UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K





(Mark One)

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

For the fiscal year ended December 31, 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)





Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

COMMON STOCK, $1.00 PAR VALUE





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.     ̈  Yes    x  No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     ̈  Yes    x   No

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K     ̈

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. (Check one):



|                        |  |                                                  |  |                           |  |  
|----------------------- |  | ------------------------------------------------ |  | ------------------------- |  | -
|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 Act).     ̈  Yes    x  No

State the aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter.
$13,048,000

Indicate the number of shares outstanding of each of the registrants classes of common stock as of the latest practicable
date. 3,387,045 shares of common stock outstanding as of March 17, 2010.





Documents
Incorporated by Reference.

Portions of the Registrants definitive Proxy Statement dated March 18, 2010 are incorporated by
reference into Part III of this report.









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FORM 10-K CROSS-REFERENCE INDEX



|                                                                                                                       |  |           |  |                
|---------------------------------------------------------------------------------------------------------------------- |  | --------- |  | ---------------
|                                                                                                                       |  | Form 10-K |  | Proxy Statement
|PART I                                                                                                                 |  |           |  |                
|                                                                                                                       |  |          
|Item 1 - Business                                                                                                      |  | X         |  |                
|Item 1A - Risk Factors                                                                                                 |  | X         |  |                
|Item 1B - Unresolved Staff Comments                                                                                    |  | X         |  |                
|Item 2 - Properties                                                                                                    |  | X         |  |                
|Item 3 - Legal Proceedings                                                                                             |  | X         |  |                
|Item 4 - [Reserved]                                                                                                    |  | X         |  |                
|                                                                                                                       |  |          
|PART II                                                                                                                |  |           |  |                
|                                                                                                                       |  |          
|Item 
5 - Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | X         |  | X              
|Item 6 - Selected Financial Data                                                                                       |  | X         |  |                
|Item 7 - Managements Discussion & Analysis of Financial Condition and Results of
Operation                            |  | X         |  |                
|Item 7A - Quantitative and Qualitative Disclosures about Market Risk                                                   |  | X         |  |                
|Item 8 - Financial Statements and Supplementary Data                                                                   |  | X         |  |                
|Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                          |  | X         |  |                
|Item 9A(T) - Controls and Procedures                                                                                   |  | X         |  |                
|Item 9B - Other Information                                                                                            |  | X         |  |                
|                                                                                                                       |  |          
|PART III                                                                                                               |  |           |  |                
|                                                                                                                       |  |          
|Item 10 - Directors, Executive Officers and Corporate Governance                                                       |  | X         |  | X              
|Item 11 - Executive Compensation                                                                                       |  |           |  | X              
|Item 
12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              |  | X         |  | X              
|Item 13 - Certain Relationships and Related Transactions, and Director Independence                                    |  |           |  | X              
|Item 14 - Principal Accountant Fees and Services                                                                       |  |           |  | X              
|                                                                                                                       |  |          
|PART IV                                                                                                                |  |           |  |                
|                                                                                                                       |  |          
|Item 15 - Exhibits and Financial Statement Schedules                                                                   |  | X         |  |                



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PART I



|ITEM 1. | BUSINESS.
|------- | ---------

General

Carolina Bank Holdings, Inc. was incorporated under the laws of the State
of North Carolina on August 16, 2000, at the direction of the Board of Directors of Carolina Bank, for the purpose of serving as the bank holding company of Carolina Bank. The bank exchanged all of its outstanding shares of capital stock for
shares of our common stock on a one-for-one basis, thereby making us its sole shareholder and bank holding company. Our corporate office is located at 101 North Spring Street, Greensboro, North Carolina.

Carolina Bank is a North Carolina chartered bank, which incorporated in August 1996 and began banking operations in November 1996. The banks main
banking office is located at 101 North Spring Street, Greensboro, North Carolina.

At December 31, 2009, we had 140 full-time equivalent
employees.

Business of Carolina Bank Holdings, Inc. and Carolina Bank

Our only function is the ownership of all of the issued and outstanding stock of the bank and ownership of all of the issued and outstanding common
securities of Carolina Capital Trust, a Delaware business trust formed in December 2004 for the purpose of selling $10,000,000 of trust preferred securities. We do not engage in any separate lines of business other than those of the bank. The bank
engages in a general banking business in Guilford, Alamance, Randolph and Forsyth Counties, North Carolina. Its operations are primarily commercially oriented and directed to individuals and small to medium-sized businesses located in its market
area and its deposits and loans are derived primarily from customers in its geographic market. The bank provides most traditional commercial and consumer banking services, including personal and commercial checking and savings accounts, money market
accounts, certificates of deposit, individual retirement accounts and related business and individual banking services. The banks lending activities are concentrated in commercial lending to small-to-medium sized businesses located primarily
in its market area, construction and development loans and various consumer-type loans to individuals, including installment loans, credit card products, mortgage loans and equity lines of credit. The bank started a wholesale mortgage loan division
in 2007 to originate residential loans through third-party brokers and banks and to sell these loans at a profit to institutional investors.

Primary Market Area

The banks primary service area consists of the Cities of
Greensboro, High Point, Burlington, Winston-Salem and Asheboro, North Carolina and the areas immediately surrounding Greensboro, High Point, Burlington, Winston-Salem and Asheboro, all of which are located in Guilford, Alamance, Forsyth and Randolph
Counties, North Carolina.

Competition

Commercial banking in the banks primary service area and in North Carolina as a whole is extremely competitive due to the early adoption of state laws permitting state-wide and interstate branching.
The bank competes directly for deposits in its primary service area with other commercial banks, savings banks, credit unions, agencies issuing United States government securities and all other organizations and institutions engaged in money market
transactions. In its lending activities, the bank competes with all other financial institutions as well as consumer finance companies, mortgage companies and other lenders



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engaged in the business of extending credit. In Guilford County, 22 commercial banks operate 144 full service offices, including all of the largest banks in North Carolina. In Alamance County, 16
commercial banks operate 50 full service branch offices. In Randolph County, 16 commercial banks operate 43 full service branch offices. In Forsyth County, 21 commercial banks operate 107 full service offices, including all of the largest banks in
North Carolina.

Interest rates, both on loans and deposits, and prices of services are significant competitive factors among financial
institutions generally. Office location, office hours, customer service, community reputation and continuity of personnel are also important competitive factors. Many of the banks competitors have greater resources, broader geographic markets
and higher lending limits, and can offer more products and better afford and make more effective use of media advertising, support services and electronic technology than the bank. The bank depends on its reputation as a community bank in its local
market, direct customer contact, its ability to make credit and other business decisions locally, and personalized service to counter these competitive disadvantages.

Employees

Carolina Bank employed 140 full-time equivalent employees at
December 31, 2009. We do not have any officers or employees who are not also officers or employees of the Bank. None of our employees are covered by a collective bargaining agreement. We believe our relations with our employees to be good.

Regulation

Regulation of Carolina Bank

Carolina Bank is extensively regulated under both federal and
state law. Generally, these laws and regulations are intended to protect depositors and borrowers, not shareholders. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by
reference to the particular statutory and regulatory provisions. Any change in applicable law or regulation may have a material effect on the business of the company and the bank.

State Law. The bank is subject to extensive supervision and regulation by the North Carolina Commissioner of Banks (the Commissioner). The Commissioner oversees state laws that set
specific requirements for bank capital and regulate deposits in, and loans and investments by, banks, including the amounts, types, and in some cases, rates. The Commissioner supervises and performs periodic examinations of North Carolina-chartered
banks to assure compliance with state banking statutes and regulations, and the bank is required to make regular reports to the Commissioner describing in detail the resources, assets, liabilities and financial condition of the bank. Among other
things, the Commissioner regulates mergers and consolidations of state-chartered banks, the payment of dividends, loans to officers and directors, record keeping, types and amounts of loans and investments, and the establishment of branches.

Deposit Insurance. Carolina Banks deposits are insured up to limits set by the Deposit Insurance Fund of the FDIC. On
October 3, 2008, the Emergency Economic Stabilization Act of 2008 temporarily raised the standard minimum deposit insurance amount (the SMDIA) from $100,000 to $250,000 per depositor until December 31, 2009. On
May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase in the SMDIA to $250,000 per depositor through December 31, 2013. On January 1, 2014, the SMDIA will return to $100,000 per depositor for all
account categories except IRAs and certain other retirement accounts, which will remain at $250,000 per depositor, unless a new law is enacted before then to extend the increased deposit insurance limits.



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The FDIC has amended its risk-based assessment system to implement authority granted by the Federal Deposit
Insurance Reform Act of 2005 (Reform Act). Under the revised system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors. An
institutions assessment rate depends upon the category to which it is assigned. Risk Category I contains well-capitalized banks with only a few minor weaknesses. Unlike the other categories, Risk Category I contains further risk
differentiation based on the FDICs analysis of financial ratios, examination component ratings and other information. During the year ended December 31, 2009, the bank was assigned to Risk Category I.

The Reform Act provided the FDIC with authority to adjust the Deposit Insurance Fund ratio to insured deposits within a range of 1.15% and 1.50%, in
contrast to the prior statutorily fixed ratio of 1.25%. Assessment rates are determined by the FDIC and currently range from 5 to 7 basis points annually of assessable deposits for the healthiest institutions (Risk Category I) to 43 basis points for
the riskiest (Risk Category IV). The FDIC may adjust assessment rates from one quarter to the next, except that no single adjustment can exceed 3 basis points. The banks quarterly Deposit Insurance Fund assessments during the year ended
December 31, 2009 ranged from 1.6 to 3.8 basis points of assessable deposits.

The Reform Act also provided for a one-time credit for
eligible insured institutions based on their assessment base as of December 31, 1996. Subject to certain limitations with respect to institutions that are exhibiting weaknesses, one-time credits are used to offset quarterly assessments until
exhausted. The Reform Act also provided that the FDIC may pay dividends to insured institutions once the Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimated insured deposits.

On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program (the TLGP) to strengthen confidence and encourage
liquidity in the banking system. The TLGP consists of two components: a temporary guarantee of newly-issued senior unsecured debt named the Debt Guarantee Program, and a temporary unlimited guarantee of funds in noninterest-bearing transaction
accounts at FDIC insured institutions named the Transaction Account Guarantee Program (TAG). All newly-issued senior unsecured debt will be charged an annual assessment of up to 100 basis points (depending on term) multiplied by the
amount of debt issued and calculated through the date of that debt or June 30, 2012, whichever is earlier. The bank elected to opt out of the Debt Guarantee Program. The Bank elected to participate in the TAG Program but does not anticipate a
material increase in its deposit insurance premiums as a result. On August 26, 2009, the FDIC adopted a final rule extending the TAG portion of the TLGP for six months through June 30, 2010. As a Risk Category I bank, for amounts exceeding
the existing $250,000 deposit insurance limit in noninterest-bearing transaction accounts the bank will be assessed an annualized fee of 9.9 basis points and collected quarterly through June 30, 2010.

On May 22, 2009, the FDIC announced that it would levy a special assessment on insured institutions as part of its effort to rebuild the Deposit
Insurance Fund. The special assessment equaled five basis points on each FDIC-insured depository institutions assets, minus its Tier 1 capital, as of June 30, 2009. The amount of the banks special assessment was $311,000.

On November 12, 2009, the FDIC voted to require all FDIC insured depository institutions to prepay risk-based assessments for the fourth
quarter of 2009 and for all of 2010, 2011 and 2012. The prepaid assessments are designed to provide the FDIC with additional liquid assets for the Deposit Insurance Fund, which have been used to protect depositors of failed institutions and have
been exchanged for less liquid claims against the assets of failed institutions. The FDIC projected that if no action is taken, its liquidity needs to resolve failures could exceed its liquid assets beginning in the first quarter of 2010. The
prepaid assessment for all insured institutions was collected on December 30, 2009. For the fourth quarter of 2009 and all of 2010, the prepaid assessment was based on an institutions total base assessment rate in effect on
September 30, 2009. That rate will be increased by 3 basis points for the 2011 and 2012 prepayments and a quarterly five percent deposit growth rate is also built into the calculation.



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On December 30, 2009, the bank paid a $3.4 million prepaid assessment which is accounted for as a
prepaid expense with a zero risk-weighting for risk-based regulatory capital purposes. On a quarterly basis after December 31, 2009, the bank will expense its regular quarterly assessment and record an offsetting credit to the prepaid
assessment asset until the asset is exhausted. If the prepaid assessment is not exhausted by June 30, 2013, any remaining amount will be returned to the bank.

The FDIC has authority to further increase deposit insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of
operations of the Company and the bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of
deposits may be terminated by the FDIC upon a finding that an insured institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or
condition imposed by the FDIC. We are not aware of any practice, condition or violation that might lead to termination of our FDIC deposit insurance.

Capital Requirements. The federal banking regulators have adopted certain risk-based capital guidelines to assist in the assessment of the capital adequacy of a banking organizations operations for both transactions reported on
the balance sheet as assets and transactions, such as letters of credit, and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance
sheet items are multiplied by one of several risk adjustment percentages which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

A banking organizations risk-based capital ratios are obtained by dividing its qualifying capital by its total risk-adjusted assets.
The regulators measure risk-adjusted assets, which include off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1, or core capital,
includes common equity, qualifying noncumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangibles, subject to certain exceptions. Tier 2, or
supplementary capital, includes among other things, limited-life preferred stock, hybrid capital instruments, mandatory convertible securities, qualifying subordinated debt, and the allowance for loan and lease losses, subject to certain limitations
and less required deductions. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. Banks and bank holding companies subject to the risk-based capital guidelines are
required to maintain a ratio of Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total capital to risk-weighted assets of at least 8%. The appropriate regulatory authority may set higher capital requirements when particular
circumstances warrant. As of December 31, 2009, the bank was classified as well-capitalized with Tier 1 and Total Risk-Based Capital of 8.50% and 11.24%, respectively.

The federal banking agencies have adopted regulations specifying that they will include, in their evaluations of a banks capital adequacy, an assessment of the banks interest rate risk
exposure. The standards for measuring the adequacy and effectiveness of a banking organizations interest rate risk management include a measurement of oversight by senior management and the board of directors, and a determination of whether a
banking organizations procedures for comprehensive risk management are appropriate for the circumstances of the specific banking organization.



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Failure to meet applicable capital guidelines could subject a banking organization to a variety of
enforcement actions, including limitations on its ability to pay dividends, the issuance by the applicable regulatory authority of a capital directive to increase capital and, in the case of depository institutions, the termination of deposit
insurance by the FDIC, as well as the measures described under the Federal Deposit Insurance Corporation Improvement Act of 1991 below, as applicable to undercapitalized institutions. In addition, future changes in regulations or
practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the ability of the bank to grow and could restrict the amount of profits, if any, available for the payment of dividends to
the shareholders.

Federal Deposit Insurance Corporation Improvement Act of 1991. In December 1991, Congress enacted the Federal
Deposit Insurance Corporation Improvement Act of 1991 (the FDIC Improvement Act), which substantially revised the bank regulatory and funding provisions of the Federal Deposit Insurance Act and made significant revisions to several other
federal banking statutes. The FDIC Improvement Act provides for, among other things:



| |  |  | publicly available annual financial condition and management reports for certain financial institutions, including audits by independent accountants,
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the establishment of uniform accounting standards by federal banking agencies,
| | - |  | ------------------------------------------------------------------------------



| |  |  | the establishment of a prompt corrective action system of regulatory supervision and intervention, based on capitalization levels, with
greater scrutiny and restrictions placed on depository institutions with lower levels of capital,
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | additional grounds for the appointment of a conservator or receiver, and
| | - |  | ------------------------------------------------------------------------



| |  |  | restrictions or prohibitions on accepting brokered deposits, except for institutions which significantly exceed minimum capital requirements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------

The FDIC Improvement Act also provides for increased funding of the FDIC insurance funds and the implementation of
risk-based premiums.

A central feature of the FDIC Improvement Act is the requirement that the federal banking agencies take prompt
corrective action with respect to depository institutions that do not meet minimum capital requirements. Pursuant to the FDIC Improvement Act, the federal bank regulatory authorities have adopted regulations setting forth a five-tiered system
for measuring the capital adequacy of the depository institutions that they supervise. Under these regulations, a depository institution is classified in one of the following capital categories: well capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. An institution may be deemed by the regulators to be in a capitalization category that is lower than is
indicated by its actual capital position if, among other things, it receives an unsatisfactory examination rating with respect to asset quality, management, earnings or liquidity.

The FDIC Improvement Act provides the federal banking agencies with significantly expanded powers to take enforcement action against institutions which fail to comply with capital or other standards. Such
action may include the termination of deposit insurance by the FDIC or the appointment of a receiver or conservator for the institution. The FDIC Improvement Act also limits the circumstances under which the FDIC is permitted to provide financial
assistance to an insured institution before appointment of a conservator or receiver.



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International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001. On
October 26, 2001, the USA PATRIOT Act of 2001 was enacted. This act contains the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which sets forth anti-money laundering measures affecting insured depository
institutions, broker-dealers and other financial institutions. The Act requires U.S. financial institutions to adopt new policies and procedures to combat money laundering and grants the Secretary of the Treasury broad authority to establish
regulations and to impose requirements and restrictions on the operations of financial institutions.

Community Reinvestment Act. We
are subject to the provisions of the Community Reinvestment Act of 1977, as amended (CRA). Under the terms of the CRA, the appropriate federal bank regulatory agency is required, in connection with the examination of a bank, to assess such
banks record in meeting the credit needs of the community served by that bank, including low-and moderate-income neighborhoods. The regulatory agencys assessment of our record is made available to the public. Such an assessment is
required of any bank which has made any application for a domestic deposit-taking branch, relocation of a main office, branch or ATM, merger or consolidation with or acquisition of assets or assumption of liabilities of a federally insured
depository institution.

Under CRA regulations, banks with assets of less than $250,000,000 that are independent or affiliated with a holding
company with total banking assets of less than $1 billion, are subject to streamlined small bank performance standards and much less stringent data collection and reporting requirements than larger banks. The agencies emphasize that small banks are
not exempt from CRA requirements. The streamlined performance method for small banks focuses on the banks loan-to-deposit ratio, adjusted for seasonal variations and as appropriate, other lending-related activities, such as loan originations
for sale to secondary markets or community development lending or qualified investments; the percentage of loans and, as appropriate, other lending-related activities located in our assessment areas; our record of lending to and, as appropriate,
other lending-related activities for borrowers of different income levels and businesses and farms of different sizes; the geographic distribution of our loans given our assessment areas, capacity to lend, local economic conditions, and lending
opportunities; and our record of taking action, if warranted, in response to written complaints about our performance in meeting the credit needs of our assessment areas.

Regulatory agencies will assign a composite rating of outstanding, satisfactory, needs to improve, or substantial noncompliance to the institution using the
foregoing ground rules. A banks performance need not fit each aspect of a particular rating profile in order for the bank to receive that rating; exceptionally strong performance with respect to some aspects may compensate for weak performance
in others, and the banks overall performance must be consistent with safe and sound banking practices and generally with the appropriate rating profile. To earn an outstanding rating, the bank first must exceed some or all of the standards
mentioned above. The agencies may assign a needs to improve or substantial noncompliance rating depending on the degree to which the bank has failed to meet the standards mentioned above.

The regulation further states that the agencies will take into consideration these CRA ratings when considering any application and that a banks
record of performance may be the basis for denying or conditioning the approval of an application.

Miscellaneous. The dividends that
may be paid by the bank are subject to legal limitations. In accordance with North Carolina banking law, dividends may not be paid unless a banks capital surplus is at least 50% of its paid-in capital.

The earnings of the bank will be affected significantly by the policies of the Federal Reserve Board, which is responsible for regulating the United States
money supply in order to mitigate recessionary and



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inflationary pressures. Among the techniques used to implement these objectives are open market transactions in United States government securities, changes in the rate paid by banks on bank
borrowings, and changes in reserve requirements against bank deposits. These techniques are used in varying combinations to influence overall growth and distribution of bank loans, investments, and deposits, and their use may also affect interest
rates charged on loans or paid for deposits.

The monetary policies of the Federal Reserve Board have had a significant effect on the
operating results of commercial banks in the past and are expected to continue to do so in the future. In view of changing conditions in the national economy and money markets, as well as the effect of actions by monetary and fiscal authorities, no
prediction can be made as to possible future changes in interest rates, deposit levels, loan demand or the business and earnings of the bank.

We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on the banks operations.

Regulation of Carolina Bank Holdings, Inc.

Federal Regulation. We are subject to examination, regulation and periodic reporting under the Bank Holding Company Act of 1956, as administered by the Federal Reserve Board. The Federal Reserve
Board has adopted capital adequacy guidelines for bank holding companies on a consolidated basis.

We are required to obtain the prior
approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval is required for the company to acquire direct or indirect ownership or control of any
voting securities of any bank or bank holding company if, after giving effect to such acquisition, we would, directly or indirectly, own or control more than five percent of any class of voting shares of such bank or bank holding company.

The merger or consolidation of the bank with another bank, or the acquisition by the company of assets of another bank, or the assumption of
liability by the company to pay any deposits in another bank, will require the prior written approval of the primary federal bank regulatory agency of the acquiring or surviving bank under the federal bank Merger Act. The decision is based upon a
consideration of statutory factors similar to those outlined above with respect to the Bank Holding Company Act. In addition, in certain such cases an application to, and the prior approval of, the Federal Reserve Board under the Bank Holding
Company Act and/or the North Carolina Banking Commission may be required.

We are required to give the Federal Reserve Board prior written
notice of any purchase or redemption of our outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months,
is equal to 10% or more of the companys consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any
law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. Such notice and approval is not required for a bank holding company that would be treated as well
capitalized and well managed under applicable regulations of the Federal Reserve Board, that has received a composite 1 or 2 rating at its most recent bank holding company inspection by the Federal Reserve
Board, and that is not the subject of any unresolved supervisory issues.

The status of the company as a registered bank holding company under
the Bank Holding Company Act does not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.



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In addition, a bank holding company is prohibited generally from engaging in, or acquiring five percent or
more of any class of voting securities of any company engaged in, non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be so closely related to banking as to be a proper incident thereto are:



| |  |  | making or servicing loans;
| | - |  | --------------------------



| |  |  | performing certain data processing services;
| | - |  | --------------------------------------------



| |  |  | providing discount brokerage services;
| | - |  | --------------------------------------



| |  |  | acting as fiduciary, investment or financial advisor;
| | - |  | -----------------------------------------------------



| |  |  | leasing personal or real property;
| | - |  | ----------------------------------



| |  |  | making investments in corporations or projects designed primarily to promote community welfare; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | acquiring a savings and loan association.
| | - |  | -----------------------------------------

In evaluating a written notice of such an acquisition, the Federal Reserve Board will consider various factors, including among others the financial and managerial resources of the notifying bank holding
company and the relative public benefits and adverse effects which may be expected to result from the performance of the activity by an affiliate of such company. The Federal Reserve Board may apply different standards to activities proposed to be
commenced de novo and activities commenced by acquisition, in whole or in part, of a going concern. The required notice period may be extended by the Federal Reserve Board under certain circumstances, including a notice for acquisition of a company
engaged in activities not previously approved by regulation of the Federal Reserve Board. If such a proposed acquisition is not disapproved or subjected to conditions by the Federal Reserve Board within the applicable notice period, it is deemed
approved by the Federal Reserve Board.

