Post Modification Outstanding Recorded Investment
	(dollars in thousands)
Extended Payment Terms
Consumer - other		-	$	-	$	-		1	$	1	$	1

Total		-	$	-	$	-		1	$	1	$	1
Grand Total		-	$	-	$	-		1	$	1	$	1

	Three months ended September 30, 2017						Nine months ended September 30, 2017
	Number of loans		Unpaid Principal Pre-Modification		Post-Modification Outstanding Recorded Investment		Number of loans		Unpaid Principal Pre-Modification		Post Modification Outstanding Recorded Investment
	(dollars in thousands)
Forgiveness of Principal Residential Mortgage:
Junior lien, closed end		-	$	-	$	-		2	$	636	$	433
Total residential mortgage		-		-		-		2		636		433
Total		-	$	-	$	-		2	$	636	$	433
Grand Total		-	$	-	$	-		2	$	636	$	433

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

There were no loans that were modified as troubled debt restructurings within the previous 12 months for which there was a payment default during the three and nine months ended September 30, 2018.

The following table presents loans that were modified as troubled debt restructurings within the previous 12 months and for which there was a payment default during the three and nine months ended September 30, 2017. The type labeled other includes concessions made to capitalize interest and extend interest only periods.

	Three months ended September 30, 2017				Three months ended September 30, 2017
	Number of loans		Recorded Investment		Number of loans		Recorded Investment
Other
Commercial:
Commercial and industrial		-	$	-		1	$	136
Total commercial		-	$	-		1	$	136

Grand Total		-	$	-		1	$	136

Table of Contents

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

If a restructured loan defaults after being restructured, the loan is liquidated or charged off. Defaults of restructured loans are addressed in the qualitative factor of the delinquency component.

The following table presents the successes and failures of the types of modifications within the previous 12 months as of September 30, 2018 and 2017.

	Paid in full				Paying as restructured				Converted to non-accrual				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment
September 30, 2018	(Dollars in thousands)
Extended payment terms		-	$	-		1	$	1		-	$	-		-	$	-
Forgiveness of principal		-		-				-		-		-		-		-
Total		-	$	-		1	$	1		-	$	-		-	$	-

	Paid in full				Paying as restructured				Converted to non-accrual				Foreclosure/Default
	Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment		Number of loans		Recorded Investment
September 30, 2017	(Dollars in thousands)
Forgiveness of principal		-	$	-		2	$	433		-	$	-		-	$	-
Other		-		-		-		-		-		-		1		136
Total		-	$	-		2	$	433		-	$	-		1	$	136

Credit Quality Indicators

As part of the on-going monitoring of credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators including trends related to (i) the local, state and national economic outlook, (ii) concentrations of credit, (iii) interest rate movements, (iv) volume, mix and size of loans, and (v) delinquencies. The Company also has an internal Loan Review Officer that monitors risk grades on an on-going basis.

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

Loan Portfolio Risk Grades

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

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

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

Extending loans that are currently performing satisfactorily but with potential weaknesses that may, if not corrected, weaken the asset or inadequately protect the Company’s position at some future date. Potential weaknesses are the result of deviations from prudent lending practice.

Table of Contents

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

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

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

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

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

Table of Contents

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

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

September 30, 2018
Dollars in thousands	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial real estate:
Residential ADC	$	4,610	$	-	$	-	$	-	$	-
Commercial ADC		23,047		243		3		-		-
Farmland		5,322		-		-		-		-
Multifamily		16,099		-		-		-		-
Owner occupied		95,916		984		1,082		-		-
Non-owner occupied		93,824		814		131		-		-
Total commercial real estate		238,818		2,041		1,216		-		-
Commercial:
Commercial and industrial		45,332		1,065		370		-		-
Agriculture		296		-		-		-		-
Other		1,603		-		-		-		-
Total commercial		47,231		1,065		370		-		-
Residential mortgage:
First lien, closed-end		50,448		660		132		-		-
Junior lien, closed-end		279		419		5		-		-
Total residential mortgage		50,727		1,079		137		-		-
Home equity lines		33,235		788		87		-		-
Consumer – other		3,787		156		9		-		-
Total	$	373,798	$	5,129	$	1,819	$	-	$	-

December 31, 2017
Dollars in thousands	Pass		Special Mention		Substandard		Doubtful		Loss
Commercial real estate:
Residential ADC	$	7,242	$	-	$	-	$	-	$	-
Commercial ADC		23,883		477		4		-		-
Farmland		5,392		-		-		-		-
Multifamily		11,967		-		-		-		-
Owner occupied		81,584		1,049		2,175		-		-
Non-owner occupied		78,531		855		163		-		-
Total commercial real estate		208,599		2,381		2,342		-		-
Commercial:
Commercial and industrial		45,480		1,130		422		-		-
Agriculture		415		-		-		-		-
Other		1,420		-		-		-		-
Total commercial		47,315		1,130		422		-		-
Residential mortgage:
First lien, closed-end		47,257		513		166		-		-
Junior lien, closed-end		239		-		884		-		-
Total residential mortgage		47,496		513		1,050		-		-
Home equity lines		32,005		1,543		124		-		-
Consumer – other		3,596		162		1		-		-
Total	$	339,011	$	5,729	$	3,939	$	-	$	-

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of an amount adequate to provide for probable losses inherent in the loan portfolio. Management determines the allowance for loan losses based on a number of factors, including a review and evaluation of the Company’s loan portfolio and current and projected economic conditions locally and nationally. The allowance is monitored and analyzed in conjunction with the Company’s loan analysis and grading program. The look-back period is a weighted twenty quarter period.

