Carolina Bank (CLBH) 10-Q 2009 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, 2009

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).    Yes  ¨    No  ¨

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 company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  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 November 9, 2009.

(Mark One)

CAROLINA BANK HOLDINGS, INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	2
	Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008	2
	Consolidated Statements of Income for the three and nine months ended September 30, 2009 and 2008	3
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2009 and 2008	4
	Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2009	5
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 4T.	Controls and Procedures	23
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	24
Item 6.	Exhibits	24
Exhibit  31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act		26
Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act		28
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350		30

1

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Balance Sheets

	September 30,			December 31,
	2009			2008
	(unaudited)
	(in thousands)
Assets
Cash and due from banks	$	31,275		$	5,947
Federal funds sold		—			1
Securities available-for-sale, at fair value		54,387			59,803
Securities held-to-maturity		853			1,116
Loans held for sale		24,979			19,163
Loans		530,791			501,424
Less allowance for loan losses		(7,038	)		(5,760	)
Net loans		523,753			495,664
Premises and equipment, net		19,408			19,652
Other assets		22,171			15,265
Total assets	$	676,826		$	616,611
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing demand	$	36,180		$	29,367
NOW, money market and savings		294,813			182,521
Time		263,870			286,176
Total deposits		594,863			498,064
Advances from the Federal Home Loan Bank		7,202			56,856
Federal funds purchased		—			4,104
Securities sold under agreements to repurchase		976			2,487
Subordinated debentures		19,321			19,265
Other liabilities and accrued expenses		4,447			4,259
Total liabilities		626,809			585,035
Commitments
Stockholders’ equity
Preferred stock, no par, authorized 1,000,000 shares; issued and outstanding 16,000 shares in 2009 and none in 2008		14,392			—
Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 3,387,045 in 2009 and 3,348,193 in 2008		3,387			3,348
Common stock warrants		1,841			—
Additional paid-in capital		15,790			15,586
Retained earnings		13,247			12,893
Stock in directors’ rabbi trust		(821	)		(648	)
Directors’ deferred fees obligation		821			648
Accumulated other comprehensive income (loss)		1,360			(251	)
Total stockholders’ equity		50,017			31,576
Total liabilities and stockholders’ equity	$	676,826		$	616,611

See accompanying notes to consolidated financial statements.

2

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Income (unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2009			2008		2009			2008
	(in thousands, except per share data)
Interest income
Loans	$	7,512		$	7,209	$	22,139		$	21,474
Investment securities, taxable		526			655		1,652			2,079
Investment securities, non-taxable		154			98		412			269
Interest from federal funds sold		2			7		2			27
Other		19			1		20			2
Total interest income		8,213			7,970		24,225			23,851
Interest expense
NOW, money market, savings		1,188			1,123		3,302			3,312
Time deposits		1,639			2,445		5,809			7,943
Other borrowed funds		271			542		947			1,460
Total interest expense		3,098			4,110		10,058			12,715
Net interest income		5,115			3,860		14,167			11,136
Provision for loan losses		1,737			350		4,968			1,205
Net interest income after provision for loan losses		3,378			3,510		9,199			9,931
Non-interest income
Service charges		299			248		797			654
Mortgage banking income		1,962			643		6,570			2,045
Gains (losses) on sale of investments		(136	)		—		99			227
Repossessed asset gains (losses & writedowns)		(695	)		2		(644	)		14
Other		149			141		401			372
Total non-interest income		1,579			1,034		7,223			3,312
Non-interest expense
Salaries and benefits		2,520			1,948		7,483			5,629
Occupancy and equipment		583			451		1,752			1,250
Professional fees		295			262		895			945
Outside data processing		209			192		615			530
FDIC insurance		257			133		977			375
Advertising and promotion		145			126		435			424
Stationery, printing and supplies		138			107		423			374
Impairment of marketable securities		85			—		850			—
Other		609			215		1,402			600
Total non-interest expense		4,841			3,434		14,832			10,127
Income before income taxes		116			1,110		1,590			3,116
Income tax (benefit) expense		(53	)		406		421			1,102
Net income		169			704		1,169			2,014
Dividends and accretion on preferred stock		277			—		815			—
Net income (loss) available (allocable) to common stockholders	$	(108	)	$	704	$	354		$	2,014
Net income per common share
Basic	$	(0.03	)	$	0.21	$	0.10		$	0.60
Diluted	$	(0.03	)	$	0.21	$	0.10		$	0.59

See accompanying notes to consolidated financial statements.

3

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2009		2008			2009		2008
	(in thousands)					(in thousands)
Net income	$	169	$	704		$	1,169	$	2,014
Other comprehensive income:
Unrealized holding gains (losses) arising during the period, net of income taxes		1,094		(108	)		1,611		(331	)
Comprehensive income	$	1,263	$	596		$	2,780	$	1,683

See accompanying notes to consolidated financial statements.