However, with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act of 1999,
which became effective on March 11, 2000, the types of activities in which a bank holding company may engage were significantly expanded. Subject to various limitations, the Modernization Act generally permits a bank holding company to elect to
become a financial holding company. A financial holding company may affiliate with securities firms and insurance companies and engage in other activities that are financial in nature. Among the activities that are deemed
financial in nature are, in addition to traditional lending activities, securities underwriting, dealing in or making a market in securities, sponsoring mutual funds and investment companies, insurance underwriting and agency activities,
certain merchant banking activities and activities that the Federal Reserve Board considers to be closely related to banking.

A bank holding
company may become a financial holding company under the Modernization Act if each of its subsidiary banks is well capitalized under the Federal Deposit Insurance Corporation Improvement Act prompt corrective action provisions, is well
managed and has at least a satisfactory rating under the Community Reinvestment Act. In addition, the bank holding company must file a declaration with the Federal Reserve Board that the bank holding company wishes to become a financial holding
company. A bank holding company that falls out of compliance with these requirements may be required to cease engaging in some of its activities. We have not yet elected to become a financial holding company.

Under the Modernization Act, the Federal Reserve Board serves as the primary umbrella regulator of financial holding companies, with supervisory
authority over each parent company and limited authority over its subsidiaries. Expanded financial activities of financial holding companies generally will be regulated according to the type of such financial activity: banking activities by banking
regulators,



---

securities activities by securities regulators and insurance activities by insurance regulators. The Modernization Act also imposes additional restrictions and heightened disclosure requirements
regarding private information collected by financial institutions.

Sarbanes-Oxley Act of 2002. On July 30, 2002, the
Sarbanes-Oxley Act of 2002 was signed into law and became some of the most sweeping federal laws addressing accounting, corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public
companies and imposes significant new requirements for public company governance and disclosure requirements.

In general, the Sarbanes-Oxley
Act mandates important corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies reported financial results. It establishes responsibilities for corporate chief executive
officers, chief financial officers and audit committees in the financial reporting process and established regulatory body to oversee auditors of public companies. It backs these requirements with SEC enforcement tools, increases criminal penalties
for federal mail, wire and securities fraud, and creates new criminal penalties for document and record destruction in connection with federal investigations. It also increases the opportunity for more private litigation by lengthening the statute
of limitations for securities fraud claims and providing new federal corporate whistleblower protection.

The economic and operational effects
of this new legislation on public companies, including us, is significant in terms of the time, resources and costs associated with complying with the new law. Because the Sarbanes-Oxley Act, for the most part, applies equally to larger and smaller
public companies, we are presented with additional challenges as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in our market.

Recent Regulatory Initiatives. Beginning in late 2008 and continuing through 2009, the federal government took sweeping actions in response to the deepening economic recession. As mentioned above,
President Bush signed the Emergency Economic Stabilization Act of 2008 or EESA into law on October 3, 2008. Pursuant to EESA, the Department of the Treasury created the Troubled Asset Relief Program or TARP for the
purpose of stabilizing the U.S. financial markets. On October 14, 2008, the Treasury announced the creation of the TARP Capital Purchase Program. The Capital Purchase Program was designed to invest up to $250 billion (later increased to $350
billion) in certain eligible financial institutions in the form of nonvoting senior preferred stock initially paying quarterly dividends at a five percent annual rate. In connection with its investment in senior preferred stock, the Treasury also
received ten-year warrants to purchase common shares of participating institutions.

We applied, and were approved, for participation in the
Capital Purchase Program in late 2008. On January 9, 2009, the company issued and sold to the Treasury (1) 16,000 shares of the companys Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase
357,675 shares of the companys common stock for an aggregate purchase price of $16.0 million in cash. The preferred stock qualifies as Tier 1 capital.

As a result of its participation in the Capital Purchase Program, we have become subject to a number of new regulations and restrictions. Our ability to declare or pay dividends or distributions on, or
purchase, redeem or otherwise acquire for consideration shares of our common stock is subject to restrictions. We are also required to have in place certain limitations on the compensation of its senior executive officers.

On February 17, 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 into law. This law includes additional restrictions on
executive compensation applicable to the company as a participant in the TARP Capital Purchase Program.



---

For additional information about this transaction and the Companys participation in
the Capital Purchase Program, please see Note 10 to the companys audited consolidated financial statements included with this report and the companys current report on Form 8-K filed with the Securities and Exchange Commission on
January 13, 2009.

Capital Requirements. The Federal Reserve Board uses capital adequacy guidelines in its examination and
regulation of bank holding companies. If capital falls below minimum guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

There are two measures of capital adequacy: a risk-based measure and a leverage measure. All capital standards must be satisfied for an institution to be
considered in compliance.

The risk-based capital standards are designed to make regulatory capital requirements more sensitive to differences
in risk profile among banks and bank holding companies, to account for off-balance sheet exposure, and to minimize disincentives for holding liquid assets. Assets and off-balance sheet items are assigned to broad risk categories, each with
appropriate weights. The resulting capital ratio represents capital as a percentage of total risk-weighted assets and off-balance sheet items. The minimum requirement for a bank holding companys ratio of capital to risk-weighted assets
(including certain off-balance sheet items, such as standby letters of credit) is 8.0%. At least half of the qualifying total capital must be composed of Tier 1 capital, which includes common equity, retained earnings and a limited amount of
qualifying perpetual preferred stock, less goodwill and certain other intangibles. The remainder may consist of subordinated debt, other preferred stock and a limited amount of loan loss reserves (Tier 2 capital).

The Federal Reserve Board also requires bank holding companies to maintain a minimum leverage ratio. This leverage ratio of Tier 1 capital to
adjusted average assets is equal to 3.0% for bank holding companies that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies are required to maintain a minimum leverage ratio of at least
4.0% to 5.0%.

The risk-based and leverage standards presently used by the Federal Reserve Board are minimum requirements, and higher capital
levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital
ratios, including tangible capital positions (i.e., Tier 1 capital less all intangible assets), well above the minimum levels.

Source of
Strength for Subsidiaries. Bank holding companies are required to serve as a source of financial strength for their depository institution subsidiaries, and, if their depository institution subsidiaries become undercapitalized, bank holding
companies may be required to guarantee the subsidiaries compliance with capital restoration plans filed with their bank regulators, subject to certain limits.

Dividends. As a bank holding company that does not, as an entity, currently engage in separate business activities of a material nature, our ability to pay cash dividends depends upon the cash
dividends we receive from the bank. At present, our only source of income is dividends paid by the bank and interest earned on any investment securities we hold. We must pay all of our operating expenses from funds it receives from the bank.
Therefore, shareholders may receive dividends from the company only to the extent that funds are available after payment of our operating expenses and the board decides to declare a dividend. In addition, the Federal Reserve Board generally
prohibits bank holding companies from



---

paying dividends except out of operating earnings, and the prospective rate of earnings retention appears consistent with the bank holding companys capital needs, asset quality and overall
financial condition. We expect that, for the foreseeable future, any dividends paid by the bank to us will likely be limited to amounts needed to pay any separate expenses of the company and/or to make required payments on our debt obligations,
including the interest payments on our junior subordinated debt.

The FDIC Improvement Act requires the federal bank regulatory agencies
biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities and, since adoption of the Riegle Community Development and
Regulatory Improvement Act of 1994, to do so taking into account the size and activities of depository institutions and the avoidance of undue reporting burdens. In 1995, the agencies adopted regulations requiring as part of the assessment of an
institutions capital adequacy the consideration of (a) identified concentrations of credit risks, (b) the exposure of the institution to a decline in the value of its capital due to changes in interest rates and (c) the
application of revised conversion factors and netting rules on the institutions potential future exposure from derivative transactions.

In addition, the agencies in September 1996 adopted amendments to their respective risk-based capital standards to require banks and bank holding companies having significant exposure to market risk arising from, among other things, trading
of debt instruments, (1) to measure that risk using an internal value-at-risk model conforming to the parameters established in the agencies standards and (2) to maintain a commensurate amount of additional capital to reflect such
risk. The new rules were adopted effective January 1, 1997, with compliance mandatory from and after January 1, 1998.

Subsidiary
banks of a bank holding company are subject to certain quantitative and qualitative restrictions imposed by the Federal Reserve Act on any extension of credit to, or purchase of assets from, or letter of credit on behalf of, the bank holding company
or its subsidiaries, and on the investment in or acceptance of stocks or securities of such holding company or its subsidiaries as collateral for loans. In addition, provisions of the Federal Reserve Act and Federal Reserve Board regulations limit
the amounts of, and establish required procedures and credit standards with respect to, loans and other extensions of credit to officers, directors and principal shareholders of the bank, the company, and any subsidiary of the company and related
interests of such persons. Moreover, subsidiaries of bank holding companies are prohibited from engaging in certain tying arrangements (with the holding company or any of its subsidiaries) in connection with any extension of credit, lease or sale of
property or furnishing of services.

Any loans by a bank holding company to a subsidiary bank are subordinate in right of payment to deposits
and to certain other indebtedness of the subsidiary bank. In the event of a bank holding companys bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank would be
assumed by the bankruptcy trustee and entitled to a priority of payment. This priority would also apply to guarantees of capital plans under the FDIC Improvement Act.

Interstate Branching

Under the Riegle-Neal Interstate Banking and Branching Act
(the Riegle-Neal Act), the Federal Reserve Board may approve bank holding company acquisitions of banks in other states, subject to certain aging and deposit concentration limits. As of June 1, 1997, banks in one state may merge
with banks in another state, unless the other state has chosen not to implement this section of the Riegle-Neal Act. These mergers are also subject to similar aging and deposit concentration limits.

North Carolina opted-in to the provisions of the Riegle-Neal Act. Since July 1, 1995, an out-of-state bank that did not already maintain a
branch in North Carolina was permitted to establish and maintain a



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de novo branch in North Carolina, or acquire a branch in North Carolina, if the laws of the home state of the out-of-state bank permit North Carolina banks to engage in the same activities in
that state under substantially the same terms as permitted by North Carolina. Also, North Carolina banks may merge with out-of-state banks, and an out-of-state bank resulting from such an interstate merger transaction may maintain and operate the
branches in North Carolina of a merged North Carolina bank, if the laws of the home state of the out-of-state bank involved in the interstate merger transaction permit interstate merger.

We cannot predict what legislation might be enacted or what regulations might be adopted, or if enacted or adopted, the effect thereof on our operations.



|ITEM 1A. | RISK FACTORS.
|-------- | -------------

Item not applicable to smaller reporting companies.



|ITEM 1B. | UNRESOLVED STAFF COMMENTS.
|-------- | --------------------------

Item not applicable to smaller reporting companies.



|ITEM 2. | PROPERTIES.
|------- | -----------

The
following table sets forth certain information regarding our properties:



|                                                                          |  |             |  |                       |  |           
|------------------------------------------------------------------------- |  | ----------- |  | --------------------- |  | ----------
|OFFICE LOCATION                                                           |  | YEAR OPENED |  | APPROX. SQUAREFOOTAGE |  | OWN/LEASE 
|Main Office Corporate Office 101 North Spring Street Greensboro, NC 27401 |  | 2008        |  | 43,000                |  | Land lease
|                                                                          |  |             | 
|Former Corporate Office 528 College Road Greensboro, NC                   |  | 2005        |  | 9,874                 |  | Own       
|                                                                          |  |             | 
|Lawndale Office 2604 Lawndale Drive Greensboro, NC                        |  | 2000        |  | 12,000                |  | Own       
|                                                                          |  |             | 
|Friendly Center Office 3124 Friendly Avenue Greensboro, NC                |  | 1996        |  | 5,300                 |  | Lease     
|                                                                          |  |             | 
|Jefferson Village Office 1601 Highwoods Blvd. Greensboro, NC              |  | 2001        |  | 3,000                 |  | Own       
|                                                                          |  |             | 
|Asheboro Office 335 S. Fayetteville Street Asheboro, NC                   |  | 2003        |  | 5,800                 |  | Own       



---

|                                                                            |  |             |  |                       |  |          
|--------------------------------------------------------------------------- |  | ----------- |  | --------------------- |  | ---------
|OFFICE LOCATION                                                             |  | YEAR OPENED |  | APPROX. SQUAREFOOTAGE |  | OWN/LEASE
|                                                                            |  |             | 
|High Point Office 4010 Brian Jordan Blvd. High Point, NC                    |  | 2007        |  | 4,500                 |  | Own      
|                                                                            |  |             | 
|Burlington Office 3214 South Church Street Burlington, NC                   |  | 2007        |  | 5,800                 |  | Own      
|                                                                            |  |             | 
|Winston-Salem Office 1590 Westbrook Plaza Drive Suite 103 Winston-Salem, NC |  | 2008        |  | 1,500                 |  | Lease    



|ITEM 3. | LEGAL PROCEEDINGS.
|------- | ------------------

As of December 31, 2009, there were no pending material legal proceedings to which we are a party, or of which any of our property is the subject, that, if decided adversely to us, could have a material adverse financial effect.



|ITEM 4. | [RESERVED]
|------- | ----------

PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
|------- | -------------------------------------------------------------------------------------------------------------

Market Summary

Our
common stock is listed for quotation on the Nasdaq Global Market under the symbol CLBH. As of March 17, 2010, we had issued and outstanding 3,387,045 shares of common stock which were held by approximately 1,278 shareholders.

No cash dividends were declared or paid on shares of our common stock in 2009 or 2008.

Market for the Common Stock

Our common stock is traded on the NASDAQ Global Market under the symbol CLBH. The following table gives the high and low

sale prices for the calendar quarters indicated.



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|               |  |   |       |  |   |      
|-------------- |  | - | ----- |  | - | -----
|2009           |  |   |       |  |   |      
|First Quarter  |  | $ | 6.95  |  | $ | 3.90 
|Second Quarter |  |   | 4.75  |  |   | 3.70 
|Third Quarter  |  |   | 4.99  |  |   | 3.50 
|Fourth Quarter |  |   | 4.15  |  |   | 2.95 
|               |  |  
|2008           |  |   |       |  |   |      
|First Quarter  |  | $ | 12.00 |  | $ | 10.00
|Second Quarter |  |   | 11.00 |  |   | 6.73 
|Third Quarter  |  |   | 9.22  |  |   | 5.27 
|Fourth Quarter |  |   | 8.00  |  |   | 4.76 

There were approximately 1,278
shareholders of the Companys common stock.

See Item 12 of this report for disclosure regarding securities authorized for issuance
and equity compensation plans required by Item 201(d) of Regulation S-K.



|ITEM 6. | SELECTED FINANCIAL DATA.
|------- | ------------------------

Not applicable
to smaller reporting companies.



|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
|------- | -------------------------------------------------------------------------------------



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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. Carolina Bank also owns two limited liability companies for the purpose of holding foreclosed real estate, of which the assets and operations of these subsidiaries are consolidated into
Carolina Bank and included herein. 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.

Forward-looking Statements

This report contains forward-looking statements with respect to our financial condition and results of operations and business. These
forward-looking statements involve risks and uncertainties and are based on our beliefs and assumptions and on information available at the time these statements and disclosures were prepared. Factors that may cause actual results to differ
materially from those expected include the following:



| |  |  | General economic conditions may deteriorate and negatively impact the ability of our borrowers to repay loans and our depositors to maintain balances.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Changes in interest rates could reduce our net interest income.
| | - |  | ---------------------------------------------------------------



| |  |  | Competitive pressures among financial institutions may increase.
| | - |  | ----------------------------------------------------------------



| |  |  | Legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses that we are engaged in.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | New products developed and new methods of delivering products could result in a reduction in our business and income.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Increases in interest rates, increases in warranty losses, or changes in the securitization of mortgages could negatively impact our mortgage banking
income.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Adverse changes may occur in the securities market.
| | - |  | ---------------------------------------------------



| |  |  | Local, state or federal taxing authorities may take tax positions that are adverse to us.
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | Unpredictable natural and other disasters could have an adverse effect on our operations or on the willingness of our customers to access our financial
services.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies

Our accounting and financial policies are in accordance with accounting principles generally accepted in the United States and conform to general practices in the banking industry. The more critical
accounting and reporting policies include our accounting for the allowance for loan losses. Our accounting policies relating to the allowance for loan losses involve the use of estimates and require significant judgment. These estimates are based on
our opinion of an amount that is adequate to absorb losses in the existing loan portfolio. The allowance for loan losses is established through a provision for loan losses based on available information including the composition of the loan
portfolio, historical loan losses, specific impaired loans, availability and quality of collateral, age of the various portfolios, changes in local economic conditions, and loan performance and quality of the portfolio. Different assumptions used in
evaluating the adequacy of our allowance for loan losses could result in material changes in our consolidated financial condition or consolidated financial results of operations. The methodology we employ to determine the allowance for loan losses
involves a number of assumptions and estimates about uncertain matters. We periodically review our assumptions and methodology.



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Comparison of Financial Condition

Assets. Our total assets increased by $80.4 million or 13.0% from $616.6 million at December 31, 2008, to $697.1 million at
December 31, 2009. During 2009, interest-bearing deposits with banks increased $33.7 million to $34.0 million, and investment securities decreased by $7.2 million to $53.7 million. We attempt to maintain adequate liquidity to meet our loan
demand and other obligations. Loans held for sale increased 53.4% in 2009 to $29.4 million due to strong originations by our wholesale loan division which began operations in 2007 and expanded in 2008 and 2009. Loans held for investment increased by
$29.2 million or 5.8% during 2009. Carolina Bank, which makes both commercial and retail loans, experienced good loan demand in 2009 but at a slower pace than past years in its primary lending markets, Guilford, Randolph, Alamance, and Forsyth
Counties, North Carolina. The compounded annual growth rate for the five years ending December 31, 2009 for loans held for investment and assets was 18.9% and 17.5%, respectively.

Liabilities. Total liabilities increased by $64.1 million or 11.0% from $585.0 million at December 31, 2008, to $649.1 million
at December 31, 2009. Deposits increased by $119.4 million, or 24.0%, during 2009 as checking and savings increased while time deposits declined. The compounded annual growth rate for the five years ending December 31, 2009 for deposits
was 19.1%. We plan to continue our efforts to gain deposits through quality service, convenient locations, and competitive pricing. While deposit growth is an ongoing goal, wholesale sources of funding such as Federal Home Loan Bank advances and
repurchase borrowings, may be utilized where cost beneficial and when necessary to meet liquidity requirements. Federal Home Loan Bank advances decreased $49.1 million during 2009 to $7.8 million at December 31, 2009 as strong deposit growth
was used to repay short-term advances utilized in 2008 for liquidity and asset liability purposes. We had approximately $21.3 million in time deposits from other depository institutions and $33.1 million brokered deposits at December 31, 2009,
which in total declined $7.0 million from December 31, 2008.

Stockholders equity. Our total
stockholders equity increased $16.4 million at December 31, 2009 to $47.9 million from $31.6 million at December 31, 2008, primarily from issuance of $16.0 million in preferred stock to the United States Treasury.

Asset Quality

Our
non-performing assets, composed of foreclosed real estate and other repossessed assets, non-accrual loans and restructured loans, totaled $28,127,000 at December 31, 2009, compared to $6,384,000 at December 31, 2008. Non-performing assets,
as a percentage of total assets, were 4.04% and 1.04% at December 31, 2009 and 2008, respectively. There were no loans 90 days or more past due and still accruing interest at December 31, 2009 and 2008. Foreclosed real estate and other
repossessed assets were $13,964,000 and $728,000 at December 31, 2009 and 2008, respectively. Net loan charge-offs totaled $6,199,000 and $682,000 for the years ended December 31, 2009 and 2008, respectively.

The increase in non-performing assets and loan charge-offs in 2009 resulted from the economic recession and deteriorating asset
values in our markets. The unemployment rate in North Carolina rose to 11.2% in December 2009 from 8.1% in December 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.

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.

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 with banks, 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 2009, we increased our levels of short-term liquidity by 42.0% due to our strong deposit growth of 24.0%, moderate loan growth of 5.8%, and proceeds of $16 million from issuance of preferred stock.
We also increased our secondary sources of liquidity during 2009 and 2010 by reducing outstanding FHLB balances and obtaining a secured line from the Federal Reserve of over $100 million.

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

Due to our growth in recent years and our anticipation of continued growth, we issued $16 million in preferred stock to the United States
Treasury under the Capital Purchase program in January 2009 to increase our capital which could further support future growth.

Results of
Operations for the Years ended December 31, 2009 and 2008

General. We had a net loss of $358,000 for the year
ended December 31, 2009 compared to net income of $2,194,000 for the year ended December 31, 2008. Net loss allocable to common stockholders was $1,448,000, or $0.43 per diluted share, for 2009 compared to net income available to common
shareholders of $2,194,000, or $0.65 per diluted share, in 2008. Net income available (loss allocable) to common stockholders represents net income (loss) adjusted by preferred stock dividends and related discount accretion. The decrease in net
income was primarily due to a higher provision for loan losses and higher repossessed asset losses as credit conditions and asset values deteriorated in our markets during 2009. Net interest income, the difference between interest earned on
interest-earning assets and interest incurred on interest-bearing liabilities, was $19.7 million in 2009 compared to $14.7 million in 2008, an increase of 33.8%. Non-interest income, principally service charges and fees, mortgage banking income,
increase in cash value of life insurance, plus gain on sale of investments amounted to $10.5 million in 2009 and $1.9 million in 2008. Our provision for loan losses was $10.5 million and $1.9 million in 2009 and 2008, respectively. The elevated
level of our non-performing loans at December 31, 2009 and increased loan charge-offs in 2009 as well as declining economic conditions in our markets resulted in the large increase in the provision for loan losses in 2009. We incurred
non-interest expense of $20.6 million in 2009 and $14.1 million in 2008. The increase in non-interest expense of $6.5 million or 46.4% was largely the result of increased growth and asset impairments. Income taxes decreased $1,658,000, or 141.2%, in
2009 to a benefit of $484,000 due to a loss before income taxes of $842,000 realized in 2009.

The commercial/retail bank
segment reported a 2009 net loss of $2,639,000, primarily due to higher provisions for loan losses and impairment losses on an investment security and three repossessed assets. On the other hand, our wholesale mortgage division reported net income
of $2,281,000 due to lower mortgage rates and expanded operations.

Net interest income. Net interest income is the
amount of interest earned on interest-earning assets such as loans, investments, and interest-earning deposits in other financial institutions less the interest expense incurred on interest-bearing liabilities such as interest-bearing deposits and
borrowed money. Net interest income is the principal source of our earnings. Net interest income is affected by the general level of interest rates, competition, and the volumes and mix of interest-earning assets and interest-bearing liabilities.



---

For the year ended December 31, 2009, net interest income increased by $5.0 million or
33.8% to $19.7 million from $14.7 million for the year ended December 31, 2008. The increase in net interest income was attributable to growth in all aspects of our business and from an increase in the net yield on interest earning assets.
Average interest-earning assets were approximately $624.0 million in 2009 compared to $528.0 million in 2008, an increase of $96.0 million or 18.2%. We experienced significant loan and deposit growth during 2009 with average loans up $71.4 million
or 15.8% and average interest-bearing deposits increasing $104.5 million or 24.7% from 2008. Average other borrowings decreased $17.9 million, or 26.0%, in 2009 because we paid off short-term borrowings taken in 2008 with deposit growth.

The net yield on average interest-earning assets was 3.20% in 2009 and 2.82% in 2008. The interest rate spread was 3.04% in 2009 and
2.59% in 2008. The increase in the net yield on interest-earning assets and the interest rate spread in 2009 resulted from growth in loans and deposits and from a greater drop in the cost of deposits and other borrowings than the drop in rates
earned on interest-earning assets.