Table of Contents

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

Based on this methodology, provisions for loan losses are made to maintain an adequate allowance for loan losses. The allowance for loan losses is created by direct charges to operations. Losses on loans are charged against the allowance for loan losses in the accounting period in which they are determined by management to be uncollectible. Recoveries during the period are credited to the allowance. The provision for loan losses is the amount necessary to adjust the allowance for loan losses to the amount that management has determined to be adequate to provide for probable losses inherent in the loan portfolio. The Company recorded provisions for loan losses of $75,000 and $415,000 for the three and nine months ended September 30, 2018. The Company recorded provisions for loan losses for the both the three and nine months ended September 30, 2017 that totaled $340,000 and $555,000, respectively. Management realizes that general economic trends greatly affect loan losses, and no assurances can be made that future charges to the allowance for loan losses may not be significant in relation to the amount provided during a particular period, or that future evaluations of the loan portfolio based on conditions then prevailing will not require sizable additions to the allowance, thus necessitating similarly sizable charges to income.

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

The following table details activity in the allowance for loan losses by portfolio segment for the three months ended September 30, 2018 and 2017.

	Beginning Balance		Provision for (Recovery of) Loan Losses			Charge- offs			Recoveries		Ending Balance
Dollars in thousands
September 30, 2018
Commercial real estate	$	2,504	$	76		$	-		$	3	$	2,583
Commercial and industrial		608		4			-			3		615
Residential mortgage		532		-			-			-		532
Consumer		200		(5	)		(3	)		3		195
Total	$	3,844	$	75		$	(3	)	$	9	$	3,925

September 30, 2017
Commercial real estate	$	1,954	$	133		$	(134	)	$	140	$	2,093
Commercial and industrial		501		241			(136	)		-		606
Residential mortgage		524		(13	)		-			-		511
Consumer		234		(21	)		(8	)		8		213
Total	$	3,213	$	340		$	(278	)	$	148	$	3,423

Table of Contents

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

The following table details activity in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2018 and 2017.

	Beginning Balance		Provision for (Recovery of) Loan Losses			Charge- offs			Recoveries		Ending Balance
Dollars in thousands
September 30, 2018
Commercial real estate	$	2,260	$	340		$	(50	)	$	33	$	2,583
Commercial and industrial		634		(2	)		(25	)		8		615
Residential mortgage		505		77			(50	)		-		532
Consumer		200		-			(13	)		8		195
Total	$	3,599	$	415		$	(138	)	$	49	$	3,925

September 30, 2017
Commercial real estate	$	1,607	$	546		$	(208	)	$	148	$	2,093
Commercial and industrial		1,171		(214	)		(369	)		18		606
Residential mortgage		427		139			(66	)		11		511
Consumer		188		84			(73	)		14		213
Total	$	3,393	$	555		$	(716	)	$	191	$	3,423

The allocation of the allowance for loan losses for September 30, 2018 and December 31, 2017 is presented in the table below.

	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Total
Dollars in thousands
September 30, 2018
Commercial real estate	$	-	$	2,583	$	2,583
Commercial and industrial		103		512		615
Residential mortgage		129		403		532
Consumer		1		194		195
Total	$	233	$	3,692	$	3,925

December 31, 2017
Commercial real estate	$	-	$	2,260	$	2,260
Commercial and industrial		144		490		634
Residential mortgage		103		402		505
Consumer		1		199		200
Total	$	248	$	3,351	$	3,599

Table of Contents

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

The Company’s recorded investment in loans as of September 30, 2018 and December 31, 2017 related to each balance in the allowance for loan losses by portfolio segment and disaggregated on the Company’s impairment methodology was as follows:

	September 30, 2018				December 31, 2017
	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment
Dollars in thousands
Commercial real estate	$	2,450	$	239,625	$	3,623	$	209,699
Commercial and industrial		648		48,018		766		48,101
Residential mortgage		1,260		50,683		1,861		47,198
Consumer and home equity lines		95		37,967		107		37,324
Total	$	4,453	$	376,293	$	6,357	$	342,322

At September 30, 2018, the Company had pre-approved but unused lines of credit totaling $74.9 million. In management’s opinion, these unused lines of credit represent no more than normal lending risk to the Company and will be funded from normal sources of liquidity.

