Carolina Bank (CLBH) 10-Q 2011 Q2 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 endedJune 30, 2011

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  x    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 August 11, 2011.

CAROLINA BANK HOLDINGS, INC.

INDEX

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)		2
Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010			2
Consolidated Statements of Operations for the three and six months ended June 30, 2011 and 2010			3
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2011 and 2010			4
Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2011			5
Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010			6
Notes to Consolidated Financial Statements			7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 4.	Controls and Procedures		29
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		30
Item 4.	(Reserved)		30
Item 6.	Exhibits		30
Exhibit 31.1 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act			33
Exhibit 31.2 Certification Pursuant to Section 302 of the Sarbanes-Oxley Act			35
Exhibit 32.1 Certification Pursuant to 18 U.S.C. Section 1350			37
Exhibit 101 Interactive data files providing financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, in XBRL (eXtensive Business Reporting Language)*

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

1

ITEM 1. Financial Statements

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Balance Sheets

	June 30,			December 31,
	2011			2010*
	(unaudited)
	(in thousands)
Assets
Cash and due from banks	$	5,053		$	5,116
Interest-bearing deposits with banks		25,781			17,710
Securities available-for-sale, at fair value		46,256			42,785
Securities held-to-maturity		479			563
Loans held for sale		39,507			53,961
Loans		501,144			514,029
Less allowance for loan losses		(13,439	)		(12,359	)
Net loans		487,705			501,670
Premises and equipment, net		18,336			18,622
Other real estate owned		11,513			9,848
Bank-owned life insurance		10,193			10,003
Other assets		15,449			16,423
Total assets	$	660,272		$	676,701
Liabilities and Stockholders’ Equity
Deposits
Non-interest bearing demand	$	44,622		$	43,564
NOW, money market and savings		312,771			303,203
Time		224,439			257,800
Total deposits		581,832			604,567
Advances from the Federal Home Loan Bank		3,121			3,165
Securities sold under agreements to repurchase		5,705			432
Subordinated debentures		19,451			19,414
Other liabilities and accrued expenses		5,172			4,841
Total liabilities		615,281			632,419
Commitments
Stockholders’ equity
Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding 16,000 shares in 2011 and 2010		14,991			14,811
Common stock, $1 par value; authorized 20,000,000 shares; issued and outstanding 3,387,045 in 2011 and 2010		3,387			3,387
Common stock warrants		1,841			1,841
Additional paid-in capital		15,852			15,834
Retained earnings		7,884			7,910
Stock in directors’ rabbi trust		(786	)		(718	)
Directors’ deferred fees obligation		786			718
Accumulated other comprehensive income		1,036			499
Total stockholders’ equity		44,991			44,282
Total liabilities and stockholders’ equity	$	660,272		$	676,701

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

2

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Operations (unaudited)

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
	(in thousands, except per share data)
Interest income
Loans	$	6,899		$	7,543		$	14,049		$	15,019
Investment securities, taxable		360			420			761			882
Investment securities, non taxable		147			164			309			326
Interest from deposits in banks		28			22			48			44
Total interest income		7,434			8,149			15,167			16,271
Interest expense
NOW, money market, savings		638			926			1,298			1,916
Time deposits		865			1,328			1,832			2,711
Other borrowed funds		187			225			375			454
Total interest expense		1,690			2,479			3,505			5,081
Net interest income		5,744			5,670			11,662			11,190
Provision for loan losses		1,650			4,700			3,350			6,688
Net interest income after provision for loan losses		4,094			970			8,312			4,502
Non-interest income
Service charges		256			235			487			451
Mortgage banking income		2,069			2,187			3,704			3,936
Gains on sale of investment securities		114			55			211			185
Repossessed asset gains (losses)		53			(140	)		53			(267	)
Other		128			165			275			330
Total non-interest income		2,620			2,502			4,730			4,635
Non-interest expense
Salaries and benefits		3,193			2,810			6,157			5,384
Occupancy and equipment		558			598			1,196			1,206
Professional fees		229			342			482			602
Outside data processing		181			216			400			457
FDIC insurance		334			262			719			519
Advertising and promotion		143			91			230			250
Stationery, printing and supplies		134			132			273			246
Impairment of repossessed assets		1,423			962			1,423			1,469
Repossessed asset expenses		315			259			609			422
Other		512			500			1,003			895
Total non-interest expense		7,022			6,172			12,492			11,450
Income (loss) before income taxes		(308	)		(2,700	)		550			(2,313	)
Income tax benefit		(250	)		(1,132	)		(4	)		(1,044	)
Net income (loss)		(58	)		(1,568	)		554			(1,269	)
Dividends and accretion on preferred stock		292			288			580			573
Net (loss) allocable to common stockholders	$	(350	)	$	(1,856	)	$	(26	)	$	(1,842	)
Net (loss) per common share
Basic	$	(0.10	)	$	(0.55	)	$	(0.01	)	$	(0.54	)
Diluted	$	(0.10	)	$	(0.55	)	$	(0.01	)	$	(0.54	)

See accompanying notes to consolidated financial statements.

3

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (unaudited)

	Three Months						Six Months
	Ended June 30,						Ended June 30,
	2011			2010			2011			2010
	(in thousands)
Net income (loss)	$	(58	)	$	(1,568	)	$	554		$	(1,269	)
Other comprehensive income:
Investment securities available for sale:
Unrealized holding gains		624			70			1,024			289
Tax effect		(212	)		(24	)		(348	)		(98	)
Reclassification of gains recognized in net income		(114	)		(55	)		(211	)		(185	)
Tax effect		39			19			72			63
		337			10			537			69
Comprehensive income (loss)	$	279		$	(1,558	)	$	1,091		$	(1,200	)

See accompanying notes to consolidated financial statements.

4

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statement of Stockholders’ Equity (unaudited)

															Stock in			Directors’		Accumulated
			Discount on					Common		Additional					Directors’			Deferred		Other
	Preferred		Preferred			Common		Stock		Paid-In		Retained			Rabbi			Fees		Comprehensive
	Stock		Stock			Stock		Warrants		Capital		Earnings			Trust			Obligation		Income		Total
	(in thousands)
Balance, December 31, 2010	$	16,000	$	(1,189	)	$	3,387	$	1,841	$	15,834	$	7,910		$	(718	)	$	718	$	499	$	44,282
Comprehensive income
Net income		—		—			—		—		—		554			—			—		—		554
Other comprehensive income -
Unrealized gain on securities available for sale, net of tax of $276		—		—			—		—		—		—			—			—		537		537
Comprehensive income																							1,091
Directors’ deferred fees paid less deferrals of new fees		—		—			—		—		—		—			(68	)		68		—		—
Stock options expensed		—		—			—		—		18		—			—			—		—		18
Amortization of preferred stock discount		—		180			—		—		—		(180	)		—			—		—		—
Preferred stock dividends		—		—			—		—		—		(400	)		—			—		—		(400	)
Balance, June 30, 2011	$	16,000	$	(1,009	)	$	3,387	$	1,841	$	15,852	$	7,884		$	(786	)	$	786	$	1,036	$	44,991

See accompanying notes to consolidated financial statements.