The table below provides a detailed analysis of the effective yields and rates on the
categories of interest-earning assets and interest-bearing liabilities for the years ended December 31, 2009 and 2008.



---

Net Interest Income and Average Balance Analysis



|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|-------------------------------------------- |  | -------------------------------- | ------- | ----------------- | ---- | ----------------- |  | ---- | ------------------- |  | ----------------- | ------- | ----------------- | - | ------ |  | ---- | -
|                                             |  | For the Years Ended December 31, |        
|                                             |  | 2009                             |         |                   | 2008 |                  
|                                             |  | AverageBalance (1.)              |         | InterestInc./Exp. |      | AverageYield Cost |  |      | AverageBalance (1.) |  | InterestInc./Exp. |         | AverageYield/Cost |  
|                                             |  | (Dollars in thousands)           |        
|Interest-earning assets                      |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Interest bearing deposits and Fed funds      |  | $                                | 17,268  |                   | $    | 35                |  | 0.20 | %                   |  | $                 | 1,577   |                   | $ | 31     |  | 1.97 | %
|Taxable investments                          |  |                                  | 42,758  |                   |      | 2,141             |  | 5.01 | %                   |  |                   | 51,866  |                   |   | 2,750  |  | 5.30 | %
|Non taxable investments (2.)                 |  |                                  | 13,077  |                   |      | 827               |  | 6.32 | %                   |  |                   | 8,744   |                   |   | 542    |  | 6.20 | %
|Loans held for sale                          |  |                                  | 27,963  |                   |      | 1,413             |  | 5.05 | %                   |  |                   | 14,188  |                   |   | 835    |  | 5.89 | %
|Loans (3.)                                   |  |                                  | 522,965 |                   |      | 28,569            |  | 5.46 | %                   |  |                   | 451,583 |                   |   | 27,648 |  | 6.12 | %
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Interest-earning assets                      |  |                                  | 624,031 |                   |      | 32,985            |  |      |                     |  |                   | 527,958 |                   |   | 31,806 |  |      |  
|Interest-earning assets                      |  |                                  |         |                   |      |                   |  | 5.29 | %                   |  |                   |         |                   |   |        |  | 6.02 | %
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Non interest-earning assets                  |  |                                  | 41,524  |                   |      |                   |  |      |                     |  |                   | 29,325  |                   |   |        |  |      |  
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Total assets                                 |  | $                                | 665,555 |                   |      |                   |  |      |                     |  | $                 | 557,283 |                   |   |        |  |      |  
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Interest-bearing liabilities                 |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Interest checking                            |  | $                                | 29,924  |                   |      | 151               |  | 0.50 | %                   |  | $                 | 24,696  |                   |   | 222    |  | 0.90 | %
|Money market and savings                     |  |                                  | 224,318 |                   |      | 4,319             |  | 1.93 | %                   |  |                   | 146,622 |                   |   | 4,080  |  | 2.78 | %
|Time certificates and IRAs                   |  |                                  | 273,916 |                   |      | 7,363             |  | 2.69 | %                   |  |                   | 252,362 |                   |   | 10,563 |  | 4.19 | %
|Other borrowings                             |  |                                  | 50,895  |                   |      | 1,183             |  | 2.32 | %                   |  |                   | 68,752  |                   |   | 2,049  |  | 2.98 | %
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Total interest-bearing liabilities           |  |                                  | 579,053 |                   |      | 13,016            |  |      |                     |  |                   | 492,432 |                   |   | 16,914 |  |      |  
|Cost on average                              |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Interest-bearing liabilities                 |  |                                  |         |                   |      |                   |  | 2.25 | %                   |  |                   |         |                   |   |        |  | 3.43 | %
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Non-interest-bearing liabilities             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Demand deposits                              |  |                                  | 33,173  |                   |      |                   |  |      |                     |  |                   | 29,015  |                   |   |        |  |      |  
|Other liabilities                            |  |                                  | 4,816   |                   |      |                   |  |      |                     |  |                   | 5,065   |                   |   |        |  |      |  
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Total non-interest-bearing liabilities       |  |                                  | 37,989  |                   |      |                   |  |      |                     |  |                   | 34,080  |                   |   |        |  |      |  
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Total liabilities                            |  |                                  | 617,042 |                   |      |                   |  |      |                     |  |                   | 526,512 |                   |   |        |  |      |  
|Stockholders equity                         |  |                                  | 48,513  |                   |      |                   |  |      |                     |  |                   | 30,771  |                   |   |        |  |      |  
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Total liabilities and equity                 |  | $                                | 665,555 |                   |      |                   |  |      |                     |  | $                 | 557,283 |                   |   |        |  |      |  
|Net interest income                          |  |                                  |         |                   | $    | 19,969            |  |      |                     |  |                   |         |                   | $ | 14,892 |  |      |  
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Net yield on average interest-earning assets |  |                                  |         |                   |      |                   |  | 3.20 | %                   |  |                   |         |                   |   |        |  | 2.82 | %
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  
|Interest rate spread                         |  |                                  |         |                   |      |                   |  | 3.04 | %                   |  |                   |         |                   |   |        |  | 2.59 | %
|                                             |  |                                  |         |                   |      |                   |  |      |                     |  |                   |         |                   |   |        |  |      |  



|(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.
|---- | ----------------------------------------------------------



---

Rate/Volume analysis of net interest income. The effect of changes in average
balances (volume) and rates on interest income, interest expense and net interest income for the period indicated is shown below. The effect of a change in the average balance has been determined by applying the average rate in the earlier period to
the change in average balance in the later period, as compared with the earlier period. The effect of a change in the average rate has been determined by applying the average balance in the earlier period to the change in the average rate in the
later period as compared with the earlier period. Changes resulting from average balance/rate variances have been allocated between volume and rate on a proportional basis.

Rate / Volume Variance Analysis



|                                         |  |                                      |        |   |                                     |   |       |      |  |   |        |  
|---------------------------------------- |  | ------------------------------------ | ------ | - | ----------------------------------- | - | ----- | ---- |  | - | ------ | -
|                                         |  | Year EndedDecember 31, 2009 vs.
2008 |       
|                                         |  | Interest Increase                    |        |   | Increase (Decrease)Due To Change in |  
|                                         |  | (Decrease)                           |        |   | Volume                              |   |       | Rate | 
|                                         |  | (Dollars in thousands)               |       
|Interest-earning assets:                 |  |                                      |        |   |                                     |   |       |      |  |   |        |  
|Interest-earning deposits/Fed funds sold |  | $                                    | 4      |   |                                     | $ | 54    |      |  | $ | (50    | )
|Taxable investments                      |  |                                      | (609   | ) |                                     |   | (463  | )    |  |   | (146   | )
|Non taxable investments                  |  |                                      | 285    |   |                                     |   | 274   |      |  |   | 11     |  
|Loans held for sale                      |  |                                      | 578    |   |                                     |   | 711   |      |  |   | (133   | )
|Loans                                    |  |                                      | 921    |   |                                     |   | 4,091 |      |  |   | (3,170 | )
|                                         |  |                                      |        |   |                                     |   |       |      |  |   |        |  
|Total interest-earning assets            |  |                                      | 1,179  |   |                                     |   | 4,667 |      |  |   | (3,488 | )
|                                         |  |                                      |        |   |                                     |   |       |      |  |   |        |  
|Interest-bearing liabilities             |  |                                      |        |   |                                     |   |       |      |  |   |        |  
|Interest checking                        |  |                                      | (71    | ) |                                     |   | 40    |      |  |   | (111   | )
|Money market and savings                 |  |                                      | 239    |   |                                     |   | 1,741 |      |  |   | (1,502 | )
|Time certificates and IRAs               |  |                                      | (3,200 | ) |                                     |   | 840   |      |  |   | (4,040 | )
|Other borrowings                         |  |                                      | (866   | ) |                                     |   | (469  | )    |  |   | (397   | )
|                                         |  |                                      |        |   |                                     |   |       |      |  |   |        |  
|Total interest-bearing liabilities       |  |                                      | (3,898 | ) |                                     |   | 2,152 |      |  |   | (6,050 | )
|                                         |  |                                      |        |   |                                     |   |       |      |  |   |        |  
|Net interest income                      |  | $                                    | 5,077  |   |                                     | $ | 2,515 |      |  | $ | 2,562  |  
|                                         |  |                                      |        |   |                                     |   |       |      |  |   |        |  

The improvement in net interest income in 2009 over 2008 was the result of growth in interest-earning assets
and interest-bearing liabilities and greater reduction in rates paid on interest-bearing liabilities than rates earned on interest-bearing assets. The increase in average stockholders equity from issuance of preferred stock and the increase in
non interest-bearing demand deposits had a positive impact on net interest income in 2009 while the increase in non interest-earning assets such as repossessed assets had a negative impact on net interest income in 2009.

Provision for loan losses. The allowance for loan losses, established through charges to expense in the form of a provision for loan
losses, allows for known and expected loan losses in our loan portfolio. The provision for loan losses increased in 2009 to $10,520,000 from $1,910,000 in 2008, primarily because nonperforming and watch list loans and related loan loss allowances
increased in 2009. Declining real estate values and tepid demand for new real estate negatively impacted the ability of many of our borrowers to make loan payments in 2009 resulting in significant increases in loan charge-offs, non-performing loans,
watch list loans and foreclosed real estate. Watch list loans still accrue interest but generally require higher loan loss reserves due to greater risk or declining credit quality. The level of the allowance for loan losses is based on our estimate
as to the amount required to maintain an allowance adequate enough to provide for known and expected losses. We consider, among other things, nonperforming loans, watch list loans, delinquencies, collateral value, loss trends, and general economic
conditions when assessing the



---

adequacy of the allowance. The allowance for loan losses was $10.1 million or 1.90% of loans and $5.8 million or 1.15% of loans at December 31, 2009 and 2008, respectively. In addition to
increased provisions related to year-end 2009 non-performing and watch list loans, substantially higher charge-offs during 2009 resulted in large increases in the provision for loan losses in 2009. Charge-offs, net of recoveries, were approximately
$6,199,000 and $682,000 during 2009 and 2008, respectively.

The following table describes the activity relating to our
allowance for loan losses for the years indicated:

Analysis of the Allowance for Loan Losses



|                          |  |                                     |        |   |      |   |       |  
|------------------------- |  | ----------------------------------- | ------ | - | ---- | - | ----- | -
|                          |  | At or for the YearEnded December 31 |       
|                          |  | 2009                                |        |   | 2008 |  
|                          |  | (Dollars in thousands)              |       
|Beginning Balance         |  | $                                   | 5,760  |   |      | $ | 4,532 |  
|Provision for loan losses |  |                                     | 10,520 |   |      |   | 1,910 |  
|Charge-Offs:              |  |                                     |        |   |      |   |       |  
|Commercial                |  |                                     | (397   | ) |      |   | (151  | )
|Real Estate               |  |                                     | (5,735 | ) |      |   | (486  | )
|Consumer                  |  |                                     | (76    | ) |      |   | (57   | )
|                          |  |                                     |        |   |      |   |       |  
|Total                     |  |                                     | (6,208 | ) |      |   | (694  | )
|Recoveries:               |  |                                     |        |   |      |   |       |  
|Commercial                |  |                                     | 7      |   |      |   |      |  
|Real Estate               |  |                                     | 2      |   |      |   | 8     |  
|Consumer                  |  |                                     |       |   |      |   | 4     |  
|                          |  |                                     |        |   |      |   |       |  
|Ending Balance            |  | $                                   | 10,081 |   |      | $ | 5,760 |  
|                          |  |                                     |        |   |      |   |       |  

Non-interest income. Non-interest income consists principally of service charges and fees, mortgage
banking income, investment services income, increase in cash value of life insurance, gain on sale of investments, and dividends from other assets. Non-interest income for 2009 was $10,550,000 compared to $4,609,000 in 2008, an increase of 128.9%.
Service charges increased 10.3% in 2009 to $1,021,000, primarily from growth in customers and their related deposits and loans. Mortgage banking income, which represents fees earned from the origination and sale of mortgage loans, rose to $8,814,000
in 2009 from $2,959,000 in 2008. Mortgage banking income in 2009 included $8,416,000 in gains and fees on loans originated and sold through the wholesale mortgage division compared to $2,641,000 in 2008. The wholesale mortgage division, which
originates loans through banks and brokers and then sells the loans to investors, began operations in 2007 and expanded operations in 2008 and 2009. Mortgage banking income from the retail banking operation was $398,000 in 2009 which increased
$78,000, or 24.4%, from 2008. Other non-interest income included $398,000 and $354,000 from the increase in cash value of life insurance in 2009 and 2008, respectively. Net gains on the sale of investments of $99,000 in 2009 and $227,000 in 2008 are
also included in other non-interest income.

Non-interest expenses.Non-interest expenses were $20.6 million in 2009
compared to $14.1 million in 2008, an increase of $6.5 million or 46.4%. Salaries and employee benefits increased 31.8% to $10,102,000 in 2009 from $7,666,000 in 2008 to facilitate our growth. The number of full time equivalent employees rose
to 140 at December 31, 2009 from 119 at the end of 2008. Occupancy and equipment rose 24.3% to $2,350,000 in 2009 from $1,891,000 in 2008 as a result of the completion and opening of our new corporate headquarters which included a new retail
office in October 2008 and from an expanded wholesale mortgage facility. FDIC insurance increased 174.3% to $1,218,000 in 2009 as a result of strong deposit growth and higher charges by the FDIC, including a special assessment to all insured banks.
Impairment charges of $850,000 on an investment security related to failed correspondent bank and of $816,000 on three repossessed assets were recorded in 2009.



---

Income taxes. An income tax benefit of $484,000 or 57.5% of loss before income taxes
in 2009 compared to income taxes of $1,174,000, or 34.9% of income before income taxes in 2008. The higher tax benefit in 2009 primarily resulted from higher non taxable income from municipal securities and from the increase in cash value of life
insurance.

Financial condition.Total assets were $697.1 million at December 31, 2009, an increase of 13.0% over
total assets of $616.6 million at December 31, 2008. Interest-bearing deposits with banks, loans and other assets increased in 2009. Funding for the asset growth came primarily from an increase in deposits and issuance of preferred stock.
We have continued our aggressive promotion and pricing of deposit products in order to establish and build market share. We regularly evaluate our deposit product offerings and attempt to meet the needs of all types of customers through both new
products and modifications to existing products. We had approximately $21.3 million and $33.2 million in deposits from other depository institutions and $33.1 million and $28.2 million of brokered deposits at December 31, 2009 and
December 31, 2008, respectively.

The majority of our asset growth occurred in interest-bearing deposits with banks and
loans. Interest-bearing deposits of $34.0 million primarily represent overnight deposits with the Federal Reserve and Federal Home Loan Bank. Loans held for investment increased $29.2 million or 5.8% to $530.6 million at December 31, 2009.
In addition, loans held for sale increased by $10.2 million to $29.4 million at December 31, 2009 as a result of the expanded wholesale mortgage division. We believe our targeted marketing efforts, experienced lenders, local decision making,
and emphasis on personal relationships and superior customer service have been key drivers of our loan growth. Approximately 82.9% of our loans at December 31, 2009 were secured by some form of real estate. At December 31, 2009 loans
secured by one-to-four family residential properties comprised 21.8% of our loan portfolio while nonresidential properties, construction loans and multifamily residential properties comprised 35.0%, 23.0% and 3.1% of our loan portfolio,
respectively. Another 15.6% were commercial and industrial loans with the balance in consumer and other loans.

Asset quality
is a primary concern of our credit administration. A thorough credit analysis is made of most loans before origination. Experienced lenders and a credit administrator review the loans structure including terms, rate, collateral and repayment
sources in addition to adherence to our lending policy. On an ongoing basis, a risk rating program and other credit administration tools are utilized to monitor loans and overall asset quality. Non-performing loans amounted to approximately
$14,163,000 or 2.67% of loans outstanding and $5,656,000 or 1.13% of loans outstanding at December 31, 2009 and 2008, respectively. Our allowance for loan losses was 1.90% and 1.15% of loans outstanding at December 31, 2009 and 2008,
respectively. Net loan charge-offs were 1.19% and .15% of average loans during 2009 and 2008, respectively.

Investment
securities declined to $53.7 million at December 31, 2009 from $60.9 million at December 31, 2008, a decrease of 11.8%. Approximately $5.9 million in investment securities were sold in 2009 for asset liability reasons. Our investment
securities portfolio consists primarily of U.S. government agency securities, mortgage-backed securities issued by the U.S. government and government sponsored entities, municipal securities, and corporate securities. Approximately 98.6% of the
investment securities at December 31, 2009 were classified as available-for-sale and were recorded at market value. Changes in market value are reflected as a separate component of stockholders equity. We do not engage in the practice of
trading securities.

Other assets consist of interest receivable on loans and investments, prepaid expenses, deferred tax
assets, real estate owned and cash value of life insurance. The increase in other assets of $18.4 million to $33.6 million at December 31, 2009 resulted primarily from the conversion of loans to real estate owned and other repossessed assets.
Foreclosed real estate and other repossessed assets were $14.0 million at December 31, 2009 compared to $0.7 million at December 31, 2008.

We opened for business in November 1996 and have not paid any cash dividends to our stockholders. Stock dividends were paid in 2007, 2005, 2004, 2001, and 2000. Certain reclassifications were made to
common stock from other equity accounts to record the stock dividends.

Investment Portfolio.At December 31, 2009
and 2008, our investment portfolio comprised approximately 7.7% and 9.9% of total assets, respectively.



---

The following table summarizes the carrying value amounts of securities at the dates
indicated. Available-for-sale securities are reported at estimated fair value and held to maturity securities are reported at amortized cost.

Analysis of Investment Securities

Amortized Cost and Market Values



|                           |  |                        |        |             |   |               |  |             |        |  |   |       
|-------------------------- |  | ---------------------- | ------ | ----------- | - | ------------- |  | ----------- | ------ |  | - | ------
|                           |  | At December 31,       
|                           |  | 2009                   |        | 2008       
|                           |  | AmortizedCost          |        | MarketValue |   | AmortizedCost |  | MarketValue
|                           |  | (Dollars in thousands)
|Available for Sale         |  |                        |        |             |   |               |  |             |        |  |   |       
|US agency securities       |  | $                      | 998    |             | $ | 1,052         |  | $           | 2,256  |  | $ | 2,363 
|Mortgage-backed securities |  |                        | 25,580 |             |   | 26,963        |  |             | 37,175 |  |   | 38,116
|Municipal securities       |  |                        | 15,102 |             |   | 15,459        |  |             | 11,245 |  |   | 11,028
|Corporate securities       |  |                        | 5,490  |             |   | 5,315         |  |             | 5,414  |  |   | 4,370 
|Restricted stock           |  |                        | 3,702  |             |   | 3,702         |  |             | 3,560  |  |   | 3,560 
|Unrestricted stock         |  |                        | 533    |             |   | 433           |  |             | 533    |  |   | 366   
|                           |  |                        |        |             |   |               |  |             |        |  |   |       
|                           |  |                        | 51,405 |             |   | 52,924        |  |             | 60,183 |  |   | 59,803
|                           |  |                        |        |             |   |               |  |             |        |  |   |       
|Held to Maturity           |  |                        |        |             |   |               |  |             |        |  |   |       
|Mortgage-backed securities |  |                        | 770    |             |   | 797           |  |             | 1,116  |  |   | 1,138 
|                           |  |                        |        |             |   |               |  |             |        |  |   |       
|Total                      |  | $                      | 52,175 |             | $ | 53,721        |  | $           | 61,299 |  | $ | 60,941
|                           |  |                        |        |             |   |               |  |             |        |  |   |       

The following table presents maturities and weighted
average yields of debt securities at the date indicated.

Analysis of Investment Securities



|                           |  |                        |      |   |                           |   |       |                            |  |   |                   |   |  |       |        |   |             |   |        |   |  |   |       
|-------------------------- |  | ---------------------- | ---- | - | ------------------------- | - | ----- | -------------------------- |  | - | ----------------- | - |  | ----- | ------ | - | ----------- | - | ------ | - |  | - | ------
|                           |  | At December 31, 2009  
|                           |  | Due OneYear orLess     |      |   | One YearThroughFive Years |   |       | Five YearsThroughTen Years |  |   | DueAfterTen Years |   |  | Total |        |   | MarketValue
|                           |  |                        |      |   |                          
|                           |  |                        |      |   |                          
|                           |  | (Dollars in thousands)
|Investment Securities      |  |                        |      |   |                           |   |       |                            |  |   |                   |   |  |       |        |   |             |   |        |   |  |   |       
|US agency securities       |  | $                      |     |   |                           | $ | 998   |                            |  | $ |                  |   |  | $     |       |   |             | $ | 998    |   |  | $ | 1,052 
|Mortgage-backed securities |  |                        | 316  |   |                           |   | 1,313 |                            |  |   | 7,147             |   |  |       | 17,574 |   |             |   | 26,350 |   |  |   | 27,760
|Municipals securities      |  |                        |     |   |                           |   | 482   |                            |  |   | 1,080             |   |  |       | 13,540 |   |             |   | 15,102 |   |  |   | 15,459
|Corporate securities       |  |                        |     |   |                           |   | 948   |                            |  |   | 500               |   |  |       | 4,042  |   |             |   | 5,490  |   |  |   | 5,315 
|                           |  |                        |      |   |                           |   |       |                            |  |   |                   |   |  |       |        |   |             |   |        |   |  |   |       
|Total                      |  | $                      | 316  |   |                           | $ | 3,741 |                            |  | $ | 8,727             |   |  | $     | 35,156 |   |             | $ | 47,940 |   |  | $ | 49,586
|                           |  |                        |      |   |                           |   |       |                            |  |   |                   |   |  |       |        |   |             |   |        |   |  |   |       
|Weighted Average Yields    |  |                        |      |   |                           |   |       |                            |  |   |                   |   |  |       |        |   |             |   |        |   |  |   |       
|US agency securities       |  |                        |     |   |                           |   | 5.18  | %                          |  |   |                  |   |  |       |       |   |             |   | 5.18   | % |  |   |       
|Mortgage-backed securities |  |                        | 3.55 | % |                           |   | 4.01  | %                          |  |   | 5.28              | % |  |       | 5.28   | % |             |   | 5.20   | % |  |   |       
|Municipals securities      |  |                        |     |   |                           |   | 6.30  | %                          |  |   | 3.97              | % |  |       | 6.25   | % |             |   | 6.09   | % |  |   |       
|Corporate securities       |  |                        |     |   |                           |   | 5.70  | %                          |  |   | 4.11              | % |  |       | 7.80   | % |             |   | 7.10   | % |  |   |       
|                           |  |                        |      |   |                           |   |       |                            |  |   |                   |   |  |       |        |   |             |   |        |   |  |   |       
|                           |  |                        | 3.55 | % |                           |   | 5.05  | %                          |  |   | 5.06              | % |  |       | 5.94   | % |             |   | 5.69   | % |  |   |       
|                           |  |                        |      |   |                           |   |       |                            |  |   |                   |   |  |       |        |   |             |   |        |   |  |   |       



---

Loan Portfolio. We believe the loan portfolio is adequately diversified although
heavily secured by real estate. There are no significant concentrations of loans to any particular individuals or industry, or group of related individuals or industries. There are no foreign loans. The following table presents, at the dates
indicated, the composition of our loan portfolio by loan type:

Analysis of Loans



|                                   |  |                        |         |         |        |   |        |   |         |  |        |  
|---------------------------------- |  | ---------------------- | ------- | ------- | ------ | - | ------ | - | ------- |  | ------ | -
|                                   |  | At December 31,        |        
|                                   |  | 2009                   |         |         | 2008   |  
|                                   |  | Amount                 |         | Percent |        |   | Amount |   | Percent | 
|                                   |  | (Dollars in thousands) |        
|Loans Secured by Real Estate:      |  |                        |         |         |        |   |        |   |         |  |        |  
|Construction and Land Development  |  | $                      | 122,072 |         | 23.01  | % |        | $ | 119,795 |  | 23.89  | %
|1-4 Family Residential Properties  |  |                        | 115,731 |         | 21.81  | % |        |   | 99,052  |  | 19.75  | %
|Multifamily Residential Properties |  |                        | 16,687  |         | 3.14   | % |        |   | 26,865  |  | 5.36   | %
|Nonfarm Nonresidential Properties  |  |                        | 185,452 |         | 34.95  | % |        |   | 172,153 |  | 34.33  | %
|                                   |  |                        |         |         |        |   |        |   |         |  |        |  
|Total Loans Secured by Real Estate |  |                        | 439,942 |         | 82.91  | % |        |   | 417,865 |  | 83.33  | %
|Commercial and Industrial Loans    |  |                        | 83,005  |         | 15.64  | % |        |   | 77,345  |  | 15.43  | %
|Consumer                           |  |                        | 5,818   |         | 1.10   | % |        |   | 4,706   |  | 0.94   | %
|All Other Loans                    |  |                        | 1,841   |         | 0.35   | % |        |   | 1,508   |  | 0.30   | %
|                                   |  |                        |         |         |        |   |        |   |         |  |        |  
|Total Loans Held for Investment    |  | $                      | 530,606 |         | 100.00 | % |        | $ | 501,424 |  | 100.00 | %
|                                   |  |                        |         |         |        |   |        |   |         |  |        |  

The table that follows shows the loan portfolio at December 31, 2009 by loan type, maturity and whether
the interest rate is fixed or variable. Loans on non-accrual have been excluded.