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

A summary of related party loan activity for the nine months ended September 30, 2018 and 2017 is as follows:

	September 30, 2018			September 30, 2017
Dollars in thousands
Balance, beginning of year	$	1,740		$	2,043
Loan disbursements		236			84
Loan repayments		(1,505	)		(345	)
Balance, end of quarter	$	471		$	1,782

At September 30, 2018 and 2017, the Company had pre-approved but unused lines of credit totaling $145,000 and $374,000, respectively, to executive officers, directors and their related interests. Related party deposits totaled $2,689,000 and $1,912,000 at September 30, 2018 and 2017, respectively.

Table of Contents

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

(7)	Foreclosed Assets

The following table summarizes the activity in foreclosed assets for the nine month periods ended September 30, 2018 and 2017:

	September 30, 2018			September 30, 2017
Dollars in thousands
Balance, beginning of year	$	789		$	1,011
Additions		1,618			196
Proceeds from sale		(330	)		(523	)
Valuation adjustments		(317	)		(193	)
Gains/(losses) on sales		22			(24	)
Balance, end of quarter	$	1,782		$	467

The Company has two foreclosed residential real estate properties totaling $794,000 as of September 30, 2018.

The company did not have any consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process as of September 30, 2018.

(8)	Stock Option Plans

The Company has six share-based compensation plans in effect at September 30, 2018 and September 30, 2017. There were no compensation cost charged against income for the three months ended September 30, 2018 and $1,000 charged against income for those plans for the nine months ended September 30, 2018. The compensation cost charged against income for those plans for the three and nine months ended September 30, 2017 was $5,000 and $23,000, respectively.

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

The options granted in 2006 through 2011 under the 2001 Director Plan and the 2001 Employee Plan vested over a four-year period. The options granted in 2005 under the 2001 Director Plan and the 2001 Employee Plan vested over a three-year period. All unexercised options expire ten years after the year of the grant or earlier in certain circumstances. The fair market value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The 2001 Employee Plan and the 2001 Director Plan expired in 2011 in accordance with their terms and no further options may be granted under these plans.

During 2005, the Company adopted, with shareholder approval, an Incentive Stock Option Plan (the “2005 Employee Plan”) and a Non-statutory Stock Option Plan (the “2005 Director Plan”). The 2005 Employee Plan made available options to purchase 72,389 shares of the Company’s common stock and the 2005 Director Plan made available 73,527 shares of the Company’s common stock, for an aggregate number of common shares reserved under these plans of 145,916. The exercise price of all options granted to date under these plans range from $2.13 to $12.25.

Table of Contents

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

The options granted in 2005 under the 2005 Director Plan and the 2005 Employee Plan vested over a three-year period. The options granted in 2006 through 2015 under the 2005 Employee Plan vest over a four-year period. All unexercised options expire ten years after the date of grant. The fair market value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The 2005 Employee Plan and the 2005 Director Plan expired in 2015 in accordance with their terms and no further options may be granted under these plans. Additionally, the Company granted 10,000 shares of restricted stock under the 2005 Employee Plan in 2014. The shares vested over a 3-year period, fully vesting in January 2017.

As a result of the merger with Carolina Commerce Bank, Carolina Trust Bank assumed all outstanding options of Carolina Commerce under the existing terms and at the conversion rate of 0.625 shares of Carolina Trust stock for each share of Carolina Commerce stock. All options assumed became fully vested at the merger date. As of September 30, 2018, there were 76,845 options outstanding from the converted plans with exercise prices ranging from $2.13 to $10.40.

Total stock-based compensation recognized as compensation expense on our consolidated statement of income for the three and nine months ended September 30, 2018 and 2017 is as follows:

	Three months ended September 30, 2018		Three months ended September 30, 2017
Dollars in thousands
Option Grants	$	-	$	5
Restricted Stock Grants		-		-
Total compensation expense	$	-	$	5

	Nine months ended September 30, 2018		Nine months ended September 30, 2017
Dollars in thousands
Option Grants	$	1	$	23
Restricted Stock Grants		-		-
Total compensation expense	$	1	$	23

Table of Contents

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

A summary of option activity under the stock option plans as of September 30, 2018 and changes during the period ended September 30, 2018 is presented below:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding, December 31, 2017		151,173		$	4.54	5.27 years
Exercised		(3,107	)		4.84
Expired		(12,000	)		12.22
Outstanding, September 30, 2018		136,066		$	3.85	4.94 years	$	594,586

Exercisable, September 30, 2018		136,066		$	3.85		$	594,586

There were 958 options vested and no options granted during the nine months ended September 30, 2018. As of September 30, 2018 there was no unrecognized compensation cost related to non-vested options granted under all of the Company’s equity compensation plans.

There was no restricted stock granted or vested during the three and nine months ended September 30, 2018.