5

Carolina Bank Holdings, Inc. and Subsidiary

Consolidated Statements of Cash Flows (unaudited)

	Six Months
	Ended June 30,
	2011			2010
	(in thousands)
Cash flows from operating activities
Net income (loss)	$	554		$	(1,269	)
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		3,350			6,688
Depreciation		449			476
Increase in cash surrender value of bank-owned life insurance		(190	)		(194	)
Equity-based compensation		18			18
Deferred income tax (benefit)		(600	)		(239	)
Amortization (accretion), net		7			(37	)
Amortization of subordinated debt discount		37			17
Loss (gain) on sale of repossessed assets		(53	)		267
Gain on sale of investments		(211	)		(185	)
Impairment of repossessed assets		1,423			1,469
(Increase) decrease in loans held for sale		18,085			(12,883	)
Net gains from the sale of loans held for sale		(3,631	)		(3,936	)
(Increase) decrease in other assets		1,297			(1,934	)
Increase in accrued expenses and other liabilities		331			279
Net cash provided by (used for) operating activities		20,866			(11,463	)
Cash flows from investing activities
Purchases of investment securities available-for-sale		(16,765	)		(2,073	)
Maturities and calls of securities available-for-sale		4,048			—
Repayments from mortgage-backed securities available-for-sale		1,532			3,357
Repayments from mortgage-backed securities held-to-maturity		83			52
Reduction (Origination) of loans, net of principal collected		5,559			(10,653	)
Additions to premises and equipment		(163	)		(90	)
Proceeds from sales of assets		10,754			9,221
Net cash provided by (used for) investing activities		5,048			(186	)
Cash flows from financing activities
Net increase (decrease) in deposits		(22,735	)		9,056
Net (decrease) in Federal Home Loan Advances		(44	)		(5,039	)
Increase in securities sold under agreements to repurchase		5,273			4,557
Dividends paid		(400	)		(400	)
Net cash provided by (used for) financing activities		(17,906	)		8,174
Net increase in cash and cash equivalents		8,008			(3,475	)
Cash and cash equivalents at beginning of period		22,826			40,455
Cash and cash equivalents at end of period	$	30,834		$	36,980
Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	3,738		$	5,212
Cash paid during the period for income taxes	$	400		$	450
Supplemental disclosure of non-cash transactions
Transfer of loans to foreclosed assets	$	5,056		$	1,274
Accretion of preferred stock discount	$	180		$	166

See accompanying notes to consolidated financial statements.

6

Carolina Bank Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Note A – Summary

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

The Bank was incorporated in August 1996, and began banking operations in November 1996. It is engaged in lending and deposit gathering activities in Guilford, Alamance, Randolph and Forsyth Counties, North Carolina and operates under the laws of North Carolina, the rules and regulations of the Federal Deposit Insurance Corporation and the North Carolina Commissioner of Banks. The Bank has eight full-service banking locations, comprised of four in Greensboro and one in each of Asheboro, Burlington, High Point, and Winston-Salem. A mortgage loan production office was opened in Burlington in July 2010. 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 six months ended June 30, 2011 and 2010, in conformity with accounting principles generally accepted in the United States of America. Operating results for the three and six months ended June 30, 2011 and 2010 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, 2010 and 2009, filed with the Securities and Exchange Commission as part of the Company’s annual report on Form 10-K. These financial statements should be read in conjunction with the annual financial statements.

Note D – Use of estimates

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

7

Note E – Stock compensation plans

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

There were no stock option grants in 2010 or the first six months of 2011. 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 $18,000 in the first six months of 2011 and 2010. At June 30, 2011, there was $53,000 of total unrecognized compensation cost related to unvested share-based compensation which is expected to be recognized over a weighted-average period of 1.5 years.

Note F – Earnings per share

Earnings per share has been determined on a basic basis and a diluted basis which considers potential stock issuances. For the quarters ended June 30, 2011 and 2010, basic earnings per share has been computed based upon the weighted average common shares outstanding of 3,387,045.

The only potential issuances of Company stock are stock options granted to various 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 six months ended June 30, 2011 and 2010.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2011			2010			2011			2010
	(in thousands, except per share data)
Net loss allocable to common shareholders	$	(350	)	$	(1,856	)	$	(26	)	$	(1,842	)
Weighted average outstanding shares - basic		3,387			3,387			3,387			3,387
Dilutive effect of stock options		—			—			—			—
Weighted average shares - diluted		3,387			3,387			3,387			3,387
Diluted loss per share	$	(0.10	)	$	(0.55	)	$	(0.01	)	$	(0.54	)

For the three months ended June 30, 2011 and 2010, there were 519,102 and 552,781 shares, respectively, of options and 357,675 shares of warrants that were excluded in computing diluted common shares outstanding given that they were anti-dilutive since the exercise price exceeded the average market price for the period.

8

Note G – Preferred stock and common stock warrants

In December 2008, the shareholders of the Company approved an amendment to the Articles of Incorporation authorizing the issuance of up to 1,000,000 shares of preferred stock, no par value. In January 2009, the Company issued 16,000 shares of preferred stock to the U.S. Treasury and received $16 million under the Capital Purchase Program. The Company granted a warrant to purchase 357,675 shares of common stock at a price of $6.71 per share to the U.S. Treasury as part of the preferred stock transaction. In accordance with accounting principles, the preferred stock and common stock warrant were valued independently and their relative fair market values were allocated to the $16 million received. Under the relative value method, $14,159,000 was allocated to the preferred stock and $1,841,000 to the common stock warrant. The discount of $1,841,000 on the preferred stock is accreted over five years using the effective yield method, thereby increasing preferred stock dividends. The accretion of the discount for the first six months of 2011 and 2010 was $180,000 and $166,000, respectively. Dividends at 5% per annum are payable quarterly for the first five years; the dividend increases to 9% per annum after the fifth year.