4

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statement of Stockholders’ Equity (unaudited)

	Preferred Stock		Discount on Preferred Stock			Common Stock		Common Stock Warrants		Additional Paid-In Capital		Retained Earnings			Stock in Directors’ Rabbi Trust			Directors’ Deferred Fees Obligation		Accumulated Other Comprehensive Income (Loss)			Total
	(in thousands)
Balance, December 31, 2008	$	—	$	—		$	3,348	$	—	$	15,587	$	12,892		$	(648	)	$	648	$	(251	)	$	31,576
Comprehensive income
Net income		—		—			—		—		—		1,169			—			—		—			1,169
Other comprehensive income - Unrealized gain on securities available for sale, net of tax of $829		—		—			—		—		—		—			—			—		1,611			1,611
Comprehensive income																								2,780
Directors’ deferred fees		—		—			—		—		—		—			(173	)		173		—			—
Stock options exercised		—		—			39		—		176		—			—			—		—			215
Stock options expensed		—		—			—		—		27		—			—			—		—			27
Issuance of preferred stock		16,000		(1,841	)		—		1,841		—		—			—			—		—			16,000
Amortization of preferred stock discount		—		233			—		—		—		(233	)		—			—		—			—
Preferred stock dividends		—		—			—		—		—		(581	)		—			—		—			(581	)
Balance, September 30, 2009	$	16,000	$	(1,608	)	$	3,387	$	1,841	$	15,790	$	13,247		$	(821	)	$	821	$	1,360		$	50,017

See accompanying notes to consolidated financial statements.

5

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Cash Flows (unaudited)

	Nine Months
	Ended September 30,
	2009			2008
	(in thousands)
Cash flows from operating activities
Net income	$	1,169		$	2,014
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		4,968			1,205
Depreciation		695			437
Impairment of investment securities available for sale		850			—
Equity-based compensation		27			27
Deferred income tax (benefit)		(634	)		(382	)
Amortization (accretion), net		(37	)		(48	)
Amortization of subordinated debt discount		56			—
Gain on sale of repossessed assets		(48	)		(14	)
Gain on sale of investments		(99	)		(227	)
Provision for loss on repossessed assets		692			—
Increase in loans held for sale, net of sales and gains		(5,816	)		(3,154	)
Increase in other assets		(358	)		(3,952	)
Increase (decrease) in accrued expenses and other liabilities		86			(228	)
Other operating activities		—			(27	)
Net cash provided by (used for) operating activities		1,551			(4,349	)
Cash flows from investing activities
Purchases of investment securities available-for-sale		(4,576	)		(6,902	)
Maturities and calls of securities available-for-sale		529			3,584
Maturities and calls of securities held-to-maturity		—			1,800
Repayments from mortgage-backed securities available-for-sale		5,442			6,190
Repayments from mortgage-backed securities held-to-maturity		257			174
Origination of loans, net of principal collected		(42,228	)		(77,049	)
Additions to premises and equipment		(451	)		(6,046	)
Proceeds from sales of assets		7,537			1,142
Net cash (used for) investing activities		(33,490	)		(77,107	)
Cash flows from financing activities
Net increase in deposits		96,799			46,396
Net increase (decrease) in Federal Home Loan Advances		(49,654	)		25,078
Net increase (decrease) in Federal funds purchased		(4,104	)		6,349
Increase (decrease) in securities sold under agreements to repurchase		(1,511	)		2,824
Net proceeds from issuance of subordinated debt		—			8,936
Proceeds from issuance of preferred stock		16,000			—
Dividends paid		(480	)		—
Proceeds from exercised stock options		216			210
Net cash provided by financing activities		57,266			89,793
Net increase in cash and cash equivalents		25,327			8,337
Cash and cash equivalents at beginning of period		5,948			5,022
Cash and cash equivalents at end of period	$	31,275		$	13,359
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	10,693		$	13,322
Cash paid during the period for income taxes	$	600		$	2,115
Supplemental disclosure of non-cash transactions
Transfer of loans to foreclosed assets	$	9,171		$	251
Accretion of preferred stock discount	$	233		$	—

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. In August 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 four retail locations in Greensboro and an office in Asheboro, Burlington and High Point. A loan production office was opened in Winston-Salem in February 2008 and obtained deposit taking capabilities in April 2009. All offices 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 and nine months ended September 30, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three and nine months ended September 30, 2009 and 2008, 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 financial statements of the Company as of and for the years ended December 31, 2008 and 2007, 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.

7

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

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.

Note E – Stock compensation plans

The Company has four equity compensation plans, a nonqualified plan for directors (Director Plan), an Omnibus Stock Ownership and Long Term Incentive Plan (Omnibus 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, and the exercise price of each option is equal to the fair value of the common stock on the date of grant. The Omnibus Plan also provides for the issuance of restricted stock awards, stock appreciation rights and certain other forms of equity compensation.