A summary of restricted stock activity during the three and nine months ended September 30, 2017 is presented below:

	Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017
	Non-Vested Restricted Stock Outstanding		Weighted Average Grant Date Fair Value		Non-Vested Restricted Stock Outstanding			Weighted Average Grant Date Fair Value
Beginning balance outstanding		-		-		3,334		$	3.31
Granted		-				-
Vested		-				(3,334	)
Ending balance outstanding		-		-		-			-

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

Table of Contents

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

(9)	Off-Balance Sheet Risk and Commitments

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

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

A summary of the contract amount of the Company’s exposure to off-balance sheet credit risk as of September 30, 2018 is as follows:

Financial instruments whose contract represents credit risk
	September 30, 2018
Dollars in thousands
Undisbursed lines of credit	$	74,864
Letters of credit		546
	$	75,410

(10)	Preferred Stock

Our articles of incorporation authorize us to issue up to 1,000,000 shares of one or more series of preferred stock. Our board of directors, in its sole discretion, has the authority to determine the preferences, limitations and relative rights of shares of preferred stock and to fix the number of shares constituting any series, the designation of such series, and the dividend rate for each series, without any further vote or action by our shareholders. Our preferred stock may be issued with voting, liquidation, dividend and other rights superior to the rights of our common stock. There were no shares of preferred stock outstanding as of September 30, 2018.

Table of Contents

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

(11)	Mergers and Acquisitions

Proposed Merger with Clover Community Bankshares, Inc.

The Company entered into an Agreement and Plan of Merger and Reorganization (the “Agreement”) dated as of June 14, 2018, with Clover Community Bankshares, Inc. (“Clover”), the parent holding company for Clover Community Bank, Clover, SC. Pursuant to the terms of the Agreement, Clover will merge with and into the Company, with the Company being the surviving corporation in the merger. In addition, following the merger of Clover with and into the Company, Clover Community Bank will be merged with and into the Bank with the Bank as the surviving bank in the bank merger.

The transaction is subject to various closing conditions, including the receipt of requisite shareholder approvals and required approvals of state and federal banking regulators.

If the merger is completed, each share of Clover common stock issued and outstanding will be converted into the right to receive either $22.00 in cash or 2.7181 shares of the Company’s common stock. Clover shareholders will have the option to elect the type of consideration that they would prefer to receive, subject to required proration as provided in the Agreement. The merger consideration will be prorated such that 20% of Clover’s common shares outstanding immediately prior to the closing of the merger will be converted to the cash consideration and 80% of Clover’s common shares outstanding immediately prior to the closing of the merger will be converted to the stock consideration. Cash will be paid in lieu of fractional shares.

In accordance with Clover’s articles of incorporation, each outstanding share of Clover preferred stock will automatically convert into one share of Clover common stock immediately prior to the closing of the merger. These shares of common stock will then be converted into the right to receive the merger consideration as described above.

Based on the Company’s 10-day volume weighted closing price of $8.23 per share as of November 2, 2018, the aggregate deal value is approximately $21.8 million.

Table of Contents

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

☐

the ability to obtain required regulatory and shareholder approvals and meet other closing conditions to the proposed merger with Clover (the “Pending Merger”);

☐

the ability to complete the Pending Merger as expected and within the expected timeframe;

☐

the possibility that (1) any of the anticipated benefits of the Pending Merger will not be realized or will not be realized within the expected time period, (2) the businesses of the Company and Clover may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected, (3) the expected revenue synergies and cost savings from the Pending Merger may not be fully realized or realized within the expected time frame, (4) revenues following the Pending Merger may be lower than expected, or (5) customer and employee relationships and business operations may be disrupted by the Pending Merger;

☐

deterioration in the financial condition of borrowers resulting in significant increases in the Company’s loan and lease losses and provisions for those losses and other adverse impacts to results of operations and financial condition;

☐

changes in interest rates that affect the level and composition of deposits, loan demand and the values of loan collateral, securities, and interest-sensitive assets and liabilities;

☐

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

☐

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

☐

risks related to the concentration in commercial real estate;

☐

declines in commercial and residential real estate;

☐

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

Table of Contents

☐

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

☐

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

☐

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

☐

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

☐

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

☐

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

☐

changes in political and economic conditions;

☐

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

☐

the success at managing the risks involved in the foregoing.

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

Discussion of Financial Condition at September 30, 2018 and December 31, 2017

During the period from December 31, 2017 to September 30, 2018, total assets increased by approximately $58.6 million, or 14.40%. The increase, reflected primarily in interest-earning deposits with banks and loans, was funded by an increase in deposits and capital. Interest-earning deposits with banks, securities available-for-sale and equity securities at September 30, 2018 totaled $57.2 million compared to $34.8 million at December 31, 2017.

The Company’s investment securities portfolio as of September 30, 2018 totaled $30.7 million, a decrease of $372,000 when compared to the $31.1 million reported at December 31, 2017. At September 30, 2018, the Company had a net unrealized loss on available-for-sale securities of $911,000, net of tax, as compared to a net unrealized loss of $732,000, net of tax, at December 31, 2017. On January 1, 2018 the Company adopted the FASB ASU 2016-01 in which there was an initial reclassification from accumulated other comprehensive income in the amount of $443,000 recorded to retained earnings for the loss on equity investments.

At September 30, 2018, net loans constituted 81.01% of the Company’s total assets. Net loans increased by $31.7 million from December 31, 2017 to September 30, 2018. Of all of the portfolio segments that increased during the first nine months of 2018, commercial real estate experienced the largest amount of growth at $28.8 million or 13.48%. Management’s continued goal is to grow the loan portfolio to provide maximum income proportionate with acceptable risks.