Analysis of Certain Loan Maturities

As of December 31, 2009



|                                       |  |                        |         |         |          |   |        |                    |         |  |        |        |  |         |        |  |        |   |         |   |         |  |        |  
|-------------------------------------- |  | ---------------------- | ------- | ------- | -------- | - | ------ | ------------------ | ------- |  | ------ | ------ |  | ------- | ------ |  | ------ | - | ------- | - | ------- |  | ------ | -
|                                       |  | Real Estate            |         |         | Consumer |   |        | Commercial & Other |         |  | Total  |       
|                                       |  | Amount                 |         | Percent |          |   | Amount |                    | Percent |  |        | Amount |  | Percent |        |  | Amount |   | Percent |  
|                                       |  | (Dollars in thousands) |        
|Due within one year:                   |  | $                      | 210,117 |         | 49.00    | % |        | $                  | 3,883   |  | 69.65  | %      |  | $       | 53,301 |  | 64.98  | % |         | $ | 267,301 |  | 51.76  | %
|                                       |  |                        |         |         |          |   |        |                   
|Due after one year through five years: |  |                        |         |         |          |   |        |                    |         |  |        |        |  |         |        |  |        |   |         |   |         |  |        |  
|Fixed Rate                             |  |                        | 95,663  |         | 22.31    | % |        |                    | 1,151   |  | 20.65  | %      |  |         | 13,867 |  | 16.91  | % |         |   | 110,681 |  | 21.43  | %
|Variable Rate                          |  |                        | 47,957  |         | 11.18    | % |        |                    | 496     |  | 8.90   | %      |  |         | 11,765 |  | 14.34  | % |         |   | 60,218  |  | 11.66  | %
|                                       |  |                        |         |         |          |   |        |                    |         |  |        |        |  |         |        |  |        |   |         |   |         |  |        |  
|                                       |  |                        | 143,620 |         | 33.49    | % |        |                    | 1,647   |  | 29.54  | %      |  |         | 25,632 |  | 31.25  | % |         |   | 170,899 |  | 33.09  | %
|                                       |  |                        |         |         |          |   |        |                   
|Due after five years:                  |  |                        |         |         |          |   |        |                    |         |  |        |        |  |         |        |  |        |   |         |   |         |  |        |  
|Fixed Rate                             |  |                        | 29,987  |         | 6.99     | % |        |                    | 45      |  | 0.81   | %      |  |         | 703    |  | 0.86   | % |         |   | 30,735  |  | 5.95   | %
|Variable Rate                          |  |                        | 45,123  |         | 10.52    | % |        |                    |        |  | 0.00   | %      |  |         | 2,385  |  | 2.91   | % |         |   | 47,508  |  | 9.20   | %
|                                       |  |                        |         |         |          |   |        |                    |         |  |        |        |  |         |        |  |        |   |         |   |         |  |        |  
|                                       |  |                        | 75,110  |         | 17.51    | % |        |                    | 45      |  | 0.81   | %      |  |         | 3,088  |  | 3.76   | % |         |   | 78,243  |  | 15.15  | %
|                                       |  | $                      | 428,847 |         | 100.00   | % |        | $                  | 5,575   |  | 100.00 | %      |  | $       | 82,021 |  | 100.00 | % |         | $ | 516,443 |  | 100.00 | %
|                                       |  |                        |         |         |          |   |        |                    |         |  |        |        |  |         |        |  |        |   |         |   |         |  |        |  

A certain degree of risk is inherent in the extension of credit. We have established loan and credit
policies designed to control both the types and amounts of risks assumed and to ultimately minimize credit losses. Such





---

policies include limitations on loan-to-collateral values for various types of collateral, requirements for appraisals of certain real estate collateral, problem loan management practices and
collection procedures, and non-accrual and charge-off guidelines.

Loans secured by real estate mortgages comprised 82.9% and
83.3% of our loan portfolio at December 31, 2009 and 2008, respectively. Residential real estate loans consist mainly of first and second mortgages on single-family homes. Loan-to-value ratios for these loans are generally limited to 90% for
second mortgages and 85% for first mortgages, unless private mortgage insurance is obtained. Nonresidential loans are secured by business and commercial properties with loan-to-value ratios generally limited to 80%. The repayment of both residential
and nonresidential real estate loans is dependent primarily on the income and cash flows of the borrowers with the real estate serving as a secondary source of repayment. Real estate construction loans generally consist of financing of commercial
real estate projects and some one-to-four family dwellings. Usually the loan-to-cost ratios are limited to 80%, and permanent financing commitments are generally required prior to advancing loan proceeds.

Commercial loans primarily represent loans to businesses and may be made on either a secured or unsecured basis. Commercial lending involves
risk because repayment usually depends on the cash flows generated by a borrowers business, and the debt service capacity of a business can deteriorate because of downturns in national and local economic conditions. To manage this risk,
initial and continuing financial analysis of a borrowers financial information is generally required.

Allowance for
loan losses. The allowance for loan losses is increased by direct charges to operating expense. Losses on loans are charged against the allowance in the period in which management has determined that such loans have become uncollectible.
Recoveries of previously charged-off loans are credited to the allowance.

Our allowance for loan losses is composed of two
parts, a specific portion related to non-performing loans and a general section related to performing loans. The specific portion of our allowance for loan losses, which relates to problem loans, increased to $4,431,000 at December 31, 2009
from $840,000 at December 31, 2008. The difference between our allowance for loan losses and the specific portion of the allowance for loan losses was $5,650,000 and $4,920,000 at December 31, 2009 and 2008, respectively. These allowances
apply to performing loans and were determined by applying estimated loss ratios inherent in the loan portfolio, ranging from .25% on loans secured by deposits or investment securities to 6.00% on non secured consumer revolving loans, to categories
of performing loans at each period end. The general section also includes allowances for certain watch list loans which are still performing but carry a higher degree of risk because of declining credit factors. Watch list loans with higher than
standard loan loss allowances increased to $16.9 million at December 31, 2009 from $8.8 million at December 31, 2008 with related allowances increasing to $574,000 from $217,000. A summary of our loan loss experience for the years ended
December 31, 2009 and 2008 is presented under the previous section, Provision for loan losses.

The following
table presents the allocation of the allowance for loan losses at December 31, 2009 and 2008, compared with the percent of loans in the applicable categories of total loans.



---

Allocation of the Allowance for Loan Losses



|                                        |  |                        |        |                        |        |   |        |   |                        |  |        |  
|--------------------------------------- |  | ---------------------- | ------ | ---------------------- | ------ | - | ------ | - | ---------------------- |  | ------ | -
|                                        |  | At December 31,        |       
|                                        |  | 2009                   |        |                        | 2008   |  
|                                        |  | Amount                 |        | % Loansin EachCategory |        |   | Amount |   | % Loansin EachCategory | 
|                                        |  | (Dollars in thousands) |       
|Balance at end of period applicable to: |  |                        |        |                        |        |   |        |   |                        |  |        |  
|Commercial                              |  | $                      | 2,025  |                        | 15.64  | % |        | $ | 932                    |  | 15.43  | %
|Real Estate                             |  |                        | 7,713  |                        | 82.91  |   |        |   | 4,377                  |  | 83.33  |  
|Consumer                                |  |                        | 93     |                        | 1.10   |   |        |   | 136                    |  | 0.94   |  
|All Other Loans                         |  |                        | 240    |                        | 0.35   |   |        |   | 19                     |  | 0.30   |  
|Unallocated                             |  |                        | 10     |                        |       |   |        |   | 296                    |  |       |  
|                                        |  |                        |        |                        |        |   |        |   |                        |  |        |  
|Total                                   |  | $                      | 10,081 |                        | 100.00 | % |        | $ | 5,760                  |  | 100.00 | %
|                                        |  |                        |        |                        |        |   |        |   |                        |  |        |  

Non-performing loans. When a loan is past due 90 days as to interest or principal or there is serious
doubt as to collectability, the accrual of interest is generally discontinued unless the estimated fair value of the collateral is sufficient to assure the collection of the principal balance and accrued interest. A non-accrual loan is not returned
to accrual status unless principal and interest are current and the borrower has demonstrated the ability to continue making payments as agreed. The following table sets forth information on non-accrual loans, restructured loans, total nonperforming
loans, and nonperforming assets at the dates indicated:

Non-Performing Assets



|                                                            |  |                        |        |   |      |   |        |  
|----------------------------------------------------------- |  | ---------------------- | ------ | - | ---- | - | ------ | -
|                                                            |  | At December 31,        |       
|                                                            |  | 2009                   |        |   | 2008 |  
|                                                            |  | (Dollars in thousands) |       
|Nonaccrual loans                                            |  | $                      | 14,163 |   |      | $ | 5,656  |  
|Restructured loans                                          |  |                        |       |   |      |   |       |  
|                                                            |  |                        |        |   |      |   |        |  
|Total nonperforming loans                                   |  |                        | 14,163 |   |      |   | 5,656  |  
|Real estate owned                                           |  |                        | 12,546 |   |      |   | 728    |  
|Other repossessed assets                                    |  |                        | 1,418  |   |      |   |       |  
|                                                            |  |                        |        |   |      |   |        |  
|Total nonperforming assets                                  |  | $                      | 28,127 |   |      | $ | 6,384  |  
|                                                            |  |                        |        |   |      |   |        |  
|Accruing loans past due 90 days or more                     |  | $                      |       |   |      | $ |       |  
|Allowance for loan losses                                   |  |                        | 10,081 |   |      |   | 5,760  |  
|Nonperforming loans to period end loans held for investment |  |                        | 2.67   | % |      |   | 1.13   | %
|Allowance for loan losses to nonperforming loans            |  |                        | 71.18  | % |      |   | 101.84 | %
|Nonperforming assets to total assets                        |  |                        | 4.04   | % |      |   | 1.04   | %

The elevated level of
non-performing assets at December 31, 2009 is related to the declining economic conditions in our lending markets. Construction and land development loans have been particularly affected by the economic downturn as demand for new housing or
developed property has declined from prior years. Note below that our construction and land development loans had the highest level of impairment and specific loan loss allowances at December 31, 2009 as well as the highest net loan charge-offs
in 2009. The following table gives expanded disclosure of our loans outstanding and impaired loans by loan type along with specific loan loss allowances at December 31, 2009 and net loan charge-offs in 2009.



---

|                                   |  |                        |         |         |             |   |                              |   |                                 |  |   |       |  |   |      
|---------------------------------- |  | ---------------------- | ------- | ------- | ----------- | - | ---------------------------- | - | ------------------------------- |  | - | ----- |  | - | -----
|                                   |  | At December 31, 2009  
|                                   |  |                        |         |         |             |   | Impaired Loans               |   | Year to DateNet LoanCharge-offs
|                                   |  | Loans Outstanding      |         |         | Outstanding |   | Specific LoanLoss Allowances |  
|                                   |  | Outstanding            |         | Percent |             |   |                              |  
|                                   |  | (Dollars in thousands)
|Loans secured by real estate:      |  |                        |         |         |             |   |                              |   |                                 |  |   |       |  |   |      
|Construction & land development    |  | $                      | 122,072 |         | 23.01       | % |                              | $ | 3,954                           |  | $ | 1,518 |  | $ | 2,952
|Revolving residential lines        |  |                        | 58,015  |         | 10.93       | % |                              |   | 504                             |  |   | 276   |  |   | 697  
|Closed-end residential             |  |                        | 57,716  |         | 10.88       | % |                              |   | 1,372                           |  |   | 317   |  |   | 509  
|Multifamily                        |  |                        | 16,687  |         | 3.14        | % |                              |   |                                |  |   |      |  |   |     
|Nonfarm nonresidential             |  |                        | 185,452 |         | 34.95       | % |                              |   | 5,185                           |  |   | 1,010 |  |   | 1,575
|                                   |  |                        |         |         |             |   |                              |   |                                 |  |   |       |  |   |      
|Total loans secured by real estate |  |                        | 439,942 |         | 82.91       | % |                              |   | 11,015                          |  |   | 3,121 |  |   | 5,733
|                                   |  |                        |         |         |            
|Commercial and industrial          |  |                        | 83,005  |         | 15.64       | % |                              |   | 2,835                           |  |   | 1,084 |  |   | 390  
|Consumer                           |  |                        | 5,818   |         | 1.10        | % |                              |   | 14                              |  |   | 2     |  |   | 76   
|All other loans                    |  |                        | 1,841   |         | 0.35        | % |                              |   | 299                             |  |   | 224   |  |   |     
|                                   |  |                        |         |         |             |   |                              |   |                                 |  |   |       |  |   |      
|Total loans held for investment    |  | $                      | 530,606 |         | 100.00      | % |                              | $ | 14,163                          |  | $ | 4,431 |  | $ | 6,199
|                                   |  |                        |         |         |             |   |                              |   |                                 |  |   |       |  |   |      

Deposits. The maturity distribution of time
deposits of $100,000 or more at December 31, 2009 and 2008 is presented below. Such deposits may be more volatile and interest rate sensitive than other deposits.

Certificates of Deposit in Amounts of $100,000 or More



|                               |  |                        |         |      |   |        
|------------------------------ |  | ---------------------- | ------- | ---- | - | -------
|                               |  | At December 31,       
|                               |  | 2009                   |         | 2008
|                               |  | (Dollars in thousands)
|Remaining maturity:            |  |                        |        
|Three months or less           |  | $                      | 37,591  |      | $ | 39,082 
|Over three through six months  |  |                        | 30,686  |      |   | 43,247 
|Over six through twelve months |  |                        | 31,619  |      |   | 20,576 
|Over twelve months             |  |                        | 25,678  |      |   | 16,988 
|                               |  |                        |         |      |   |        
|                               |  | $                      | 125,574 |      | $ | 119,893
|                               |  |                        |         |      |   |        

Interest rate sensitivity.Interest rate
sensitivity management is concerned with the timing and magnitude of re-pricing assets compared to liabilities and is a part of asset/liability management. It is the objective of interest rate sensitivity management to generate stable growth in net
interest income, and to control the risks associated with interest rate movements. We measure interest rate risk by using simulation analysis. Prior to 2009, simulation analysis indicated, in the absence of growth or changes in the mix of assets and
liabilities, our net interest income generally increased when short-term interest rates rose and declined when short-term interest rates fell. In late 2008, we set our Carolina Bank prime at 4.50% when the Wall Street Prime declined to 3.25% with
the expectation that the Carolina Bank prime would not rise again until the Wall Street prime exceeded 4.25%. Approximately 56% of our loans held for investment, or $297.8 million at December 31, 2009 adjust with the Carolina Bank prime. We
also implemented floors on a number of our variable rate loans which benefits our loan yields in a very low rate environment. Our net yield on average interest-earning assets increased to 3.20% in 2009 from 2.82% in 2008



---

because deposit yields declined more than asset yields. Our simulation analysis indicates that our net interest margin will decline slightly, less than 4%, as interest rates increase and will not
begin to rise until interest rates rise between 2% and 3%. The delay in adjusting our loans tied to the Carolina Bank prime or at floors is the major reason for the potential decline in net interest income as the Wall Street prime increases.

The table below reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their
re-pricing or maturity dates. Fixed rate loans are reflected at their contractual maturity date and variable rate loans are reflected when the loans may be re-priced contractually, except variable loans that have reached their floors are treated as
fixed rate loans. Investments in restricted and unrestricted stocks are excluded from the presentation. Interest-bearing liabilities with no contractual maturity, such as interest-bearing transaction accounts and savings deposits, are reflected in
the earliest re-pricing interval due to contractual arrangements which give the bank the opportunity to vary rates paid on these deposits within a thirty day or shorter period. The interest rate sensitivity of our assets and liabilities illustrated
in the following table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.



|                                                                               |  |                                            |          |   |            |   |          |                           |  |   |             |   |  |       |         |   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------------------ | -------- | - | ---------- | - | -------- | ------------------------- |  | - | ----------- | - |  | ----- | ------- | - |  | - | ------- | -
|                                                                               |  | Repricing Schedule as of December 31, 2009 |         
|                                                                               |  | 0-90Days                                   |          |   | 91-365Days |   |          | More than1 Year to3 Years |  |   | Over3 Years |   |  | Total |        
|                                                                               |  | (Dollars in Thousands)                     |         
|Interest-earning assets                                                        |  |                                            |          |   |            |   |          |                           |  |   |             |   |  |       |         |   |  |   |         |  
|Interest-bearing deposits                                                      |  | $                                          | 34,039   |   |            | $ |         |                           |  | $ |            |   |  | $     |        |   |  | $ | 34,039  |  
|Investment securities                                                          |  |                                            | 4,369    |   |            |   | 7,675    |                           |  |   | 1,293       |   |  |       | 36,222  |   |  |   | 49,559  |  
|Loans held for sale                                                            |  |                                            | 29,388   |   |            |   |         |                           |  |   |            |   |  |       |        |   |  |   | 29,388  |  
|Loans                                                                          |  |                                            | 150,685  |   |            |   | 101,385  |                           |  |   | 71,603      |   |  |       | 192,771 |   |  |   | 516,444 |  
|                                                                               |  |                                            |          |   |            |   |          |                           |  |   |             |   |  |       |         |   |  |   |         |  
|Total                                                                          |  |                                            | 218,481  |   |            |   | 109,060  |                           |  |   | 72,896      |   |  |       | 228,993 |   |  |   | 629,430 |  
|                                                                               |  |                                            |          |   |            |   |          |                           |  |   |             |   |  |       |         |   |  |   |         |  
|Interest-bearing liabilities                                                   |  |                                            |          |   |            |   |          |                           |  |   |             |   |  |       |         |   |  |   |         |  
|Savings, NOW and money market                                                  |  |                                            | 353,526  |   |            |   |         |                           |  |   |            |   |  |       |        |   |  |   | 353,526 |  
|Time Deposits                                                                  |  |                                            | 73,480   |   |            |   | 127,007  |                           |  |   | 58,307      |   |  |       | 5,151   |   |  |   | 263,945 |  
|Federal Home Loan Bank advances                                                |  |                                            | 2,022    |   |            |   | 3,057    |                           |  |   | 165         |   |  |       | 2,539   |   |  |   | 7,783   |  
|Securities sold under agreements to repurchase                                 |  |                                            | 683      |   |            |   |         |                           |  |   |            |   |  |       |        |   |  |   | 683     |  
|Subordinated debentures                                                        |  |                                            | 19,360   |   |            |   |         |                           |  |   |            |   |  |       |        |   |  |   | 19,360  |  
|                                                                               |  |                                            |          |   |            |   |          |                           |  |   |             |   |  |       |         |   |  |   |         |  
|Total                                                                          |  |                                            | 449,071  |   |            |   | 130,064  |                           |  |   | 58,472      |   |  |       | 7,690   |   |  |   | 645,297 |  
|                                                                               |  |                                            |          |   |            |   |          |                           |  |   |             |   |  |       |         |   |  |   |         |  
|Interest sensitive gap                                                         |  | $                                          | (230,590 | ) |            | $ | (21,004  | )                         |  | $ | 14,424      |   |  | $     | 221,303 |   |  | $ | (15,867 | )
|                                                                               |  |                                            |          |   |            |   |          |                           |  |   |             |   |  |       |         |   |  |   |         |  
|Cumulative gap                                                                 |  | $                                          | (230,590 | ) |            | $ | (251,594 | )                         |  | $ | (237,170    | ) |  | $     | (15,867 | ) |  | $ | (15,867 | )
|                                                                               |  |                                            |          |   |            |   |          |                           |  |   |             |   |  |       |         |   |  |   |         |  
|Ratio of interest-sensitive assetsto interest-sensitive liabilities            |  |                                            | 48.65    | % |            |   | 83.85    | %                         |  |   | 124.67      | % |  |       | 2977.80 | % |  |   | 97.54   | %
|                                                                               |  |                                            |          |   |           
|Cumulative ratio of interest-sensitiveassets to interest-sensitive liabilities |  |                                            | 48.65    | % |            |   | 56.56    | %                         |  |   | 62.80       | % |  |       | 97.54   | % |  |   | 97.54   | %



---

Return on equity and assets. The following table shows the return on assets (net
income divided by average total assets), return on equity (net income divided by average equity), cash dividend payout ratio (cash dividends declared divided by net income), and equity to asset ratio (average equity divided by average total assets)
for each period indicated.



|                                                               |  |                                |   |  |      |  
|-------------------------------------------------------------- |  | ------------------------------ | - |  | ---- | -
|                                                               |  | For the YearEnded December 31, |  
|                                                               |  | 2009                           |   |  | 2008 |  
|Return on Average Assets                                       |  | -0.05                          | % |  | 0.39 | %
|Return on Average Stockholders Equity                         |  | -0.74                          | % |  | 7.13 | %
|Dividend Payout Ratio                                          |  |                               |   |  |     |  
|Average Stockholders Equity as a Percentage of Average Assets |  | 7.29                           | % |  | 5.52 | %

Capital
resources. Carolina Bank Holdings, Inc. and Carolina Bank are subject to various regulatory capital adequacy standards. Under these standards, financial institutions are required to maintain minimum ratios of capital to risk-weighted assets and
average total assets. Carolina Bank Holdings, Inc. and Carolina Bank exceeded all minimum capital requirements, and Carolina Bank met the requirements to be categorized as well capitalized at December 31, 2009 and 2008. Included in
the regulatory capital of Carolina Bank Holdings, Inc. and Subsidiary is $10.0 million in junior subordinated debentures which has been primarily reinvested in the Bank. Another $9.0 million in junior subordinated debentures issued by Carolina Bank
in 2008 is included in the regulatory capital of the Bank and the consolidated capital of Carolina Bank Holdings, Inc and Subsidiary. On January 9, 2009 we issued $16 million in preferred stock to the United States Treasury under the Capital
Purchase program to help support future growth. The preferred stock is included in the consolidated capital of Carolina Bank Holdings, Inc. and Subsidiary, and $10 million of this capital, which was reinvested in the Bank, is included in the
Banks capital.