There were no stock option grants in 2008 or the first nine months of 2009. 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 $27,000 in the first nine months of 2009 and 2008. At September 30, 2009, there was $113,000 of total unrecognized compensation cost related to unvested share-based compensation which is expected to be recognized over a weighted-average period of 3.2 years.

Note F – Earnings per share

Earnings per share has been determined on a basic basis and a diluted basis which considers potential stock. For the quarters ended September 30, 2009 and 2008, basic earnings per share has been computed based upon the weighted average common shares outstanding of 3,387,045 and 3,343,818, respectively.

The only potential stock of the Company are stock options granted to various directors and 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 and nine months ended September 30, 2009 and 2008.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2009			2008		2009		2008
	(in thousands, except per share data)
Net income available to common shareholders	$	(108	)	$	704	$	354	$	2,014
Weighted average outstanding shares - basic		3,387			3,344		3,384		3,343
Dilutive effect of stock options		—			24		1		50
Weighted average shares - diluted		3,387			3,368		3,385		3,393
Diluted earnings per share	$	(0.03	)	$	0.21	$	0.10	$	0.59

8

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

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 discount for the first nine months of 2009 was $233,000. 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 qualify as Tier 1 capital under Federal Reserve Board guidelines. 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, on or after January 7, 2010.

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 $9,011,000 and $8,955,000 at September 30, 2009 and December 31, 2008, 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.

9

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

Note I – Operating segments

The Company is considered to have two principal business segments in 2009 and 2008, the Commercial/Retail Bank and the Wholesale Mortgage Division. The Wholesale Mortgage Division began originating home mortgage loans through third parties and selling these loans to investors in late 2007. Financial performance for the three months ending September 30, 2009 and 2008 and selected balance sheet information at September 30, 2009 and 2008 for each segment is as follows:

	Three months ending September 30, 2009								Three months ending September 30, 2008
	Commercial/Retail Bank			Wholesale Mortgage Division		Total			Commercial/Retail Bank		Wholesale Mortgage Division		Total
	(in thousands)								(in thousands)
Interest income	$	7,888		$	325	$	8,213		$	7,820	$	150	$	7,970
Interest expense		2,773			325		3,098			3,983		127		4,110
Net interest income		5,115			—		5,115			3,837		23		3,860
Provision for loan losses		1,737			—		1,737			350		—		350
Net interest income after provision for loan losses		3,378			—		3,378			3,487		23		3,510
Non-interest income		(320	)		1,899		1,579			429		605		1,034
Non-interest expense		3,669			1,172		4,841			2,955		479		3,434
Income before income taxes		(611	)		727		116			961		149		1,110
Income tax (benefit) expense		(364	)		311		(53	)		349		57		406
Net income	$	(247	)	$	416	$	169		$	612	$	92	$	704
Total Assets	$	651,486		$	25,340	$	676,826		$	576,132	$	15,232	$	591,364
Net loans		498,774			24,979		523,753			471,844		15,023		486,867
Equity		48,228			1,789		50,017			30,673		684		31,357

Financial performance for the nine months ending September 30, 2009 and 2008 and selected balance sheet information at September 30, 2009 and 2008 for each segment is as follows:

	Nine months ending September 30, 2009								Nine months ending September 30, 2008
	Commercial/Retail Bank			Wholesale Mortgage Division			Total		Commercial/Retail Bank		Wholesale Mortgage Division		Total
	(in thousands)								(in thousands)
Interest income	$	23,189		$	1,036		$	24,225	$	23,253	$	598	$	23,851
Interest expense		9,014			1,044			10,058		12,251		464		12,715
Net interest income		14,175			(8	)		14,167		11,002		134		11,136
Provision for loan losses		4,968			—			4,968		1,205		—		1,205
Net interest income after provision for loan losses		9,207			(8	)		9,199		9,797		134		9,931
Non-interest income		960			6,263			7,223		1,523		1,789		3,312
Non-interest expense		11,547			3,285			14,832		8,900		1,227		10,127
Income before income taxes		(1,380	)		2,970			1,590		2,420		696		3,116
Income tax expense		(760	)		1,181			421		831		271		1,102
Net income	$	(620	)	$	1,789		$	1,169	$	1,589	$	425	$	2,014
Total Assets	$	651,486		$	25,340		$	676,826	$	576,132	$	15,232	$	591,364
Net loans		498,774			24,979			523,753		471,844		15,023		486,867
Equity		48,228			1,789			50,017		30,673		684		31,357

The Wholesale Mortgage Division has experienced strong growth in originations and related fee income during 2009 due to low interest rates and due to expansion into new market and new products such as FHA and VA loans. Risks have been minimized by obtaining optional loan sales commitments when loan origination commitments are made to borrowers and by primarily originating loans that conform to FNMA, FHLMC, or FHA standards. Borrower fraud is a risk that has been minimized by more robust underwriting standards and by getting the originating banker or broker to indemnify us for the risks we assume. During the third quarter of 2009, we recorded $145,000 in expense and established a related warranty liability for two loans that involved borrower fraud. We were notified of this potential claim in the third quarter of 2009 and do not expect to recover from the originating broker.

