Carolina Bank (CLBH) 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012                          

or

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                          to                            

Commission File Number: 000-31877                                             

Carolina Bank Holdings, Inc.

(Exact name of registrant as specified in its charter)

North Carolina	56-2215437
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

101 North Spring Street, Greensboro, North Carolina	27401
(Address of principal executive offices)	(Zip Code)

(336) 288-1898

(Registrant’s telephone number, including area code)

n/a

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.x Yes¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer¨	Accelerated filer¨
Non-accelerated filer¨ (Do not check if a smaller reporting company)		Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨Yesx No

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

There were 3,387,045 shares of the Issuer’s common stock, $1.00 par value, outstanding as of May 11, 2012. 

CAROLINA BANK HOLDINGS, INC.

INDEX
	Page
PART I.    FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)	2
Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011	2
Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011	3
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011	4
Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2012	5
Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	6
Notes to Consolidated Financial Statements	7
Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 4.  Controls and Procedures	35
PART II.   OTHER INFORMATION
Item 1. Legal Proceedings	36
Item 4. (Reserved)	36
Item 6. Exhibits	36
Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350

1

ITEM 1. Financial Statements

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Balance Sheets

	March 31,			December 31,
	2012			2011*
	(unaudited)
	(in thousands, except share data)
Assets
Cash and due from banks	$	6,100		$	5,664
Interest-bearing deposits with banks		15,130			7,647
Securities available-for-sale, at fair value		44,929			42,208
Securities held-to-maturity		370			392
Loans held for sale		81,497			91,955
Loans		480,888			487,031
Less allowance for loan losses		(12,491	)		(11,793	)
Net loans		468,397			475,238
Premises and equipment, net		17,454			17,442
Other real estate owned		7,708			6,728
Bank-owned life insurance		10,480			10,385
Other assets		15,944			15,666
Total assets	$	668,009		$	673,325
Liabilities and Stockholders' Equity
Deposits
Non-interest bearing demand	$	57,172		$	57,475
NOW, money market and savings		325,636			324,449
Time		205,692			214,715
Total deposits		588,500			596,639
Advances from the Federal Home Loan Bank		3,053			3,075
Securities sold under agreements to repurchase		1,918			1,536
Subordinated debentures		19,507			19,489
Other liabilities and accrued expenses		7,088			6,028
Total liabilities		620,066			626,767
Commitments  - Note O
Stockholders' equity
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding 16,000 shares		15,273			15,177
Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 3,387,045 shares		3,387			3,387
Common stock warrants		1,841			1,841
Additional paid-in capital		15,879			15,870
Retained earnings		10,058			9,132
Stock in directors' rabbi trust		(912	)		(875	)
Directors' deferred fees obligation		912			875
Accumulated other comprehensive income		1,505			1,151
Total stockholders’ equity		47,943			46,558
Total liabilities and stockholders’ equity	$	668,009		$	673,325

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

2

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Operations (unaudited)

	Three Months
	Ended March 31,
	2012		2011
	(in thousands, except per share data)
Interest income
Loans	$	7,085	$	7,150
Investment securities, taxable		306		401
Investment securities, non taxable		107		162
Interest from deposits in banks		10		20
Total interest income		7,508		7,733
Interest expense
NOW, money market, savings		548		660
Time deposits		709		967
Other borrowed funds		202		188
Total interest expense		1,459		1,815
Net interest income		6,049		5,918
Provision for loan losses		1,460		1,700
Net interest income after provision for loan losses		4,589		4,218
Non-interest income
Service charges		283		231
Mortgage banking income		3,297		1,635
Gain on sale of securities available-for-sale		-		97
Gain on sale of other real estate owned		48		-
Other		172		147
Total non-interest income		3,800		2,110
Non-interest expense
Salaries and benefits		4,030		2,964
Occupancy and equipment		682		638
Professional fees		257		253
Outside data processing		206		219
FDIC insurance		215		385
Advertising and promotion		175		87
Stationery, printing and supplies		135		139
Impairment of other real estate owned		296		-
Other real estate owned expense		156		294
Other		539		491
Total non-interest expense		6,691		5,470
Income before income taxes		1,698		858
Income tax expense		470		246
Net income		1,228		612
Dividends and accretion on preferred stock		302		288
Net income available to common stockholders	$	926	$	324
Net income per common share
Basic	$	0.27	$	0.10
Diluted	$	0.27	$	0.10

See accompanying notes to consolidated financial statements.

3

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (unaudited)

	Three Months
	Ended March 31,
	2012			2011
	(in thousands)
Net income	$	1,228		$	612
Other comprehensive income:
Investment securities available-for-sale:
Unrealized holding gains		537			400
Tax effect		(183	)		(136	)
Reclassification of gains recognized in net income		-			(97	)
Tax effect		-			33
		354			200
Comprehensive income	$	1,582		$	812

See accompanying notes to consolidated financial statements.

4

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statement of Stockholders' Equity (unaudited)

												Stock in			Directors'		Accumulated
					Common		Additional					Directors'			Deferred		Other
	Preferred		Common		Stock		Paid-In		Retained			Rabbi			Fees		Comprehensive
	Stock		Stock		Warrants		Capital		Earnings			Trust			Obligation		Income		Total
	(in thousands)
Balance, December 31, 2011	$	15,177	$	3,387	$	1,841	$	15,870	$	9,132		$	(875	)	$	875	$	1,151	$	46,558
Net income		-		-		-		-		1,228			-			-		-		1,228
Other comprehensive income, net of tax		-		-		-		-		-			-			-		354		354
Directors' fees deferred less payment of deferred fees		-		-		-		-		-			(37	)		37		-		-
Stock options expensed		-		-		-		9		-			-			-		-		9
Amortization of preferred stock discount		96		-		-		-		(96	)		-			-		-		-
Preferred stock dividends		-		-		-		-		(206	)		-			-		-		(206	)
Balance, March 31, 2012	$	15,273	$	3,387	$	1,841	$	15,879	$	10,058		$	(912	)	$	912	$	1,505	$	47,943

See accompanying notes to consolidated financial statements.

5

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Cash Flows (unaudited)

	Three Months
	Ended March 31,
	2012			2011
Cash flows from operating activities	(in thousands)
Net income	$	1,228		$	612
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		1,460			1,700
Depreciation		219			226
Increase in cash surrender value of bank-owned life insurance		(95	)		(94	)
Stock-based compensation expense		9			9
Deferred income tax benefit		(202	)		(36	)
Amortization (accretion), net		(15	)		5
Amortization of subordinated debt discount		18			19
Gain on sale of other real estate owned		(48	)		-
Gain on sale of investments		-			(97	)
Impairment of other real estate owned		296			-
Net decrease in loans held for sale		10,458			37,838
(Increase) decrease in other assets		(258	)		669
Increase (decrease) in accrued expenses and other liabilities		854			(10	)
Net cash provided by operating activities		13,924			40,841
Cash flows from investing activities
Purchases of investment securities available-for-sale		(3,778	)		(11,846	)
Maturities and calls of securities available-for-sale		919			2,000
Repayments from mortgage-backed securities available-for-sale		690			888
Repayments from mortgage-backed securities held-to-maturity		21			56
Reduction of loans, net of principal collected		3,419			7,844
Proceeds from sales of investment securities		-			365
Improvements to other real estate owned		(44	)		-
Proceeds from sale (less purchases) of premises and equipment		(231	)		(145	)
Proceeds from sales of other real estate owned		778			1,249
Net cash provided by investing activities		1,774			411
Cash flows from financing activities
Net decrease in deposits		(8,139	)		(15,172	)
Net decrease in Federal Home Loan Advances		(22	)		(21	)
Increase in securities sold under agreements to repurchase		382			1,793
Net cash used for financing activities		(7,779	)		(13,400	)
Net increase in cash and cash equivalents		7,919			27,852
Cash and cash equivalents at beginning of period		13,311			22,826
Cash and cash equivalents at end of period	$	21,230		$	50,678
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	1,423		$	1,936
Cash paid during the period for income taxes	$	-		$	-
Supplemental disclosure of non-cash transactions
Transfer of loans to other real estate owned	$	1,962		$	2,563
Dividends declared but not paid	$	206		$	200
Accretion of preferred stock discount	$	96		$	89
Change in unrealized gains on securities available-for-sale	$	537		$	400

See accompanying notes to consolidated financial statements.