Inflation. Since our assets and liabilities are primarily monetary in nature, our performance is
more affected by changes in interest rates than by inflation. Interest rates generally increase as the rate of inflation increases, but the magnitude of the change in rates may not necessarily be the same.

While the effect of inflation on a financial institution is normally not as significant as is its influence on those businesses which have
large investments in plant and inventories, it does have an effect. During periods of high inflation, there are normally corresponding increases in the money supply, and financial institutions will normally experience above average growth in assets,
loans and deposits. Also, general increases in the prices of goods and services will result in increased operating expenses.



|ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|-------- | -----------------------------------------------------------

Not applicable to smaller reporting companies.



---

|ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|------- | --------------------------------------------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders

Carolina Bank Holdings, Inc. and Subsidiary

Greensboro, North Carolina

We have audited the accompanying consolidated balance sheets of
Carolina Bank Holdings, Inc. and Subsidiary (the Company) as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders equity, and cash flows for each of the years in the
two-year period ended December 31, 2009. The Companys management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of Carolina Bank Holdings, Inc. and Subsidiary at December 31, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2009,
in conformity with accounting principles generally accepted in the United States of America.



|                                     
|-------------------------------------
|/S/ CHERRY, BEKAERT & HOLLAND, L.L.P.

Raleigh, North Carolina

March 3, 2010



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Consolidated Balance Sheets

For the years ended December 31, 2009 and 2008



|                                                                                                                          |  |                |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                          |  | 2009           |         |   | 2008 |  
|                                                                                                                          |  | (in thousands) |        
|Assets                                                                                                                    |  |                |         |   |      |   |         |  
|Cash and due from banks                                                                                                   |  | $              | 6,416   |   |      | $ | 5,589   |  
|Interest-bearing deposits with banks                                                                                      |  |                | 34,039  |   |      |   | 359     |  
|Securities available-for-sale, at fair value                                                                              |  |                | 52,924  |   |      |   | 59,803  |  
|Securities held-to-maturity                                                                                               |  |                | 770     |   |      |   | 1,116   |  
|Loans held for sale                                                                                                       |  |                | 29,388  |   |      |   | 19,163  |  
|Loans                                                                                                                     |  |                | 530,606 |   |      |   | 501,424 |  
|Less allowance for loan losses                                                                                            |  |                | (10,081 | ) |      |   | (5,760  | )
|                                                                                                                          |  |                |         |   |      |   |         |  
|Net loans                                                                                                                 |  |                | 520,525 |   |      |   | 495,664 |  
|Premises and equipment, net                                                                                               |  |                | 19,351  |   |      |   | 19,652  |  
|Other assets                                                                                                              |  |                | 33,639  |   |      |   | 15,265  |  
|                                                                                                                          |  |                |         |   |      |   |         |  
|Total assets                                                                                                              |  | $              | 697,052 |   |      | $ | 616,611 |  
|                                                                                                                          |  |                |         |   |      |   |         |  
|Liabilities and Stockholders Equity                                                                                      |  |                |         |   |      |   |         |  
|Deposits                                                                                                                  |  |                |         |   |      |   |         |  
|Non-interest bearing demand                                                                                               |  | $              | 39,261  |   |      | $ | 29,367  |  
|NOW, money market and savings                                                                                             |  |                | 314,265 |   |      |   | 182,521 |  
|Time                                                                                                                      |  |                | 263,945 |   |      |   | 286,176 |  
|                                                                                                                          |  |                |         |   |      |   |         |  
|Total deposits                                                                                                            |  |                | 617,471 |   |      |   | 498,064 |  
|                                                                                                                          |  |               
|Advances from the Federal Home Loan Bank                                                                                  |  |                | 7,783   |   |      |   | 56,856  |  
|Federal funds purchased                                                                                                   |  |                |        |   |      |   | 4,104   |  
|Securities sold under agreements to repurchase                                                                            |  |                | 683     |   |      |   | 2,487   |  
|Subordinated debentures                                                                                                   |  |                | 19,360  |   |      |   | 19,265  |  
|Other liabilities and accrued expenses                                                                                    |  |                | 3,807   |   |      |   | 4,259   |  
|                                                                                                                          |  |                |         |   |      |   |         |  
|Total liabilities                                                                                                         |  |                | 649,104 |   |      |   | 585,035 |  
|                                                                                                                          |  |                |         |   |      |   |         |  
|Commitments (note 12)                                                                                                     |  |                |         |   |      |   |         |  
|Stockholders equity                                                                                                      |  |                |         |   |      |   |         |  
|Preferred stock, no par value, authorized 1,000,000 shares; issued and outstanding 16,000 shares in 2009 and none in
2008 |  |                | 14,473  |   |      |   |        |  
|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                                                                                                |  |                | 15,799  |   |      |   | 15,586  |  
|Retained earnings                                                                                                         |  |                | 11,445  |   |      |   | 12,893  |  
|Stock in directors rabbi trust                                                                                           |  |                | (874    | ) |      |   | (648    | )
|Directors deferred fees obligation                                                                                       |  |                | 874     |   |      |   | 648     |  
|Accumulated other comprehensive income (loss)                                                                             |  |                | 1,003   |   |      |   | (251    | )
|                                                                                                                          |  |                |         |   |      |   |         |  
|Total stockholders equity                                                                                                |  |                | 47,948  |   |      |   | 31,576  |  
|                                                                                                                          |  |                |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                                |  | $              | 697,052 |   |      | $ | 616,611 |  
|                                                                                                                          |  |                |         |   |      |   |         |  

See accompanying notes to consolidated financial statements.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Consolidated Statements of Operations

For the years ended December 31, 2009 and 2008



|                                                               |  |                                       |        |   |      |   |       
|-------------------------------------------------------------- |  | ------------------------------------- | ------ | - | ---- | - | ------
|                                                               |  | 2009                                  |        |   | 2008
|                                                               |  | (in thousands, except per share data)
|Interest income                                                |  |                                       |        |   |      |   |       
|Loans                                                          |  | $                                     | 29,982 |   |      | $ | 28,483
|Investment securities, taxable                                 |  |                                       | 2,141  |   |      |   | 2,750 
|Investment securities, non taxable                             |  |                                       | 563    |   |      |   | 376   
|Interest from federal funds sold and other                     |  |                                       | 35     |   |      |   | 31    
|                                                               |  |                                       |        |   |      |   |       
|Total interest income                                          |  |                                       | 32,721 |   |      |   | 31,640
|                                                               |  |                                       |        |   |      |   |       
|Interest expense                                               |  |                                       |        |   |      |   |       
|NOW, money market, savings                                     |  |                                       | 4,470  |   |      |   | 4,301 
|Time deposits                                                  |  |                                       | 7,363  |   |      |   | 10,563
|Other borrowed funds                                           |  |                                       | 1,183  |   |      |   | 2,049 
|                                                               |  |                                       |        |   |      |   |       
|Total interest expense                                         |  |                                       | 13,016 |   |      |   | 16,913
|                                                               |  |                                       |        |   |      |   |       
|Net interest income                                            |  |                                       | 19,705 |   |      |   | 14,727
|Provision for loan losses                                      |  |                                       | 10,520 |   |      |   | 1,910 
|                                                               |  |                                       |        |   |      |   |       
|Net interest income after provision for loan losses            |  |                                       | 9,185  |   |      |   | 12,817
|                                                               |  |                                       |        |   |      |   |       
|Non-interest income                                            |  |                                       |        |   |      |   |       
|Service charges                                                |  |                                       | 1,021  |   |      |   | 926   
|Mortgage banking income                                        |  |                                       | 8,814  |   |      |   | 2,959 
|Gains on sale of investment securities                         |  |                                       | 99     |   |      |   | 227   
|Other                                                          |  |                                       | 616    |   |      |   | 497   
|                                                               |  |                                       |        |   |      |   |       
|Total non-interest income                                      |  |                                       | 10,550 |   |      |   | 4,609 
|                                                               |  |                                       |        |   |      |   |       
|Non-interest expense                                           |  |                                       |        |   |      |   |       
|Salaries and benefits                                          |  |                                       | 10,102 |   |      |   | 7,666 
|Occupancy and equipment                                        |  |                                       | 2,350  |   |      |   | 1,891 
|Professional fees                                              |  |                                       | 1,285  |   |      |   | 1,316 
|Outside data processing                                        |  |                                       | 835    |   |      |   | 758   
|FDIC insurance                                                 |  |                                       | 1,218  |   |      |   | 444   
|Advertising and promotion                                      |  |                                       | 585    |   |      |   | 587   
|Stationery, printing and supplies                              |  |                                       | 581    |   |      |   | 529   
|Impairment of investment security                              |  |                                       | 850    |   |      |   |      
|Impairment of repossessed assets                               |  |                                       | 816    |   |      |   |      
|Other                                                          |  |                                       | 1,955  |   |      |   | 867   
|                                                               |  |                                       |        |   |      |   |       
|Total non-interest expense                                     |  |                                       | 20,577 |   |      |   | 14,058
|                                                               |  |                                       |        |   |      |   |       
|Income (loss) before income taxes                              |  |                                       | (842   | ) |      |   | 3,368 
|Income tax (benefit) expense                                   |  |                                       | (484   | ) |      |   | 1,174 
|                                                               |  |                                       |        |   |      |   |       
|Net income (loss)                                              |  |                                       | (358   | ) |      |   | 2,194 
|                                                               |  |                                       |        |   |      |   |       
|Dividends and accretion on preferred stock                     |  |                                       | 1,090  |   |      |   |      
|                                                               |  |                                       |        |   |      |   |       
|Net income (loss) available (allocable) to common stockholders |  | $                                     | (1,448 | ) |      | $ | 2,194 
|                                                               |  |                                       |        |   |      |   |       
|Net income (loss) per common share                             |  |                                       |        |   |      |   |       
|Basic                                                          |  | $                                     | (0.43  | ) |      | $ | 0.66  
|                                                               |  |                                       |        |   |      |   |       
|Diluted                                                        |  | $                                     | (0.43  | ) |      | $ | 0.65  
|                                                               |  |                                       |        |   |      |   |       

See accompanying notes to consolidated financial
statements.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders Equity

For the years ended December 31, 2009 and 2008



|                                                                     |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|-------------------------------------------------------------------- |  | -------------- | ------ | ------------------------- | - | ------ | ----------- |  | ------------------- | ----- | ------------------------ | - | ---------------- |  | - | ---------------------------- |  | - | -------------------------------- | - | ------------------------------------------ | - | ---- | ----- |  | - | --- |  | - | ----- | - |  | - | ------ | -
|                                                                     |  | PreferredStock |        | Discount onPreferredStock |   |        | CommonStock |  | CommonStockWarrants |       | AdditionalPaid-InCapital |   | RetainedEarnings |  |   | Stock inDirectorsRabbiTrust |  |   | DirectorsDeferredFeesObligation |   | AccumulatedOtherComprehensiveIncome (Loss) |   |      | Total | 
|                                                                     |  | (in thousands) |       
|Balance, December 31, 2007                                           |  | $              |       |                           | $ |       |             |  | $                   | 3,315 |                          | $ |                 |  | $ | 15,379                       |  | $ | 10,875                           |   |                                            | $ | (524 | )     |  | $ | 524 |  | $ | 71    |   |  | $ | 29,640 |  
|Comprehensive income                                                 |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|Net income                                                           |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   |                             |  |   | 2,194                            |   |                                            |   |     |       |  |   |    |  |   |      |   |  |   | 2,194  |  
|Other comprehensive income-                                          |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|Unrealized loss on securities available for sale, net of tax of $165 |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   |                             |  |   |                                 |   |                                            |   |     |       |  |   |    |  |   | (322  | ) |  |   | (322   | )
|                                                                     |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|Comprehensive income                                                 |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   | 1,872  |  
|Directors deferred fees                                              |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   |                             |  |   |                                 |   |                                            |   | (124 | )     |  |   | 124 |  |   |      |   |  |   |       |  
|Stock options exercised                                              |  |                |       |                           |   |       |             |  |                     | 33    |                          |   |                 |  |   | 171                          |  |   |                                 |   |                                            |   |     |       |  |   |    |  |   |      |   |  |   | 204    |  
|Stock options expensed                                               |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   | 36                           |  |   |                                 |   |                                            |   |     |       |  |   |    |  |   |      |   |  |   | 36     |  
|Cumulative-effect adjustment for split dollar life insurance         |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   |                             |  |   | (176                             | ) |                                            |   |     |       |  |   |    |  |   |      |   |  |   | (176   | )
|                                                                     |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|Balance, December 31, 2008                                           |  | $              |       |                           | $ |       |             |  | $                   | 3,348 |                          | $ |                 |  | $ | 15,586                       |  | $ | 12,893                           |   |                                            | $ | (648 | )     |  | $ | 648 |  | $ | (251  | ) |  | $ | 31,576 |  
|                                                                     |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|Comprehensive income                                                 |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|Net income (loss)                                                    |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   |                             |  |   | (358                             | ) |                                            |   |     |       |  |   |    |  |   |      |   |  |   | (358   | )
|Other comprehensive income-                                          |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|Unrealized gain on securities available for sale, net of tax of $646 |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   |                             |  |   |                                 |   |                                            |   |     |       |  |   |    |  |   | 1,254 |   |  |   | 1,254  |  
|                                                                     |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|Comprehensive income                                                 |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   | 896    |  
|Directors deferred fees                                             |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   |                             |  |   |                                 |   |                                            |   | (226 | )     |  |   | 226 |  |   |      |   |  |   |       |  
|Stock options exercised                                              |  |                |       |                           |   |       |             |  |                     | 39    |                          |   |                 |  |   | 177                          |  |   |                                 |   |                                            |   |     |       |  |   |    |  |   |      |   |  |   | 216    |  
|Stock options expensed                                               |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   | 36                           |  |   |                                 |   |                                            |   |     |       |  |   |    |  |   |      |   |  |   | 36     |  
|                                                                     |  |                |        |                           |   |        |             |  |                     |      
|Issuance of preferred stock                                          |  |                | 16,000 |                           |   | (1,841 | )           |  |                     |      |                          |   | 1,841            |  |   |                             |  |   |                                 |   |                                            |   |     |       |  |   |    |  |   |      |   |  |   | 16,000 |  
|Amortization of preferred stock discount                             |  |                |       |                           |   | 314    |             |  |                     |      |                          |   |                 |  |   |                             |  |   | (314                             | ) |                                            |   |     |       |  |   |    |  |   |      |   |  |   |       |  
|Preferred stock dividends                                            |  |                |       |                           |   |       |             |  |                     |      |                          |   |                 |  |   |                             |  |   | (776                             | ) |                                            |   |     |       |  |   |    |  |   |      |   |  |   | (776   | )
|                                                                     |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  
|Balance, December 31, 2009                                           |  | $              | 16,000 |                           | $ | (1,527 | )           |  | $                   | 3,387 |                          | $ | 1,841            |  | $ | 15,799                       |  | $ | 11,445                           |   |                                            | $ | (874 | )     |  | $ | 874 |  | $ | 1,003 |   |  | $ | 47,948 |  
|                                                                     |  |                |        |                           |   |        |             |  |                     |       |                          |   |                  |  |   |                              |  |   |                                  |   |                                            |   |      |       |  |   |     |  |   |       |   |  |   |        |  

See accompanying notes to consolidated financial statements.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

For the years ended December 31, 2009 and 2008



|                                                                                 |  |                |         |   |      |   |          |  
|-------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | -------- | -
|                                                                                 |  | 2009           |         |   | 2008 |  
|                                                                                 |  | (in thousands) |        
|Cash flows from operating activities                                             |  |                |         |   |      |   |          |  
|Net income (loss)                                                                |  | $              | (358    | ) |      | $ | 2,194    |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                |         |   |      |   |          |  
|Provision for loan losses                                                        |  |                | 10,520  |   |      |   | 1,910    |  
|Depreciation                                                                     |  |                | 935     |   |      |   | 665      |  
|Impairment of investment securities                                              |  |                | 850     |   |      |   |         |  
|Equity-based compensation                                                        |  |                | 36      |   |      |   | 36       |  
|Deferred income tax (benefit)                                                    |  |                | (2,068  | ) |      |   | (150     | )
|Amortization (accretion), net                                                    |  |                | (53     | ) |      |   | (61      | )
|Amortization of subordinated debt discount                                       |  |                | 95      |   |      |   | 28       |  
|Gain on sale of repossessed assets                                               |  |                | (55     | ) |      |   | (15      | )
|Gain on sale of investments                                                      |  |                | (99     | ) |      |   | (227     | )
|Impairment of repossessed assets                                                 |  |                | 816     |   |      |   |         |  
|Increase in loans held for sale, net of sales and gains                          |  |                | (10,225 | ) |      |   | (7,294   | )
|Increase in other assets                                                         |  |                | (4,624  | ) |      |   | (4,479   | )
|Increase (decrease) in accrued expenses and other liabilities                    |  |                | (548    | ) |      |   | 172      |  
|                                                                                 |  |                |         |   |      |   |          |  
|Net cash (used for) operating activities                                         |  |                | (4,778  | ) |      |   | (7,221   | )
|                                                                                 |  |                |         |   |      |   |          |  
|Cash flows from investing activities                                             |  |                |         |   |      |   |          |  
|Purchases of investment securities available-for-sale                            |  |                | (5,411  | ) |      |   | (15,655  | )
|Maturities and calls of securities available-for-sale                            |  |                | 529     |   |      |   | 6,616    |  
|Maturities and calls of securities held-to-maturity                              |  |                |        |   |      |   | 1,800    |  
|Repayments from mortgage-backed securities available-for-sale                    |  |                | 7,222   |   |      |   | 8,031    |  
|Repayments from mortgage-backed securities held-to-maturity                      |  |                | 335     |   |      |   | 212      |  
|Origination of loans, net of principal collected                                 |  |                | (50,542 | ) |      |   | (101,860 | )
|Additions to premises and equipment                                              |  |                | (634    | ) |      |   | (6,525   | )
|Proceeds from sales of assets                                                    |  |                | 7,824   |   |      |   | 1,142    |  
|                                                                                 |  |                |         |   |      |   |          |  
|Net cash (used for) investing activities                                         |  |                | (40,677 | ) |      |   | (106,239 | )
|                                                                                 |  |                |         |   |      |   |          |  
|Cash flows from financing activities                                             |  |                |         |   |      |   |          |  
|Net increase in deposits                                                         |  |                | 119,407 |   |      |   | 79,491   |  
|Net increase (decrease) in Federal Home Loan Advances                            |  |                | (49,073 | ) |      |   | 25,275   |  
|Net increase (decrease) in Federal funds purchased                               |  |                | (4,104  | ) |      |   | 1,454    |  
|Increase (decrease) in securities sold under agreements to repurchase            |  |                | (1,804  | ) |      |   | (965     | )
|Net proceeds from issuance of subordinated debt                                  |  |                |        |   |      |   | 8,927    |  
|Proceeds from issuance of preferred stock                                        |  |                | 16,000  |   |      |   |         |  
|Dividends paid                                                                   |  |                | (680    | ) |      |   |         |  
|Proceeds from exercised stock options                                            |  |                | 216     |   |      |   | 204      |  
|                                                                                 |  |                |         |   |      |   |          |  
|Net cash provided by financing activities                                        |  |                | 79,962  |   |      |   | 114,386  |  
|                                                                                 |  |                |         |   |      |   |          |  
|Net increase in cash and cash equivalents                                        |  |                | 34,507  |   |      |   | 926      |  
|Cash and cash equivalents at beginning of period                                 |  |                | 5,948   |   |      |   | 5,022    |  
|                                                                                 |  |                |         |   |      |   |          |  
|Cash and cash equivalents at end of period                                       |  | $              | 40,455  |   |      | $ | 5,948    |  
|                                                                                 |  |                |         |   |      |   |          |  
|Supplemental disclosure of cash flow information                                 |  |                |         |   |      |   |          |  
|Cash paid during the period for interest                                         |  | $              | 13,780  |   |      | $ | 17,555   |  
|                                                                                 |  |                |         |   |      |   |          |  
|Cash paid during the period for income taxes                                     |  | $              | 600     |   |      | $ | 2,409    |  
|                                                                                 |  |                |         |   |      |   |          |  
|Supplemental disclosure of non-cash transactions                                 |  |                |         |   |      |   |          |  
|Transfer of loans to foreclosed assets                                           |  | $              | 15,161  |   |      | $ | 538      |  
|                                                                                 |  |                |         |   |      |   |          |  
|Accretion of preferred stock discount                                            |  | $              | 314     |   |      | $ |         |  
|                                                                                 |  |                |         |   |      |   |          |  

See accompanying notes to consolidated financial statements.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements

December 31, 2009 and 2008

Note 1 - Summary of significant accounting policies

Carolina Bank Holdings, Inc. (the Holding Company) is a North Carolina corporation organized in 2000. In August 2000 pursuant to
the plan of exchange approved by the shareholders of Carolina Bank (the Bank), all of the outstanding shares of common stock of the Bank were exchanged for shares of common stock of the Holding Company. The Holding Company presently has
no employees.

The Bank was incorporated 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 locations in Greensboro and an office in Asheboro, Burlington, High Point and Winston-Salem. All offices are in the Piedmont Triad region of North Carolina.

The following is a description of the significant accounting and reporting policies that the Holding Company and Bank (collectively the Company) follows in preparing and presenting their
consolidated financial statements.

(a) Basis of presentation and consolidation

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

(b) Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that affect reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination of the allowance for loan losses.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 1 - Summary of significant accounting policies (continued)



(c) Securities

Investments in equity securities that have readily determinable fair values and all investments in debt securities are classified at
acquisition into one of three categories and accounted for as follows:



| |  |  | securities held to maturity - reported at amortized cost,
| | - |  | ---------------------------------------------------------



| |  |  | trading securities - reported at fair value with unrealized gains and losses included in earnings, or;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | securities available-for-sale - reported at estimated fair value with unrealized gains and losses reported as a separate component of comprehensive
income (net of tax effect).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company does not engage in any securities trading activities. Gains and
losses on sales of securities are recognized on a specific identification basis. Purchases and sales of investments are recorded on a trade-date basis. Premiums and discounts are amortized into interest income using a method that approximates the
level yield method. The investment in the Federal Home Loan Bank represents restricted stock which is carried at cost and is required for advances or borrowings. The amounts invested were $3,600,000 and $3,458,000 at December 31, 2009 and 2008,
respectively.

(d) Loans held for sale

Loans held for sale represent residential real estate loans originated by the wholesale mortgage division, which was formed in 2007.
Generally, optional commitments to sell these loans are made shortly after origination commitments are entered into with borrowers. Loans held for sale are marked to market and gains or losses are recognized when loans are originated and again when
sold, if necessary.

(e) Loans and allowance for loan losses

Loans are carried at their principal amount outstanding. Interest income is recorded as earned on the accrual basis. Loan origination fees
and certain origination costs are capitalized with the net fee or cost recognized as an adjustment to interest income using the interest method.