Table of Contents

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

At September 30, 2018 and December 31, 2017 impaired loans, which consisted primarily of troubled debt restructurings and non-accrual loans, were $4.5 million and $6.4 million, respectively. Impaired loans of $1.4 million and $1.8 million had related allowances for loan losses totaling $233,000 and $248,000 at September 30, 2018 and December 31, 2017, respectively. There were $3.1 million and $4.6 million of impaired loans without a specific allowance at September 30, 2018 and December 31, 2017, respectively. Impaired loans at September 30, 2018 and December 31, 2017 consisted primarily of commercial real estate, commercial and industrial and residential mortgage loans. At September 30, 2018, there were eleven loans amounting to approximately $3.9 million, which were restructured to facilitate the borrowers’ ability to repay the outstanding balance. These eleven restructured loans are considered troubled debt restructurings at September 30, 2018 and have specific reserves amounting to approximately $233,000. Of these eleven loans, nine loans totaling $3.2 million were accruing interest at September 30, 2018. At December 31, 2017, there were ten loans totaling $4.2 million which were restructured to facilitate the borrowers’ ability to repay the outstanding balance, and of these ten loans, nine loans totaling $3.4 million were accruing interest. Reserves for loans not considered impaired were approximately $3.7 million and $3.4 million at September 30, 2018 and December 31, 2017, respectively. The allowance for loan losses at both September 30, 2018 and December 31, 2017 was 1.03% of gross loans outstanding.

The Company records provision for loan losses based upon known problem loans and estimated probable losses in the existing loan portfolio. The Company’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key components, which are a specific allowance for identified problem or impaired loans and a model estimating probable losses for the remainder of the portfolio.

Identified problem and impaired loans are measured for impairment based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant change. The adequacy of the allowance is also reviewed by management based upon its evaluation of then-existing economic and business conditions affecting the key lending areas of the Company and other conditions, such as new loan products, collateral values, loan concentrations, changes in the mix and volume of the loan portfolio, trends in portfolio credit quality, including delinquency and charge-off rates and current economic conditions that may affect a borrower’s ability to repay. Although management believes it has established and maintained the allowance for loan losses at appropriate levels, future adjustments may be necessary if economic, real estate and other conditions differ substantially from the current operating environment.

Non-interest earning assets consisting of cash and due from banks, bank premises, equipment and software, foreclosed assets and other assets increased to $20.0 million at September 30, 2018 compared to $15.6 million at December 31, 2017. The increase is attributed mostly to the increase in cash and due from banks of $3.6 million, or 66.40% and to an increase in foreclosed assets of $1.0 million or 125.83%. At September 30, 2018, foreclosed assets consisted of six properties valued at $1.8 million. At December 31, 2017, foreclosed assets consisted of five properties valued at $789,000.

Deposit accounts represent the Company’s primary funding source and consist of non-interest bearing demand deposits, interest-bearing demand deposits, savings accounts and time deposits. Total deposits increased by approximately $45.8 million, or 13.46%, for the nine months ended September 30, 2018. The growth is due to the increases in noninterest-earning demand deposits of $17.6 million, or 35.77%, interest-earning demand deposits of $8.2 million, or 7.10%, savings deposits of $1.4 million or 6.23%, and time deposits of $18.7 million or 12.13%.

Table of Contents

Federal Home Loan Bank advances totaled $16.1 million at September 30, 2018, a decrease of $7.5 million from the $23.6 million advanced at December 31, 2017.

On March 29, 2018, the Company entered into a Term Loan Agreement and a Security Agreement with, and executed and delivered a Promissory Note to Community Bankers’ Bank, Midlothian, Virginia (the “Lender”). These documents provide for a $3 million secured term loan to the Company. The term loan accrues interest at the Wall Street Journal prime rate, which was 4.75% on the Promissory Note date, with a maximum rate of 18.0%. There is no penalty for voluntary prepayment of the Promissory Note, and on April 27^th, the Company repaid the outstanding balance.

Stockholders’ equity amounted to $49.0 million, or 10.52% of total assets at September 30, 2018, compared to $29.1 million, or 7.16% of total assets at December 31, 2017.

Discussion of Results of Operations

For the three months ended September 30, 2018 and 2017

Net Income and Net Income Available to Common Shareholders

Net income for the three months ended September 30, 2018 was $915,000 compared to $351,000 for the third quarter of 2017, an increase of $564,000. Diluted earnings per common share was $0.13 for the three months ended September 30, 2018 compared to $0.07 for the third quarter of 2017. The increase in net income is primarily due to an increase in interest income on loans of $821,000 as average loans increased by $44 million from the third quarter of 2017 to the third quarter of 2018. The interest income was partially offset by an increase in interest expense of $282,000 due to an increase in total deposits outstanding and merger expenses of $157,000 relating to the proposed acquisition of Clover Community Bankshares, Inc.