6

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note A – Summary

Carolina Bank Holdings, Inc. (the “Holding Company” or the “Company”) is a North Carolina corporation organized in 2000. Effective October 31, 2000, pursuant to the plan of share exchange approved by the shareholders of Carolina Bank (the “Bank”), all of the outstanding shares of common stock of the Bank were exchanged for shares of common stock of the Holding Company. The Holding Company presently has no employees.

The Bank was incorporated in August 1996, and began banking operations in November 1996. It is engaged in lending and deposit gathering activities in Guilford, Alamance, Randolph and Forsyth Counties, North Carolina and operates under the laws of North Carolina, the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank has eight full-service banking locations, comprised of four in Greensboro and one in each of Asheboro, Burlington, High Point, and Winston-Salem. A wholesale mortgage division is located at the Greensboro corporate headquarters, and retail mortgage loan production offices are located in Burlington and Raleigh. The Raleigh loan production office was opened in March 2012. All offices, except the Raleigh loan production office, are in the Piedmont Triad region of North Carolina.

The Holding Company files periodic reports with the Securities and Exchange Commission and is also subject to regulation by the Federal Reserve Board.

Note B – Consolidation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, the Bank. All significant inter-company transactions and balances have been eliminated.

Note C – Basis of presentation

In management’s opinion, the financial information, which is unaudited, reflects all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of the financial information as of and for the three months ended March 31, 2012 and 2011, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three months ended March 31, 2012 and 2011 are not necessarily indicative of the results that may be expected for annual future periods.

The organization and business of the Company, accounting policies followed, and other information are contained in the notes to the financial statements of the Company as of and for the years ended December 31, 2011 and 2010, filed with the Securities and Exchange Commission as part of the Company’s annual report on Form 10-K. These financial statements should be read in conjunction with the annual financial statements.

Note D - Use of estimates

The financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

7

Note E - Stock compensation plans

The Company’s shareholders approved the 2009 Omnibus Stock Ownership and Long Term Incentive Plan (“Omnibus Plan”) in 2009 to replace three expired stock option plans, a nonqualified plan for directors (Director Plan) and two incentive stock option plans for management and employees (Employee Plans). The Omnibus Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, long-term incentive compensation units and stock appreciation rights to employees and directors. An aggregate of 500,000 shares of the Company’s common stock have been reserved for issuance under the terms of the Omnibus Plan.

There were no stock option grants in 2011 or the first three months of 2012. The fair value of employee plan options granted in December 2007 was $178,000, which is being expensed over a five year vesting period. Total expense related to the 2007 grants was $9,000 in the first three months of 2012 and 2011. At March 31, 2012, there was $27,000 of total unrecognized compensation cost related to unvested share-based compensation which is expected to be recognized over a weighted-average period of 0.75 years.

Note F - Earnings per share

Earnings per share has been determined on a basic basis and a diluted basis which considers potential stock issuances. For the quarters ended March 31, 2012 and 2011, basic earnings per share has been computed based upon the weighted average common shares outstanding of 3,387,045.

The only potential issuances of Company stock are stock options granted to various officers of the Bank and a warrant to purchase common stock executed in conjunction with the issuance of preferred stock to the U.S. Treasury in 2009. The following is a summary of the diluted earnings per share calculation for the three months ended March 31, 2012 and 2011.

	Three Months Ended
	March 31,
	2012		2011
	(in thousands, except per share data)
Net income available to common stockholders	$	926	$	324
Weighted average outstanding shares - basic		3,387		3,387
Dilutive effect of stock options and warrants		-		-
Weighted average shares - diluted		3,387		3,387
Diluted net income per share	$	0.27	$	0.10

For the three months ended March 31, 2012 and 2011, there were stock options and warrants covering 513,976 and 519,102 shares, respectively, that were excluded in computing diluted common shares outstanding given that they were anti-dilutive since the exercise price exceeded the average market price for the period.

8

Note G – Preferred stock and common stock warrants

In December 2008, the shareholders of the Company approved an amendment to the Articles of Incorporation authorizing the issuance of up to 1,000,000 shares of preferred stock, no par value. In January 2009, the Company issued 16,000 shares of preferred stock to the U.S. Treasury and received $16 million under the Capital Purchase Program. The Company granted a warrant to purchase 357,675 shares of common stock at a price of $6.71 per share to the U.S. Treasury as part of the preferred stock transaction. In accordance with accounting principles, the preferred stock and common stock warrant were valued independently and their relative fair market values were allocated to the $16 million received. Under the relative value method, $14,159,000 was allocated to the preferred stock and $1,841,000 to the common stock warrant. The discount of $1,841,000 on the preferred stock is accreted over five years using the effective yield method, thereby increasing preferred stock dividends. The accretion of the discount for the first three months of 2012 and 2011 was $96,000 and $89,000, respectively. Dividends at 5% per annum are payable quarterly for the first five years; the dividend increases to 9% per annum after the fifth year.

Note H – Subordinated debentures

In December 2004, the Company issued $10,310,000 of unsecured junior subordinated debentures which accrue and pay interest quarterly at three month LIBOR plus 2% per annum. These debentures were issued to Carolina Capital Trust (“Carolina Trust”), a wholly owned subsidiary of the Company which is not consolidated in these consolidated financial statements pursuant to accounting principles governingConsolidated Variable Interest Entities. Carolina Trust acquired these debentures using the proceeds of its offerings of common securities to the Company and $10 million of Trust Preferred Securities to outside investors. The Trust Preferred Securities currently qualify as Tier 1 capital under Federal Reserve Board guidelines. The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act eliminates trust preferred securities as an element of Tier 1 capital for certain institutions. However, bank holding companies with assets of less than $15 billion as of December 31, 2009, will be permitted to include trust preferred securities that were issued before May 19, 2010, as Tier 1 capital. The Company therefore believes the Trust Preferred Securities will continue to qualify as Tier 1 capital. The Company has entered into contractual arrangements which, in the aggregate, constitute a full, irrevocable and unconditional guarantee on a subordinated basis by the Company of the obligations of Carolina Trust under the Trust Preferred Securities. The Trust Preferred Securities are redeemable upon maturity of the debentures on January 7, 2035, or upon earlier redemption as provided in the indenture. The Company has the right to redeem the debentures purchased by Carolina Trust in whole or in part at any time.

In the third quarter of 2008, Carolina Bank issued $9,300,000 of unsecured junior subordinated notes to outside investors which accrue and pay interest quarterly at three month LIBOR plus 4% per annum. The notes, net of unamortized expenses associated with the offering, equal to $9,197,000 and $9,179,000 at March 31, 2012 and December 31, 2011, respectively and qualify as Tier 2 capital for the Bank. The notes are redeemable upon maturity on September 30, 2018, or earlier at the Bank’s option, in whole or part subject to regulatory approval, beginning September 30, 2013. The expenses of the offering of $373,000 were capitalized at issue and are being amortized over sixty months. The notes are subordinate to the rights of payment to depositors, bankers acceptances, letters of creditors and general creditors.

Note I – Operating segments

The Company is considered to have three principal business segments in 2012 and 2011, the Commercial/Retail Bank, the Mortgage Division, and the Holding Company. The Mortgage Division began originating home mortgage loans through third parties and selling these loans to investors in late 2007. A retail mortgage operation was added to the mortgage division in July 2010. Financial performance, reflective of inter-company eliminations, for the three months ended March 31, 2012 and 2011, and selected balance sheet information, reflective of inter-company eliminations, at March 31, 2012 and 2011 for each segment is as follows:

9

	Three months ended March 31, 2012
	Commercial/Retail		Mortgage			Holding
	Bank		Division			Company			Total
	(in thousands)
Interest income	$	6,795	$	711		$	2		$	7,508
Interest expense		680		713			66			1,459
Net interest income (loss)		6,115		(2	)		(64	)		6,049
Provision for loan losses		1,460		-			-			1,460
Net interest income (loss) after provision for loan losses		4,655		(2	)		(64	)		4,589
Non-interest income		503		3,297			-			3,800
Non-interest expense		4,436		2,234			21			6,691
Income (loss) before income taxes		722		1,061			(85	)		1,698
Income tax (benefit) expense		80		419			(29	)		470
Net income (loss)	$	642	$	642		$	(56	)	$	1,228
Total assets	$	584,438	$	83,216		$	355		$	668,009
Net loans		468,397		81,497			-			549,894
Equity		642		642			46,659			47,943