10

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

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:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
	(in thousands)
September 30, 2009
Available for sale
U.S. agency obligations	$	997	$	65	$	—	$	1,062
Municipal securities		14,267		871		—		15,138
FNMA, FHLMC, and GNMA mortgage-backed securities		27,350		1,310		—		28,660
Corporate securities		5,478		61		166		5,373
Restricted stock		3,702		—		—		3,702
Unrestricted stock		533		—		81		452
	$	52,327	$	2,307	$	247	$	54,387
Held to maturity
FNMA and GNMA mortgage-backed securities		853		37		—		890
	$	853	$	37	$	—	$	890
December 31, 2008
Available for sale
U.S. agency obligations	$	2,256	$	107	$	—	$	2,363
Municipal securities		11,245		62		279		11,028
FNMA, FHLMC, and GNMA mortgage-backed securities		37,175		983		42		38,116
Corporate securities		5,414		—		1,044		4,370
Restricted stock		3,560		—		—		3,560
Unrestricted stock		533		—		167		366
	$	60,183	$	1,152	$	1,532	$	59,803
Held to maturity
FNMA and GNMA mortgage-backed securities		1,116		22		—		1,138
	$	1,116	$	22	$	—	$	1,138

Investments are periodically evaluated for any impairment which would be deemed other than temporary. At September 30, 2009, our investment in a trust preferred debt security of $850,000 issued by Silverton Financial Services, Inc. (SFSI), formerly Community Financial Services, Inc., was estimated to be worthless. SFSI is the former parent company of Silverton Bank, NA which was closed by the Office of the Comptroller of the Currency in May 2009. SFSI is currently in bankruptcy. The decline in value was determined to be other than temporary and impairment charges of $85,000 and $850,000 were recorded in the three and nine months ended September 30, 2009, respectively. This is the only debt security which the Company has deemed impaired.

11

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

Information pertaining to securities with gross unrealized losses at September 30, 2009 and December 31, 2008, 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
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in thousands)
September 30, 2009:
Municipal securities	$	—	$	—	$	—	$	—	$	—	$	—
FNMA, FHLMC, GNMA mortgage backed securities		—		—		—		—		—		—
Corporate securities		—		—		3,877		166		3,877		166
Unrestricted stock		—		—		452		81		452		81
Total	$	—	$	—	$	4,329	$	247	$	4,329	$	247
December 31, 2008:
Municipal securities	$	7,470	$	279	$	—	$	—	$	7,470	$	279
FNMA, FHLMC, GNMA mortgage backed securities		3,248		39		372		3		3,620		42
Corporate securities		3,870		1,044		—		—		3,870		1,044
Unrestricted stock		—		—		366		167		366		167
Total	$	14,588	$	1,362	$	738	$	170	$	15,326	$	1,532

Note K – Fair Value Measurement

Effective January 1, 2008, we adopted fair value measurements 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. We utilize fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. We have 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, we record at fair value other assets on a nonrecurring basis, such as 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.

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

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.

12

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

Loans Held for Sale

Loans held for sale are carried at fair value which is 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. Loans held for sale of $25.0 million and $19.2 million included positive fair value adjustments of $269,000 and $152,000 at September 30, 2009 and December 31, 2008, respectively.

Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, its fair value is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At September 30, 2009 and December 31, 2008, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management 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 totaled $14.4 million and $5.7 million at September 30, 2009 and December 31, 2008, respectively. Of such loans, $12.8 million had specific loss allowances aggregating $1.62 million at September 30, 2009 and $5.7 million had specific loss allowances aggregating $.84 million at December 31, 2008.

Assets measured at fair value on a recurring basis, including financial instruments for which the Company has elected the fair value option, are summarized below:

	September 30, 2009
	Fair Value Measurement Using
	Level 1		Level 2		Level 3		Assets at Fair Value
	(in thousands)
Assets
Loans held for sale	$	—	$	24,979	$	—	$	24,979
Securities available-for-sale		452		53,935		—		54,387
Total assets	$	452	$	78,914	$	—	$	79,366

13

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

Note L – Fair value of financial statements

The following represents the estimated fair values and carrying amounts of financial instruments at September 30, 2009 and December 31, 2008:

	September 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands)
Financial Assets:
Cash and due from banks	$	31,275	$	31,275	$	5,947	$	5,947
Federal funds sold		—		—		1		1
Securities available for sale		54,387		54,387		59,803		59,803
Securities held to maturity		853		891		1,116		1,138
Net loans held for sale		24,979		24,979		19,163		19,163
Net loans held for investment		530,791		531,963		495,664		496,270
Accrued interest receivable		2,168		2,168		2,102		2,102
Financial Liabilities:
Demand and savings deposits		330,993		330,993		211,888		211,888
Time deposits		263,870		264,086		286,176		287,039
Federal Home Loan Bank advances		7,202		7,320		56,856		57,057
Securities sold under agreements to repurchase		976		976		2,487		2,487
Federal funds purchased		—		—		4,104		4,104
Subordinated debt		9,011		9,011		8,955		8,955
Trust preferred debt		10,310		7,299		10,310		8,681
Accrued interest payable		1,065		1,065		1,593		1,593

Note M – Impact of Recently Adopted Accounting Standards

ASC 815Disclosures about Derivative Instruments and Hedging Activitiesrequires enhanced disclosures about an entity’s derivative and hedging activities to improve the transparency of financial reporting. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The adoption of this statement did not have a material impact on our consolidated financial statements.

ASC 805Business Combinations requires an acquirer in a business combination to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date. Relevance, completeness, and representation faithfulness of the information provided in financial reports about the assets acquired and liabilities assumed in a business combination are improved with implementation of this statement. This statement applies to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. This statement did not have an impact on our consolidated financial statements as no business combinations have been experienced.

In April 2009, the FASB updated ASC 820-10, “Fair Value Measurements and Disclosures” to provide guidance on determining fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly. This issuance provides guidance on estimating fair value when there has been a significant decrease in the volume and level of activity for the asset or liability and for identifying transactions that may not be orderly. The guidance requires entities to disclose the inputs and valuation techniques used to measure fair value and to discuss changes in valuation techniques and related inputs, if any, in both interim and annual periods. This guidance is effective for interim and annual periods ending after September 15, 2009, but entities may early adopt for the interim and annual periods ending after March 15, 2009. We adopted the aforementioned FSPs in the period ended March 31, 2009 as outlined in Note K.

14

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements—(Continued)

ASC 855Subsequent Events, is effective for September 30, 2009 interim financial statements and provides guidance similar to that in the auditing standards related to recognized and unrecognized subsequent events with required disclosure of the date that an entity had evaluated subsequent events and whether that date is the date of issuance of the financial statements. The adoption of this statement did not have a material impact on our consolidated financial statements.

ASC 105The FASB Accounting Standards Codification and The Hierarchy of Generally Accepted Accounting Principles codifies generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy), effective July 1, 2009. The codification is not intended to change GAAP but will represent a significant change in the way we research issues and reference U.S. GAAP. The adoption of this statement did not have a material impact on our consolidated financial statements.

ASC 860Accounting for Transfers of Financial Assets, requires more information about transfers of financial assets, including securitization transactions and the continuing exposure to the risks related to the transfer of financial assets. It eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. It is effective for annual reporting periods beginning after November 15, 2009. We are currently evaluating the future impact of this statement on our consolidated financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05,Fair Value Measurements and Disclosures (Topic 820) –Measuring Liabilities at Fair Value. This ASU provides amendments for fair value measurements of liabilities. It provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more techniques. ASU 2009-05 also clarifies that when estimating a fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. ASU 2009-05 is effective for the first reporting period (including interim periods) beginning after issuance or fourth quarter 2009. The Company is assessing the impact of ASU 2009-05 on our financial condition, results of operations, and disclosures.

Several other new accounting standards became effective during the periods presented or will be effective subsequent to September 30, 2009. None of these new standards had or is expected to have a significant impact on the Company’s consolidated financial statements.

15

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 $60.2 million, or 9.8%, from $616.6 million at December 31, 2008, to $676.8 million at September 30, 2009. During the nine months ended September 30, 2009, cash and due from banks increased by $25.3 million, while investment securities decreased by $5.7 million. Loans held for sale increased 30.4% during the first nine months of 2009 to $25.0 million at September 30, 2009 due to strong originations by our wholesale loan division. Loans held for investment increased by $29.4 million or 5.9% during the first nine months of 2009. We experienced good commercial and consumer loan demand in our primary lending markets, Guilford, Randolph, Alamance and Forsyth Counties, North Carolina in the first half of 2009. Loans held for investment declined slightly during the third quarter of 2009, primarily due to an increased focus on credit issues.

Liabilities. Total deposits increased by $96.8 million, or 19.4%, from $498.1 million at December 31, 2008, to $594.9 million at September 30, 2009. NOW, money market and savings accounts increased $112.3 million while time deposits declined $22.3 million during the first nine months of 2009. 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 declined $49.7 million during the first nine months to $7.2 million at September 30, 2009 due to strong deposit growth. We had approximately $23.7 million in out-of-market time deposits from other institutions and $38.3 million in brokered deposits at September 30, 2009, an increase of $0.6 million in these two types of accounts from December 31, 2008.

