Carolina Bank (CLBH) 10-Q 2007 Q3 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 September 30, 2007

¨ 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 Number)

528 College Road, Greensboro, NC 27410

(Address of principal executive offices)

Issuer’s telephone number including area code: (336)-288-1898

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer  ¨    Accelerated filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨    No  x

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 3,315,157 shares of the Issuer’s common stock, $1.00 par value outstanding as of November 9, 2007.

CAROLINA BANK HOLDINGS, INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006	2
	Consolidated Statements of Income for the three and nine months ended September 30, 2007 and 2006	3
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2007 and 2006	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2007 and 2006	5
	Notes to Consolidated Financial Statements	6
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3. Quantitative and Qualitative Disclosure about Market Risk	16
	Item 4. Controls and Procedures	17
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings	18
	Item 6. Exhibits	18
	Exhibit 31.1 Certification Pursuant Section 302 of the Sarbanes-Oxley Act	19
	Exhibit 31.2 Certification Pursuant Section 302 of the Sarbanes-Oxley Act	21
	Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350	23

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Balance Sheets

	September 30, 2007			December 31, 2006
	(unaudited)
	(in thousands)
Assets
Cash and due from banks	$	6,709		$	4,983
Securities available-for-sale, at fair value		66,552			71,054
Securities held-to-maturity		3,264			3,637
Loans held for sale		2,007			—
Loans held for investment		372,595			315,732
Less allowance for loan losses		(4,476	)		(3,898	)
Net loans held for investment		368,119			311,834
Premises and equipment, net		11,803			10,078
Other assets		9,873			10,006
Total assets	$	468,327		$	411,592
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing demand	$	30,105		$	26,984
NOW, money market and savings		164,001			167,124
Time		214,988			166,307
Total deposits		409,094			360,415
Advances from the Federal Home Loan Bank		8,588			8,908
Federal funds purchased		5,670			1,574
Securities sold under agreements to repurchase		2,801			2,031
Junior subordinated debentures		10,310			10,310
Other liabilities and accrued expenses		3,377			2,425
Total liabilities		439,840			385,663
Commitments
Stockholders’ equity
Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 3,281,250 in 2007 and 3,266,866 in 2006		3,281			2,722
Additional paid-in capital		15,152			15,597
Retained earnings		10,189			7,851
Stock in directors rabbi trust		(492	)		(453	)
Directors deferred fees obligation		492			453
Accumulated other comprehensive loss		(135	)		(241	)
Total stockholders’ equity		28,487			25,929
Total liabilities and stockholders’ equity	$	468,327		$	411,592

See accompanying notes to consolidated financial statements.

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Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Income (unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2007			2006		2007			2006
	(in thousands, except per share data)
Interest income
Loans	$	7,526		$	6,024	$	21,560		$	16,851
Investment securities, taxable		787			874		2,426			2,330
Investment securities, non taxable		43			—		62			—
Interest from federal funds sold		61			125		186			376
Other		23			11		30			30
Total interest income		8,440			7,034		24,264			19,587
Interest expense
NOW, money market, savings		1,681			1,703		5,218			4,443
Time deposits		2,745			1,730		7,289			4,745
Other borrowed funds		387			452		1,128			1,312
Total interest expense		4,813			3,885		13,635			10,500
Net interest income		3,627			3,149		10,629			9,087
Provision for loan losses		272			231		742			886
Net interest income after provision for loan losses		3,355			2,918		9,887			8,201
Non-interest income
Service charges		191			183		544			494
Mortgage banking income		76			101		200			271
Repossessed asset gains (losses)		(1	)		183		(1	)		183
Other		120			193		341			490
Total non-interest income		386			660		1,084			1,438
Non-interest expense
Salaries and benefits		1,401			1,046		3,964			3,188
Occupancy and equipment		351			286		958			810
Professional fees		140			170		511			562
Outside data processing		144			139		444			434
Advertising and promotion		113			127		355			332
Stationery, printing, supplies		114			80		340			261
Impairment of non-marketable securities		—			—		100			—
Other		196			118		560			401
Total non-interest expense		2,459			1,966		7,232			5,988
Income before income taxes		1,282			1,612		3,739			3,651
Income tax expense		482			638		1,401			1,396
Net income	$	800		$	974	$	2,338		$	2,255
Net income per common share
Basic	$	0.24		$	0.30	$	0.72		$	0.69
Diluted	$	0.24		$	0.29	$	0.69		$	0.67