	Three months ended March 31, 2011
	Commercial/Retail		Mortgage		Holding
	Bank		Division		Company			Total
	(in thousands)
Interest income	$	7,431	$	300	$	2		$	7,733
Interest expense		1,474		284		57			1,815
Net interest income (loss)		5,957		16		(55	)		5,918
Provision for loan losses		1,700		-		-			1,700
Net interest income (loss) after provision for loan losses		4,257		16		(55	)		4,218
Non-interest income		475		1,635		-			2,110
Non-interest expense		4,033		1,412		25			5,470
Income (loss) before income taxes		699		239		(80	)		858
Income tax (benefit) expense		179		94		(27	)		246
Net income (loss)	$	520	$	145	$	(53	)	$	612
Total assets	$	647,273	$	16,476	$	381		$	664,130
Net loans		489,563		16,123		-			505,686
Equity		520		145		44,238			44,903

The Mortgage Division has experienced strong growth in originations since its establishment in 2007 due to low interest rates and due to the purchase of a retail loan production office in July of 2010. Originations and related fee income increased substantially in the first three months of 2012 over 2011 due to lower interest rates in 2012, continued refinancing by borrowers, and expansion of staff and overtime to manage the additional volume. Interest rate risk has been minimized by obtaining optional loan sales commitments when loan origination commitments are made or by entering into hedging transactions whereby mortgage backed securities are sold for the estimated closing value of loan commitments. Borrower fraud is a risk that has been minimized by prudent underwriting and by obtaining indemnification from the originating bank or broker for the risks the Company assumes. Warranty expenses and related warranty liabilities were established in 2009 to provide for potential claims that might arise from borrower fraud or underwriting errors. Warranty expenses were $128,000 and $109,000 for the three months ending March 31, 2012 and 2011, respectively. The warranty liability, which is available to fund future warranty claims, was $932,000 and $833,000 at March 31, 2012 and December 31, 2011, respectively. Five warranty claims totaling $410,000 have been paid since establishment of the mortgage division in 2007. In addition, three loans with a total current principal balance of $467,000 and fair value of $411,000 have been repurchased and are included in loans held for sale at fair value. Other real estate owned includes one residence valued at $116,000 which was repurchased due to warranty claims.

10

Note J - Securities

A summary of the amortized cost, gross unrealized gains and losses and estimated fair values of securities available-for-sale and held-to-maturity follows:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
			(in thousands)
March 31, 2012
Available for sale
Municipal securities	$	15,599	$	1,235	$	-	$	16,834
FNMA, FHLMC, and GNMA mortgage-backed securities		12,807		988		-		13,795
Corporate securities		13,977		42		72		13,947
Unrestricted stock		266		87		-		353
	$	42,649	$	2,352	$	72	$	44,929
Held to maturity
FNMA and GNMA mortgage-backed securities	$	370	$	28	$	-	$	398
	$	370	$	28	$	-	$	398
December 31, 2011
Available for sale
Municipal securities	$	16,531	$	1,236	$	-	$	17,767
FNMA, FHLMC, and GNMA mortgage-backed securities		13,489		1,005		-		14,494
Corporate securities		10,179		15		588		9,606
Unrestricted stock		266		75		-		341
	$	40,465	$	2,331	$	588	$	42,208
Held to maturity
FNMA and GNMA mortgage-backed securities	$	392	$	28	$	-	$	420
	$	392	$	28	$	-	$	420

11

Investments are periodically evaluated for any impairment which would be deemed other than temporary. Based upon these evaluations, the Company did not deem any debt securities to be impaired during 2011 or the first three months of 2012. The deterioration in value is primarily attributable to changes in market demand for corporate securities, not changes in the credit risk of the corporate issuers, and the Company expects these securities to be paid in full and that any temporary impairment will be fully recoverable prior to or at maturity.  The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient for a forecasted recovery or until maturity. Information pertaining to temporarily impaired securities with gross unrealized losses at March 31, 2012 and December 31, 2011, by category and length of time that individual securities have been in a continuous loss position follows:

	Less Than 12 Months						12 Months or Greater				Total
	Number				Gross				Gross				Gross
	of		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Securities		Value		Losses		Value		Losses		Value		Losses
			(in thousands)
March 31, 2012:
Corporate securities		6	$	7,604	$	72	$	-	$	-	$	7,604	$	72
Total		6	$	7,604	$	72	$	-	$	-	$	7,604	$	72
December 31, 2011:
Corporate securities		6	$	8,142	$	588	$	-	$	-	$	8,142	$	588
Total		6	$	8,142	$	588	$	-	$	-	$	8,142	$	588

12

Note K - Loans and allowance for loan losses

The activity in the allowance for loan losses for the first three months of 2012 and 2011 and related asset balances at March 31, 2012 and December 31, 2011 is summarized as follows:

	Construction &			Commercial			Home Equity			Residential			Commercial			Consumer
	Development			Real Estate			Lines			Real Estate			& Industrial			& Other			Unallocated			Total
	(in thousands)
Allowance for loan losses:
2012
Beginning of year balance	$	2,948		$	3,690		$	1,126		$	994		$	2,985		$	46		$	4		$	11,793
Provision for loan losses		821			559			(46	)		76			(56	)		95			11			1,460
Charge-offs		(146	)		(354	)		(163	)		(76	)		(28	)		(17	)		-			(784	)
Recoveries		-			5			-			2			14			1			-			22
Balance at March 31,	$	3,623		$	3,900		$	917		$	996		$	2,915		$	125		$	15		$	12,491
2011
Beginning of year balance	$	4,478		$	3,364		$	818		$	846		$	2,746		$	79		$	28		$	12,359
Provision for loan losses		3,440			1,161			698			896			708			(29	)		(24	)		6,850
Charge-offs		(5,137	)		(1,319	)		(405	)		(756	)		(569	)		(6	)		-			(8,192	)
Recoveries		167			484			15			8			100			2			-			776
Balance at December 31,	$	2,948		$	3,690		$	1,126		$	994		$	2,985		$	46		$	4		$	11,793
Balances at March 31,2012
Allowance for loan losses:
Balance at March 31,	$	3,623		$	3,900		$	917		$	996		$	2,915		$	125		$	15		$	12,491
Ending balance individually evaluated for impairment	$	544		$	1,185		$	304		$	207		$	1,542		$	-		$	-		$	3,782
Ending balance collectively evaluated for impairment	$	3,079		$	2,715		$	613		$	789		$	1,373		$	125		$	15		$	8,709
Loans Outstanding:
Balance at March 31,	$	52,205		$	242,321		$	67,060		$	48,860		$	64,402		$	6,040		$	-		$	480,888
Ending balance individually evaluated for impairment	$	4,395		$	27,965		$	1,701		$	5,372		$	5,570		$	8		$	-		$	45,011
Ending balance collectively evaluated for impairment	$	47,810		$	214,356		$	65,359		$	43,488		$	58,832		$	6,032		$	-		$	435,877
Balances at December 31, 2011
Allowance for loan losses:
Balance at December 31,	$	2,948		$	3,690		$	1,126		$	994		$	2,985		$	46		$	4		$	11,793
Ending balance individually evaluated for impairment	$	23		$	595		$	556		$	165		$	1,398		$	-		$	-		$	2,737
Ending balance collectively evaluated for impairment	$	2,925		$	3,095		$	570		$	829		$	1,587		$	46		$	4		$	9,056
Loans Outstanding:
Balance at December 31,	$	51,383		$	251,015		$	66,172		$	51,499		$	60,863		$	6,099		$	-		$	487,031
Ending balance individually evaluated for impairment	$	4,606		$	27,183		$	1,858		$	5,978		$	5,868		$	10		$	-		$	45,503
Ending balance collectively evaluated for impairment	$	46,777		$	223,832		$	64,314		$	45,521		$	54,995		$	6,089		$	-		$	441,528

13

A loan is past due when the borrower has not made a payment by the contractual due date. The following table presents the carrying value of loans that are past due thirty days or more. Loans which are ninety days or more past due are generally on non-accrual status, at which time all accrued interest is removed from interest income, as shown in the following table:

													Loans Past
	Number of Days Past Due												Due 90 Days
	30-59 Days		60-89 Days		90 Days or More		Total Past Due		Current		Total Loans		or More & Accruing
	(in thousands)
At March 31, 2012
Real Estate Loans:
Construction & development	$	-	$	-	$	2,464	$	2,464	$	49,741	$	52,205	$	-
Commercial real estate		23		-		13,766		13,789		228,532		242,321		-
Home equity lines		227		-		685		912		66,148		67,060		-
Residential real estate		625		-		2,925		3,550		45,310		48,860		-
Total real estate		875		-		19,840		20,715		389,731		410,446		-
Commercial & industrial		27		-		3,344		3,371		61,031		64,402		-
Consumer & other		-		4		3		7		6,033		6,040		-
Total loans	$	902	$	4	$	23,187	$	24,093	$	456,795	$	480,888	$	-
At December 31, 2011
Real Estate Loans:
Construction & development	$	-	$	-	$	4,265	$	4,265	$	47,118	$	51,383	$	-
Commercial real estate		-		-		12,513		12,513		238,502		251,015		-
Home equity lines		300		-		791		1,091		65,081		66,172		-
Residential real estate		369		3		3,770		4,142		47,357		51,499		-
Total real estate		669		3		21,339		22,011		398,058		420,069		-
Commercial & industrial		-		-		1,572		1,572		59,291		60,863		-
Consumer & other		-		-		4		4		6,095		6,099		-
Total loans	$	669	$	3	$	22,915	$	23,587	$	463,444	$	487,031	$	-

Loans are determined to be impaired when, based on current information and events, it is probable that all amounts will not be collected when due according to the contractual terms of the original loan agreement. At March 31, 2012 and December 31, 2011, the total recorded investment in impaired loans amounted to approximately $45,011,000 and $45,503,000, respectively. Of these impaired loans, $23,187,000 and $22,915,000 were on non-accrual at March 31, 2012 and December 31, 2011, respectively.

14

The recorded investment and related information for impaired loans is summarized as follows:

	Impaired Loans
	At end of period							For Period Ended
			Unpaid		Related			Average		Interest
	Recorded		Principal		Loan Loss			Recorded		Income
	Investment		Balance		Allowance			Investment		Recognized
	(in thousands)
March 31, 2012
With no related allowance recorded
Real Estate Loans:
Construction & development	$	2,779	$	2,849	$	-		$	2,875	$	5
Commercial real estate		21,872		22,422		-			23,368		518
Home equity lines		405		426		-			539		3
Residential real estate		4,018		4,145		-			4,372		29
Total real estate		29,074		29,842		-			31,154		555
Commercial & industrial		3,616		3,629		-			3,634		20
Consumer & other		8		9		-			10		-
Total loans		32,698		33,480		-			34,798		575
With an allowance recorded
Real Estate Loans:
Construction & development		1,615		1,617		544			1,671		21
Commercial real estate		6,094		6,134		1,185			6,146		69
Home equity lines		1,296		1,314		304			1,314		16
Residential real estate		1,354		1,368		207			1,375		21
Total real estate		10,359		10,433		2,240			10,506		127
Commercial & industrial		1,954		1,960		1,542			2,147		26
Consumer & other		-		-		-			-		-
Total loans		12,313		12,393		3,782			12,653		153
Total impaired loans	$	45,011	$	45,873	$	3,782	#	$	47,451	$	728
December 31, 2011
With no related allowance recorded
Real Estate Loans:
Construction & development	$	4,479	$	5,473	$	-		$	5,352	$	81
Commercial real estate		22,967		23,551		-			23,297		846
Home equity lines		533		555		-			542		20
Residential real estate		4,929		5,448		-			5,727		173
Total real estate		32,908		35,027		-			34,918		1,120
Commercial & industrial		2,186		2,200		-			2,273		77
Consumer & other		10		11		-			13		1
Total loans		35,104		37,238		-			37,204		1,198
With an allowance recorded
Real Estate Loans:
Construction & development		127		127		23			222		2
Commercial real estate		4,216		4,226		595			4,339		246
Home equity lines		1,325		1,336		556			1,319		77
Residential real estate		1,049		1,057		165			1,070		61
Total real estate		6,717		6,746		1,339			6,950		386
Commercial & industrial		3,682		3,691		1,398			3,789		191
Consumer & other		-		-		-			-		-
Total loans		10,399		10,437		2,737			10,739		577
Total impaired loans	$	45,503	$	47,675	$	2,737	#	$	47,943	$	1,775

15

Loans that are past due 90 days or more or where there is serious doubt as to collectability are placed on non-accrual status. Non-accrual loans are not returned to accrual status unless principal and interest are current and borrowers have demonstrated the ability to make contractual payments. Accrued interest is reversed through a charge to income when loans are placed on non-accrual and future payments on non-accrual loans are generally applied to principal. The following is a summary of non-accrual loans at March 31, 2012 and December 31, 2011:

	March 31,		December 31,
	2012		2011
	(in thousands)
Real Estate Loans:
Construction & development	$	2,464	$	4,265
Commercial real estate		13,766		12,513
Home equity lines		685		791
Residential real estate		2,925		3,770
Total real estate		19,840		21,339
Commercial & industrial		3,344		1,572
Consumer & other		3		4
Total loans	$	23,187	$	22,915

Loans are graded according to an internal loan rating classification system when originated. Loan grades are periodically re-evaluated during servicing, internal loan reviews, and external loan reviews. The general categories of the internal loan rating classification are:

· Pass - Acceptable loans

· Special Mention - Loans with potential identified weaknesses in administration or servicing.

· Criticized - Adversely classified loans with identified weaknesses, and potential or identified losses of principal and/or interest due.

The following is a breakdown of loans by the general categories of the internal rating system:

	Outstanding Loans at March 31, 2012 and December 31, 2011
	Construction &				Commercial				Home Equity
	Development				Real Estate				Lines of Credit
	2012		2011		2012		2011		2012		2011
	(in thousands)
Pass	$	39,900	$	36,968	$	205,186	$	210,356	$	64,610	$	64,561
Special Mention		1,083		1,083		6,132		9,099		214		214
Criticized		11,222		13,332		31,003		31,560		2,236		1,397
TOTAL	$	52,205	$	51,383	$	242,321	$	251,015	$	67,060	$	66,172

	Residential				Commercial &				Consumer
	Real Estate				Industrial				& Other
	2012		2011		2012		2011		2012		2011
	(in thousands)
Pass	$	39,685	$	41,664	$	57,694	$	54,947	$	6,005	$	6,064
Special Mention		824		802		353		646		23		25
Criticized		8,351		9,033		6,355		5,270		12		10
TOTAL	$	48,860	$	51,499	$	64,402	$	60,863	$	6,040	$	6,099

16

During 2012 and 2011, the Company restructured certain loans to improve the likelihood that the loans would be repaid in full under the modified terms in accordance with reasonable repayment schedules. Management evaluates each of these loans in accordance with generally accepted accounting principles to determine whether they should be reported as troubled debt restructurings. The Company adopted the amendments in Accounting Standards Update No. 2011-02 during the period ended September 30, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings. The Company did not identify as troubled debt restructurings any receivables for which the allowance for credit losses had previously been measured under a general allowance for credit losses methodology.

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

· Rate Modification - A modification in which the interest rate is changed.

· Term Modification - A modification in which the maturity date, timing of payments, or frequency of payments is changed.

· Interest Only Modification– A modification in which the loan is converted to interest only payments for a period of time.

· Payment Modification – A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

· Combination Modification – Any other type of modification, including the use of multiple categories above.

There were no available commitments for troubled debt restructurings outstanding at March 31, 2012.

17

The following tables present troubled debt restructurings as of March 31, 2012 and December 31, 2011:

Troubled Debt Restructurings
	March 31, 2012
					Non-Accrual				Total
	Accrual Status				Status				Modifications
	#		Amount		#		Amount		#		Amount
	($ in thousands)
Real Estate Loans:
Construction & development		2	$	346		4	$	1,130		6	$	1,476
Commercial real estate		9		11,958		16		7,718		25		19,676
Home equity lines		0		-		1		150		1		150
Residential real estate		10		1,924		9		1,199		19		3,123
Total real estate		21		14,228		30		10,197		51		24,425
Commercial & industrial		5		1,495		5		2,091		10		3,586
Consumer & other		1		5		0		-		1		5
Total loans		27	$	15,728		35	$	12,288		62	$	28,016

	December 31, 2011
					Non-Accrual				Total
	Accrual Status				Status				Modifications
	#		Amount		#		Amount		#		Amount
	($ in thousands)
Real Estate Loans:
Construction & development		2	$	349		6	$	1,789		8	$	2,138
Commercial real estate		11		13,912		13		5,758		24		19,670
Home equity lines		0		-		1		150		1		150
Residential real estate		10		1,949		8		870		18		2,819
Total real estate		23		16,210		28		8,567		51		24,777
Commercial & industrial		10		2,286		2		493		12		2,779
Consumer & other		1		6		0		-		1		6
Total loans		34	$	18,502		30	$	9,060		64	$	27,562

The Bank’s policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appears relatively certain. The Bank’s policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status.