Net Interest Income

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

Net interest income for the quarter ended September 30, 2018 totaled $4,243,000 compared to $3,540,000 for the quarter ended September 30, 2017. The Company’s net interest spread decreased by 11 basis points to 3.53% from 3.64% for the quarters ended September 30, 2018 and 2017, respectively. Net interest margin on average interest earning assets increased by 2 basis points to 3.82% from 3.80% for the quarters ended September 30, 2018 and 2017, respectively.

Table of Contents

The decrease in net interest spread was primarily due to an increase in the percentage of average interest-earning cash with banks as a component of total average earning assets. The yield on interest earning cash with banks is lower than the overall earning asset yield. So, increasing the percentage of interest earning cash with banks softened the overall increase in the earning asset yield. The percentages of interest-earning cash with banks to total earning assets were 7.4% and 1.5%, for the quarters ended September 30, 2018 and 2017, respectively. The spread between the yield on loans and the cost of interest bearing liabilities actually expanded by 6 basis points. Loan increased by 28 basis points to 5.32% while the cost of interest bearing liabilities increased by 22 basis points to 1.34%, comparing the quarters ended September 30, 2018 and 2017.

The slight increase in the net interest margin was due to an increase in the percentage of total funding (i.e. interest bearing liabilities plus noninterest bearing deposits) from noninterest bearing deposits and to an increase in the yield on loans. The percentage of average noninterest bearing deposits to average total funding increased to 16.3% from 12.5% for the third quarters of 2018 and 2017, respectively.

Provision for Loan Losses

The Company recorded a provision for loan losses of $75,000 and $340,000 for the quarters ended September 30, 2018 and 2017. This decrease of $265,000 in the provision for loan losses is due to a decrease in the amount of impaired loans with an allowance. The ratio of the allowance for loan and lease losses as a percentage of total loans increased from 1.01% at September 30, 2017 to 1.03% at September 30, 2018. The increase in this percentage is due to increase in the qualitative factor for nature and volume of the portfolio for Residential and Commercial acquisition, development and construction (“ADC”) loans, Commercial Real Estate loans and Commercial and Industrial loans used in the model. The provision for loan losses is charged to operations to bring the allowance to a level deemed appropriate based on management’s evaluation of the adequacy of the allowance for loan losses.

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

	Loans Outstanding		Non- Performing Loans		Net Charge-offs (Recoveries)			Allowance for Loan Losses
	(Dollars in thousands)

September 30, 2018	$	380,746	$	1,057	$	(6	)	$	3,925
June 30, 2018		374,026		1,105		95			3,844
March 31, 2018		367,039		1,125		71			3,780
December 31, 2017		348,679		2,746		(26	)		3,599
September 30, 2017		340,038		2,142		130			3,423
June 30, 2017		324,349		2,896		322			3,213
March 31, 2017		311,609		2,937		73			3,471
December 31, 2016		308,492		2,875		(303	)		3,393
September 30, 2016		301,420		3,579		56			3,687
June 30, 2016		293,157		1,739		(20	)		3,541
March 31, 2016		297,746		2,100		122			3,521
December 31, 2015		292,362		2,164		2			3,723
September 30, 2015		286,469		2,079		(109	)		3,825

Non-interest Income

Non-interest income for the quarter ended September 30, 2018 totaled $374,000, an increase of $92,000 over the $282,000 reported for the quarter ended September 30, 2017. The primary factors contributing to the overall increase were the increase in interchange fees of $34,000 for the quarter ended September 30, 2018 when compared to the same period in 2017 and the unrealized gain on equity securities of $35,000 for the quarter ended September 30, 2018. On January 1, 2018 the net unrealized loss on equity securities was reclassified from accumulated other comprehensive income to retained earnings and from that date forward will be recorded on the income statement.

Table of Contents

Interchange fees, or “swipe” fees, are charges that merchants pay to the Bank and other card-issuing banks for processing electronic payment transactions. Interchange fees consist of income from check card usage, point of sale income from PIN-based debit card transactions and ATM service fees. With the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, in 2018, interchange fees are reported net of related costs. See Note 2 – Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Previously, such costs were reported as check card expense. Interchange fees for the three months ended September 30, 2018 and September 30, 2017 reported on a net basis totaled $67,000 and $33,000, respectively.

Non-interest Expense

Non-interest expenses for the September 30, 2018 and 2017 quarters totaled $3,327,000 and $2,961,000, respectively. The $366,000 increase was due in part to Merger expenses of $157,000 relating to the proposed acquisition of Clover Community Bank and an increase of foreclosed asset expenses in the amount of $105,000 due to the valuation adjustment of four properties and maintenance work completed on another property. Furniture, fixture and equipment expenses also increased $72,000 mainly due to increased network monitoring and security costs.

Income Tax Expense

The Company recorded income tax expense of $300,000 for the three-months ended September 30, 2018 resulting in an effective tax rate of 25%. For the same period in 2017, the Company recorded income tax expense of $170,000 with an effective tax rate of 33%. The Company’s federal income tax rate was lowered from 34% to 21% due to the enactment of the Tax Cuts and Jobs Act of 2017 on December 22, 2017. For 2018, the effective tax rate is higher than the statutory rate mainly due to the $242,000 in merger expenses that are non-deductible.