Stockholders’ Equity. Total stockholders’ equity was up $18.4 million at September 30, 2009 to $50.0 million from $31.6 million at December 31, 2008, primarily due to the issuance of $16 million in preferred stock to the U. S. Treasury in January 2009, retained income, and an increase in accumulated other comprehensive income.

Comparison of Results of Operations for the Three Months Ended September 30, 2009 and 2008

General. Net income for third quarter of 2009 was $169,000 compared to $704,000 in the third quarter of 2008. Net income (loss) available to common stockholders for the three months ended September 30, 2009 and 2008, amounted to $(108,000), or $(0.03) per diluted share and $704,000, or $0.21 per diluted share, respectively. Net income (loss) available to common stockholders represents net income less preferred stock dividends and related discount accretion. The decrease in net income available to common shareholders was primarily due to a higher provision for loan losses and

16

higher repossessed asset losses as credit conditions and asset values deteriorated in our markets during the third quarter of 2009. The unemployment rate in North Carolina rose to 10.8% at September 30, 2009 from 6.8% at September 30, 2008. Our primary lending market in the Piedmont Triad also experienced a similar unemployment rate increase in the past year with deteriorating economic conditions which have negatively impacted our borrowers. The commercial/retail bank segment reported a net loss of $247,000 for the three months ending September 30, 2009 due to higher provisions for loan losses and higher repossessed asset losses. On the other hand, our wholesale mortgage division reported quarterly net income of $416,000 for the three months ending September 30, 2009 due to lower mortgage rates and expanded operations.

Net interest income.Net interest income increased 32.5% to $5,115,000 for the three months ended September 30, 2009, from $3,860,000 for the three months ended September 30, 2008. Growth in interest earning assets and liabilities and a 39 basis point increase in the net yield on interest earning assets accounted for most of the higher net interest income in 2009. The increase in capital through the issuance of $16 million in preferred stock in early 2009 also contributed to increased net interest income. The net yield on interest earning assets, adjusted to a fully taxable basis, increased to 3.25% in the third quarter of 2009 from 2.86% in the third quarter of 2008. 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, 2009 and 2008.

17

Net Interest Income and Average Balance Analysis

	For the Three Months Ended September 30,
	2009						2008
	Average Balance (1.)		Interest Inc./Exp.		Average Yield/Cost		Average Balance (1.)		Interest Inc./Exp.		Average Yield/Cost
	(Dollars in thousands)
Interest-earning assets
Interest bearing deposits	$	29,905	$	19	0.25	%	$	128	$	1	3.10	%
Federal funds sold		439		2	1.81	%		1,668		7	1.66	%
Non-taxable investments (2.)		14,270		226	6.28	%		9,078		142	6.21	%
Taxable investments		40,777		526	5.12	%		50,006		655	5.20	%
Loan held for sale		24,697		320	5.14	%		9,621		150	6.19	%
Loans (3.)		523,019		7,192	5.46	%		470,730		7,059	5.95	%
Interest-earning assets		633,107		8,285				541,231		8,014
Interest-earning assets					5.25	%					5.87	%
Non interest-earning assets		46,673						30,710
Total assets	$	679,780					$	571,941
Interest-bearing liabilities
Interest checking	$	30,164	$	38	0.50	%	$	26,217	$	60	0.91	%
Money market and savings		245,977		1,150	1.85	%		154,305		1,063	2.73	%
Time certificates and IRAs		269,771		1,639	2.41	%		247,150		2,445	3.92	%
Other borrowings		46,069		271	2.33	%		78,259		542	2.75	%
Total interest-bearing liabilities		591,981		3,098				505,931		4,110
Cost on average
Interest-bearing liabilities					2.08	%					3.22	%
Non-interest-bearing liabilities
Demand deposits		33,716						29,032
Other liabilities		4,633						5,920
Total non-interest-bearing liabilities		38,349						34,952
Total liabilities		630,330						540,883
Stockholders’ equity		49,450						31,058
Total liabilities and equity	$	679,780					$	571,941
Net interest income			$	5,187					$	3,904
Net yield on average interest-earning assets					3.25	%					2.86	%
Interest rate spread					3.17	%					2.65	%

(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.

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Provision for loan losses.The provision for loan losses amounted to $1,737,000 for the three months ended September 30, 2009 compared to $350,000 for the three months ended September 30, 2008, an increase of 396.3%. The amount of the provision for loan losses increased primarily because of higher allowances for loan losses required on the elevated level of non-performing loans at September 30, 2009 and due to higher loan charge-offs for the third quarter of 2009. 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 $1,579,000 for the three months ended September 30, 2009, as compared to $1,034,000 for the three months ended September 30, 2008. The increase in 2009 was primarily attributable to additional mortgage banking income of $1,319,000 which was mostly generated by the wholesale mortgage division. The wholesale mortgage division has expanded rapidly to keep up with strong home mortgage demand during a period of low interest rates. Repossessed asset losses of $695,000 reduced non-interest income in the third quarter of 2009 and primarily resulted from write-downs of real estate owned (formerly a used auto dealership) and of a repossessed business jet.