Troubled debt restructurings are classified as impaired loans when modified, and fair value calculations are performed to determine the specific reserves required in the allowance for loan losses related to these loans. Troubled debt restructurings can be removed from such status and returned to non-impaired status in years subsequent to restructure if the interest rate charged at restructure was greater than or equal to the rate charged for a new extension of credit with comparable risk and if the loan is performing and there is no available information to indicated that performance will not continue.

18

The following tables present newly restructured loans that occurred during the three months ended March 31, 2012 and 2011, respectively:

	New Troubled Debt Restructurings
	Three Months Ended March 31, 2012
	Rate				Term				Payment				Combination				Total
	Modifications				Modifications				Modifications				Modifications				Modifications
	#		Amount		#		Amount		#		Amount		#		Amount		#		Amount
	($ in thousands)
Pre-Modification Outstanding Recorded Investment:
Real Estate Loans:
Commercial real estate		-	$	-		-	$	-		1	$	123		-	$	-		1	$	123
Total real estate		-		-		-		-		1		123		-		-		1		123
Commercial & industrial		-		-		-		-		1		835		-		-		1		835
Total loans		-	$	-		-	$	-		2	$	958		-	$	-		2	$	958
Post-Modification Outstanding Recorded Investment:
Real Estate Loans:
Commercial real estate		-	$	-		-	$	-		1	$	122		-	$	-		1	$	122
Total real estate		-		-		-		-		1		122		-		-		1		122
Commercial & industrial		-		-		-		-		1		829		-		-		1		829
Total loans		-	$	-		-	$	-		2	$	951		-	$	-		2	$	951
	Three Months Ended March 31, 2011
Pre-Modification Outstanding Recorded Investment:
Real Estate Loans:
Commercial real estate		-	$	-		-	$	-		2	$	3,481		9	$	5,214		11	$	8,695
Residential real estate		-		-		-		-		2		190		11		1,801		13		1,991
Total real estate		-		-		-		-		4		3,671		20		7,015		24		10,686
Commercial & industrial		-		-		-		-		1		85		1		68		2		153
Total loans		-	$	-		-	$	-		5	$	3,756		21	$	7,083		26	$	10,839
Post-Modification Outstanding Recorded Investment:
Real Estate Loans:
Commercial real estate		-	$	-		-	$	-		2	$	3,481		9	$	5,208		11	$	8,689
Residential real estate		-		-		-		-		2		190		11		1,794		13		1,984
Total real estate		-		-		-		-		4		3,671		20		7,002		24		10,673
Commercial & industrial		-		-		-		-		1		83		1		68		2		151
Total loans		-	$	-		-	$	-		5	$	3,754		21	$	7,070		26	$	10,824

The following tables represent financing receivables modified as troubled debt restructurings and with a payment default, with the payment default occurring within 12 months of the restructure date, and the payment default occurring during the three months ended March 31, 2012 and 2011, respectively:

19

TDRs with a payment default occurring within 12 months of restructure

	During the three months ended
	March 31, 2012				March 31, 2011
	#		Amount		#		Amount
	($ in thousands)
Real Estate Loans:
Commercial real estate		5	$	7,134		-	$	-
Total real estate		5		7,134		-		-
Commercial & industrial		3		1,606		-		-
Total loans		8	$	8,740		-	$	-

Troubled debt restructuring defaults can result in a higher allowance for loan losses and a corresponding higher provision for loan losses because defaults generally negatively impact the timing of and expected collections from these impaired loans. Impaired loans, which include troubled debt restructurings, are evaluated for specific additions to the allowance for loan losses by subtracting the recorded investment in these impaired loans from their fair values. Fair value is generally determined by the present value of future cash flows, collateral value, or liquidation value. Defaults generally reduce the present value of the future cash flows and can negatively impact the collateral values if declining real estate values are impacting the sale of collateral.

Note L – Fair value measurements

The Company has adopted the accounting standards within FASB AccountingStandards Codification (ASC) 820 “Fair Value Measurements and Disclosures”,which provides a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The Company has not elected the fair value option to value liabilities. Securities available-for-sale and loans held 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, such as impaired loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

When measuring fair value, valuation techniques should be appropriate in the circumstances and consistently applied. A hierarchy is used to prioritize valuation inputs into the following three levels to determine fair value:

Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – observable inputs other than the quoted prices included in Level 1.

Level 3 – unobservable inputs.

Fair Value on a Recurring Basis. The Company measures certain assets at fair value on a recurring basis and the following is a general description of the methods used to value such assets.

Investment Securities Available-for-Sale

Investment securities available-for-sale are recorded at fair value. 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 the 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, U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

20

Loans Held for Sale

The Company opted to account for loans held for sale at fair value which is measured based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to recurring fair value adjustments as Level 2 valuation.

Interest Rate Lock Commitments

The Mortgage Division of the Company hedges some of its residential mortgage loans held for sale by selling mortgage backed securities on a forward basis. The forward sale mortgage backed securities are later purchased or closed when mandatory loan sales are consummated for the related mortgages that are originated. The value of the estimated loan commitments and open hedges are marked to market through the income statement. The significant unobservable input used in the Level 3 fair value measurement of the Company’s Interest Rate Lock Commitments (IRLCs) on hedged loans held for sale is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close. Generally, the fair value of an IRLC is positive (negative) if the prevailing interest rate is lower (higher) than the IRLC rate. Therefore, an increase in the closing ratio (i.e., higher percentage of loans are estimated to close) will result in the fair value of the IRLC to increase if in a gain position, or decrease if in a loss position. The closing ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The closing ratio is computed by management using historical data.

21

Assets measured at fair value on a recurring basis at March 31, 2012 and December 31, 2011 are summarized below:

	Assets
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
	(in thousands)
At March 31, 2012:
Securities available-for-sale:
Municipal securities	$	16,834	$	-	$	16,834	$	-
Mortgage-backed securities		13,795		-		13,795		-
Corporate securities		13,947		-		13,947		-
Unrestricted stock		353		353		-		-
Total available-for-sale securities		44,929		353		44,576		-
Loans held for sale		81,497		-		81,497		-
Interest rate lock commitments		159		-		-		159
Total	$	126,585	$	353	$	126,073	$	159
At December 31, 2011:
Securities available-for-sale:
Municipal securities	$	17,767	$	-	$	17,767	$	-
Mortgage-backed securities		14,494		-		14,494		-
Corporate securities		9,606		-		9,606		-
Unrestricted stock		341		341		-		-
Total available-for-sale securities		42,208		341		41,867		-
Loans held for sale		91,955		-		91,955		-
Interest rate lock commitments		47		-		-		47
Total	$	134,210	$	341	$	133,822	$	47

Fair Value on a Non-recurring Basis. The Company measures certain assets at fair value on a non-recurring basis and the following is a general description of the methods used to value such assets.

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. Impaired loans are recorded at fair value less estimated selling costs. Once a loan is identified as individually impaired, the Company measures impairment. Fair values of impaired loans are generally estimated using one of several methods, including collateral value, liquidation value, discounted cash flows and, in rare cases, the market value of the note. Those impaired loans not requiring an allowance represent loans for which the net present value of the expected cash flows or fair value of the collateral less costs to sell exceed the recorded investments in such loans. At March 31, 2012 and December 31, 2011, a majority of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an executed sales contract with an independent third party, the Company records the impaired loans as nonrecurring Level 1. If the collateral is based on another observable market price or a current appraised value, the Company records the impaired loans as nonrecurring Level 2. When an appraised value is not available or the Company determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3. Impaired loans can also be evaluated for impairment using the present value of expected future cash flows discounted at the loan’s effective interest rate. The measurement of impaired loans using future cash flows discounted at the loan’s effective interest rate rather than the market rate of interest is not a fair value measurement and is therefore excluded from fair value disclosure requirements. Impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly.

22

Other Real Estate Owned and Repossessed Assets

Properties acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value less costs to sell at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying value or the new fair value less estimated selling costs. Fair value is generally based upon current appraisals, comparable sales, and other estimates of value obtained principally from independent sources, adjusted for selling costs. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the asset as nonrecurring Level 2. However, the Company also considers other factors or recent developments which could result in adjustments to the collateral value estimates indicated in the appraisals such as changes in absorption rates or market conditions from the time of valuation. In situations where an appraisal less estimated selling costs is used to determine fair value, management adjustments are significant to the fair value measurements, or other means are used to estimate fair value in the absence of an appraisal, the Company records the impaired loan as nonrecurring Level 3 within the valuation hierarchy.