See accompanying notes to consolidated financial statements.

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Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (unaudited)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(in thousands)
Net income	$	800	$	974	$	2,338	$	2,255
Other comprehensive income:
Unrealized holding gains arising during the period		466		355		106		73
Comprehensive income	$	1,266	$	1,329	$	2,444	$	2,328

See accompanying notes to consolidated financial statements.

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Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Cash Flows (unaudited)

	Nine Months Ended September 30,
	2007			2006
	(in thousands)
Cash flows from operating activities
Net income	$	2,338		$	2,255
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		742			886
Depreciation		350			307
Deferred income tax benefit		(87	)		(173	)
Impairment of non-marketable securities		100			—
Amortization (accretion), net		(48	)		(63	)
Gain on sale of assets		(9	)		(183	)
Increase in other assets		(244	)		(1,059	)
Increase in other liabilities		952			479
Net cash provided by operating activities		4,094			2,449
Cash flows from investing activities
Origination of loans held for sale		(1,998	)		—
Origination of loans held for investment, net of principal collected		(57,217	)		(26,891	)
Maturities and calls of investment securities available-for-sale		11,063			14,278
Purchases of investment securities available-for-sale		(11,912	)		(28,101	)
Repayments from mortgage-backed securities available-for-sale		6,050			3,965
Repayments from mortgage-backed securities held-to-maturity		373			236
Additions to premises and equipment		(2,081	)		(1,145	)
Proceeds from sales of assets		15			747
Net cash used for investing activities		(55,707	)		(36,911	)
Cash flows from financing activities
Net increase in deposits		48,679			42,605
Net increase (decrease) in retail repurchase agreements		770			(192	)
Net decrease in advances from Federal Home Loan Bank		(320	)		(9,185	)
Net increase in Federal funds purchased		4,096			—
Proceeds from exercised stock options		114			19
Net cash provided by financing activities		53,339			33,247
Net increase (decrease) in cash and cash equivalents		1,726			(1,215	)
Cash and cash equivalents at beginning of period		4,983			20,759
Cash and cash equivalents at end of period	$	6,709		$	19,544
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	13,237		$	10,180
Cash paid during the period for income taxes	$	1,158		$	1,700
Supplemental disclosure of non-cash transactions
Transfer of loans to foreclosed assets	$	190		$	—

See accompanying notes to consolidated financial statements.

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Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note A – Summary

Carolina Bank Holdings, Inc. (the “Holding Company”) is a North Carolina corporation organized in 2000. On August 17, 2000 pursuant to the plan of 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 on August 20, 1996, and began banking operations on November 25, 1996. It is engaged in lending and deposit gathering activities in Guilford, Alamance and Randolph 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 six retail locations with three in Greensboro, North Carolina, an office in Asheboro, North Carolina, an office in Burlington, North Carolina, and an office in High Point, North Carolina which opened on January 2, 2007. The corporate headquarters is also located in Greensboro. The Bank started a wholesale mortgage operation in the third quarter of 2007 to originate residential mortgage loans through other banks and brokers and to sell these loans in the secondary market to generate fee income. A majority of these loans conform to FHLMC and FNMA standards. This new operation has four employees and one contract employee.

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 Holding 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 and nine months ended September 30, 2007 and 2006, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended September 30, 2007 and 2006, are not necessarily indicative of the results that may be expected for future periods.