In June 2017, the North Carolina corporate tax rate was lowered from 3% to 2.5%, effective in 2019. Management has determined initially that the impact of the rate change on deferred tax assets is not material and will continue to monitor the impact until the new tax rate is effective in 2019.

Discussion of Results of Operations

For the nine months ended September 30, 2018 and 2017

Net Income and Net Income Available to Common Shareholders

Net income for the nine months ended September 30, 2018 was $2,006,000 compared to $758,000 for the nine months ended September 30, 2017, an increase of $1.2 million. Diluted earnings per common share was $0.32 for the nine months ended September 30, 2018 and $0.16 for the nine months ended September 30, 2017.

Table of Contents

Net Interest Income

Net interest income for the nine months ended September 30, 2018 totaled $12,053,000 compared to $10,214,000 for the nine months ended September 30, 2017. The Company’s net interest spread was approximately 3.56% and 3.62% for the nine months ended September 30, 2018 and 2017, respectively. Net interest margin on average interest earning assets was 3.79% and 3.77% for the nine months ended September 30, 2018 and 2017, respectively. The decrease in net interest spread was 0.06%, and the increase in net interest margin was 0.02%, respectively. These variances were attributed to the same causes that were provided in the discussion of quarterly results above.

Provision for Loan Losses

The Company recorded provision for loan losses of $415,000 and $555,000 for the nine months ended September 30, 2018 and 2017, respectively. This decrease in the provision for loan losses is due to a decrease in the amount of impaired loans with an allowance. The provision for loan losses is charged to operations to bring the allowance to a level deemed appropriate based on management’s evaluation of the adequacy of the allowance for loan losses.

Non-interest Income

Non-interest income for the nine months ended September 30, 2018 and 2017 totaled $1,070,000 and $732,000, respectively. The increase of $338,000 is comprised of overdraft fees on deposits and the unrealized gain on equity securities. Overdraft fees on deposits increased by $118,000 or 39.83% and the unrealized gain on equity securities was $123,000. On January 1, 2018 the net unrealized loss on equity securities was reclassified from accumulated other comprehensive income to retained earnings and from that date forward will be recorded on the income statement.

Interchange fees, or “swipe” fees, are charges that merchants pay to the Bank and other card-issuing banks for processing electronic payment transactions. Interchange fees consist of income from check card usage, point of sale income from PIN-based debit card transactions and ATM service fees. With the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, in 2018, interchange fees are reported net of related costs. See Note 2 – Recent Accounting Pronouncements, of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Report. Previously, such costs were reported as check card expense. Interchange fees for the nine months ended September 30, 2018 and September 30, 2017 reported on a net basis totaled $165,000 and $96,000, respectively.

Non-interest Expense

Non-interest expenses for the nine months ended September 30, 2018 and 2017 totaled $10,043,000 and $9,265,000, respectively. The $778,000 increase was due in part to $480,000 of merger expenses for the proposed acquisition of Clover Community Bank and a $217,000, or 4.12%, increase in compensation expense due to salary and wage increases. The increase in salaries and wages was attributable to annual raises and performance bonuses and a net addition of one full-time equivalent employee. Foreclosed asset expense also increased $170,000 due to the valuation adjustment of three properties and maintenance work completed on another property. Slightly offsetting these increases was a $150,000 or 20.41% decrease in data processing expenses. During the first quarter of 2017, data processing expenses were higher due to the conversion of our core processing system that was complete in April of that year.

Table of Contents

Income Tax Expense

The Company recorded income tax expense of $659,000 for the nine months ended September 30, 2018 resulting in an effective tax rate of 25%. For the same period in 2017, the Company recorded income tax expense of $368,000 with an effective tax rate of 33%. The Company’s federal income tax rate was lowered from 34% to 21% due to the enactment of the Tax Cuts and Jobs Act of 2017 on December 22, 2017. For 2018, the effective tax rate is higher than the statutory rate mainly due to the $242,000 in merger expenses that are non-deductible.

Liquidity

The Company’s liquidity is a measure of its ability to fund loans, withdrawals and maturities of deposits, and other cash outflows in a cost effective manner. The Company’s principal sources of liquidity are deposits, scheduled payments and prepayments of loan principal, maturities of investment securities, access to liquid assets, and funds provided by operations. While scheduled loan payments and maturing investments are relatively predictable sources of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. Liquid assets, which consist of cash and due from banks, interest-earning deposits with banks, certificates of deposit with banks, investment securities classified as available-for-sale, and equity securities represented 14.54% and 10.25% of total assets at September 30, 2018 and December 31, 2017, respectively.

Should the need arise, management believes the Company would have the capability to sell securities classified as available-for-sale or to borrow funds as necessary to meet the Company’s cash flow demands. The Company has established credit lines with other financial institutions to purchase up to $15.5 million in federal funds and to borrow up to $10 million under a reverse repurchase agreement. There were no borrowings outstanding against these credit lines at September 30, 2018. The Company has also established a credit line with the Federal Home Loan Bank of Atlanta. The credit line is secured by a portion of the Company’s loan portfolio that qualifies under FHLB guidelines as eligible collateral. Total availability, based on collateral pledged at September 30, 2018 was $80.9 million, of which $16.1 million was advanced and $7 million was securing a letter of credit. The Company also has $3 million available in a loan agreement with the Community Bankers’ Bank as previously discussed in the Discussion of Financial Condition.