Note H – Subordinated debentures

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

In the third quarter of 2008, Carolina Bank issued $9,300,000 of unsecured junior subordinated notes to outside investors which accrue and pay interest quarterly at three month LIBOR plus 4% per annum. The notes, net of unamortized expenses associated with the offering, equal to $9,141,000 and $9,104,000 at June 30, 2011 and December 31, 2010, 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

Note I – Operating segments

The Company is considered to have three principal business segments in 2011 and 2010, the Commercial/Retail Bank, the Mortgage Division, and the Holding Company. The Mortgage Division began originating home mortgage loans through third parties and selling these loans to investors in late 2007. A retail mortgage operation was added to the division in July 2010. Financial performance, reflective of inter-company eliminations, for the three and six months ended June 30, 2011 and 2010, and selected balance sheet information, reflective of inter-company eliminations, at June 30, 2011 and 2010 for each segment is as follows:

	Three months ending June 30, 2011											Three months ending June 30, 2010
	Commercial/Retail			Mortgage		Holding						Commercial/Retail			Mortgage		Holding
	Bank			Division		Company			Total			Bank			Division		Company			Total
	(in thousands)											(in thousands)
Interest income	$	7,179		$	253	$	2		$	7,434		$	7,690		$	457	$	2		$	8,149
Interest expense		1,385			247		58			1,690			1,978			457		44			2,479
Net interest income		5,794			6		(56	)		5,744			5,712			—		(42	)		5,670
Provision for loan losses		1,650			—		—			1,650			4,700			—		—			4,700
Net interest income after provision for loan losses		4,144			6		(56	)		4,094			1,012			—		(42	)		970
Non-interest income		551			2,069		—			2,620			368			2,134		—			2,502
Non-interest expense		5,321			1,674		27			7,022			4,872			1,261		39			6,172
Income (loss) before income taxes		(626	)		401		(83	)		(308	)		(3,492	)		873		(81	)		(2,700	)
Income tax (benefit) expense		(385	)		163		(28	)		(250	)		(1,463	)		358		(27	)		(1,132	)
Net income (loss)	$	(241	)	$	238	$	(55	)	$	(58	)	$	(2,029	)	$	515	$	(54	)	$	(1,568	)
Total Assets	$	619,450		$	40,426	$	396		$	660,272		$	656,774		$	47,191	$	375		$	704,340
Net loans		487,705			39,507		—			527,212			533,486			46,207		—			579,693
Equity		280			383		44,328			44,991			(2,102	)		930		47,531			46,359
	Six months ending June 30, 2011											Six months ending June 30, 2010
	Commercial/Retail			Mortgage		Holding						Commercial/Retail			Mortgage		Holding
	Bank			Division		Company			Total			Bank			Division		Company			Total
	(in thousands)											(in thousands)
Interest income	$	14,610		$	553	$	4		$	15,167		$	15,499		$	768	$	4		$	16,271
Interest expense		2,859			531		115			3,505			4,229			768		84			5,081
Net interest income		11,751			22		(111	)		11,662			11,270			—		(80	)		11,190
Provision for loan losses		3,350			—		—			3,350			6,688			—		—			6,688
Net interest income after provision for loan losses		8,401			22		(111	)		8,312			4,582			—		(80	)		4,502
Non-interest income		1,026			3,704		—			4,730			806			3,829		—			4,635
Non-interest expense		9,354			3,086		52			12,492			9,105			2,277		68			11,450
Income (loss) before income taxes		73			640		(163	)		550			(3,717	)		1,552		(148	)		(2,313	)
Income tax (benefit) expense		(206	)		257		(55	)		(4	)		(1,616	)		622		(50	)		(1,044	)
Net income (loss)	$	279		$	383	$	(108	)	$	554		$	(2,101	)	$	930	$	(98	)	$	(1,269	)
Total Assets	$	619,450		$	40,426	$	396		$	660,272		$	656,774		$	47,191	$	375		$	704,340
Net loans		487,705			39,507		—			527,212			533,486			46,207		—			579,693
Equity		280			383		44,328			44,991			(2,102	)		930		47,531			46,359

The Mortgage Division experienced strong growth in originations and related fee income during the last half of 2010 due to low interest rates and due to the purchase of a retail loan production office in July of 2010. Originations and related fee income declined in the first six months of 2011 due to higher interest rates and slowing refinancing by borrowers. Interest rate risk has been minimized by obtaining optional loan sales commitments when loan origination commitments are made or by entering into hedging transactions whereby mortgage backed securities are sold for the estimated closing value of loan commitments. Borrower fraud is a risk that has been minimized by in-house underwriting and by obtaining indemnification from the originating bank or broker for the risks the Company assumes. Warranty expenses and related warranty liabilities were established in 2009 to provide for potential claims that might arise from borrower fraud or underwriting errors. Warranty expenses were $98,000 and $82,000 for the three months ending June 30, 2011 and 2010, respectively, and were $207,000 and $148,000 for the six months ending June 30, 2011 and 2010, respectively. The warranty liability, which is available to fund future warranty claims, was $635,000 and $428,000 at June 30, 2011 and December 31, 2010, respectively. Three warranty claims totaling $346,000 have been paid since establishment of the mortgage division in 2007. Another known claim of approximately $40,000 will be paid in the third quarter of 2011.

10

Note J – Securities

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

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
			(in thousands)
June 30, 2011
Available for sale
Municipal securities	$	16,579	$	353	$	47	$	16,885
FNMA, FHLMC, and GNMA mortgage-backed securities		18,614		1,176		—		19,790
Corporate securities		9,228		49		26		9,251
Unrestricted stock		266		64		—		330
	$	44,687	$	1,642	$	73	$	46,256
Held to maturity
FNMA and GNMA mortgage-backed securities		479		33		—		512
	$	479	$	33	$	—	$	512
December 31, 2010
Available for sale
U.S. agency obligations	$	1,000	$	11	$	—	$	1,011
Municipal securities		19,685		74		488		19,271
FNMA, FHLMC, and GNMA mortgage-backed securities		15,275		998		—		16,273
Corporate securities		5,536		20		7		5,549
Unrestricted stock		533		148		—		681
	$	42,029	$	1,251	$	495	$	42,785
Held to maturity
FNMA and GNMA mortgage-backed securities		563		33		—		596
	$	563	$	33	$	—	$	596

11

Investments are periodically evaluated for any impairment which would be deemed other than temporary. Based upon these evaluations, the Company did not deem any debt securities to be impaired during 2010 or the first six months of 2011. The deterioration in value is primarily attributable to changes in market interest rates and the Company expects these securities to be paid in full and that any temporary impairment will be fully recoverable prior to or at maturity. The Company has the ability and intent to hold the investment securities for a reasonable period of time sufficient for a forecasted recovery or until maturity. Information pertaining to temporarily impaired securities with gross unrealized losses at June 30, 2011 and December 31, 2010, 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
			Gross				Gross				Gross
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
	(in thousands)
June 30, 2011:
Municipal securities	$	3,037	$	47	$	—	$	—	$	3,037	$	47
Corporate securities		2,862		26		—		—		2,862		26
Total	$	5,899	$	73	$	—	$	—	$	5,899	$	73
December 31, 2010:
Municipal securities	$	14,613	$	488	$	—	$	—	$	14,613	$	488
Corporate securities		1,020		7		—		—		1,020		7
Total	$	15,633	$	495	$	—	$	—	$	15,633	$	495