The Company uses the allowance method in providing for loan losses. The provision for loan losses is based upon managements estimate of the amount needed to maintain the allowance for loan losses at
an adequate level to cover known and inherent risks of loss in the loan portfolio. In determining the provision amount, management gives consideration to current and anticipated economic conditions, the growth and composition of the loan portfolio,
the relationship of the allowance for loan losses to outstanding loans, delinquencies, loss trends, and other factors. Management believes that the allowance for loan losses is adequate. While management uses the best information available to make
evaluations, future adjustments may be necessary if economic and other conditions differ substantially from the assumptions used.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 1 - Summary of significant accounting policies (continued)



Management considers loans to be impaired when based on current information and events,
it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Factors that influence managements judgments include, but are not limited to, loan payment pattern, source of
repayment, and value of collateral, if any. A loan would not be considered impaired if an insignificant delay in loan payment occurs and management expects to collect all amounts due. The major sources of identification of loans to be evaluated for
impairment include past due and non-accrual reports, internally generated lists of certain risk grades, and regulatory reports of examination. Impaired loans are measured using either the discounted expected cash flow method or the value of
collateral method. When the ultimate collectibility of an impaired loans principal is in doubt, wholly or partially, all cash receipts are applied to principal.

The accrual of interest on loans is discontinued when, in managements opinion, the borrower may be unable to meet all payments as they become due. When the interest accrual is discontinued, all
unpaid accrued interest is reversed and income is recognized only to the extent cash payments are received.

(f)
Foreclosed assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially
recorded at the lower of fair value less costs to sell or carrying value at the date of foreclosure. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair
value less costs to sell. Fair value is generally determined by appraisal.

(g) Premises and equipment

Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation.
Depreciation is provided over the estimated useful lives of the respective assets on the straight-line basis. Leasehold improvements are amortized over a term which includes the remaining lease term and probable renewal periods. Expenditures for
major renewals and betterments are capitalized and those for maintenance and repairs are charged to operating expenses as incurred.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 1 - Summary of significant accounting policies (continued)



(h) Income taxes

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated
financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered in income. Deferred tax assets are reduced by a valuation allowance if it is more likely than not than the tax benefits will not be realized.

(i) Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents includes cash and due from banks, federal funds sold, and interest-bearing deposits with banks. The Company maintains due from accounts with
correspondent banks. During the normal course of business, the Company may have cash deposits with these banks that are in excess of federally insured limits.

(j) Income per share

Basic income per share is computed based on
the weighted average number of common shares outstanding. Diluted income per share includes the dilutive effects of stock options.

(k) Stock options

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. No awards were made under the Omnibus Plan or under the three expired plans in 2009 and 2008.

The Company adopted Accounting for Stock-Based Compensation in 2006 under the modified prospective application method. The fair value of
options granted in 2007 under the Employee Plans was $178,000, of which $36,000 was expensed in both 2009 and 2008. As of December 31, 2009, there was $99,000 of total unrecognized compensation cost related to non-vested share-based
compensation which is expected to be recognized over a weighted-average period of 2.9 years.

The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for 2007: dividend yield of 0%, expected volatility of 32%, risk-free interest rate of 3.90%, and weighted average
expected lives of eight years. The weighted average fair value per share of options granted for the year ended December 31, 2007 was $5.28.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 1 - Summary of significant accounting policies (continued)



Following is a summary of stock options outstanding under both plans, adjusted for the
stock splits that have occurred in prior years:



|                                 |  |               |  |                              |      |                                |   |        |  |         |                              |  |                                |       |  |   |  
|-------------------------------- |  | ------------- |  | ---------------------------- | ---- | ------------------------------ | - | ------ |  | ------- | ---------------------------- |  | ------------------------------ | ----- |  | - | -
|                                 |  | Director Plan |  | Employee Plan               
|                                 |  | Shares        |  | WeightedAverageExercisePrice |      | AggregateIntrinsicValue($000s) |   | Shares |  |         | WeightedAverageExercisePrice |  | AggregateIntrinsicValue($000s)
|Balance at January 1, 2008       |  | 22,607        |  | $                            | 4.73 |                                |   |        |  | 273,221 |                              |  | $                              | 8.20  |  |   |  
|Issued                           |  |              |  |                              |     |                                |   |        |  |        |                              |  |                                |      |  |   |  
|Exercised                        |  |              |  |                              |     |                                |   |        |  | (33,036 | )                            |  |                                | 5.57  |  |   |  
|Forfeited                        |  |              |  |                              |     |                                |   |        |  | (1,200  | )                            |  |                                | 10.41 |  |   |  
|                                 |  |               |  |                              |      |                                |   |        |  |         |                              |  |                                |       |  |   |  
|Balance at December 31, 2008     |  | 22,607        |  | $                            | 4.73 |                                |   |        |  | 238,985 |                              |  | $                              | 8.55  |  |   |  
|Issued                           |  |              |  |                              |     |                                |   |        |  |        |                              |  |                                |      |  |   |  
|Exercised                        |  |              |  |                              |     |                                |   |        |  | (38,852 | )                            |  |                                | 5.57  |  |   |  
|Forfeited                        |  |              |  |                              |     |                                |   |        |  | (1,886  | )                            |  |                                | 8.40  |  |   |  
|                                 |  |               |  |                              |      |                                |   |        |  |         |                              |  |                                |       |  |   |  
|Balance at December 31, 2009     |  | 22,607        |  | $                            | 4.73 |                                | $ |       |  | 198,247 |                              |  | $                              | 9.13  |  | $ | 
|                                 |  |               |  |                              |      |                                |   |        |  |         |                              |  |                                |       |  |   |  
|Exercisable at December 31, 2009 |  | 22,607        |  | $                            | 4.73 |                                | $ |       |  | 177,055 |                              |  | $                              | 8.83  |  | $ | 
|                                 |  |               |  |                              |      |                                |   |        |  |         |                              |  |                                |       |  |   |  

At December 31, 2009, and 2008,
all options under the Director Plan were exercisable at weighted average exercise prices of $4.73. Under the Employee Plans, exercisable options at 2009 and 2008 were 177,055 and 210,650, respectively, with weighted average exercise prices of $8.83
and $8.13, respectively.

The range of exercise prices at December 31, 2009 for the Director Plan was
$4.73 and for the Employee Plans was $4.73 - $11.65. The weighted average remaining contractual term for Director Plan options was 19 months and for the Employee Plans was 59 months.

The aggregate intrinsic value of all stock options at December 31, 2009 was $0 for all Plans. The intrinsic value of exercisable options
at December 31, 2009 was $0 for all Plans.

(l) Reclassification

Certain amounts in the 2008 consolidated financial statements have been reclassified to conform to the 2009 presentation.

(m) Advertising

Advertising costs are expensed as incurred.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 1 - Summary of significant accounting policies (continued)



(n) Operating segments

ASC 280, Segment Reporting, provides standards for the way public business enterprises report and disclose information
about operating segments. The Corporation 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 2009 and 2008 and selected balance sheet information at December 31, 2009 and 2008 for each segment are as follows:



|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|---------------------------------------------------------- |  | ---------------------------- | ------- | - | -------------------------- | - | ------ | ----- |  | - | ------- | -
|                                                           |  | Year Ended December 31, 2009 |        
|                                                           |  | Commercial/RetailBank        |         |   | WholesaleMortgage Division |   |        | Total | 
|                                                           |  | (in thousands)               |        
|Interest income                                            |  | $                            | 31,308  |   |                            | $ | 1,413  |       |  | $ | 32,721  |  
|Interest expense                                           |  |                              | 11,592  |   |                            |   | 1,424  |       |  |   | 13,016  |  
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Net interest income (loss)                                 |  |                              | 19,716  |   |                            |   | (11    | )     |  |   | 19,705  |  
|Provision for loan losses                                  |  |                              | 10,520  |   |                            |   |       |       |  |   | 10,520  |  
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Net interest income (loss) after provision for loan losses |  |                              | 9,196   |   |                            |   | (11    | )     |  |   | 9,185   |  
|Non-interest income                                        |  |                              | 2,134   |   |                            |   | 8,416  |       |  |   | 10,550  |  
|Non-interest expense                                       |  |                              | 16,048  |   |                            |   | 4,529  |       |  |   | 20,577  |  
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Income (loss) before income taxes                          |  |                              | (4,718  | ) |                            |   | 3,876  |       |  |   | (842    | )
|Income tax (benefit) expense                               |  |                              | (2,079  | ) |                            |   | 1,595  |       |  |   | (484    | )
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Net income (loss)                                          |  | $                            | (2,639  | ) |                            | $ | 2,281  |       |  | $ | (358    | )
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Total Assets                                               |  | $                            | 667,138 |   |                            | $ | 29,914 |       |  | $ | 697,052 |  
|Net loans                                                  |  |                              | 520,525 |   |                            |   | 29,388 |       |  |   | 549,913 |  
|Equity                                                     |  |                              | 45,667  |   |                            |   | 2,281  |       |  |   | 47,948  |  
|                                                           | 
|                                                           |  | Year Ended December 31, 2008 |        
|                                                           |  | Commercial/RetailBank        |         |   | WholesaleMortgage Division |   |        | Total | 
|                                                           |  | (in thousands)               |        
|Interest income                                            |  | $                            | 30,805  |   |                            | $ | 835    |       |  | $ | 31,640  |  
|Interest expense                                           |  |                              | 16,243  |   |                            |   | 670    |       |  |   | 16,913  |  
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Net interest income                                        |  |                              | 14,562  |   |                            |   | 165    |       |  |   | 14,727  |  
|Provision for loan losses                                  |  |                              | 1,910   |   |                            |   |       |       |  |   | 1,910   |  
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Net interest income after provision for loan losses        |  |                              | 12,652  |   |                            |   | 165    |       |  |   | 12,817  |  
|Non-interest income                                        |  |                              | 1,968   |   |                            |   | 2,641  |       |  |   | 4,609   |  
|Non-interest expense                                       |  |                              | 12,211  |   |                            |   | 1,847  |       |  |   | 14,058  |  
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Income before income taxes                                 |  |                              | 2,409   |   |                            |   | 959    |       |  |   | 3,368   |  
|Income tax expense                                         |  |                              | 800     |   |                            |   | 374    |       |  |   | 1,174   |  
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Net income                                                 |  | $                            | 1,609   |   |                            | $ | 585    |       |  | $ | 2,194   |  
|                                                           |  |                              |         |   |                            |   |        |       |  |   |         |  
|Total Assets                                               |  | $                            | 597,214 |   |                            | $ | 19,397 |       |  | $ | 616,611 |  
|Net loans                                                  |  |                              | 495,664 |   |                            |   | 19,163 |       |  |   | 514,827 |  
|Equity                                                     |  |                              | 30,991  |   |                            |   | 585    |       |  |   | 31,576  |  



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 1 - Summary of significant accounting policies (continued)



(o) Retail repurchase agreements

Funds are borrowed on an overnight basis through retail repurchase agreements with bank customers. Retail repurchase agreements are
collateralized by securities of U.S. governmental agencies or by mortgage backed securities issued by government sponsored entities. The market value of collateral pledged for retail repurchase agreements is monitored by the Company to equal or
exceed the balances borrowed.

(p) Impact of recently adopted accounting standards

ASC 815, Disclosures about Derivative Instruments and Hedging Activities, requires 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 the consolidated financial statements of the Company.

ASC 805, Business 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 the Companys consolidated financial statements as no business combinations have been experienced.

ASC 810, Consolidation, improves the relevance, comparability, and transparency of financial information provided to investors by requiring entities to report non-controlling, minority,
interests in subsidiaries as equity in the consolidated financial statements. This statement is effective for fiscal years and interim periods beginning after December 15, 2008. The adoption of this statement did not have a material impact on
the consolidated financial statements of the Company.

ASC 825, Financial Instruments, provides interim
disclosure requirements regarding the fair value of financial instruments, intending to enhance the consistency and improve the transparency and quality of information provided to financial statement users by increasing the frequency of fair value
disclosures. These requirements are effective for interim and annual periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The Company adopted these standards in the period ended
March 31, 2009, with the expanded disclosures reflected in Note 14 below.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 1 - Summary of significant accounting policies (continued)



ASC 320, Investments  Debt and Equity Securities, provides
guidance on the recognition and presentation of other than temporary investments, which is designed to bring greater consistency to the timing of impairment recognition and provide greater clarity to investors about the credit and noncredit
components of impaired debt securities that are not expected to be sold. This guidance is effective for interim and annual periods ending after June 15, 2009, but entities may early adopt for the interim and annual periods ending after
March 15, 2009. The Company adopted these standards in the period ended March 31, 2009, with the expanded disclosures reflected in Note 5 below.

ASC 105, The 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 for interim or annual periods ending after September 15, 2009. The codification is not intended to change GAAP but represents a significant change in the way accounting principles are researched and U.S.
GAAP is referenced. The adoption of this statement did not have a material impact on the Companys consolidated financial statements.

In April 2009, the FASB updated ASC 820, Fair Value Measurements and Disclosures, which provides guidance on determining the fair value when there has been a significant decrease
in the volume and level of activity for the asset or liability and on 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 or annual periods ending after September 15, 2009, but early adoption is permitted. The Company adopted the
aforementioned standard in the period ended March 31, 2009, as reflected in the expanded disclosures in Note 14.

ASC 820,
Fair Value Measurements and Disclosures, was further updated during August 2009 by Accounting Standards Update (ASU) 2009-05, which clarifies how entities should estimate the fair value of liabilities. The standard
describes 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 of the specified 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. This standard is
effective for the first reporting period beginning after the issuance of ASU 2009-05 in August 2009. The Company has disclosed the fair value of its financial statements in accordance with generally accepted accounting principles in Note 14.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 1 - Summary of significant accounting policies (continued)



ASC 860, Accounting for Transfers of Financial Assets, requires
entities to disclose 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. The adoption of this standard is not expected to have a material
impact on the Companys consolidated financial statements.

Several other new accounting standards became effective during
the periods presented or will be effective subsequent to December 31, 2009. None of these new standards had or is expected to have a significant impact on the Companys consolidated financial statements.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 2 - Securities

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



|                                                 |  |                |        |                      |   |                       |  |                    |       |  |   |       
|------------------------------------------------ |  | -------------- | ------ | -------------------- | - | --------------------- |  | ------------------ | ----- |  | - | ------
|                                                 |  | AmortizedCost  |        | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedFairValue
|                                                 |  | (in thousands)
|December 31, 2009                                |  |                |        |                      |   |                       |  |                    |       |  |   |       
|                                                 |  |                |        |                     
|Available for sale                               |  |                |        |                      |   |                       |  |                    |       |  |   |       
|U.S. agency obligations                          |  | $              | 998    |                      | $ | 54                    |  | $                  |      |  | $ | 1,052 
|Municipal securities                             |  |                | 15,102 |                      |   | 397                   |  |                    | 40    |  |   | 15,459
|FNMA, FHLMC, and GNMA mortgage-backed securities |  |                | 25,580 |                      |   | 1,383                 |  |                    |      |  |   | 26,963
|Corporate securities                             |  |                | 5,490  |                      |   | 53                    |  |                    | 228   |  |   | 5,315 
|Restricted stock                                 |  |                | 3,702  |                      |   |                      |  |                    |      |  |   | 3,702 
|Unrestricted stock                               |  |                | 533    |                      |   |                      |  |                    | 100   |  |   | 433   
|                                                 |  |                |        |                      |   |                       |  |                    |       |  |   |       
|                                                 |  | $              | 51,405 |                      | $ | 1,887                 |  | $                  | 368   |  | $ | 52,924
|                                                 |  |                |        |                      |   |                       |  |                    |       |  |   |       
|Held to maturity                                 |  |                |        |                      |   |                       |  |                    |       |  |   |       
|FNMA and GNMA mortgage-backed securities         |  |                | 770    |                      |   | 27                    |  |                    |      |  |   | 797   
|                                                 |  |                |        |                      |   |                       |  |                    |       |  |   |       
|                                                 |  | $              | 770    |                      | $ | 27                    |  | $                  |      |  | $ | 797   
|                                                 |  |                |        |                      |   |                       |  |                    |       |  |   |       
|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 
|                                                 |  |                |        |                      |   |                       |  |                    |       |  |   |       



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 2 - Securities (continued)

The scheduled maturities of debt securities available-for-sale and held-to-maturity at December 31, 2009 were as follows:



|                           |  |                    |        |                     |   |               |  |                     |     |  |   |    
|-------------------------- |  | ------------------ | ------ | ------------------- | - | ------------- |  | ------------------- | --- |  | - | ---
|                           |  | Available for Sale |        | Held to Maturity   
|                           |  | AmortizedCost      |        | EstimatedFair Value |   | AmortizedCost |  | EstimatedFair Value
|                           |  | (in thousands)    
|Due in one year or less    |  | $                  |       |                     | $ |              |  | $                   |    |  | $ |   
|Due from one to five years |  |                    | 2,427  |                     |   | 2,576         |  |                     |    |  |   |   
|Due from five to ten years |  |                    | 1,580  |                     |   | 1,599         |  |                     |    |  |   |   
|Over ten years             |  |                    | 17,583 |                     |   | 17,651        |  |                     |    |  |   |   
|Mortgage-backed securities |  |                    | 25,580 |                     |   | 26,963        |  |                     | 770 |  |   | 797
|                           |  |                    |        |                     |   |               |  |                     |     |  |   |    
|                           |  | $                  | 47,170 |                     | $ | 48,789        |  | $                   | 770 |  | $ | 797
|                           |  |                    |        |                     |   |               |  |                     |     |  |   |    

One agency security and three mortgage-backed securities were sold
during 2009 for gains totaling $235,000. Restricted stock with a carrying value of $88,000 was sold at a gain of $227,000 in 2008.

At
December 31, 2009, securities with a carrying value of approximately $8,508,000 were pledged to secure public deposits and other purposes.

Management evaluates securities for other-than-temporary impairment at least quarterly. Consideration is given to the length of time and the extent to which the fair values have been less than amortized cost, the financial condition and
near-term prospects of the security issuers, and the intent and ability to retain impaired investments for a period to allow recovery in fair value.

At December 31, 2009, debt securities and unrestricted stock with $8,317,000 in fair value had total unrealized losses of $368,000 of amortized cost. These securities were municipal securities, corporate debt securities and
unrestricted stock. As management has the ability and intent to hold these debt securities until maturity, no declines are deemed to be other-than-temporary.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 2 - Securities (continued)

Information pertaining to securities with gross unrealized losses at December 31, 2009 and 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    
|                                             |  | FairValue           |        | GrossUnrealizedLosses |   | FairValue |  | GrossUnrealizedLosses |       | FairValue |   | GrossUnrealizedLosses
|                                             |  | (in thousands)     
|December 31, 2009:                           |  |                     |        |                       |   |           |  |                       |       |           |   |                       |  |   |        |  |   |      
|Municipal securities                         |  | $                   | 4,069  |                       | $ | 40        |  | $                     |      |           | $ |                      |  | $ | 4,069  |  | $ | 40   
|FNMA, FHLMC, GNMA mortgage backed securities |  |                     |       |                       |   |          |  |                       |      |           |   |                      |  |   |       |  |   |     
|Corporate securities                         |  |                     |       |                       |   |          |  |                       | 3,815 |           |   | 228                   |  |   | 3,815  |  |   | 228  
|Unrestricted stock                           |  |                     |       |                       |   |          |  |                       | 433   |           |   | 100                   |  |   | 433    |  |   | 100  
|                                             |  |                     |        |                       |   |           |  |                       |       |           |   |                       |  |   |        |  |   |      
|Total                                        |  | $                   | 4,069  |                       | $ | 40        |  | $                     | 4,248 |           | $ | 328                   |  | $ | 8,317  |  | $ | 368  
|                                             |  |                     |        |                       |   |           |  |                       |       |           |   |                       |  |   |        |  |   |      
|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 3 - Loans and allowance for loan losses

Loans at December 31, 2009 and 2008 were as follows:



|                              |  |                 |         |   |      |   |         |  
|----------------------------- |  | --------------- | ------- | - | ---- | - | ------- | -
|                              |  | 2009            |         |   | 2008 |  
|                              |  | ( in thousands) |        
|Real estate - construction    |  | $               | 122,072 |   |      | $ | 119,795 |  
|Real estate - mortgage        |  |                 | 317,903 |   |      |   | 298,092 |  
|Commercial                    |  |                 | 83,005  |   |      |   | 77,345  |  
|Installment and other         |  |                 | 7,659   |   |      |   | 6,214   |  
|                              |  |                 |         |   |      |   |         |  
|Total loans                   |  |                 | 530,639 |   |      |   | 501,446 |  
|Less: Deferred loan fees, net |  |                 | (33     | ) |      |   | (22     | )
|Allowance for loan losses     |  |                 | (10,081 | ) |      |   | (5,760  | )
|                              |  |                 |         |   |      |   |         |  
|                              |  | $               | 520,525 |   |      | $ | 495,664 |  
|                              |  |                 |         |   |      |   |         |  



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 3 - Loans and allowance for loan losses (continued)

The activity in the allowance for loan losses for 2009 and 2008 is summarized as follows:



|                                |  |                 |        |   |      |   |       |  
|------------------------------- |  | --------------- | ------ | - | ---- | - | ----- | -
|                                |  | 2009            |        |   | 2008 |  
|                                |  | ( in thousands) |       
|Balance at beginning of year    |  | $               | 5,760  |   |      | $ | 4,532 |  
|Provision charged to operations |  |                 | 10,520 |   |      |   | 1,910 |  
|Loan charge-offs                |  |                 | (6,208 | ) |      |   | (694  | )
|Loan recoveries                 |  |                 | 9      |   |      |   | 12    |  
|                                |  |                 |        |   |      |   |       |  
|Balance at end of year          |  | $               | 10,081 |   |      | $ | 5,760 |  
|                                |  |                 |        |   |      |   |       |  

At December 31, 2009 and 2008, the total recorded investment in impaired loans amounted to approximately $14,163,000
and $5,656,000, respectively. These loans were also on non-accrual. The average recorded investment in impaired loans amounted to $13,535,000 and $3,090,000 for the years ended December 31, 2009 and 2008, respectively. There were no loans
ninety days or more past due and still accruing interest at December 31, 2009 and 2008. The allowance for loan losses related to impaired loans was $4,431,000 at December 31, 2009 and $840,000 at December 31, 2008. There was no
interest income recognized on impaired loans for 2009 and 2008.

During 2009 and 2008, 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 December 31, 2009 and 2008, the Company had no troubled debt restructurings as none of the modifications made granted concessions to borrowers experiencing financial difficulties.