Non-interest expense.Total non-interest expense amounted to $4,841,000 for the three months ended September 30, 2009, as compared to $3,434,000 for the three months ended September 30, 2008. Excluding an impairment charge on an investment security of $85,000 during the third quarter of 2009 and increased FDIC insurance premiums of $124,000, non-interest expenses increased $1,198,000, or 34.9% in 2009 from 2008. Higher salaries and employee benefits, occupancy and equipment expenses, and other expenses resulted primarily from growth in our wholesale mortgage division, from our new corporate headquarters and banking office in downtown Greensboro, and from an expanded office in Winston-Salem.

Income taxes.Income taxes amounted to $(53,000) for the three month period ended September 30, 2009, as compared to $406,000, or 36.6% of income before income taxes, for the three month period ended September 30, 2008. Non-taxable income exceeded net income before taxes in the third quarter of 2009 which resulted in an income tax benefit in the 2009 period.

Comparison of Results of Operations for the Nine Months Ended September 30, 2009 and 2008

General. Net income for the nine months ended September 30, 2009 and 2008, amounted to $1,169,000 and $2,014,000, respectively. Net income available to common stockholders for the nine months ended September 30, 2009 and 2008, amounted to $354,000, or $0.10 per diluted share and $2,014,000, or $0.49 per diluted share, respectively. The decrease in net income available to common shareholders was primarily due to a higher provision for loan losses and higher repossessed asset losses as credit conditions and real estate values deteriorated in our markets during 2009. An impairment of a marketable security of $850,000 during 2009 also contributed to the decline in net income.

Net interest income.Net interest income increased 27.2% to $14,167,000 for the nine months ended September 30, 2009, from $11,136,000 for the nine months ended September 30, 2008. Growth in interest earning assets and liabilities and an increase in the net yield on interest earning assets accounted for most of the higher net interest income in 2009. The net yield on average interest earning assets increased in 2009 due to progress in pricing loans and interest-bearing liabilities and from issuance of preferred stock of $16 million in January 2009.

Provision for loan losses.The provision for loan losses amounted to $4,968,000 for the nine months ended September 30, 2009 compared to $1,205,000 for the nine months ended September 30, 2008, an increase of 312.3%. The amount of the provision for loan losses increased primarily because of higher allowances for loan losses required on the elevated level of non-performing loans at September 30, 2009 and due to higher loan charge-offs in 2009. We believe the allowance for loan losses is appropriate based on asset quality indicators and other factors. The economic conditions in our markets have declined during 2009, resulting in higher unemployment and higher loan defaults. Our non-performing loans have increased 155% to $14,407,000 at September 30, 2009 from $5,656,000 at December 31, 2008.

19

Non-interest income.Total non-interest income amounted to $7,223,000 for the nine months ended September 30, 2009, as compared to $3,312,000 for the nine months ended September 30, 2008. The increase in 2009 was primarily attributable to additional mortgage banking income of $4,525,000 which was mostly generated by the wholesale mortgage division. The wholesale mortgage division has expanded rapidly to keep up with strong home mortgage demand during a period of low interest rates. Repossessed asset losses, consisting primarily of two write-downs of repossessed asset values, reduced non-interest income by $644,000 in 2009.

Non-interest expense.Total non-interest expense amounted to $14,832,000 for the nine months ended September 30, 2009, as compared to $10,127,000 for the nine months ended September 30, 2008, an increase of 46.6%. Excluding an impairment charge on an investment security of $850,000 and increased FDIC insurance premiums of $602,000, non-interest expenses increased $3,253,000, or 32.1% in 2009 from 2008. Higher expenses resulted primarily from growth in our wholesale mortgage division, from our new corporate headquarters and banking branch in downtown Greensboro, and from an expanded office in Winston-Salem.

Income taxes.Income taxes amounted to $421,000, or 26.5% of income before income taxes, for the nine months ended September 30, 2009, as compared to $1,102,000, or 35.4% of income before income taxes, for the nine months ended September 30, 2008. The decline in the income tax rate resulted from higher non-taxable income as a percentage of net income before taxes in the 2009 period.