The organization and business of the Company, accounting policies followed, and other information are contained in the notes to the consolidated financial statements of the Company as of and for the years ended December 31, 2006 and 2005, filed with the Securities and Exchange Commission as part of the Company’s annual report on Form 10-KSB. These consolidated financial statements should be read in conjunction with the annual consolidated financial statements.

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Note D – Use of Estimates

The consolidated 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 consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Note E – Stock Compensation Plans

The Company has three stock option plans, a nonqualified plan for directors (Director Plan) and two incentive stock option plans for management and employees (Employee Plans). The plans provide for the issuance of options to purchase common shares of the Company. Under the plans, the exercise price of each option is equal to the fair value of the common stock on the date of grant. The 1997 Incentive Stock Option Plan expired on May 20, 2007, and the 36,420 remaining ungranted incentive options (post stock split) became the authorized incentive options under the new 2007 Incentive Stock Option Plan. The 2007 Incentive Stock Option Plan expires on April 17, 2008.

The Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R,Share-Based Payment, on January 1, 2006 under the modified prospective application method. The adoption of this statement did not impact the consolidated financial statements since there were no outstanding unvested options as of the date of adoption or grants during the 2006 or 2007 periods.

Note F – Earnings per Share

Earnings per share has been determined under the provisions of the SFAS No. 128,Earnings Per Share. For the quarters ended September 30, 2007 and 2006, basic earnings per share has been computed based upon the weighted average common shares outstanding of 3,273,806 and 3,266,066, respectively.

The only potential stock of the Company as defined in the SFAS No. 128, Earnings Per Share, is stock options granted to various directors and officers of the Bank. The following is a summary of the diluted earnings per share calculation for the three and nine months ended September 30, 2007 and 2006.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(in thousands, except per share data)
Net income	$	800	$	974	$	2,338	$	2,255
Weighted average shares outstanding		3,274		3,266		3,269		3,265
Dilutive effect of stock options		118		114		135		110
Weighted average diluted shares		3,392		3,380		3,404		3,375
Diluted earnings per share	$	0.24	$	0.29	$	0.69	$	0.67

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Note G – Stock Split

The Company issued a 6-for-5 stock split effected in the form of a 20% stock dividend in June 2007. All per share amounts have been adjusted to retroactively reflect the stock split.

Note H – Impairment of Non-Marketable Equity Securities

Investments are periodically evaluated for any impairment which would be deemed other than temporary. During the second quarter of 2007, we determined that the fair value of an investment in a trust company was less than the original cost and that the decline was other than temporary. The original investment of $305,000 was written down $100,000 to $205,000 by an impairment charge against second quarter earnings. The trust company has a common director with the Company.

Note I – Junior Subordinated Debentures

In December 2004, the Company issued $10,310,000 of unsecured junior subordinated debentures which carry a floating rate of three month LIBOR plus 2% at September 30, 2007. The proceeds from the sale of the debentures were used to repay $3,100,000 of unsecured junior subordinated debentures which were issued in March 2001 and were used to fund loan growth. 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 FIN 46R. 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 qualify as Tier 1 and Tier 2 capital under the Federal Reserve Board guidelines and accrue and pay distributions quarterly. 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 at the election of the Company on or after January 7, 2010.

Note J – Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements, which establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact of this statement on its future financial statements.

In September 2006, the FASB issued SFAS No. 158,Employers Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of SFAS No.’s 87, 88, 106 and 132(R), which requires a business entity to recognize the over-funded or under-funded status of a single-employer defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in comprehensive income in the year in which the changes occur. The provisions of this statement are effective as of the end of the first fiscal year after December 15, 2006. The adoption of this new standard did not have a material impact on our consolidated financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”),Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be recognized in the financial statements when it is

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more likely than not, based on the technical merits, that the position will be sustained upon examination. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this new standard did not have a material impact on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of SFAS No. 115. This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. While most of the provisions are elective, the amendment to SFAS No. 115,Accounting for Certain Investments in Debt and Equity Securities,applies to all entities with available-for-sale securities and trading securities. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied to entire instruments and not to portions of instruments. This statement is effective for fiscal years beginning after November 15, 2007 with earlier adoption permitted if the decision to do so is made within the first 120 days of the earlier fiscal year. We did not choose to adopt any provisions of this statement early and are currently evaluating the impact of this statement on our future financial statements.