12

Note K – Loans and allowance for loan losses

The activity in the allowance for loan losses for the first six months of 2011 and 2010 and related asset balances at June 30, 2011 and December 31, 2010 is summarized as follows:

	Construction &			Commercial			Home Equity			Residential			Commercial			Consumer
	Development			Real Estate			Lines			Real Estate			& Industrial			& Other			Unallocated			Total
	(in thousands)
Allowance for loan losses:
2011
Beginning of year balance	$	4,478		$	3,364		$	818		$	846		$	2,746		$	79		$	28		$	12,359
Provision for loan losses		2,495			390			576			277			(388	)		26			(26	)		3,350
Charge-offs		(2,206	)		(277	)		(72	)		(159	)		(255	)		(4	)		—			(2,973	)
Recoveries		163			472			15			—			52			1			—			703
Balance at June 30,	$	4,930		$	3,949		$	1,337		$	964		$	2,155		$	102		$	2		$	13,439
																				��
2010
Beginning of year balance	$	2,993		$	2,961		$	903		$	856		$	2,025		$	333		$	10		$	10,081
Provision for loan losses		2,896			1,065			59			510			2,017			131			10			6,688
Charge-offs		(2,625	)		(418	)		(352	)		(646	)		(2,310	)		(222	)		—			(6,573	)
Recoveries		17			4			—			12			40			1			—			74
Balance at June 30,	$	3,281		$	3,612		$	610		$	732		$	1,772		$	243		$	20		$	10,270
Balances at June 30, 2011
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	3,115		$	1,126		$	744		$	269		$	922		$	6		$	—		$	6,182
Ending balance collectively evaluated for impairment	$	1,815		$	2,823		$	593		$	695		$	1,233		$	96		$	2		$	7,257
Loans Outstanding:
Balance at June 30,	$	56,865		$	247,993		$	62,550		$	59,141		$	67,520		$	7,075		$	—		$	501,144
Ending balance individually evaluated for impairment	$	16,727		$	20,379		$	2,593		$	4,382		$	6,690		$	14		$	—		$	50,785
Ending balance collectively evaluated for impairment	$	40,138		$	227,614		$	59,957		$	54,759		$	60,830		$	7,061		$	—		$	450,359
Balances at December 31, 2010
Allowance for loan losses:
Ending balance individually evaluated for impairment	$	2,122		$	648		$	106		$	134		$	1,125		$	7		$	—		$	4,142
Ending balance collectively evaluated for impairment	$	2,356		$	2,716		$	712		$	712		$	1,621		$	72		$	28		$	8,217
Loans Outstanding:
Balance at December 31,	$	113,564		$	198,985		$	63,312		$	56,993		$	72,956		$	8,219		$	—		$	514,029
Ending balance individually evaluated for impairment	$	23,576		$	5,187		$	833		$	1,660		$	2,625		$	20		$	—		$	33,901
Ending balance collectively evaluated for impairment	$	89,988		$	193,798		$	62,479		$	55,333		$	70,331		$	8,198		$	—		$	480,127

13

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

	Number of Days Past Due												Loans Past Due 90 Days
					90 Days		Total				Total		or More
	30-59 Days		60-89 Days		or More		Past Due		Current		Loans		& Accruing
	(in thousands)
At June 30, 2011
Real Estate Loans:
Construction & development	$	—	$	—	$	9,410	$	9,410	$	47,455	$	56,865	$	—
Commercial real estate		956		317		11,367		12,640		235,353		247,993		—
Home equity lines		35		—		999		1,034		61,516		62,550		—
Residential real estate		319		37		5,786		6,142		52,999		59,141		39
Total real estate		1,310		354		27,562		29,226		397,323		426,549		39
Commercial & industrial		270		190		2,290		2,750		64,770		67,520		—
Consumer & other		10		—		14		24		7,051		7,075		—
Total loans	$	1,590	$	544	$	29,866	$	32,000	$	469,144	$	501,144	$	39
At December 31, 2010
Real Estate Loans:
Construction & development	$	—	$	—	$	11,983	$	11,983	$	101,581	$	113,564	$	—
Commercial real estate		783		—		12,682		13,465		185,520		198,985		2,326
Home equity lines		245		—		832		1,077		62,235		63,312		—
Residential real estate		1,038		290		2,060		3,388		53,605		56,993		—
Total real estate		2,066		290		27,557		29,913		402,941		432,854		2,326
Commercial & industrial		71		3		2,462		2,536		70,420		72,956		—
Consumer & other		—		—		20		20		8,199		8,219		—
Total loans	$	2,137	$	293	$	30,039	$	32,469	$	481,560	$	514,029	$	2,326

Loans are determined to be impaired when, based on current information and events, it is probable that all amounts will not be collected when due according to the contractual terms of the original loan agreement. At June 30, 2011 and December 31, 2010, the total recorded investment in impaired loans amounted to approximately $50,785,000 and $33,901,000, respectively. Of these impaired loans, $29,827,000 and $27,713,000 were on non-accrual at June 30, 2011 and December 31, 2010, respectively.

14

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

	Impaired Loans
	At end of period						For Period Ended*
			Unpaid		Related		Average		Interest
	Recorded		Principal		Loan Loss		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
	(in thousands)
June 30, 2011
With no related allowance recorded
Real Estate Loans:
Construction & development	$	1,774	$	1,903	$	—	$	1,979	$	26
Commercial real estate		11,110		11,258		—		11,147		192
Home equity lines		1,209		1,224		—		1,214		22
Residential real estate		3,016		3,122		—		2,722		56
Total real estate		17,109		17,507		—		17,062		296
Commercial & industrial		4,209		4,209		—		4,256		84
Consumer & other		—		—		—		—		—
Total loans	$	21,318	$	21,716	$	—	$	21,318	$	380
With an allowance recorded
Real Estate Loans:
Construction & development	$	14,953	$	15,023	$	3,115	$	15,435	$	65
Commercial real estate		9,269		9,342		1,126		9,323		226
Home equity lines		1,384		1,394		744		1,386		36
Residential real estate		1,366		1,401		269		1,394		35
Total real estate		26,972		27,160		5,254		27,538		362
Commercial & industrial		2,481		2,500		922		2,505		53
Consumer & other		14		16		6		17		1
Total loans	$	29,467	$	29,676	$	6,182	$	30,060	$	416
December 31, 2010
With no related allowance recorded
Real Estate Loans:
Construction & development	$	7,233	$	7,474	$	—	$	7,712	$	207
Commercial real estate		3,141		4,032		—		3,651		83
Home equity lines		692		835		—		761		12
Residential real estate		996		1,207		—		1,163		25
Total real estate		12,062		13,548		—		13,287		327
Commercial & industrial		1,061		1,061		—		1,113		20
Consumer & other		—		—		—		—		—
Total loans	$	13,123	$	14,609	$	—	$	14,400	$	347
With an allowance recorded
Real Estate Loans:
Construction & development	$	16,343	$	19,880	$	2,122	$	20,166	$	398
Commercial real estate		2,046		2,060		648		2,057		82
Home equity lines		141		180		106		160		—
Residential real estate		664		671		134		686		27
Total real estate		19,194		22,791		3,010		23,069		507
Commercial & industrial		1,564		1,719		1,125		1,771		66
Consumer & other		20		21		7		25		2
Total loans	$	20,778	$	24,531	$	4,142	$	24,865	$	575