Securities Held to Maturity

The fair values of securities held to maturity are recorded on a non-recurring basis when an impairment in value that is deemed to be other than temporary occurs.  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 the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions.  At March 31, 2012, there were no fair value adjustments related to $370,000 of securities held to maturity.

Assets measured at fair value on a non-recurring basis at March 31, 2012 and December 31, 2011 are summarized below:

	Assets
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
	(in thousands)
At March 31, 2012:
Impaired loans	$	41,229	$	-	$	-	$	41,229
Other real estate owned		7,708		-		-		7,708
At December 31, 2011:
Impaired loans	$	42,766	$	-	$	-	$	42,766
Other real estate owned		6,728		-		-		6,728

Fair Value on a Recurring or Non-recurring Basis – Unobservable Inputs for Level 3.For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of March 31, 2012, the significant unobservable inputs used in the fair value measurements were as follows:

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				Significant	Significant
	Fair Value at		Valuation	Unobservable	Unobservable
Description	March 31, 2012		Technique	Inputs	Input Value
	(in thousands)
Impaired loans	$	41,229	Appraised Value / Discounted Cash Flows / Market Value of Note	Appraisals and/or sales of comparable properties / Independent quotes	n/a
Other real estate owned	$	7,708	Appraised Value / Comparable Sales / Other Estimates from Independent Sources	Appraisals and/or sales of comparable properties / Independent quotes/bids / Forward sale contract values	n/a
Net Derivative Assets and Liabilities:
Interest rate lock commitments	$	159	Pricing Models	Weighted Average Closing Ratio	80.7	%

Fair Value of items not valued as such. The Company measures certain financial assets and liabilities at fair value for disclosure purposes only.

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of financial instruments at March 31, 2012 and December 31, 2011. This table excludes financial instruments for which the carrying amount approximates fair value. For short-term financial assets such as cash and due from banks and interest-bearing deposits with banks, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. For financial liabilities such as non-interest bearing demand deposits, NOW, money market and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

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					Fair Value Measurements
					Quoted
					Prices in
					Active Markets		Significant
					for Identical		Other		Significant
					Assets or		Observable		Unobservable
	Carrying		Fair		Liabilities		Inputs		Inputs
	Amount		Value		(Level 1)		(Level 2)		(Level 3)
	(in thousands)
March 31, 2012
Financial Instruments - Assets
Investment securities held-to-maturity	$	370	$	398	$	-	$	398	$	-
Net loans held for investment		468,397		469,626		-		-		469,626
Financial Instruments - Liabilities
Time deposits		205,692		207,556		-		-		207,556
Trust preferred subordinated debt		10,310		7,398		-		-		7,398
December 31, 2011
Financial Instruments - Assets
Investment securities held-to-maturity	$	392	$	420	$	-	$	420	$	-
Net loans held for investment		475,238		477,271		-		-		477,271
Financial Instruments - Liabilities
Time deposits		214,715		216,418		-		-		216,418
Trust preferred subordinated debt		10,310		7,453		-		-		7,453

Note M – Derivatives and financial instruments

A derivative is a financial instrument that derives its cash flows and value by reference to an underlying instrument, index or referenced interest rate. These instruments are designed to hedge exposures to interest rate risk or for speculative purposes.

Accounting guidance requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measure those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting.

The Mortgage Division of the Company began hedging its governmental mortgage loans, primarily FHA and VA loans, in October 2010 by selling mortgage backed securities on a forward basis. The forward sale mortgage backed securities are later purchased or closed when mandatory loan sales are consummated for the related mortgages that are originated. The value of the estimated loan commitments and open hedges are marked to market through the income statement.

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The table below provides the carrying values of derivative instruments at March 31, 2012 and December 31, 2011:

	Carrying Value		Carrying Value		Gain (Loss)			Notional Amount
Derivatives designated as	of Assets		of Liabilities		in Income			of Derivative
hedging instruments:	(in thousands)
At March 31, 2012:
Mortgage loan rate lock commitments	$	159	$	-	$	159		$	-
Mortgage backed securities forward sales	$	-	$	5	$	(5	)	$	11,500
At December 31, 2011:
Mortgage loan rate lock commitments	$	47	$	-	$	47		$	-
Mortgage backed securities forward sales	$	-	$	60	$	(60	)	$	4,750

Prior to October 2010, the Company sold mortgage loans on a best efforts basis whereby optional commitments to sell mortgage loans were consummated at approximately the same time that optional commitments were given to borrowers to originate the loans. Conventional loans which represent the majority of mortgage originations by the Mortgage Division are still sold on a best efforts basis. The below presents the aggregate fair value and aggregate unpaid principal of loans held for sale at March 31, 2012 and December 31, 2011;

March 31, 2012

December 31, 2011

Aggregate Fair

Aggregate Fair

Value Less

Value Less

Aggregate

Aggregate

Aggregate

Aggregate

Aggregate

Unpaid

Unpaid

Aggregate

Unpaid

Unpaid

Fair Value

Principal

Principal

Fair Value

Principal

Principal

(in thousands)

Loans held for sale, at fairvalue

$

81,497

$

80,855

$

642

$

91,955

$

91,254

$

701

Interest income on loans held for sale is recognized based on contractual rates and is reflected in interest income on loans in the consolidated statements of operations. The following table details net (losses) resulting from changes in fair value of these loans which were recorded in mortgage banking income in the consolidated statements of operations during the three months ended March 31, 2012 and 2011, respectively. These changes in fair value are mostly offset by economic hedging activities and also fluctuate based on the change in the aggregate loan principal outstanding. An immaterial portion of these amounts was attributable to changes in instrument-specific credit risk.

	Loans Held for Sale, At Fair Value
	Three Months Ended March 31,
	2012			2011
	(in thousands)
Net gains (losses) resulting from changes in fair value	$	(59	)	$	(322	)

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Note N – Impact of recently adopted accounting standards

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-02,A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring. The Update amended the existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring (“TDR”). The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. The Company implemented this guidance in the quarter ended September 30, 2011; the adoption of this amendment has resulted in expanded narrative and tabular disclosures surrounding TDRs in the Company’s consolidated financial statements, as reflected in Note K.

In April 2011, the FASB issued ASU No. 2011-03,Reconsideration of Effective Control for Repurchase Agreements. The Update amends existing guidance to remove from the assessment of effective control, the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms and the collateral maintenance implementation guidance related to that criterion. The other criteria to assess effective control were not changed. The amendments were effective for the Company on January 1, 2012 and had no effect on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04,Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The Update amends existing guidance by clarifying the application of existing fair value measurement and disclosure requirements and by changing particular principles or requirements for measuring fair value or for disclosing information about fair value measurements. The amendments were effective for the Company beginning January 1, 2012. The adoption of this guidance has resulted in expanded narrative and tabular disclosures regarding fair value measurements in the Company’s consolidated financial statements, as reflected in Note L.

In June 2011, the FASB issued ASU No. 2011-05,Presentation of Comprehensive Income. The amendments eliminate the option to present other comprehensive income as a part of the statement of changes in stockholders’ equity and require consecutive presentation of the statement of net income and other comprehensive income. The Company implemented this guidance in the period ended December 31, 2011; the adoption of these amendments affected the presentation of the Company’s consolidated financial statements, but did not change the items that are reported in other comprehensive income. In December 2011, the FASB further amended this topic with ASU No. 2011-12. This amendment deferred the effective date of presenting reclassification adjustments from other comprehensive income to net income on the face of the financial statements. Companies should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect prior to the amendments while FASB redeliberates further requirements.

Several other accounting standards have been issued or proposed by the FASB or other standards-setting bodies during the periods presented or will be effective subsequent to March 31, 2012. None of these new standards had or is expected to have a material impact on the Company’s consolidated financial statements.

Note O - Commitments

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At March 31, 2012 and December 31, 2011, pre-approved but unused lines of credit for loans totaled approximately $124,069,000 and $133,103,000, respectively. In addition, we had $1,862,000 in standby letters of credit at March 31, 2012 and December 31, 2011. These commitments represent no more than the normal lending risk that we commit to borrowers. If these commitments are drawn, we will obtain collateral if it is deemed necessary based on our credit evaluation of the counter-party. We believe these commitments can be funded through normal operations.