Asset Quality

Non-performing assets, composed of foreclosed real estate, repossessions, non-accrual loans and restructured loans, totaled $22,083,000 at September 30, 2009, compared to $6,384,000 at December 31, 2008. Non-performing assets, as a percentage of total assets, was 3.26% at September 30, 2009, compared to 1.04% at December 31, 2008. There were no loans 90 days or more past due and still accruing interest at September 30, 2009 or at December 31, 2008. Foreclosed real estate and other repossessed assets were $7,676,000 at September 30, 2009 and $728,000 at December 31, 2008. The elevated level of non-performing assets at September 30, 2009 is related to the declining economic conditions in our lending markets. The unemployment rate in North Carolina increased to 10.8% in September 2009 from 6.8% in September 2008. The unemployment rate in North Carolina declined from its peak of 11.1% in May 2009. A large portion of our loans are made to businesses and real estate developers and are secured by real estate. Due to slowing 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 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 $1,623,000 at September 30, 2009 from $840,000 at December 31, 2008 as the level of non-performing loans increased $8,751,000 during the same period to $14,407,000 at September 30, 2009. The general section of our allowance for loan losses was $5,415,000 at September 30, 2009 and $4,920,000 at December 31, 2008. The general section of our allowance applies to performing loans and was determined by applying estimated loss ratios inherent in the loan portfolio, ranging from 0.25% on loans secured by stocks and deposits to 6.00% on unsecured consumer revolving loans, to categories of performing loans at each period end. The loss ratios in the general section of the allowance were increased for revolving residential lines and nonfarm nonresidential loans due to increased charge-offs in these categories during 2009. The general section also includes specific allowances for watch list loans which are still performing but carry a higher degree of risk because of declining credit factors.

20

The following table shows the composition of the loan portfolio, impaired loans, specific loan loss allowances on impaired loans, and year to date net loan charge-offs, all by loan type, at September 30, 2009:

	At September 30, 2009
					Impaired Loans				Year to Date Net Loan Charge-offs
	Loans Outstanding				Outstanding		Specific Loan Loss Allowances
	Outstanding		Percent
	(Dollars in thousand)
Loans secured by real estate:
Construction & land development	$	125,897	23.72	%	$	6,982	$	800	$	791
Revolving residential lines		55,218	10.40	%		204		107		697
Closed-end residential		58,255	10.98	%		1,732		231		331
Multifamily		15,568	2.93	%		—		—		—
Nonfarm nonresidential		185,931	35.03	%		2,396		169		1,428
Total loans secured by real estate		440,869	83.06	%		11,314		1,307		3,247
Commercial and industrial		82,133	15.47	%		2,780		281		387
Consumer		5,850	1.10	%		13		5		56
All other loans		1,938	0.37	%		300		30		—
Total loans held for investment	$	530,790	100.00	%	$	14,407	$	1,623	$	3,690

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. Recoveries of previously charged-off loans are added back to the allowance. Net loan charge-offs (charge-offs minus recoveries) totaled $3,690,000 for the nine months ended September 30, 2009 compared to $283,000 for the same period in 2008. Due to the higher loan charge-offs in 2009 and the higher specific loan loss allowances on impaired loans, the provision for loan losses, or amount charged to operating expense, increased to $4,968,000 for the nine months ended September 30, 2009 from $1,205,000 for the nine months ended September 30, 2008.

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, federal funds purchased from banks 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, federal funds sold, and investment securities available-for-sale 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 2008, we kept lower levels of short-term liquidity due to our strong loan growth, due to our attempts to minimize the negative impact of declining interest rates, and due to our decision not to match the irresponsible deposit pricing of some of our competitors. Short-term liquidity in the form of cash and due from banks increased in 2009 due to strong deposit growth and moderate loan growth. We also reduced borrowings from FHLB by $49.7 million in 2009 to $7.2 million at September 30, 2009 from $56.9 million at December 31, 2008 due to our strong deposit growth.

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

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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 September 30, 2009 and December 31, 2008, our levels of capital exceeded all applicable regulatory requirements.

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 million in subordinated debt through a private placement in the third quarter of 2008 to increase capital at the bank level.

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, 2009 and December 31, 2008, pre-approved but unused lines of credit for loans totaled approximately $129,724,000 and $108,650,000, respectively. In addition, we had $9,707,000 and $7,582,000 in standby letters of credit at September 30, 2009 and December 31, 2008, 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 Center office, the land for our new Greensboro headquarters, our office in Winston-Salem and an ATM out-parcel in Asheboro. Aggregate minimum lease payments over the next five years are $983,000 and $3,312,000 thereafter.

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ITEM 4T. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have conducted an evaluation of our disclosure controls and procedures as of September 30, 2009. 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 third quarter of 2009. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the third 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 is periodically involved incidental to the Company’s business. In the opinion of management, no material loss is expected from any of such pending claims or lawsuits.

Item 6. Exhibits

Exhibit No.	Description of Exhibit
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act.

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 10, 2009	By:	/S/    ROBERT T. BRASWELL
		Robert T. Braswell
		President and Chief Executive Officer
Date: November 10, 2009	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.
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1	Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act.

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