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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.

Comparison of Financial Condition

Assets. Our total assets increased by $56.7 million, or 13.8%, from $411.6 million at December 31, 2006, to $468.3 million at September 30, 2007. During the nine month period ended September 30, 2007, cash and due from banks increased by $1.7 million to $6.7 million, and investment securities decreased by $4.9 million to $69.8 million. Loan demand was stronger than projected as loans held for investment before allowance for loan losses increased by $56.9 million or 18.0% during the first nine months of 2007. We make both commercial and retail loans and continue to experience good loan demand in our primary lending markets, Guilford, Randolph and Alamance Counties, North Carolina. Approximately 83% of our loans are secured by real estate which is up slightly from 80% secured by real estate at December 31, 2006. Our sixth office was opened in High Point, just past Greensboro’s busy Wendover Avenue, in January 2007. Our new full service Burlington office which replaced our limited service leased facility was opened in September 2007. Construction of a new corporate headquarters and retail banking office of approximately 40,000 square feet on leased land in downtown Greensboro began in the third quarter of 2007. The new corporate headquarters is scheduled to be completed in 2008 and will replace our current Greensboro headquarters on College Road which is anticipated to be sold.

Liabilities. Total deposits increased by $48.7 million, or 13.5%, from $360.4 million at December 31, 2006, to $409.1 million at September 30, 2007. Time deposits, which increased $48.7 million or 29.2%, accounted for most of our deposit growth in the first nine months of 2007. We plan to continue our efforts to gain deposits through quality service, convenient locations, and competitive pricing. Our continued branching activities are designed to enhance customer convenience and related deposit gathering activities as well as provide new sources for loans. While deposit growth is an ongoing goal, wholesale sources of funding such as Federal Home Loan Bank advances and repurchase borrowings, may be utilized where cost beneficial and when necessary to meet liquidity requirements. Federal Home Loan Bank advances decreased $0.3 million during the first nine months of 2007 to $8.6 million at September 30, 2007. We had approximately $16.7 million in out-of-market time deposits from other institutions and $17.3 million in brokered time deposits at September 30, 2007, a decrease of $8.2 million in these two types of accounts from December 31, 2006. The decline in out-of-market and brokered time deposits during the first nine months of 2007 was planned due to increases in interest rates with more attractive relative pricing in the local market for time deposits.

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Stockholders’ Equity. Total stockholders’ equity was up $2.6 million at September 30, 2007 to $28.5 million from $25.9 million at December 31, 2006 due to retention of net income of $2.3 million, exercise of stock options, and an increase in the value (after-tax) of our investment securities available-for-sale.

Comparison of Results of Operations for the Three Months Ended September 30, 2007 and 2006

General. Net income for the three months ended September 30, 2007 and 2006, amounted to $800,000, or $0.24 per diluted share, and $974,000, or $0.29 per diluted share, respectively. A repossessed asset gain and an income distribution from a limited partnership investment in the third quarter of 2006 were the primary reasons for higher net income in the 2006 period.

Net interest income.Net interest income increased 15.2% to $3,627,000 for the three months ended September 30, 2007, from $3,149,000 for the three months ended September 30, 2006. Growth in interest earning assets and liabilities primarily accounted for the higher net interest income in 2007. 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 September 30, 2007 and 2006.