We are committed for future lease payments on our Friendly Center office, the land for our Greensboro headquarters, our office in Winston-Salem, and a mortgage loan office in Burlington. Aggregate minimum lease payments over the next five years are $1,646,000 and $2,919,000 thereafter.

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

The following discussion is intended to assist in understanding our financial condition and results of operations. Because we have no material operations and conduct no business on our own other than owning our subsidiaries, Carolina Bank and Carolina Capital Trust, and because Carolina Capital Trust has no operations other than the issuance of its trust preferred securities, the discussion contained in this Management’s Discussion and Analysis concerns primarily the business of Carolina Bank. However, for ease of reading and because the financial statements are presented on a consolidated basis, Carolina Bank Holdings, Inc. and Carolina Bank are collectively referred to herein as “we”, “our” or “us” unless otherwise noted.

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 relating to, without limitation, our future economic performance, plans and objectives for future operations, and projections of revenues and other financial items that are based on our beliefs, as well as assumptions made by and information currently available to us. The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “could”, “project”, “predict,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements. Our actual results, performance, or achievements may differ materially from the results expressed or implied by our forward-looking statements.

Impact of Dodd-Frank Act.On July 21, 2010, President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) into law. The Dodd-Frank Act represents a comprehensive overhaul of the financial services industry in the United States. The Dodd-Frank Act includes, among other things:

· the creation of a Financial Stability Oversight Council to identify emerging systemic risks posed by financial firms, activities and practices, and improve cooperation between federal agencies;

· the creation of a Bureau of Consumer Financial Protection authorized to promulgate and enforce consumer protection regulations relating to financial products, which would affect both banks and non-bank financial companies;

· the establishment of strengthened capital and prudential standards for banks and bank holding companies;

· enhanced regulation of financial markets, including derivatives and securitization markets;

· the elimination of certain trading activities by banks;

· a permanent increase of the previously implemented temporary increase of FDIC deposit insurance to $250,000 per account, an extension of unlimited deposit insurance on qualifying noninterest-bearing transaction accounts, and an increase in the minimum deposit insurance fund reserve requirement from 1.15% to 1.35%, with assessments to be based on assets as opposed to deposits;

· amendments to the Truth in Lending Act aimed at improving consumer protections with respect to mortgage originations, including originator compensation, minimum repayment standards, and prepayment considerations; and

· new disclosure and other requirements relating to executive compensation and corporate governance.

The Company is unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact the Company’s business. However, the Company believes that certain aspects of the new legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure and reporting requirements and examinations could have a significant impact on the Company’s business, financial condition, and results of operations. Additionally, the Company cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect the Company.

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Comparison of Financial Condition

Assets. Our total assets decreased by $5.3 million, or 0.8%, from $673.3 million at December 31, 2011, to $668.0 million at March 31, 2012. During the three months ended March 31, 2012, cash and due from banks, interest-bearing deposits with banks and investment securities increased by $10.6 million while loans held for sale decreased $10.5 million, and loans held for investment decreased $6.1 million. The decrease in loans held for sale was expected as loans outstanding had risen to above targeted levels at December 31, 2011 due to delays in processing loan sales. We experienced slowing commercial and consumer loan demand in our primary lending markets, Guilford, Randolph, Alamance and Forsyth Counties, North Carolina in 2010, 2011, and the first three months of 2012. The slowing demand complimented our planned asset reduction strategy to improve our capital ratios.

Liabilities. Total deposits decreased by $8.1 million, or 1.4%, from $596.6 million at December 31, 2011, to $588.5 million at March 31, 2012. Time deposits decreased $9.0 million during the first three months of 2012, primarily from maturing broker deposits, that were not renewed due to ample liquidity. Our branching activities are designed to enhance customer convenience and related deposit gathering activities as well as provide new sources for loans. While deposit growth has been an ongoing goal, wholesale sources of funding such as Federal Home Loan Bank (“FHLB’) advances and repurchase borrowings, may be utilized where cost beneficial and when necessary to meet liquidity requirements. Retail repurchase agreements increased $0.4 million and FHLB advances were down slightly during the first three months of 2012. We had approximately $35.2 million in out-of-market time deposits from other institutions and $19.4 million in brokered deposits at March 31, 2012, a decrease of $4.2 million in these two types of accounts from December 31, 2011.

Stockholders’ Equity. Total stockholders’ equity increased $1.3 million at March 31, 2012 to $47.9 million from $46.6 million at December 31, 2011, due to retained net income and an increase in accumulated other comprehensive income from appreciation of investment securities available-for-sale.

Comparison of Results of Operations for the Three Months Ended March 31, 2012 and 2011

General. Net income was $1,228,000 and $612,000 for the first quarter of 2012 and 2011, respectively. Net income available to common stockholders was $926,000, or $0.27 per diluted share, for the three months ended March 31, 2012 compared to $324,000, or $0.10 per diluted share, for the three months ended March 31, 2011. Net income available to common stockholders represents net income less preferred stock dividends and related discount accretion. Higher net income in 2012 resulted primarily from higher mortgage banking income. Our primary markets in the Triad of North Carolina experienced deteriorating economic conditions in 2010, 2011, and the first three months of 2012 which negatively impacted our borrowers as evidenced by increasing defaults and loan charge-offs. While economic conditions have not improved substantially since 2010 in our primary markets, loan charge-offs have declined and the risk in the loan portfolio has declined as evidenced by a decrease in construction and development loans.

Net interest income. Net interest income of $6,049,000 for the three months ended March 31, 2012 increased $131,000 from the first quarter of 2011. An increase in the net yield on interest earning assets of 10 basis points in 2012 was partially offset by a decline in average interest-earning assets by $10.7 million. The net yield on interest earning assets, adjusted to a fully taxable basis, increased to 3.98% in the first quarter of 2012 from 3.88% in the first quarter of 2011. The table below provides an analysis of effective yields and rates on categories of interest-earning assets and interest-bearing liabilities for the three months ended March 31, 2012 and 2011.

29

Net Interest Income and Average Balance Analysis

	For the Three Months Ended March 31,
	2012							2011
	Average		Interest		Average			Average		Interest		Average
	Balance (1.)		Inc./Exp.		Yield/Cost			Balance (1.)		Inc./Exp.		Yield/Cost
	(Dollars in thousands)
Interest-earning assets
Interest bearing deposits	$	20,163	$	10		0.20	%	$	41,596	$	20		0.19	%
Non-taxable investments (2.)		11,107		160		5.79	%		16,080		241		6.08	%
Taxable investments		32,626		306		3.77	%		35,742		401		4.55	%
Loans held for sale		73,084		711		3.91	%		23,353		300		5.21	%
Loans (3.)		479,121		6,374		5.35	%		510,051		6,850		5.45	%
Interest-earning assets		616,101		7,561					626,822		7,812
Interest-earning assets						4.94	%						5.05	%
Non interest-earning assets		47,831							46,841
Total assets	$	663,932						$	673,663
Interest-bearing liabilities
Interest checking	$	35,193	$	22		0.25	%	$	31,821	$	24		0.31	%
Money market and savings		286,638		526		0.74	%		274,282		636		0.94	%
Time certificates and IRAs		207,574		709		1.37	%		249,278		967		1.57	%
Other borrowings		24,530		202		3.31	%		24,293		188		3.14	%
Total interest-bearing liabilities		553,935		1,459					579,674		1,815
Cost on average
Interest-bearing liabilities						1.06	%						1.27	%
Non-interest-bearing liabilities
Demand deposits		57,446							44,818
Other liabilities		5,350							4,520
Total non-interest-bearing  liabilities		62,796							49,338
Total liabilities		616,731							629,012
Stockholders' equity		47,201							44,651
Total liabilities and equity	$	663,932						$	673,663
Net interest income			$	6,102						$	5,997
Net yield on average interest-earning assets						3.98	%						3.88	%
Interest rate spread						3.88	%						3.78	%

(1.) Average balances are computed on a daily basis.

(2.) Interest income and yields related to certain investment securities exempt from federal income tax are stated on a fully taxable basis using a 34% federal tax rate, reduced by the nondeductible portion of interest expense.

(3.) Nonaccrual loans are included in the average loan balance.

30

Provision for loan losses.The provision for loan losses amounted to $1,460,000 and $1,700,000 for the three months ended March 31, 2012 and 2011, respectively. The amount of the provision for loan losses decreased in 2012 primarily because of a decrease in net loan charge-offs and fewer allowances for loan losses on impaired loans. We believe the allowance for loan losses is appropriate based on asset quality indicators and other factors.