The Company has made loans in the ordinary course of business to certain directors and executive officers of the Company and to their
affiliates and associates. The total amount of such loans was $14,483,000 and $14,447,000 at December 31, 2009 and 2008, respectively. During 2009, new loans were $4,079,000 and repayments were $4,204,000. These loans were made on substantially
the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other borrowers.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 4 - Premises and equipment



Premises and equipment at December 31, 2009 and 2008 were as follows:



|                              |  |                |        |   |      |   |        |  
|----------------------------- |  | -------------- | ------ | - | ---- | - | ------ | -
|                              |  | 2009           |        |   | 2008 |  
|                              |  | (in thousands) |       
|Land                          |  | $              | 3,824  |   |      | $ | 3,824  |  
|Building and improvements     |  |                | 6,563  |   |      |   | 6,563  |  
|Leasehold improvements        |  |                | 7,388  |   |      |   | 7,080  |  
|Furniture and equipment       |  |                | 4,807  |   |      |   | 4,497  |  
|Construction in progress      |  |                |       |   |      |   |       |  
|Land improvements             |  |                | 1,004  |   |      |   | 1,004  |  
|                              |  |                |        |   |      |   |        |  
|                              |  |                | 23,586 |   |      |   | 22,968 |  
|Less accumulated depreciation |  |                | (4,235 | ) |      |   | (3,316 | )
|                              |  |                |        |   |      |   |        |  
|Premises and equipment, net   |  | $              | 19,351 |   |      | $ | 19,652 |  
|                              |  |                |        |   |      |   |        |  

Interest capitalized was $0 and $178,000 in 2009 and 2008, respectively. Depreciation expense was $935,000 in 2009 and
$665,000 in 2008.

Note 5 - Impairment of investment security

Investments are periodically evaluated for any impairment which would be deemed other than temporary. During 2009, the Companys 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 $850,000 were recorded in 2009. This is the only debt security which the Company has deemed impaired.

Note 6 - Deposits

The aggregate amount of
certificates of deposit with a minimum denomination of $100,000 was $125,245,000 and $119,893,000 at December 31, 2009 and 2008, respectively.

The Company has accepted deposits during the ordinary course of business from certain directors and executive officers of the Company and from their affiliates and associates. The total amount of these deposits outstanding was $5,637,000
and $6,234,000 at December 31, 2009 and 2008, respectively.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 6 - Deposits (continued)

At December 31, 2009, the scheduled maturities of time deposits were as follows:



|           |  |                |        
|---------- |  | -------------- | -------
|           |  | (in thousands)
|2010       |  | $              | 200,487
|2011       |  |                | 51,346 
|2012       |  |                | 4,828  
|2013       |  |                | 2,133  
|2014       |  |                | 5,151  
|Thereafter |  |                |       
|           |  |                |        
|           |  | $              | 263,945
|           |  |                |        

Note 7 - Advances from Federal Home Loan Bank of Atlanta

The Company had the following advances from the Federal Home Loan Bank outstanding at December 31, 2009 and 2008:



|                                                      |  |                 |       |      |   |       
|----------------------------------------------------- |  | --------------- | ----- | ---- | - | ------
|                                                      |  | 2009            |       | 2008
|                                                      |  | ( in thousands)
|Fixed rate advance at 6.05%                           |  | $               | 3,000 |      | $ | 3,000 
|Variable rate advances at 0.36% and 0.46% (overnight) |  |                 | 2,000 |      |   | 51,000
|Amortizing fixed rate advances at 1.00%               |  |                 | 1,011 |      |   | 1,050 
|Amortizing fixed rate advance at 1.25%                |  |                 | 1,337 |      |   | 1,360 
|Amortizing fixed rate advance at 0.25%                |  |                 | 330   |      |   | 337   
|Amortizing fixed rate advance at 0.00%                |  |                 | 105   |      |   | 109   
|                                                      |  |                 |       |      |   |       
|                                                      |  | $               | 7,783 |      | $ | 56,856
|                                                      |  |                 |       |      |   |       

These advances are secured by the Companys FHLB stock and a
blanket floating lien on the Companys one-to-four family residential and commercial real estate loan portfolios. Outstanding loan balances of approximately $114 million were pledged to the Federal Home Loan Bank at December 31, 2009. The
contractual maturities of these advances are as follows:



|           |  |                |      
|---------- |  | -------------- | -----
|           |  | (in thousands)
|2010       |  |                | 5,079
|2011       |  |                | 81   
|2012       |  |                | 84   
|2013       |  |                | 87   
|2014       |  |                | 90   
|Thereafter |  |                | 2,362
|           |  |                |      
|           |  | $              | 7,783
|           |  |                |      



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 7 - Advances from Federal Home Loan Bank of Atlanta (continued)

Credit availability for additional advances from the Federal Home Loan Bank was $37,671,000 at December 31, 2009. The Company also had $9,000,000 in
federal funds borrowing accommodations from two Banks, of which none was outstanding at December 31, 2009. The Company also obtained a discount borrowing line of approximately $100,000,000 from the Federal Reserve Bank of Richmond subsequent to
December 31, 2009 which is secured by land development, construction, commercial, and home equity loans. No borrowings have been conducted under the Federal Reserve line.

Note 8 - 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 standards incorporated within ASC 810, Consolidation. Carolina Trust acquired these debentures using the proceeds of its offerings
of common securities to the Company and $10 million of Trust Preferred Securities to outside investors. The Trust Preferred Securities qualify as Tier 1 and Tier 2 capital under 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 August and September 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 $9,050,000 at December 31, 2009 and qualify as Tier 2 capital
for the Bank. The notes are redeemable upon maturity on September 30, 2018, or earlier at the Banks option, in whole or part subject to regulatory approval, beginning September 30, 2013. The expenses of the offering of $373,000 were
capitalized at issue and are being amortized over sixty months. The notes are subordinate to the rights of payment to depositors, bankers acceptances, letters of creditors and general creditors.

Note 9 - Income taxes

The Company did not
recognize any interest or penalties related to income tax during the years ended December 31, 2009 and 2008, and did not accrue interest or penalties as of December 31, 2009 and 2008. The Company does not have an accrual for uncertain tax
positions as of December 31, 2009 and 2008, as deductions taken and benefits accrued are based on widely understood administrative practices and procedures and are based on clear and unambiguous tax law. Tax returns for all years 2005 and
thereafter are subject to future examination by tax authorities.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 9 - Income taxes (continued)



The provision for income tax expense (benefit) consisted of the following for the year ended
December 31:



|         |  |                |        |   |      |   |       |  
|-------- |  | -------------- | ------ | - | ---- | - | ----- | -
|         |  | 2009           |        |   | 2008 |  
|         |  | (in thousands) |       
|Current  |  |                |        |   |      |   |       |  
|Federal  |  | $              | 1,261  |   |      | $ | 981   |  
|State    |  |                | 323    |   |      |   | 343   |  
|         |  |                |        |   |      |   |       |  
|         |  |                | 1,584  |   |      |   | 1,324 |  
|         |  |                |        |   |      |   |       |  
|Deferred |  |                |        |   |      |   |       |  
|Federal  |  |                | (1,832 | ) |      |   | (87   | )
|State    |  |                | (236   | ) |      |   | (63   | )
|         |  |                |        |   |      |   |       |  
|         |  |                | (2,068 | ) |      |   | (150  | )
|         |  |                |        |   |      |   |       |  
|         |  | $              | (484   | ) |      | $ | 1,174 |  
|         |  |                |        |   |      |   |       |  

A reconciliation of reported income tax expense for the years ended December 31, 2009 and 2008 to the amount of tax
expense computed by multiplying income before taxes by the statutory federal income tax rate of 34% follows:



|                                                                       |  |                |      |   |      |   |       |  
|---------------------------------------------------------------------- |  | -------------- | ---- | - | ---- | - | ----- | -
|                                                                       |  | 2009           |      |   | 2008 |  
|                                                                       |  | (in thousands) |     
|Tax provision at statutory rate                                        |  | $              | (286 | ) |      | $ | 1,145 |  
|Increase (decrease) in income taxes resulting from                     |  |                |      |   |      |   |       |  
|State income taxes net of federal benefit                              |  |                | 57   |   |      |   | 184   |  
|Increase in cash value of life insurance                               |  |                | (135 | ) |      |   | (120  | )
|Non taxable securites income reduced by nondeductible interest expense |  |                | (188 | ) |      |   | (111  | )
|Other                                                                  |  |                | 68   |   |      |   | 76    |  
|                                                                       |  |                |      |   |      |   |       |  
|                                                                       |  | $              | (484 | ) |      | $ | 1,174 |  
|                                                                       |  |                |      |   |      |   |       |  



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 9 - Income taxes (continued)



The primary components of deferred income taxes are as follows:



|                                            |  |                |       |   |      |   |      
|------------------------------------------- |  | -------------- | ----- | - | ---- | - | -----
|                                            |  | 2009           |       |   | 2008
|                                            |  | (in thousands)
|Deferred tax assets                         |  |                |       |   |      |   |      
|Allowance for loan losses                   |  | $              | 3,702 |   |      | $ | 1,987
|Deferred compensation expense               |  |                | 840   |   |      |   | 621  
|Impaired assets                             |  |                | 327   |   |      |   | 39   
|Other                                       |  |                | (20   | ) |      |   | 6    
|Unrealized loss on securities               |  |                |      |   |      |   | 129  
|                                            |  |                |       |   |      |   |      
|Gross deferred tax assets                   |  |                | 4,849 |   |      |   | 2,782
|                                            |  |                |       |   |      |   |      
|Deferred tax liabilities                    |  |                |       |   |      |   |      
|Depreciable basis of premises and equipment |  |                | 755   |   |      |   | 699  
|Deferred loan costs                         |  |                | 327   |   |      |   | 287  
|Prepaid assets                              |  |                | 93    |   |      |   | 61   
|Unrealized gain on securities               |  |                | 517   |   |      |   |     
|                                            |  |                |       |   |      |   |      
|Gross deferred tax liabilities              |  |                | 1,692 |   |      |   | 1,047
|                                            |  |                |       |   |      |   |      
|Net deferred tax assets                     |  | $              | 3,157 |   |      | $ | 1,735
|                                            |  |                |       |   |      |   |      

Note 10 - 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 2009 was $314,000. Dividends at 5% per annum are payable quarterly for the first five years; the dividend increases to
9% per annum after the fifth year if not called by the Company.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 11 - Regulatory matters



Federal and state banking regulations place certain restrictions on dividends paid and loans or advances
made by the Bank to the Holding Company. The total amount of dividends, which may be paid at any date, is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10 percent of the Banks common stock and
surplus on a secured basis. In addition, dividends paid by the Bank to the Holding Company would be prohibited if the effect would cause the Banks capital to be reduced below applicable minimum regulatory capital requirements.

The Holding Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys consolidated financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Holding Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Companys and the Banks assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting practices. The Companys and the Banks capital amounts and classifications are also subject to qualitative judgments by the regulators as to components, risk
weighting, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures
established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier 1 capital to average assets (as defined). At December 31, 2009 and 2008, management believes that the Company and the Bank have met all capital adequacy requirements to which it is subject.

As of December 31, 2009, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. The Companys and the Banks actual capital amounts and
ratios as of December 31, 2009 and 2008 are presented in the table that follows.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 11 - Regulatory matters (continued)



|                          |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|------------------------- |  | ---------------- | ------ | ----- | --------------------------- | - | ------ | ------------------------------------------------------------- | ------ |  |  | ------ |  | ----- | ------ |  | --- | ----
|                          |  | Actual           |        |       | For CapitalAdequacyPurposes |   |        | To Be WellCapitalized UnderPrompt CorrectiveAction Provisions |       
|                          |  | Amount           |        | Ratio |                             |   | Amount |                                                               | Ratio  |  |  | Amount |  | Ratio |       
|                          |  | ($ in thousands) |       
|December 31, 2009:        |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|Total Capital             |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|(To risk weighted assets) |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|Consolidated              |  | $                | 73,614 |       | 12.09                       | % |        | $                                                             | 48,698 |  |  | 38%    |  |       | n/a    |  | n/a |     
|Carolina Bank             |  |                  | 68,421 |       | 11.24                       | % |        |                                                               | 48,698 |  |  | 38%    |  | $     | 60,873 |  |     | 310%
|Tier 1 Capital            |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|(To risk weighted assets) |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|Consolidated              |  |                  | 56,945 |       | 9.35                        | % |        |                                                               | 24,349 |  |  | 34%    |  |       | n/a    |  | n/a |     
|Carolina Bank             |  |                  | 51,752 |       | 8.50                        | % |        |                                                               | 24,349 |  |  | 34%    |  |       | 36,524 |  |     | 36% 
|Tier 1 Capital            |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|(To average assets)       |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|Consolidated              |  |                  | 56,945 |       | 8.20                        | % |        |                                                               | 27,781 |  |  | 34%    |  |       | n/a    |  | n/a |     
|Carolina Bank             |  |                  | 51,752 |       | 7.45                        | % |        |                                                               | 27,768 |  |  | 34%    |  |       | 34,710 |  |     | 35% 
|                          |  |                  |        |       |                             |  
|December 31, 2008:        |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|Total Capital             |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|(To risk weighted assets) |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|Consolidated              |  | $                | 47,587 |       | 8.64                        | % |        | $                                                             | 44,085 |  |  | 38%    |  |       | n/a    |  | n/a |     
|Carolina Bank             |  |                  | 56,613 |       | 10.29                       | % |        |                                                               | 44,012 |  |  | 38%    |  | $     | 55,015 |  |     | 310%
|Tier 1 Capital            |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|(To risk weighted assets) |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|Consolidated              |  |                  | 41,827 |       | 7.59                        | % |        |                                                               | 22,042 |  |  | 34%    |  |       | n/a    |  | n/a |     
|Carolina Bank             |  |                  | 41,898 |       | 7.62                        | % |        |                                                               | 22,006 |  |  | 34%    |  |       | 33,009 |  |     | 36% 
|Tier 1 Capital            |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|(To average assets)       |  |                  |        |       |                             |   |        |                                                               |        |  |  |        |  |       |        |  |     |     
|Consolidated              |  |                  | 41,827 |       | 6.99                        | % |        |                                                               | 23,952 |  |  | 34%    |  |       | n/a    |  | n/a |     
|Carolina Bank             |  |                  | 41,898 |       | 7.00                        | % |        |                                                               | 23,937 |  |  | 34%    |  |       | 29,922 |  |     | 35% 



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 12 - Commitments



Operating leases

The Company leases land for its main office, a loan production office, a branch facility, and an ATM site under operating leases. Total future minimum lease
payments, excluding renewal options, at December 31, 2009, under the leases are as follows:



|           |  |                 |      
|---------- |  | --------------- | -----
|           |  | ( in thousands)
|2010       |  | $               | 353  
|2011       |  |                 | 336  
|2012       |  |                 | 352  
|2013       |  |                 | 371  
|2014       |  |                 | 382  
|Thereafter |  |                 | 3,509
|           |  |                 |      
|           |  | $               | 5,303
|           |  |                 |      

Total lease expense was approximately $378,000 in 2009 and $367,000 in
2008.

Loans

In the normal course of business there are outstanding commitments for the extension of credit which are not reflected in the financial statements. At December 31, 2009 and 2008, pre-approved but unused lines of credit for loans
totaled approximately $129,192,000 and $108,650,000. In addition, the Company had $10,217,000 and $7,289,000 in standby letters of credit at December 31, 2009 and 2008, respectively. These commitments represent no more than the normal lending
risk that the Bank commits to its borrowers. If these commitments are drawn, the Company will obtain collateral if it is deemed necessary based on managements credit evaluation of the counterparty. Management believes that these commitments
can be funded through normal operations.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 13 - Employee benefit plans

All employees of the Company who meet certain eligibility requirements can elect to participate in the Banks 401(k) plan. Participants may make voluntary contributions resulting in salary deferrals
in accordance with Section 401(k) of the Internal Revenue Code and the plan documents. The Company makes a 100% matching contribution up to a maximum of six percent of compensation which is vested immediately. The Companys matching
expense was $331,000 in 2009 and $271,000 in 2008.

In 2003, the Company established a nonqualified deferred compensation plan under which
directors may elect to defer their directors fees. Participating directors receive an additional matching contribution for monthly fees and the amounts deferred are invested solely in Company stock that is held in a rabbi trust. The matching
contribution was 25% of fees deferred in 2008 and during the first ten months of 2009 and was reduced to 0% during the last two months of 2009. The Company stock held by the trust and the related deferred compensation liability are recorded at an
amount equal to the original compensation deferred. Changes in the fair value of the stock are not recognized in the Companys financial statements. At December 31, 2009, deferred directors fees of $874,000 had been used to purchase
124,466 shares of the Companys stock held by the trust after distribution of shares to retiring directors. Deferred directors fees of $11,000 were also remitted to the trust before December 31, 2009 to buy stock in 2009. Prior to
2003, directors could elect to defer their fees however there was no separate trust, matching provision or investment in Company stock.

During December 2002, the Company added a supplemental executive retirement plan for certain officers. The plan was expanded in 2009 to include new officers and directors. The future benefits of the plan will be funded primarily by life
insurance policies on certain employees with the Company designated as the beneficiary. Expenses were $551,000 in 2009 and $466,000 in 2008 related to this plan. At December 31, 2009 and 2008, other liabilities include $1,514,000 and $964,000,
respectively, for this supplemental retirement plan. The cash surrender value of the related insurance policies has been included in other assets.

Note 14 - Fair value of financial statements

The Company has adopted the accounting standards within ASC 820 Fair
Value Measurements and Disclosures, which provides a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Generally accepted accounting principles defines fair value as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Company
utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. The Company has not elected the fair value option to value liabilities. Securities available-for-sale and loans held for
sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as 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.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 14 - Fair value of financial statements (continued)

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.

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 $29.4 million and $19.2 million included positive fair value adjustments of $255,000 and $152,000 at
December 31, 2009 and 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,
management measures the impairment in accordance with generally accepted accounting principles. The fair value of impaired loans is 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 December 31, 2009,
most of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with generally accepted accounting principles, 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



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 14 - Fair value of financial statements (continued)



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 $14.2 million at December 31, 2009. Of such loans, $14.2 million had specific loss allowances aggregating $4.4 million at that date.

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.



|                              |  |                              |     |                     |   |         |  |   |   |  |   |       
|----------------------------- |  | ---------------------------- | --- | ------------------- | - | ------- |  | - | - |  | - | ------
|                              |  | December 31, 2009           
|                              |  | Fair Value Measurement Using |     | Assets atFair Value
|                              |  | Level 1                      |     | Level 2             |   | Level 3 | 
|                              |  | (in thousands)              
|Assets                        |  |                              |     |                     |   |         |  |   |   |  |   |       
|Loans held for sale           |  | $                            |    |                     | $ | 29,388  |  | $ |  |  | $ | 29,388
|Securities available-for-sale |  |                              | 433 |                     |   | 52,491  |  |   |  |  |   | 52,924
|                              |  |                              |     |                     |   |         |  |   |   |  |   |       
|Total assets                  |  | $                            | 433 |                     | $ | 81,879  |  | $ |  |  | $ | 82,312
|                              |  |                              |     |                     |   |         |  |   |   |  |   |       



|                              |  |                              |     |                     |   |         |  |   |   |  |   |       
|----------------------------- |  | ---------------------------- | --- | ------------------- | - | ------- |  | - | - |  | - | ------
|                              |  | December 31, 2008           
|                              |  | Fair Value Measurement Using |     | Assets atFair Value
|                              |  | Level 1                      |     | Level 2             |   | Level 3 | 
|                              |  | (in thousands)              
|Assets                        |  |                              |     |                     |   |         |  |   |   |  |   |       
|Loans held for sale           |  | $                            |    |                     | $ | 19,163  |  | $ |  |  | $ | 19,163
|Securities available-for-sale |  |                              | 366 |                     |   | 59,437  |  |   |  |  |   | 59,803
|                              |  |                              |     |                     |   |         |  |   |   |  |   |       
|Total assets                  |  | $                            | 366 |                     | $ | 78,600  |  | $ |  |  | $ | 78,966
|                              |  |                              |     |                     |   |         |  |   |   |  |   |       

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.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 14 - Fair value of financial statements (continued)

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. Restricted and unrestricted stock is valued at cost except for Triangle Capital Corporation which 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.

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

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 with similar terms and remaining maturities.

Federal funds purchased: Due to the short-term nature of these assets, the carrying value approximates 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 (2% higher in 2008) than the actual current rate over an estimated remaining term of fifteen years. The trust preferred debt was issued at favorable rates in 2004, and current rates are approximately
3% higher when available.



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 14 - Fair value of financial statements (continued)

The following represents the estimated fair values and carrying amounts of financial instruments at December 31:



|                                               |  |                |         |                     |   |                |  |                     |         |  |   |        
|---------------------------------------------- |  | -------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                                               |  | 2009           |         | 2008               
|                                               |  | CarryingAmount |         | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|                                               |  | (in thousands) |         | (in thousands)     
|Financial Assets:                              |  |                |         |                     |   |                |  |                     |         |  |   |        
|Cash and due from banks                        |  | $              | 6,416   |                     | $ | 6,416          |  | $                   | 5,589   |  | $ | 5,589  
|Interest-bearing deposits with banks           |  |                | 34,039  |                     |   | 34,039         |  |                     | 359     |  |   | 359    
|Securities available for sale                  |  |                | 52,924  |                     |   | 52,924         |  |                     | 59,803  |  |   | 59,803 
|Securities held to maturity                    |  |                | 770     |                     |   | 797            |  |                     | 1,116   |  |   | 1,138  
|Net loans held for sale                        |  |                | 29,388  |                     |   | 29,388         |  |                     | 19,163  |  |   | 19,163 
|Net loans held for investment                  |  |                | 520,525 |                     |   | 522,490        |  |                     | 495,664 |  |   | 496,270
|Accrued interest receivable                    |  |                | 2,222   |                     |   | 2,222          |  |                     | 2,102   |  |   | 2,102  
|                                               |  |                |         |                    
|Financial Liabilities:                         |  |                |         |                     |   |                |  |                     |         |  |   |        
|Demand and savings deposits                    |  |                | 353,526 |                     |   | 353,526        |  |                     | 211,888 |  |   | 211,888
|Time deposits                                  |  |                | 263,945 |                     |   | 264,422        |  |                     | 286,176 |  |   | 287,039
|Federal Home Loan Bank advances                |  |                | 7,783   |                     |   | 7,861          |  |                     | 56,856  |  |   | 57,057 
|Securities sold under agreements to repurchase |  |                | 683     |                     |   | 683            |  |                     | 2,487   |  |   | 2,487  
|Federal funds purchased                        |  |                |        |                     |   |               |  |                     | 4,104   |  |   | 4,104  
|Subordinated debt                              |  |                | 9,050   |                     |   | 9,050          |  |                     | 8,955   |  |   | 8,955  
|Trust preferred debt                           |  |                | 10,310  |                     |   | 7,232          |  |                     | 10,310  |  |   | 8,681  
|Accrued interest payable                       |  |                | 1,019   |                     |   | 1,019          |  |                     | 1,593   |  |   | 1,593  



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 15 - Income (loss) per common share (EPS)