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Net Interest Income and Average Balance Analysis

	For the Three Months Ended September 30,
	2007						2006
	Average		Interest		Average		Average		Interest		Average
	Balance (1)		Inc./Exp.		Yield/Cost		Balance (1)		Inc./Exp.		Yield/Cost
	(taxable equivalent basis, dollars in thousands)
Interest-earning assets
Interest bearing deposits	$	1,736	$	23	5.30	%	$	789	$	11	5.58	%
Federal funds sold		5,136		61	4.75	%		9,612		125	5.20	%
Investments, taxable		65,378		787	4.82	%		76,818		874	4.55	%
Investments, non taxable		3,993		61	6.11	%		—		—	—
Loans		363,801		7,526	8.27	%		288,433		6,024	8.35	%
Interest-earning assets		440,044		8,458				375,652		7,034
Interest-earning assets					7.69	%					7.49	%
Non interest-earning assets		18,454						17,953
Total assets	$	458,498					$	393,605
Interest-bearing liabilities
NOW, money market, savings	$	158,405	$	1,681	4.24	%	$	154,944	$	1,703	4.40	%
Time certificates and IRAs		212,990		2,745	5.16	%		152,556		1,730	4.54	%
Other borrowings		26,449		387	5.85	%		30,437		452	5.94	%
Total interest-bearing liabilities		397,844		4,813				337,937		3,885
Cost on average
Interest-bearing liabilities					4.84	%					4.60	%
Non-interest-bearing liabilities
Demand deposits		28,680						26,323
Other liabilities		4,268						4,924
Total non-interest-bearing liabilities		32,948						31,247
Total liabilities		430,792						369,184
Stockholders’ equity		27,706						24,421
Total liabilities and equity	$	458,498					$	393,605
Net interest income			$	3,645					$	3,149
Net yield on average interest-earning assets					3.31	%					3.35	%
Interest rate spread					2.85	%					2.89	%

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

Provision for loan losses.The provision for loan losses amounted to $272,000 for the three months ended September 30, 2007, as compared to $231,000 for the three months ended September 30, 2006, an increase of 17.8%. The amount of the provision for loan losses increased because additional reserves were required on additional non-performing assets. Non-performing loans increased from $2.8 million at September 30, 2006 to

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$4.4 million at September 30, 2007. Net loan charge-offs were $21,000 in the third quarter of 2007 compared to net loan recoveries of $21,000 in the third quarter of 2006. 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 $386,000 for the three months ended September 30, 2007, as compared to $660,000 for the three months ended September 30, 2006. A repossessed asset gain of $183,000 and an income distribution from a limited partnership investment of $117,000 in the third quarter of 2006 were not repeated in the 2007 period.

Non-interest expense.Total non-interest expense amounted to $2,459,000 for the three months ended September 30, 2007, as compared to $1,966,000 for the three months ended September 30, 2006. This increase of 25.8% was due to expenses related to our growth during the past year, to increased FDIC premiums of $57,000, and to additional expenses of $46,000 from our newly created wholesale mortgage operation. The High Point office was added during the first quarter of 2007 with six new employees, most who joined the Bank in late 2006. Three new positions were added at our new Burlington office during the third quarter of 2007. Our number of full-time equivalent employees increased to eighty-six at September 30, 2007 from sixty-two at September 30, 2006.

Income taxes.Income taxes amounted to $482,000, or 37.6% of income before income taxes, for the three month period ended September 30, 2007, as compared to $638,000, or 39.6% of income before income taxes, for the three month period ended September 30, 2006. The lower tax rate in 2007 resulted from an increase in non-taxable income.

Comparison of Results of Operations for the Nine Months Ended September 30, 2007 and 2006

General. Net income for the nine months ended September 30, 2007 and 2006, amounted to $2,338,000, or $0.69 per diluted share and $2,255,000, or $0.67 per diluted share, respectively. The increase in net income was primarily due to higher net interest income and a lower provision for loan losses.

Net interest income.Net interest income increased 17.0% to $10,629,000 for the nine months ended September 30, 2007, from $9,087,000 for the nine months ended September 30, 2006. Growth in interest earning assets and liabilities primarily accounted for the higher net interest income in the 2007 period.