Non-interest income.Total non-interest income amounted to $3,800,000 for the three months ended March 31, 2012, as compared to $2,110,000 for the three months ended March 31, 2011. Service charges increased $52,000, or 22.5%, and mortgage banking income increased $1,662,000, or 101.7%, during the first quarter of 2012 compared to the first quarter of 2011.

Non-interest expense.Total non-interest expense amounted to $6,691,000 and $5,470,000 for the three months ended March 31, 2012 and 2011, respectively. Salaries and employee benefits increased $1,066,000, or 36.0%, primarily from expansion of our Mortgage Division, from increased variable compensation in our Mortgage Division due to additional mortgage loan activity, and from resumption of incentive accruals for Bank employees upon attainment of certain financial goals. The number of full-time equivalent employees increased to 184 at March 31, 2012 from 163 at March 31, 2011. Impairment of other real estate owned was $296,000 and $0 in the first quarter of 2012 and 2011, respectively, as real estate values continued to decrease in our primary lending markets in 2012. Lower expenses were incurred in the first quarter of 2012 in the areas of outside data processing, FDIC insurance and repossessed asset expenses.

Income taxes.Income tax expense was $470,000, or 27.7% of net income before income taxes, for the three month period ended March 31, 2012, as compared to $246,000, or 28.7% of net income before income taxes, for the three month period ended March 31, 2011. Larger tax credits primarily accounted for the lower effective tax rate in 2012.

Asset Quality

Non-performing assets, composed of other real estate owned and non-accrual loans, totaled $30,895,000 at March 31, 2012, compared to $29,643,000 at December 31, 2011. Non-performing assets, as a percentage of total assets, was 4.62% at March 31, 2012, compared to 4.40% at December 31, 2011. There were no loans 90 days or more past due and still accruing interest at March 31, 2012 or December 31, 2011. Other real estate owned was $7,708,000 at March 31, 2012 and $6,728,000 at December 31, 2011. The increase in the level of non-performing assets was primarily one commercial loan relationship of $2,719,000 that defaulted in March of 2012; otherwise, the level of non-performing assets would have declined in accordance with our goal of meaningful reductions in 2012. The elevated level of non-performing assets at March 31, 2012 and December 31, 2011 is related to the decline in economic conditions in our lending markets. The seasonally adjusted unemployment rate in North Carolina decreased to 9.7% in March 2012 from 10.4% in December 2011 and March 2011. A large portion of our loans are made to businesses and real estate developers and are secured by real estate. Due to the slow economic conditions, it has been difficult for borrowers to sell businesses or real estate properties as needed to pay off their loans.

Our allowance for loan losses is composed of two parts, a specific portion related to non-performing loans and performing impaired loans and a general section related to non-impaired loans. The specific portion of our allowance for loan losses, which relates to impaired loans, increased to $3,782,000 at March 31, 2012 from $2,737,000 at December 31, 2011, and impaired loans decreased to $45,011,000 at March 31, 2012 from $45,503,000 at December 31, 2011. The specific portion of our allowance relating to impaired loans increased primarily because we changed from using the present value of cash flows to a collateral based method to measure impairment on two loans whose cash flows had not met expectations during 2012. The general portion of our allowance for loan losses decreased to $8,709,000 on non-impaired loans of $435,877,000 at March 31, 2012 from $9,056,000 on non-impaired loans of $441,528,000 at December 31, 2011. The general portion of our allowance applies to non-impaired loans and was determined by applying estimated loss ratios inherent in the loan portfolio, ranging from 0.37% on loans secured by multi-family properties to 4.86% on construction and development loans, to categories of non-impaired loans at each period end. We changed from using the latest eight quarters in 2011 to the latest ten quarters in 2012 to determine the estimated loss ratios inherent in the loan portfolio because we believe the longer period is more representative of expected losses. The general section of our allowance also includes a qualitative component which is calculated based on nine environmental factors such as the changes in economic and business conditions that affect the collectability of the loan portfolio and changes in the value of collateral dependent loans. The qualitative component of the general section of our allowance for loan losses increased from $1,605,000 at December 31, 2011 to $2,006,000 at March 31, 2012 because of continued decline in the market value of collateral securing many of our real estate loans.

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The allowance for loan losses is increased by direct charges to operating expense, the provision for loan losses. Losses on loans or charge-offs are deducted from the allowance in the period that loans are deemed to become uncollectible or in the period that updated appraisals indicate a loss in value of non-performing, collateral dependent, real estate loans. Recoveries of previously charged-off loans are added back to the allowance. Net loan charge-offs (charge-offs minus recoveries) totaled $762,000 for the three months ended March 31, 2012 compared to $1,645,000 for the same period in 2011.

Liquidity and Capital Resources

The objective of our liquidity management is to ensure the availability of sufficient cash flows to meet all financial commitments and to capitalize on opportunities for expansion. Liquidity management addresses our ability to meet deposit withdrawals on demand or at contractual maturity, to repay borrowings as they mature, and to fund new loans and investments as opportunities arise.

Our primary sources of internally generated funds are principal and interest payments on loans receivable and cash flows generated from operations. External sources of funds include increases in deposits, repurchase agreements, lines of credit from banks, including the Federal Reserve, and advances from the Federal Home Loan Bank of Atlanta (“FHLB”).

Carolina Bank is required under applicable federal regulations to maintain specified levels of liquid investments in qualifying types of investments. Cash and due from banks, interest-bearing deposits in banks, investment securities available-for-sale, and loans held for sale by our mortgage division are the primary liquid assets of Carolina Bank. We regularly monitor Carolina Bank’s liquidity position to ensure its liquidity is sufficient to meet its needs. During the first three months of 2012, we increased our levels of short-term liquidity due to a decrease in our loans held for sale and loans held for investment. Short-term liquidity in the form of cash and due from banks and interest-bearing deposits in banks, increased to $21.2 million at March 31, 2012 from $13.3 million at December 31, 2011. We also have substantial secondary sources of liquidity in the form of unused secured lines of credit from the FHLB and the Federal Reserve of approximately $146 million at March 31, 2012.

We are subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of March 31, 2012 and December 31, 2011, our levels of capital exceeded all applicable published regulatory requirements. Carolina Bank met its goal of increasing Tier 1 capital to average assets to 8% in 2011 through earnings and moderate asset growth in response to regulatory requests in January 2011. Tier 1 capital to average assets for Carolina Bank was 8.35% at March 31, 2012 compared to 8.02% at December 31, 2011. Carolina Bank Holdings, Inc. also agreed to seek regulatory approval to pay dividends on its preferred stock and interest on its trust preferred securities after January 2011. Interest payments on trust preferred securities are current based on approvals granted. Dividends of $608,000 on preferred stock have been deferred due to approvals not granted.

32

Due to our strong growth in recent years and our anticipation of continued growth, we increased our capital in January 2009 by issuing $16 million in preferred stock to the United States Treasury under the Capital Purchase Program. Carolina Bank also issued approximately $9.3 million in subordinated debt through a private placement in the third quarter of 2008 to increase capital at the bank level.

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ITEM 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have conducted an evaluation of our disclosure controls and procedures as of March 31, 2012. Based on their evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time period specified in the applicable Securities and Exchange Commission Rules and Forms. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation of these controls by our Chief Executive Officer and Chief Financial Officer.

Management of the Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, changes in the Company's internal controls over financial reporting (as defined in Rule 13a−15(f) and 15d−15(f) of the Exchange Act) during the first quarter of 2012. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the first quarter that have materially affected or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

There are various claims and lawsuits in which the Company and the Bank are periodically involved incidental to their business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.

Item 4. (Reserved)

Item 6. Exhibits

Exhibit No.	Description of Exhibit
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
32.1	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith).
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, in XBRL(eXtensible Business Reporting Language). *

* Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

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 Bank Holdings, Inc.
Date: May 14, 2012	By:	/s/ Robert T. Braswell
		Robert T. Braswell
		President and Chief Executive Officer
Date: May 14, 2012	By:	/s/ T. Allen Liles
		T. Allen Liles
		Chief Financial and Principal Accounting Officer

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Exhibit Index

Exhibit No.	Description of Exhibit
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (filed herewith).
32.1	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (filed herewith).
101	Interactive data files providing financial information from the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, in XBRL(eXtensible Business Reporting Language). *

* Pursuant to Regulation 406T of Regulation S-T, these interactive data files are furnished and not filed or part of a registration statement or prospectus for purposes of section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, and are otherwise not subject to liability.

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