* period ended June 30, 2011 includes 6 months and period ended December 31, 2010 includes 12 months

15

Loans that are past due 90 days or more or where there is serious doubt as to collectability are placed on non-accrual status. Non-accrual loans are not returned to accrual status unless principal and interest are current and borrowers have demonstrated the ability to make contractual payments. Accrued interest is reversed through a charge to income when loans are placed on non-accrual and future payments on non-accrual loans are generally applied to principal. The following is a summary of non-accrual loans at June 30, 2011 and December 31, 2010:

	June 30,		December 31,
	2011		2010
	(in thousands)
Real Estate Loans:
Construction & development	$	9,410	$	11,983
Commercial real estate		11,367		10,356
Home equity lines		999		832
Residential real estate		5,747		2,060
Total real estate		27,523		25,231
Commercial & industrial		2,290		2,462
Consumer & other		14		20
Total loans	$	29,827	$	27,713

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

• Pass - Acceptable loans

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

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

16

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

	Outstanding Loans at June 30, 2011 and December 31, 2010
	Construction &				Commercial				Home Equity
	Development				Real Estate				Lines of Credit
	2011		2010		2011		2010		2011		2010
	(in thousands)
Pass	$	38,145	$	83,697	$	213,553	$	169,845	$	60,299	$	60,002
Special Mention		1,052		—		4,262		3,602		336		1,683
Criticized		17,668		29,867		30,178		25,538		1,915		1,627
TOTAL	$	56,865	$	113,564	$	247,993	$	198,985	$	62,550	$	63,312
	Residential				Commercial &				Consumer
	Real Estate				Industrial				& Other
	2011		2010		2011		2010		2011		2010
	(in thousands)
Pass	$	49,292	$	52,804	$	60,253	$	68,077	$	7,046	$	8,183
Special Mention		122		326		176		251		15		16
Criticized		9,727		3,863		7,091		4,628		14		20
TOTAL	$	59,141	$	56,993	$	67,520	$	72,956	$	7,075	$	8,219

During 2011 and 2010, the Company restructured certain loans to improve the likelihood that the loans would be repaid in full under the modified terms in accordance with reasonable repayment schedules. Management evaluates each of these loans in accordance with generally accepted accounting principles to determine whether they should be reported as troubled debt restructurings. At June 30, 2011 and December 31, 2010, the Company had troubled debt restructurings of $25,148,000 and $5,328,000, respectively. Of these troubled debt restructurings, $8,010,000 and $356,000 were on non-accrual at June 30, 2011 and December 31, 2010, respectively.

Note L – Fair value measurements

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

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

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

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

Level 3 – unobservable inputs.

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

17

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.

Assets measured at fair value on a recurring basis at June 30, 2011 and December 31, 2010 are summarized below:

	Assets
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
			(in thousands)
At June 30, 2011:
Securities available-for-sale	$	46,256	$	330	$	45,926	$	—
At December 31, 2010:
Securities available-for-sale	$	42,785	$	681	$	42,104	$	—

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

Loans Held for Sale

Loans held for sale are carried at the lower of cost or market value. The fair value of loans held for sale is based on what secondary markets are currently offering for portfolios with similar characteristics. As such, the Company classifies loans subjected to nonrecurring fair value adjustments as Level 2 valuation.

Impaired Loans

The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Fair values of impaired loans are generally estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Those 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 June 30, 2011 and December 31, 2010, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as Level 2 valuation. When current 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 Level 3 valuation.

Other Real Estate Owned

Fair values of other real estate owned are carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised values of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as Level 2 valuation. 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 foreclosed asset as Level 3 valuation.

18

Securities Held to Maturity

The fair values of securities held to maturity are recorded on a non-recurring basis when an impairment in value that is deemed to be other than temporary occurs. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. At June 30, 2011, there were no fair value adjustments related to $479,000 of securities held to maturity.

Assets measured at fair value on a non-recurring basis at June 30, 2011 and December 31, 2010 are summarized below:

	Assets
	Measured at		Fair Value Measured Using
Description	Fair Value		Level 1		Level 2		Level 3
			(in thousands)
At June 30, 2011:
Loans held for sale	$	39,507	$	—	$	39,507	$	—
Impaired loans		50,785		—		—		50,785
Other real estate owned		11,513		—		—		11,513
At December 31, 2010:
Loans held for sale	$	53,961	$	—	$	53,961	$	—
Impaired loans		33,901		—		—		33,901
Other real estate owned		9,848		—		—		9,848

19

The assumptions used in estimating the fair value of the Company’s financial instruments are detailed below. Where quoted prices are not available, fair values are based on estimates using discounted cash flows and other valuation techniques. The use of discounted cash flows can be significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following disclosures should not be considered an indication of the liquidation value of the Company, but rather represent a good-faith estimate of the increase or decrease in value of financial instruments held by the Company since purchase, origination or issuance.

Cash and due from banks: The carrying amount approximates fair value.

Interest-bearing deposits with banks: The carrying amount approximates fair value.

Securities available for sale and securities held to maturity: Fair values for debt securities are based on quoted market prices or discounted cash flows using discount rates of similar quoted securities. Unrestricted stock is valued at its quoted market price.

Loans held for sale: Fair values are based on commitment prices entered into to sell specific loans outstanding or on estimated commitment prices that could be obtained to sell loans if no commitment exists.

Loans: For variable rate loans, fair values are based on carrying values. Fixed rate commercial, other installment, and certain real estate mortgage loans are valued using discounted cash flows. The discount rates used to determine the present value of these loans are based on interest rates currently being charged by the Company on comparable loans as to credit risk and term.

Off-balance sheet instruments: The Company’s unfunded lines of credit and loan commitments are negotiated at current market rates and are relatively short-term in nature.

Deposit liabilities: The fair values of demand deposits are equal to the carrying value of such deposits. Demand deposits include non-interest bearing demand deposits, savings accounts, NOW accounts and money market demand accounts. Discounted cash flows have been used to value fixed rate and variable rate term deposits. The discount rate used is based on interest rates currently being offered by the Company on comparable deposits as to amount and term.

Advances from the Federal Home Loan Bank: For variable rate advances, fair values are based on carrying values. Fixed rate advances are valued using discounted cash flows based on rates currently available to the Company on comparable borrowings.