Provision for loan losses.The provision for loan losses amounted to $742,000 for the nine months ended September 30, 2007, as compared to $886,000 for the nine months ended September 30, 2006, a decrease of 16.2%. The amount of the provision for loan losses decreased because of improving loan credit quality in the first half of 2007 period. Non-performing loans increased in the third quarter of 2007, but the increase primarily represented loans to one borrower that were adequately secured by real estate.

Non-interest income.Total non-interest income amounted to $1,084,000 for the nine months ended September 30, 2007, as compared to $1,438,000 for the nine months ended September 30, 2006. The decrease in 2007 was primarily attributable to the large repossessed asset gain and the income distribution in 2006 as previously discussed in the third quarter comparisons. Mortgage banking income and investment services income from the sale of non-deposit products also declined in the 2007 period.

Non-interest expense.Total non-interest expense amounted to $7,232,000 for the nine months ended September 30, 2007, as compared to $5,988,000 for the nine months ended September 30, 2006. This increase of 20.8% was due to expenses related to our growth during the past year including our new High Point and Burlington offices, to increased FDIC premiums of $168,000, to our new wholesale mortgage operation, and an impairment charge of $100,000 on an investment in a trust company. Generally, all FDIC insured banks experienced higher FDIC assessments in 2007; however, banks accepting deposits before 1997 were given one-time credits based on amounts previously paid into the insurance fund, effectively delaying their higher premiums until after 2007.

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Income taxes.Income taxes amounted to $1,401,000, or 37.5% of taxable income, for the nine month period ended September 30, 2007, as compared to $1,396,000, or 38.2% of taxable income, for the nine month period ended September 30, 2006. The lower tax rate in 2007 resulted from an increase in non-taxable income.

Asset Quality

Non-performing assets, composed of foreclosed real estate, repossessions, non-accrual loans and restructured loans, totaled $4,633,000 at September 30, 2007 compared to $2,433,000 at December 31, 2006 and $2,139,000 at June 30, 2007. Non-performing assets, as a percentage of total assets, were 0.99% at September 30, 2007, compared to 0.59% at December 31, 2006 and 0.48% at June 30, 2007. There were no loans 90 days or more past due and still accruing interest at September 30, 2007 and December 31, 2006. Foreclosed real estate was $190,000 at September 30, 2007 and $0 at December 31, 2006. The increase in non-performing assets in the third quarter is primarily centered around one loan relationship that is secured by real estate; foreclosure proceedings are underway, and no additional losses over those reserved are expected.

Our allowance for loan losses is composed of two parts, a specific portion related to non-performing and problem loans and a general section related to performing loans. The specific portion of our allowance for loan losses, which relates to non-performing loans, increased to $580,000 at September 30, 2007 from $433,000 at December 31, 2006 because several new loans added to non-performing loans during the second and third quarters had higher required reserves than those paying off. The specific portion of our allowance for loan losses was $372,000 at September 30, 2006. The general section of our allowance for loan losses was $3,896,000 at September 30, 2007 and $3,465,000 at December 31, 2006. These reserves apply to performing loans and were determined by applying estimated loss ratios inherent in the loan portfolio, ranging from 0.40% on residential real estate loans to 3.00% on non secured consumer revolving loans, to categories of performing loans at each period end. The general section also includes reserves on watch list loans which are still performing but carry a higher degree of risk because of declining credit factors.

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, retail and broker obtained repurchase agreements, federal funds purchased from banks and advances from the Federal Home Loan Bank of Atlanta.

We are required under applicable federal regulations to maintain specified levels of liquid investments in qualifying types of investments. Cash and due from banks, federal funds sold, and investment securities available-for-sale are the primary liquid assets of the Bank. Management regularly monitors the Bank’s liquidity position to ensure its liquidity is sufficient to meet its needs.