Total deposits were $386.5 million and $340.7 million at September 30, 2018 and December 31, 2017, respectively. Time deposits, which are the only deposit accounts that have stated maturity dates, are generally considered to be rate sensitive. Time deposits represented 44.68% and 45.20% of total deposits at September 30, 2018 and December 31, 2017, respectively. At September 30, 2018 and December 31, 2017, the Company had brokered time deposits of $17.2 million and $23.3 million, respectively. The Company also obtains time accounts by connecting with institutional depositors through an online listing service. At September 30, 2018 and December 31, 2017, respectively, the deposits attributed to the listing service were $11.0 million and $14.3 million, respectively. Management accepts time deposits from outside the Bank’s local market area when such funding sources are necessary to fund growth and the rates paid are comparable to rates offered to retail customers or lower. Management believes most time deposits are relationship-oriented. While the Company will need to pay competitive rates to retain these deposits at their maturities, there are other subjective factors that will determine their continued retention. Based upon prior experience, the Company anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

Table of Contents

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

Capital Resources

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

In July 2013, the Federal Reserve issued final rules to include technical changes to its market risk capital rules to align them with the Basel III regulatory capital framework and meet certain requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The final rules require the Bank to comply with the following minimum capital ratios: (i) a common equity Tier 1 capital ratio of 4.5% of risk-weighted assets; (ii) a Tier 1 capital ratio of 6.0% of risk-weighted assets; (iii) a total capital ratio of 8.0% of risk-weighted assets; and (iv) a leverage ratio of 4.0% of total assets. The rules also require the Bank to maintain a capital conservation buffer. The capital conservation buffer requirement began January 1, 2016, at 0.625% of risk-weighted assets, and will increase by the same amount each year until fully implemented at 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of common equity Tier 1 to risk-weighted assets above the minimum but below the conservation buffer will face constraints on dividends, equity repurchases, and compensation based on the amount of the shortfall.

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

Management considers the Bank to be well-capitalized and expects to be able to meet future needs caused by growth and expansion, as well as capital requirements implemented by the regulatory agencies.

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

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

Table of Contents

	At September 30, 2018
	Actual Ratio			Minimum Requirement			Well-Capitalized Requirement

Common equity tier 1 capital ratio		12.21	%		4.50	%		6.50	%
Total risk-based capital ratio		13.19	%		8.00	%		10.00	%
Tier 1 risk-based capital ratio		12.21	%		6.00	%		8.00	%
Tier 1 leverage ratio		10.56	%		4.00	%		5.00	%

Item 4. - Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e)) pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective. No change in the Company’s internal control over financial reporting occurred during the Company’s last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents

Part II.

OTHER INFORMATION

Item 6.

Exhibits

Exhibit #		Description

2.1		Agreement and Plan of Merger Reorganization by and between Carolina Trust BancShares, Inc. and Clover Community Bankshares, Inc., dated as of June 14, 2018 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 20, 2018)

10.1*		2018 Supplemental Executive Retirement Plan Agreement dated August 31, 2018, with Edwin E. Laws (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2018)

10.2*		2018 Supplemental Executive Retirement Plan Agreement dated August 31, 2018, with Jerry L. Ocheltree (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2018)

10.3*		2018 Supplemental Executive Retirement Plan Agreement dated August 31, 2018, with Richard M. Rager (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2018)

10.4*		First Amendment to the 2014 Supplemental Executive Retirement Plan Agreement for Jerry L. Ocheltree dated August 31, 2018 (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on September 4, 2018)

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) (filed herewith)

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) (filed herewith)

32		Section 1350 Certification (furnished herewith)

101		Interactive data files pursuant to Rule 405 of Regulation S-T: (i) Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2018 and December 31, 2017; (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended September 30, 2018 and 2017; (iii) Condensed Consolidated Statements of Operations (Unaudited) for the Nine Months Ended September 30, 2018 and 2017; (iv) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Three Months Ended September 30, 2018 and 2017; (v) Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the Nine Months Ended September 30, 2018 and 2017; (vi) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2018 and 2017; (vii) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2018 and 2017; and (viii) Notes to Condensed Consolidated Financial Statements (Unaudited)

*Compensatory plan.

Table of Contents

SIGNATURES

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

	CAROLINA TRUST BANCSHARES, INC.


Date: November 9, 2018	By:	/s/	Jerry L. Ocheltree
		Jerry L. Ocheltree
		President and Chief Executive Officer

Date: November 9, 2018	By:	/s/	Edwin E. Laws
		Edwin E. Laws
		Executive Vice President and Chief Financial Officer

Large Accelerated Filer	☐	Accelerated Filer	☐

Non-accelerated Filer	☐	Smaller Reporting Company	☒

		Emerging Growth Company	☐