Short-term borrowings: The carrying value of securities sold under agreements to repurchase approximates the fair value.

Subordinated debt: The carrying value of subordinated debt approximates the fair value, since the interest rate is variable and since the terms are similar to current offerings.

Trust preferred debt: The fair value of trust preferred debt was determined by discounting cash flows using a rate 3% higher than the actual current rate over an estimated remaining term of fourteen years in 2011 and 2010. The trust preferred debt was issued at favorable rates in 2004, and current rates are approximately 3% higher when available.

The following represents the estimated fair values and carrying amounts of financial instruments at June 30, 2011 and December 31, 2010:

	June 30,				December 31,
	2011				2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(in thousands)
Financial Assets:
Cash and due from banks	$	5,053	$	5,053	$	5,116	$	5,116
Interest-bearing deposits with banks		25,781		25,781		17,710		17,710
Securities available for sale		46,256		46,256		42,785		42,785
Securities held to maturity		479		512		563		596
Net loans held for sale		39,507		39,507		53,961		53,961
Net loans held for investment		487,705		488,109		501,670		500,915
Accrued interest receivable		1,917		1,917		2,063		2,063
Financial Liabilities:
Demand and savings deposits		357,393		357,393		346,767		346,767
Time deposits		224,439		225,916		257,800		259,510
Federal Home Loan Bank advances		3,121		3,121		3,165		3,165
Securities sold under agreements to repurchase		5,705		5,705		432		432
Subordinated debt		9,141		9,141		9,104		9,104
Trust preferred debt		10,310		7,393		10,310		7,403
Accrued interest payable		460		460		693		693

Note M – Derivatives and financial instruments

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

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

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

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The table below provides the carrying values of derivative instruments at June 30, 2011 and December 31, 2010:

	Carrying Value		Carrying Value		Gain (Loss)			Notional Amount
Derivatives designated as	of Assets		of Liabilities		in Income			of Derivative
hedging instruments:	(in thousands)
At June 30, 2011:
Mortgage loan rate lock commitments	$	148	$	—	$	148		$	—
Mortgage backed securities forward sales	$	8	$	35	$	(27	)	$	17,750
At December 31, 2010:
Mortgage loan rate lock commitments	$	138	$	—	$	138		$	—
Mortgage backed securities forward sales	$	—	$	55	$	(55	)	$	12,500

Prior to October 2010, the Company sold mortgage loans on a best efforts basis whereby optional commitments to sell mortgage loans were consummated at approximately the same time that optional commitments were given to borrowers to originate the loans. Conventional loans which represent the majority of mortgage originations by the Mortgage Division are still sold on a best efforts basis.

Note N – Impact of recently adopted accounting standards

In April 2011, the Financial Accounting Standard Board (“FASB”) amended existing guidance for assisting a creditor in determining whether a restructuring is a troubled debt restructuring (“TDR”). The amendments clarify the guidance for a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. This guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on newly identified troubled debt restructurings, the amendments should be applied prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has not determined the impact, if any, upon the adoption of the standard.

In May 2011, the FASB issued an amendment to achieve common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective during interim and annual periods beginning after December 15, 2011. The Company is currently evaluating the impact of this amendment on the consolidated financial statements.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in a two separate consecutive statement approach. The adoption of this amendment will change the presentation of the components of comprehensive income for the Company as part of the consolidated statement of shareholder’s equity. This amendment is effective for fiscal and interim periods beginning after December 15, 2011.

Several other new accounting standards became effective during the periods presented or will be effective subsequent to June 30, 2011. None of these new standards had or is expected to have a significant impact on the Company’s consolidated financial statements.

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Note O – Commitments

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At June 30, 2011 and December 31, 2010, pre-approved but unused lines of credit for loans totaled approximately $114,536,000 and $109,728,000, respectively. In addition, we had $8,126,000 and $8,339,000 in standby letters of credit at June 30, 2011 and December 31, 2010, 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 Greensboro headquarters, our office in Winston-Salem, and a mortgage loan office in Burlington. Aggregate minimum lease payments over the next five years are $1,788,000 and $3,036,000 thereafter.

Other assets include a net investment of $1,052,000 in a limited partnership which owns low income housing projects and provides income tax losses and credits to the Company. The Company is committed to an additional investment of $1,724,000 in this limited partnership.

Note P – Reclassification

Certain amounts in the 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation.

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

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

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

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

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

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

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

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

• the elimination of certain trading activities by banks;

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

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

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

The Company is unable to predict the extent to which the Dodd-Frank Act or the forthcoming rules and regulations will impact the Company’s business. However, the Company believes that certain aspects of the new legislation, including, without limitation, the additional cost of higher deposit insurance coverage and the costs of compliance with disclosure

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and reporting requirements and examinations could have a significant impact on the Company’s business, financial condition, and results of operations. Additionally, the Company cannot predict whether there will be additional proposed laws or reforms that would affect the U.S. financial system or financial institutions, whether or when such changes may be adopted, how such changes may be interpreted and enforced, or how such changes may affect the Company.

Comparison of Financial Condition

Assets. Our total assets decreased by $16.4 million, or 2.4%, from $676.7 million at December 31, 2010, to $660.3 million at June 30, 2011. During the six months ended June 30, 2011, cash and due from banks and interest-bearing deposits with banks increased by $8.0 million while loans held for sale decreased by $14.5 million, or 26.8%, and loans decreased $12.9 million, or 2.5%. The decline in loans held for sale resulted from the transfer to investors of an unusually large amount of mortgage loans which were originated in the fourth quarter of 2010. We experienced slowing commercial and consumer loan demand in our primary lending markets, Guilford, Randolph, Alamance and Forsyth Counties, North Carolina in the first six months of 2011 in addition to the slow demand experienced in 2010. The slowing demand complimented our planned asset reduction strategy to improve our capital ratios.

Liabilities. Total deposits decreased by $22.7 million, or 3.8%, from $604.6 million at December 31, 2010, to $581.8 million at June 30, 2011. Time deposits decreased $33.4 million, noninterest demand accounts increased by $1.1 million, and interest-bearing transaction accounts increased $9.6 million during the first six months of 2011. Our branching activities are designed to enhance customer convenience and related deposit gathering activities as well as provide new sources for loans. While deposit growth has been an ongoing goal, wholesale sources of funding such as Federal Home Loan Bank (“FHLB’) advances and repurchase borrowings, may be utilized where cost beneficial and when necessary to meet liquidity requirements. Retail repurchase agreements increased $5.3 million and FHLB advances were down slightly during the first half of 2011. We had approximately $24.5 million in out-of-market time deposits from other institutions and $34.6 million in brokered deposits at June 30, 2011, a decrease of $6.9 million in these two types of accounts from December 31, 2010. The decline in deposits during the first six months of 2011 resulted from a planned strategy to improve capital ratios and to more closely match declining liquidity needs.