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We are subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial statements. 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 September 30, 2007, the Holding Company’s and Bank’s levels of capital exceeded all applicable regulatory requirements.

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 September 30, 2007 and December 31, 2006, pre-approved but unused lines of credit for loans totaled approximately $93,965,000 and $86,160,000, respectively. In addition, we had $6,246,000 and $7,189,000 in standby letters of credit at September 30, 2007 and December 31, 2006, respectively. 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 office for 39 months, for the land for our new Greensboro headquarters for 24.75 years, and for an ATM site in Asheboro for 33 months. Lease payments totaling $1,250,000 are due under the three leases over the next five years, and a total of $3,628,000 is due for the remaining 19.75 years.

Recent Developments

We started a wholesale mortgage operation in the third quarter of 2007 to originate residential mortgage loans utilizing smaller banks and brokers and to sell these loans in the secondary market. The manager of this new division has over 25 years of mortgage experience and has a seasoned staff of four including a contract underwriter. Approximately 65%-70% of the loans originated to date are residential mortgage loans conforming with FHLMC and FNMA standards with the remainder of the loans being jumbo residential mortgages and mortgages with alternative documentation. Optional commitments to sell loans are obtained shortly after commitments to originate loans are made to prospective borrowers, thereby reducing market risk. Loan applications have increased in the past two months, and a profit is expected from this new operation in the fourth quarter of 2007. The wholesale mortgage operation originated approximately $2 million loans in the third quarter of 2007 and incurred a small loss of approximately $.01 per share.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Our primary market risk is interest rate risk which involves the adverse affect that changes in interest rates have on our net interest income. We attempt to manage interest rate risk through the loan and deposit products that we offer to our customers and by managing the mixes and maturities of our investments and other borrowings. We measure interest rate risk by using simulation analysis. Our most recent simulation analysis indicates, in the absence of growth or changes in the mix of assets and liabilities, that our net interest income for the year ending September 30, 2008, would change by the following percentages given changes in interest rates of 1%, 2%, or 3% as follows:

Basis Point Change in Interest Rates	% Change in Net Interest Income Year Ended 9/30/08
+300	6.17	%
+200	4.14	%
+100	1.97	%
0	No Change
-100	-2.43	%
-200	-5.17	%
-300	-8.05	%

There are many assumptions made in obtaining the above simulated results such as loan and mortgage backed securities prepayments, customer decisions to renew loans and deposits in current product lines rather than switching to more favorable products, and the magnitude of deposit and loan rate changes given changes in federal funds or the prime rate. We also assume that interest rate changes are applied evenly over the coming year rather than immediate. Although the assumptions we use in simulation modeling are designed to approximate reality, simulation results could be materially different if customer preferences are different than we assume, if the yield curve is different than we assume, or if competitive factors negatively impact the future rates charged for loans or paid on deposits.

We have an asset/liability committee (“ALCO”) who has the responsibility of minimizing the adverse affects of changes in interest rates on our net interest margin and to comply with board approved parameters for interest rate risk. ALCO is also charged with assuring that adequate levels of liquidity are available for funding and other needs. ALCO determines strategies to obtain the most desirable mix of interest earning assets and interest-bearing liabilities given competitive pressures and given capital and liquidity limitations.

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Item 4. Controls and Procedures

At 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 design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.

Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective (1) to provide reasonable assurance that information required to be disclosed by the Company in the reports filed or submitted by it under the Securities Exchange Act was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) to provide reasonable assurance that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow for timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 6. Exhibits

(a.) Exhibits

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

SIGNATURES

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

	Carolina Bank Holdings, Inc.
Date: November 12, 2007	By:	/s/ Robert T. Braswell
		Robert T. Braswell
		President and Chief Executive Officer
Date: November 12, 2007	By:	/s/ T. Allen Liles
		T. Allen Liles
		Chief Financial and Principal Accounting Officer

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