The reconciliation of the numerators and denominators of the basic income (loss) per share and diluted income per share computation at December 31,
2009 and 2008 follows:



|                                                                    |  |                          |        |   |                     |           |                |   |       |  
|------------------------------------------------------------------- |  | ------------------------ | ------ | - | ------------------- | --------- | -------------- | - | ----- | -
|                                                                    |  | Income (Loss)(Numerator) |        |   | Shares(Denominator) |           | PerShareAmount |  
|                                                                    |  | (in thousands)           |        |   |                     |           |                |  
|2009                                                                |  |                          |        |   |                     |           |                |   |       |  
|Basic income (loss) per share:                                      |  |                          |        |   |                     |           |                |   |       |  
|Net (loss) allocable to common stockholders                         |  | $                        | (1,448 | ) |                     | 3,383,748 |                | $ | (0.43 | )
|                                                                    |  |                          |       
|Effect of dilutive securities                                       |  |                          |        |   |                     |           |                |   |       |  
|Stock options                                                       |  |                          |       |   |                     | 1,354     |                |   |      |  
|                                                                    |  |                          |       
|Diluted income per share:                                           |  |                          |        |   |                     |           |                |   |       |  
|                                                                    |  |                          |        |   |                     |           |                |   |       |  
|Net (loss) allocable to common stockholders and assumed conversions |  | $                        | (1,448 | ) |                     | 3,385,102 |                | $ | (0.43 | )
|                                                                    |  |                          |        |   |                     |           |                |   |       |  
|2008                                                                |  |                          |        |   |                     |           |                |   |       |  
|Basic income per share:                                             |  |                          |        |   |                     |           |                |   |       |  
|Net income available to common stockholders                         |  | $                        | 2,194  |   |                     | 3,344,010 |                | $ | 0.66  |  
|                                                                    |  |                          |       
|Effect of dilutive securities                                       |  |                          |        |   |                     |           |                |   |       |  
|Stock options                                                       |  |                          |       |   |                     | 42,621    |                |   | (0.01 | )
|                                                                    |  |                          |       
|Diluted income per share:                                           |  |                          |        |   |                     |           |                |   |       |  
|                                                                    |  |                          |        |   |                     |           |                |   |       |  
|Net income available to common stockholders and assumed conversions |  | $                        | 2,194  |   |                     | 3,386,631 |                | $ | 0.65  |  
|                                                                    |  |                          |        |   |                     |           |                |   |       |  



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 16 - Condensed financial statements of parent company

Financial information pertaining to Carolina Bank Holdings, Inc. is as follows:

Condensed Balance Sheets



|                                           |  |                |        |      |   |       
|------------------------------------------ |  | -------------- | ------ | ---- | - | ------
|                                           |  | December 31,  
|                                           |  | 2009           |        | 2008
|                                           |  | (in thousands)
|Assets:                                    |  |                |        |      |   |       
|Cash                                       |  | $              | 5,322  |      | $ | 39    
|Securities available-for-sale              |  |                |       |      |   |      
|Investment in Carolina Capital Trust       |  |                | 310    |      |   | 310   
|Investment in Carolina Bank                |  |                | 52,756 |      |   | 41,647
|Other assets                               |  |                | 22     |      |   | 72    
|                                           |  |                |        |      |   |       
|Total assets                               |  | $              | 58,410 |      | $ | 42,068
|                                           |  |                |        |      |   |       
|Liabilities and stockholders equity:      |  |                |        |      |   |       
|Accrued expenses                           |  | $              | 152    |      | $ | 182   
|Junior subordinated debentures             |  |                | 10,310 |      |   | 10,310
|Stockholders Equity                       |  |                | 47,948 |      |   | 31,576
|                                           |  |                |        |      |   |       
|Total liabilities and stockholders equity |  | $              | 58,410 |      | $ | 42,068
|                                           |  |                |        |      |   |       

Condensed Statements of Operations



|                                                                 |  |                          |        |   |      |   |       |  
|---------------------------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ----- | -
|                                                                 |  | Years ended December 31, |       
|                                                                 |  | 2009                     |        |   | 2008 |  
|                                                                 |  | (in thousands)           |       
|Interest income                                                  |  | $                        | 145    |   |      | $ | 19    |  
|                                                                 |  |                         
|Interest expense                                                 |  |                          | 295    |   |      |   | 593   |  
|Other expense                                                    |  |                          | 119    |   |      |   | 100   |  
|                                                                 |  |                          |        |   |      |   |       |  
|Total expense                                                    |  |                          | 414    |   |      |   | 693   |  
|                                                                 |  |                          |        |   |      |   |       |  
|Income tax benefit                                               |  |                          | 92     |   |      |   | 229   |  
|                                                                 |  |                          |        |   |      |   |       |  
|(Loss) before equity in undistributed net income of subsidiaries |  |                          | (177   | ) |      |   | (445  | )
|Equity in undistributed income of subsidiaries                   |  |                          | (181   | ) |      |   | 2,639 |  
|                                                                 |  |                          |        |   |      |   |       |  
|Net income (loss)                                                |  | $                        | (358   | ) |      | $ | 2,194 |  
|                                                                 |  |                          |        |   |      |   |       |  
|Dividends and accretion on preferred stock                       |  |                          | (1,090 | ) |      |   |      |  
|                                                                 |  |                          |        |   |      |   |       |  
|Net income (loss) available (allocable) to common stockholders   |  | $                        | (1,448 | ) |      | $ | 2,194 |  
|                                                                 |  |                          |        |   |      |   |       |  



---

CAROLINA BANK HOLDINGS, INC. AND SUBSIDIARY

Notes to the Consolidated Financial Statements(Continued)

December 31, 2009 and 2008



Note 16 - Condensed financial statements of parent company (continued)

Condensed Statements of Cash Flows

Years ended December 31, 2009 and 2008



|                                                                                            |  |                |         |   |      |   |        |  
|------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------ | -
|                                                                                            |  | 2009           |         |   | 2008 |  
|                                                                                            |  | (in thousands) |        
|Operating activities:                                                                       |  |                |         |   |      |   |        |  
|Net income (loss)                                                                           |  | $              | (358    | ) |      | $ | 2,194  |  
|Adjustments to reconcile net income to net cash provided by (used by) operating activities: |  |                |         |   |      |   |        |  
|Equity in undistributed income of subsidiaries                                              |  |                | 181     |   |      |   | (2,639 | )
|Change in other assets                                                                      |  |                | 50      |   |      |   | 1      |  
|Change in accrued expenses                                                                  |  |                | (126    | ) |      |   | 5      |  
|                                                                                            |  |                |         |   |      |   |        |  
|Net cash used by operating activites                                                        |  |                | (253    | ) |      |   | (439   | )
|                                                                                            |  |                |         |   |      |   |        |  
|Investing activities:                                                                       |  |                |         |   |      |   |        |  
|Investment in subsidiary                                                                    |  |                | (10,000 | ) |      |   |       |  
|                                                                                            |  |                |         |   |      |   |        |  
|Net cash provided by (used by) investing activities                                         |  |                | (10,000 | ) |      |   |       |  
|                                                                                            |  |                |         |   |      |   |        |  
|Financing activities:                                                                       |  |                |         |   |      |   |        |  
|Dividend from subsidiary                                                                    |  |                |        |   |      |   | 150    |  
|Proceeds from stock options                                                                 |  |                | 216     |   |      |   | 184    |  
|Proceeds from issuance of preferred stock                                                   |  |                | 16,000  |   |      |   |       |  
|Dividends paid                                                                              |  |                | (680    | ) |      |   |       |  
|                                                                                            |  |                |         |   |      |   |        |  
|Net cash provided by financing activities                                                   |  |                | 15,536  |   |      |   | 334    |  
|                                                                                            |  |                |         |   |      |   |        |  
|Net change in cash                                                                          |  |                | 5,283   |   |      |   | (105   | )
|                                                                                            |  |               
|Cash at beginning of year                                                                   |  |                | 39      |   |      |   | 144    |  
|                                                                                            |  |                |         |   |      |   |        |  
|Cash at end of year                                                                         |  | $              | 5,322   |   |      | $ | 39     |  
|                                                                                            |  |                |         |   |      |   |        |  
|Supplemental disclosure of cash flow information:                                           |  |                |         |   |      |   |        |  
|Cash paid during the year for interest                                                      |  | $              | 387     |   |      | $ | 599    |  
|                                                                                            |  |                |         |   |      |   |        |  



---

|ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- | -------------------------------------------------------------------------------------

There have been no changes in or disagreements with accountants.



|ITEM 9A(T). | CONTROLS AND PROCEDURES.
|----------- | ------------------------

Evaluation of Disclosure Controls and Procedures

At the end of the period covered by this report, the company carried
out an evaluation, under the supervision and with the participation of the companys management, including the companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the
companys disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-14.

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

Managements Annual Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. The companys
internal control over financial reporting is a process designed under the supervision of the companys Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of the companys financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Management has made a comprehensive review, evaluation and assessment of the companys
internal control over financial reporting as of December 31, 2009. In making its assessment of internal control over financial reporting, management used the criteria issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal ControlIntegrated Framework. In accordance with Section 404 of the SarbanesOxley Act of 2002, management makes the following assertions:

Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The companys
management, including its principal executive officer and principal financial officer, assessed the effectiveness of the companys internal control over financial reporting as of December 31, 2009. In making this assessment, it used the
criteria set forth by the COSO in Internal ControlIntegrated Framework. Based on that assessment, management believes that, as of December 31, 2009, the companys internal control over financial reporting is effective based on
those criteria.

This annual report does not include an attestation report of the companys registered public accounting firm regarding
internal control over financial reporting. Managements report was not subject to attestation by the companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company
to provide only managements report in this annual report.



---

Changes in Internal Control over Financial Reporting

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 fourth 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 fourth quarter that have materially affected or are reasonably likely to materially affect, the companys internal control over financial reporting.



|ITEM 9B. | OTHER INFORMATION
|-------- | -----------------

None.

PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
|-------- | -------------------------------------------------------

Incorporated by reference to pages 4-11 of the Proxy Statement.

We have adopted a Code of Ethics
that applies, among others, to our principal executive officer and principal financial officer. Our Code of Ethics is available to any person, without charge, upon written request submitted to T. Allen Liles, Carolina Bank Holdings, Inc., 101 North
Spring Street, Greensboro, North Carolina 27401.



|ITEM 11. | EXECUTIVE COMPENSATION.
|-------- | -----------------------

Incorporated by
reference to pages 7-9 and 12-17 of the Proxy Statement.



---

|ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
|-------- | -----------------------------------------------------------------------------------------------

Incorporated by reference to pages 3-4 of the Proxy Statement.

The following table sets forth certain information with respect to the Companys equity compensation plans at December 31, 2009.



|                                                           |  |                                                                        |  |                                                                             |      |                                                                                                                                          |        
|---------------------------------------------------------- |  | ---------------------------------------------------------------------- |  | --------------------------------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------------------------------------------------------- | -------
|Plan Category                                              |  | Number of securitiesto be issued uponexercise ofoutstanding options(a) |  | Weighted-averageexercise price ofoutstanding options,warrants and rights(b) |      | Number of securitiesremaining availablefor future issuanceunder equitycompensation
plans(excluding securitiesreflected in column (a))(c)
|Equity compensation plans approved by security holders     |  | 220,854                                                                |  | $                                                                           | 8.68 |                                                                                                                                          | 500,000
|                                                           |  |                                                                        | 
|Equity compensation plans not approved by security holders |  | None                                                                   |  |                                                                             | N/A  |                                                                                                                                          | None   
|                                                           |  |                                                                        | 
|Total                                                      |  | 220,854                                                                |  | $                                                                           | 8.68 |                                                                                                                                          | 500,000



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
|-------- | --------------------------------------------------------------------------

Incorporated by reference to pages 7 and 17 of the Proxy Statement.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------

Incorporated by reference to pages 18-20 of the Proxy Statement.



---

PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
|-------- | -------------------------------------------



|(a) | The following documents are filed as part of this report:
|--- | ---------------------------------------------------------



| | 1. | Financial statements included in Item 8 of this Annual Report on Form 10-K:
| | -- | ---------------------------------------------------------------------------

Report of independent registered public accounting firm

Consolidated Balance Sheets as of December 31, 2009 and 2008

Consolidated
Statements of Operations for the years ended December 31, 2009 and 2008

Consolidated Statements of Changes in
Stockholders Equity for the years ended December 31, 2009 and 2008

Consolidated Statements of Cash Flows for the
years ended December 31, 2009 and 2008

Notes to Consolidated Financial Statements



| | 2. | Financial statement schedules required to be filed by Item 8 of this Form: None
| | -- | -------------------------------------------------------------------------------



| | 3. | Exhibits
| | -- | --------



|               |  |                                                                                            
|-------------- |  | -------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                
|               | 
|3.1            |  | Articles of Incorporation of Registrant(1)                                                 
|               | 
|3.2            |  | Articles of Amendment of Registrant(11)                                                    
|               | 
|3.3            |  | Bylaws of Registrant(2)                                                                    
|               | 
|4.1            |  | Form of Stock Certificate for Common Stock(2)                                              
|               | 
|4.2            |  | Indenture(3)                                                                               
|               | 
|4.3            |  | Warrant to Purchase Common Stock of Carolina Bank Holdings, Inc., dated January 9, 2009(11)
|               | 
|4.4            |  | Form of Stock Certificate for Series A Preferred Stock(11)                                 
|               | 
|10.1           |  | Employment Agreement of Robert T. Braswell(4)                                              
|               | 
|10.2           |  | Employment Agreement of T. Allen Liles(5)                                                  
|               | 
|10.3           |  | Employment Agreement of Gunnar N. R. Fromen(5)                                             
|               | 
|10.4           |  | Employment Agreement of Daniel D. Hornfeck(5)                                              
|               | 
|10.5           |  | 1997 Incentive Stock Option Plan(6)                                                        



---

|               |  |                                                                                                                
|-------------- |  | ---------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                    
|               | 
|10.6           |  | 1997 Non-qualified Stock Option Plan(7)                                                                        
|               | 
|10.7           |  | 2007 Incentive Stock Option Plan(7)                                                                            
|               | 
|10.8           |  | Salary Continuation Agreement between Carolina Bank and Robert T. Braswell(8)                                  
|               | 
|10.9           |  | Salary Continuation Agreement between Carolina Bank and T. Allen Liles(9)                                      
|               | 
|10.10          |  | Salary Continuation Agreement between Carolina Bank and Gunnar N.R. Fromen(5)                                  
|               | 
|10.11          |  | Salary Continuation Agreement between Carolina Bank and Daniel D. Hornfeck(5)                                  
|               | 
|10.12          |  | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Robert T. Braswell(9)  
|               | 
|10.13          |  | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and T. Allen Liles(9)      
|               | 
|10.14          |  | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Gunnar N.R. Fromen(9)  
|               | 
|10.15          |  | Carolina Bank Directors Deferral Plan(9)                                                                      
|               | 
|10.16          |  | Director Retirement Agreement Between Carolina Bank and J. Alexander S. Barrett(5)                             
|               | 
|10.17          |  | Director Retirement Agreement Between Carolina Bank and Gary N. Brown(5)                                       
|               | 
|10.18          |  | Director Retirement Agreement Between Carolina Bank and George E. Carr, III(5)                                 
|               | 
|10.19          |  | Director Retirement Agreement Between Carolina Bank and James E. Hooper(5)                                     
|               | 
|10.20          |  | Director Retirement Agreement Between Carolina Bank and D. Wayne Thomas(5)                                     
|               | 
|10.21          |  | Amended and Restated Declaration of Trust of Carolina Capital Trust(10)                                        
|               | 
|10.22          |  | Guarantee Agreement(10)                                                                                        
|               | 
|10.23          |  | Form of Bonus Recovery Agreement(12)                                                                           
|               | 
|10.24          |  | Form of Golden Parachute Payment Waiver Agreement(12)                                                          
|               | 
|10.25          |  | 2009 Omnibus Stock Ownership and Long Term Incentive Plan(13)                                                  
|               | 
|10.26          |  | Employment Agreement with Philip Carmac (Filed herewith)                                                       
|               | 
|21.1           |  | Subsidiaries (Filed herewith)                                                                                  
|               | 
|23.1           |  | Consent of Cherry, Bekaert & Holland, L.L.P. (Filed herewith)                                                  
|               | 
|31.1           |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)



---

|               |  |                                                                                                                
|-------------- |  | ---------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                    
|               | 
|31.2           |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)
|               | 
|32.1           |  | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)                              
|               | 
|99.1           |  | Proxy Statement for the 2010 Annual Meeting of Shareholders(14)                                                
|               | 
|99.2           |  | Certification pursuant to Emergency Economic Stabilization Act of 2008, as amended (Filed herewith)            
|               | 
|99.3           |  | Certification pursuant to Emergency Economic Stabilization Act of 2008, as amended (Filed herewith)            



|(1) | Incorporated by reference to Form 10-K of Carolina Bank Holdings, Inc. (Filed March 30, 2009 with the Securities and Exchange Commission).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Form 10-KSB of Carolina Bank Holdings, Inc. (Filed April 2, 2001 with the Securities and Exchange Commission).
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed January 4, 2005 with the Securities and Exchange Commission).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Form 8-K/A of Carolina Bank Holdings, Inc. (Filed June 9, 2008 with the Securities and Exchange Commission).
|--- | -----------------------------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed June 5, 2008 with the Securities and Exchange Commission).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to the registrants Registrant Statement on Form S-8, filed with the Securities and Exchange Commission on June 2, 2003
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to Form S-8 of Carolina Bank Holdings, Inc. (Filed May 11, 2000 with the Securities and Exchange Commission).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed May 27, 2008 with the Securities and Exchange Commission).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to Form 10-KSB of Carolina Bank Holdings, Inc. (Filed March 28, 2003 with the Securities and Exchange Commission).
|--- | --------------------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed January 4, 2005 with the Securities and Exchange Commission).
|---- | ------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed January 13, 2009 with the Securities and Exchange Commission).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed February 5, 2010 with the Securities and Exchange Commission).
|---- | -------------------------------------------------------------------------------------------------------------------------------------------

|(13) | Incorporated by reference to Form 8-K of Carolina Bank Holdings, Inc. (Filed March 5, 2010 with the Securities and Exchange Commission).
|---- | ----------------------------------------------------------------------------------------------------------------------------------------

|(14) | Filed with the Securities and Exchange Commission Pursuant to Rule 14a-6.
|---- | -------------------------------------------------------------------------



---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.(Registrant)By:

/S/    ROBERT T.
BRASWELLRobert T. BraswellPresident and Chief Executive OfficerDate:

March 24, 2010




---

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.



|                                                                                             |  |               
|-------------------------------------------------------------------------------------------- |  | --------------
|                                                                                             | 
|/S/    ROBERT T.
BRASWELL Robert T. Braswell President, Chief Executive Officer and Director |  | March 24, 2010
|                                                                                             | 
|/S/    SUSAN
ALT Susan Alt Director                                                          |  | March 24, 2010
|                                                                                             | 
|/S/    J. ALEXANDER S.
BARRETT J. Alexander S. Barrett Director                              |  | March 24, 2010
|                                                                                             | 
|/S/    STEPHEN K.
BRIGHT Stephen K. Bright Director                                          |  | March 24, 2010
|                                                                                             | 
|/S/    GARY N.
BROWN Gary N. Brown Chairman of the Board of Directors                        |  | March 24, 2010
|                                                                                             | 
|/S/    GEORGE E.
CARR George E. Carr Director                                                |  | March 24, 2010
|                                                                                             | 
|/S/    JAMES E.
HOOPER James E. Hooper Director                                              |  | March 24, 2010
|                                                                                             | 
|/S/    BETTY J.
PEARCE Betty J. Pearce Director                                              |  | March 24, 2010
|                                                                                             | 
|/S/    D. WAYNE
THOMAS D. Wayne Thomas Director                                              |  | March 24, 2010
|                                                                                             | 
|/S/    KIM A.
THOMPSON Kim A. Thompson Director                                              |  | March 24, 2010
|                                                                                             | 
|/S/    T. ALLEN
LILES T. Allen Liles Principal Financial and Principal Accounting Officer    |  | March 24, 2010



---

EXHIBIT INDEX



|               |  |                                                                                                                
|-------------- |  | ---------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                    
|               | 
|3.1            |  | Articles of Incorporation of Registrant *                                                                      
|               | 
|3.2            |  | Articles of Amendment of Registrant *                                                                          
|               | 
|3.3            |  | Bylaws of Registrant*                                                                                          
|               | 
|4.1            |  | Form of Stock Certificate*                                                                                     
|               | 
|4.2            |  | Indenture*                                                                                                     
|               | 
|4.3            |  | Warrant to Purchase Common Stock of Carolina Bank Holdings, Inc., dated January 9, 2009*                       
|               | 
|4.4            |  | Form of Stock Certificate for Series A Preferred Stock*                                                        
|               | 
|10.1           |  | Employment Agreement of Robert T. Braswell*                                                                    
|               | 
|10.2           |  | Employment Agreement of T. Allen Liles*                                                                        
|               | 
|10.3           |  | Employment Agreement of Gunnar N. R. Fromen*                                                                   
|               | 
|10.4           |  | Employment Agreement of Daniel D. Hornfeck*                                                                    
|               | 
|10.5           |  | 1997 Incentive Stock Option Plan*                                                                              
|               | 
|10.6           |  | 1997 Non-qualified Stock Option Plan*                                                                          
|               | 
|10.7           |  | 2007 Incentive Stock Option Plan*                                                                              
|               | 
|10.8           |  | Salary Continuation Agreement between Carolina Bank and Robert T. Braswell*                                    
|               | 
|10.9           |  | Salary Continuation Agreement between Carolina Bank and T. Allen Liles*                                        
|               | 
|10.10          |  | Salary Continuation Agreement between Carolina Bank and Gunnar N.R. Fromen*                                    
|               | 
|10.11          |  | Salary Continuation Agreement between Carolina Bank and Daniel D. Hornfeck*                                    
|               | 
|10.12          |  | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Robert T. Braswell*    
|               | 
|10.13          |  | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and T. Allen Liles*        
|               | 
|10.14          |  | Life Insurance Endorsement Method Split Dollar Plan Agreement Between Carolina Bank and Gunnar N.R. Fromen*    
|               | 
|10.15          |  | Carolina Bank Directors Deferral Plan*                                                                        
|               | 
|10.16          |  | Director Retirement Agreement Between Carolina Bank and J. Alexander S. Barrett*                               
|               | 
|10.17          |  | Director Retirement Agreement Between Carolina Bank and Gary N. Brown*                                         
|               | 
|10.18          |  | Director Retirement Agreement Between Carolina Bank and George E. Carr, III*                                   
|               | 
|10.19          |  | Director Retirement Agreement Between Carolina Bank and James E. Hooper*                                       
|               | 
|10.20          |  | Director Retirement Agreement Between Carolina Bank and D. Wayne Thomas*                                       
|               | 
|10.21          |  | Amended and Restated Declaration of Trust of Carolina Capital Trust*                                           
|               | 
|10.22          |  | Guarantee Agreement*                                                                                           
|               | 
|10.23          |  | Form of Bonus Recovery Agreement*                                                                              
|               | 
|10.24          |  | Form of Golden Parachute Waiver Agreement*                                                                     
|               | 
|10.25          |  | 2009 Omnibus Stock Ownership and Long Term Incentive Plan*                                                     
|               | 
|10.26          |  | Employment Agreement with Philip Carmac (Filed herewith)                                                       
|               | 
|21.1           |  | Subsidiaries (Filed herewith)                                                                                  
|               | 
|23.1           |  | Consent of Cherry, Bekaert & Holland, L.L.P. (Filed herewith)                                                  
|               | 
|31.1           |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)
|               | 
|31.2           |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act (Filed herewith)
|               | 
|32.1           |  | Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act (Filed herewith)                              
|               | 
|99.1           |  | Proxy Statement for 2010 Annual Meeting of shareholders**                                                      
|               | 
|99.2           |  | Certification pursuant to Emergency Economic Stabilization Act of 2008, as amended (Filed herewith)            
|               | 
|99.3           |  | Certification pursuant to Emergency Economic Stabilization Act of 2008, as amended (Filed herewith)            



|* | Incorporated by reference.
|- | --------------------------

|** | To be filed with the Securities and Exchange Commission pursuant to Rule 14a-6.
|-- | -------------------------------------------------------------------------------