Stockholders’ Equity. Total stockholders’ equity increased $0.7 million at June 30, 2011 to $45.0 million from $44.3 million at December 31, 2010, primarily due to an increase in accumulated other comprehensive income related to an increase in the value of investment securities available-for-sale and from accretion of the preferred stock discount.

Comparison of Results of Operations for the Three Months Ended June 30, 2011 and 2010

General. Net (loss) was ($58,000) and ($1,568,000) for the second quarter of 2011 and 2010, respectively. Net (loss) allocable to common stockholders was ($350,000), or ($0.10) per diluted share, for the three months ended June 30, 2011 compared to ($1,856,000), or ($0.55) per diluted share, for the three months ended June 30, 2010. Net loss allocable to common stockholders represents net income (loss) less preferred stock dividends and related discount accretion. The decrease in net loss allocable to common shareholders in 2011 resulted primarily from a lower provision for loan losses in the 2011 period. Net losses in the second quarter of 2010 and 2011 compared to net income in the same quarters in the previous five years due to deteriorating economic conditions which have negatively impacted our borrowers.

Net interest income.Net interest income increased 1.3% to $5,744,000 for the three months ended June 30, 2011, from $5,670,000 for the three months ended June 30, 2010 due to a 26 basis point increase in the net yield on interest earning assets, partially offset by a decline in average interest earning assets by $38.8 million . The net yield on interest earning assets, adjusted to a fully taxable basis, increased to 3.76% in the second quarter of 2011 from 3.50% in the second quarter of 2010. 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 June 30, 2011 and 2010.

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Net Interest Income and Average Balance Analysis

	For the Three Months Ended June 30,
	2011							2010
	Average		Interest		Average			Average		Interest		Average
	Balance (1.)		Inc./Exp.		Yield/Cost			Balance (1.)		Inc./Exp.		Yield/Cost
	(Dollars in thousands)
Interest-earning assets
Interest bearing deposits	$	41,596	$	20		0.19	%	$	32,303	$	22		0.28	%
Non-taxable investments (2.)		16,080		241		6.08	%		15,560		244		6.36	%
Taxable investments		35,742		401		4.55	%		36,819		462		5.09	%
Loans held for sale		23,353		300		5.21	%		24,251		311		5.20	%
Loans (3.)		510,051		6,850		5.45	%		532,928		7,165		5.45	%
Interest-earning assets		626,822		7,812					641,861		8,204
Interest-earning assets						5.05	%						5.18	%
Non interest-earning assets		46,841							49,545
Total assets	$	673,663						$	691,406
Interest-bearing liabilities
Interest checking	$	31,821	$	24		0.31	%	$	30,367	$	34		0.45	%
Money market and savings		274,282		636		0.94	%		280,598		956		1.38	%
Time certificates and IRAs		249,278		967		1.57	%		266,003		1,383		2.11	%
Other borrowings		24,293		188		3.14	%		26,079		229		3.56	%
Total interest-bearing liabilities		579,674		1,815					603,047		2,602
Cost on average
Interest-bearing liabilities						1.27	%						1.75	%
Non-interest-bearing liabilities
Demand deposits		44,818							36,919
Other liabilities		4,520							3,225
Total non-interest-bearing liabilities		49,338							40,144
Total liabilities		629,012							643,191
Stockholders’ equity		44,651							48,215
Total liabilities and equity	$	673,663						$	691,406
Net interest income			$	5,997						$	5,602
Net yield on average interest-earning assets						3.88	%						3.54	%
Interest rate spread						3.78	%						3.43	%

(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.

Provision for loan losses.The provision for loan losses amounted to $1,650,000 and $4,700,000 for the three months ended June 30, 2011 and 2010, respectively. The amount of the provision for loan losses decreased in 2011 primarily because of a decline in loans outstanding and a lower level of allowances required for impaired loans. We believe the allowance for loan losses is appropriate based on asset quality indicators and other factors.

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Non-interest income.Total non-interest income amounted to $2,620,000 for the three months ended June 30, 2011, as compared to $2,502,000 for the three months ended June 30, 2010. Service charges, gains from the sale of investments and repossessed asset gains increased while mortgage banking income declined in the second quarter of 2011.

Non-interest expense.Total non-interest expense amounted to $7,022,000 and $6,172,000 for the three months ended June 30, 2011 and 2010, respectively. Impairment charges for other real estate owned were $1,423,000 and $962,000 in the second quarter of 2011 and 2010, respectively. Salaries and benefits increased $383,000, or 13.6%, in the second quarter of 2011 from the second quarter of 2010, primarily due to an increase in employees in the expanded mortgage division which included a larger retail operation in 2011.

Income taxes.Income tax benefit was $250,000, or 81.2% of net loss before income taxes, for the three month period ended June 30, 2011, as compared to $1,132,000, or 41.9% of net loss before income taxes for the three month period ended June 30, 2010. Non-taxable income and income tax credits represented a larger percentage of net loss before taxes in the second quarter of 2011 which resulted in the more favorable income tax benefit rate in the 2011 period.

Comparison of Results of Operations for the Six Months Ended June 30, 2011 and 2010

General. Net income (loss) for the six months ended June 30, 2011 and 2010, amounted to $554,000 and $(1,269,000), respectively. Net (loss) allocable to common stockholders for the six months ended June 30, 2011 and 2010 amounted to $(26,000), or $(0.01) per diluted share and $(1,842,000), or $(0.54) per diluted share, respectively. The increase in net income in 2011 was primarily due to a lower provision for loan losses and higher net interest income. The provision for loan losses was significantly higher in the 2010 period due to the higher level of charge-offs.

Net interest income.Net interest income increased 4.2% to $11,662,000 for the six months ended June 30, 2011, from $11,190,000 for the six months ended June 30, 2010. An increase in the net yield on interest earning assets accounted for most of the higher net interest income in 2011. The net yield on average interest earning assets increased in 2011 due to increased focus in pricing loans and interest-bearing deposits.

Provision for loan losses.The provision for loan losses amounted to $3,350,000 for the six months ended June 30, 2011 compared to $6,688,000 for the six months ended June 30, 2010, a decrease of 49.9%. The amount of the provision for loan losses decreased in 2011 because of lower loan charge-offs during 2011, a decrease in loans outstanding, and a change in the loan mix in 2011 with less construction and development loans. We believe the allowance for loan losses is adequate based on asset quality indicators and other factors.

Non-interest income.Total non-interest income amounted to $4,730,000 for the six months ended June 30, 2011, as compared to $4,635,000 for the six months ended June 30, 2010. The increase in 2011 was primarily attributable to repossessed asset gains of $53,000 in 2011 compared to repossessed asset losses of $267,000 in 2010. Mortgage banking income declined $232,000, or 5.9%, in the first six months of 2011 to $3,704,000 due to less mortgage refinancing by consumers in the first half of 2011.

Non-interest expense.Total non-interest expense amounted to $12,492,000 for the six months ended June 30, 2011, as compared to $11,450,000 for the six months ended June 30, 2010, an increase of 9.1%. Salaries and employee benefits increased $773,000, or 14.4%, in 2011 to $6,157,000 due to higher benefit costs and an increase in the number of full-time equivalent employees to 168 from 147 a year ago. The majority of the increased compensation resulted from the expansion of the mortgage division which added a retail loan production office on July 1, 2010 and has since

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expanded into a number of our banking offices. FDIC insurance increased $200,000, or 38.5%, to $719,000 for the first six months of 2011 due to increased FDIC assessment rates for insurance premiums. Warranty expense related to the sale of mortgage loans and included in other expenses was $207,000 and $148,000 for the first six months of 2011 and 2010, respectively.

Income taxes.An income tax benefit of $4,000 was recognized on income before income taxes of $550,000 in the first six months of 2011 due to non-taxable income of approximately $400,000 and tax credits of about $97,000. The tax benefit for the first six months of 2010 was $1,044,000, or 45.1% of loss before income taxes. The favorable tax benefits in both 2011 and 2010 are better than the combined federal and state incremental tax rates of 38.7% due to non-taxable income such as increase in cash value of life insurance and non-taxable municipal securities and due to income tax credits relating to low income housing investments that reduce taxes payable.

Asset Quality

Non-performing assets, composed of foreclosed assets, non-accrual loans and non-performing restructured loans, totaled $41,340,000 at June 30, 2011, compared to $37,576,000 at December 31, 2010. Non-performing assets, as a percentage of total assets, was 6.26% at June 30, 2011, compared to 5.55% at December 31, 2010. There were $39,000 and $2,326,000 loans 90 days or more past due and still accruing interest at June 30, 2011 and December 31, 2010, respectively. Foreclosed assets were $11,513,000 at June 30, 2011 and $9,863,000 at December 31, 2010. The elevated level of non-performing assets at June 30, 2011 is related to the declining economic conditions in our lending markets. The seasonally adjusted unemployment rate in North Carolina increased to 9.9 % in June 2011 from 9.8% in December 2010 but decreased from 10.9% at December 2009. A large portion of our loans are made to businesses and real estate developers and are secured by real estate. Due to the slow economic conditions, it has been difficult for borrowers to sell businesses or real estate properties as needed to pay off their loans.

Our allowance for loan losses is composed of two parts, a specific portion related to non-performing and performing impaired loans and a general section related to non-impaired loans. We adopted a more conservative loan loss methodology in the second quarter of 2010 which resulted in higher allowances for loan losses in the second and third quarters of 2010. The specific portion of our allowance for loan losses, which relates to impaired loans, increased to $6,182,000 at June 30, 2011 from $4,142,000 at December 31, 2010 and impaired loans increased to $50,785,000 at June 30, 2011 from $33,901,000 at December 31, 2010. Net loan charge-offs amounted to $2,270,000 and $6,499,000 for the six months ending June 30, 2011 and 2010, respectively. The general portion of our allowance for loan losses decreased to $7,257,000 on non-impaired loans of $450,359,000 at June 30, 2011 from $8,217,000 on performing loans of $480,127,000 at December 31, 2010. The general portion of our allowance applies to non-impaired loans and was determined by applying estimated loss ratios inherent in the loan portfolio, ranging from 0.41% on loans secured by multi-family properties to 11.24% on unsecured consumer revolving loans, to categories of non-impaired loans at each period end. The general section of our allowance for loan losses declined $960,000 from December 31, 2010 to June 30, 2011 because of a $29,768,000 decline in non-impaired loans and a change in the mix of our non-impaired loans with a decrease in construction and development loans of $49,850,000 and an increase in commercial real estate loans of $33,816.000.

The allowance for loan losses is increased by direct charges to operating expense, the provision for loan losses. Losses on loans or charge-offs are deducted from the allowance in the period that loans are deemed to become uncollectible or in the period that updated appraisals indicate a loss in value of non-performing real estate loans. Recoveries of previously charged-off loans are added back to the allowance. Net loan charge-offs (charge-offs minus recoveries) totaled $2,270,000 for the six months ended June 30, 2011 compared to $6,499,000 for the same period in 2010.

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.

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

Carolina Bank is required under applicable federal regulations to maintain specified levels of liquid investments in qualifying types of investments. Cash and due from banks, interest-bearing deposits in banks, investment securities available-for-sale, and loans held for sale by our mortgage division are the primary liquid assets of Carolina Bank. We regularly monitor Carolina Bank’s liquidity position to ensure its liquidity is sufficient to meet its needs. During the first six months of 2011, we increased our levels of short-term liquidity due to a decline in our loans, both held for sale and for investment. Short-term liquidity in the form of cash and due from banks and interest-bearing deposits in banks, increased to $30.8 million at June 30, 2011 from $22.8 million at December 31, 2010. We also have substantial secondary sources of liquidity in the form of secured lines of credit from the FHLB and the Federal Reserve of approximately $145 million at June 30, 2011. These lines of credit are secured by certain real estate loans and commercial and industrial loans.

We are subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate mandatory and possibly discretionary actions by the regulators that, if undertaken, could have a direct material effect on our financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are subject to qualitative judgments by the regulators about components, risk-weightings, and other factors. As of June 30, 2011 and December 31, 2010, our levels of capital exceeded all applicable published regulatory requirements. Carolina Bank met its goal of increasing Tier 1 capital to average assets to 8% in 2011 through earnings and moderate asset growth in response to regulatory requests in January 2011. Tier 1 capital to average assets for Carolina Bank was 8.00% at June 30, 2011 compared to 7.59% at December 31, 2010. Carolina Bank Holdings, Inc. also agreed to seek regulatory approval to pay dividends on its preferred stock and its trust preferred securities in 2011 which was granted through July 2011 but was denied for payments thereafter.

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.

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ITEM 4. Controls and Procedures

Our Chief Executive Officer and Chief Financial Officer have conducted an evaluation of our disclosure controls and procedures as of June 30, 2011. 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 second quarter of 2011. In connection with such evaluation, the Company has determined that there have been no changes in internal control over financial reporting during the second quarter that have materially affected or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 4. (Reserved)

Item 6. Exhibits

Exhibit No.	Description of Exhibit
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.
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.
101	Interactive data files providing financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, in XBRL (eXtensible Business Reporting Language)*

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

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SIGNATURES

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

	Carolina Bank Holdings, Inc.
Date: August 12, 2011	By:	/s/ Robert T. Braswell
		Robert T. Braswell
		President and Chief Executive Officer
Date: August 12, 2011	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.
101	Interactive data files providing financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2011, in XBRL (eXtensible Business Reporting Language)*

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

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