DIRECTOR RETIREMENT AGREEMENT

Exhibit 10.13

C AROLINA B ANK

D IRECTOR R ETIREMENT A GREEMENT

This D IRECTOR R ETIREMENT A GREEMENT (this “Agreement”) is entered into as of this 30th day of May, 2008, by and between Carolina Bank, a North Carolina-chartered bank (the “Bank”), and T. Gray McCaskill, a director of the Bank (the “Director”).

W HEREAS , to encourage the Director to remain a member of the Bank’s board of directors, the Bank is willing to provide to the Director retirement benefits payable from the Bank’s general assets,

W HEREAS , the parties hereto intend that this Agreement shall be considered an unfunded arrangement maintained primarily to provide supplemental retirement benefits for the Director, and to be considered a non-qualified benefit plan for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). The Director is fully advised of the Bank’s financial status, and

W HEREAS , none of the conditions or events included in the definition of the term “golden parachute payment” that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Bank, is contemplated insofar as the Bank is concerned.

N OW T HEREFORE , in consideration of the foregoing premises and other good and valuable consideration, the receipt and acceptance of which are hereby acknowledged, the Director and the Bank hereby agree as follows.

A RTICLE 1

D EFINITIONS

1.1         “ Accrual Balance ” means the liability that should be accrued by the Bank under generally accepted accounting principles (“GAAP”) for the Bank’s obligation to the Director under this Agreement, applying Accounting Principles Board Opinion No. 12, as amended by Statement of Financial Accounting Standards No. 106, and the calculation method and discount rate specified hereinafter. The Accrual Balance shall be calculated such that when it is credited with interest each month the Accrual Balance at Normal Retirement Age equals the present value of the normal retirement benefits. The discount rate means the rate used by the Plan Administrator for determining the Accrual Balance. In its sole discretion the Plan Administrator may adjust the discount rate to maintain the rate within reasonable standards according to GAAP.

1.2         “ Beneficiary ” means each designated person, determined according to Article 4, or the estate of the deceased Director, entitled to benefits, if any, at the Director’s death.

1.3         “ Beneficiary Designation Form ” means the form established from time to time by the Plan Administrator that the Director completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

1.4         “ Change in Control ” means a change in control as defined in Internal Revenue Code section 409A and rules, regulations, and guidance of general application thereunder issued by the Department of the Treasury, including –

(a)         Change in ownership : a change in ownership of Carolina Bank Holdings, Inc., a North Carolina corporation of which the Bank is a wholly owned subsidiary, occurs on the date any one person or group accumulates ownership of Carolina Bank Holdings, Inc. stock constituting more than 50% of the total fair market value or total voting power of Carolina Bank Holdings, Inc. stock,

(b)         Change in effective control : ( x ) any one person, or more than one person acting as a group, acquires within a 12-month period ownership of Carolina Bank Holdings, Inc. stock possessing 30% or more of the total voting power of Carolina Bank Holdings, Inc. stock, or ( y ) a majority of Carolina Bank Holdings, Inc.’s board of directors is replaced during any 12-month period by directors whose appointment or election is not endorsed in advance by a majority of Carolina Bank Holdings, Inc.’s board of directors, or

(c)         Change in ownership of a substantial portion of assets : a change in ownership of a substantial portion of Carolina Bank Holdings, Inc.’s assets occurs if in a 12-month period any one person or more than one person acting as a group acquires from Carolina Bank Holdings, Inc. assets having a total gross fair market value equal to or exceeding 40% of the total gross fair market value of all of Carolina Bank Holdings, Inc.’s assets immediately before the acquisition or acquisitions. For this purpose, gross fair market value means the value of Carolina Bank Holdings, Inc.’s assets, or the value of the assets being disposed of, determined without regard to any liabilities associated with the assets.

1.5         “ Code ” means the Internal Revenue Code of 1986, as amended, and rules, regulations, and guidance of general application issued by the Department of the Treasury under the Internal Revenue Code of 1986, as amended.

1.6         “ Disability ” means, because of a medically determinable physical or mental impairment that can be expected to result in death or that can be expected to last for a continuous period of at least 12 months, ( x ) the Director is unable to engage in any substantial gainful activity, or ( y ) the Director is receiving income replacement benefits for a period of at least three months under an accident and health plan. Medical determination of disability may be made either by the Social Security Administration or by the provider of an accident or health plan covering employees of the Bank or its subsidiaries. Upon request of the Plan Administrator, the Director must submit proof to the Plan Administrator of the Social Security Administration’s or provider’s determination.

1.7         “ Early Termination ” means Separation from Service before Normal Retirement Age for reasons other than death, Disability, or Termination with Cause.

1.8         “ Effective Date ” means May 30, 2008.

1.9         “ Normal Retirement Age ” means the Director’s 70 ^th birthday.

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1.10       “ Plan Administrator ” or “ Administrator ” means the plan administrator described in Article 7.

1.11       “ Plan Year ” means a twelve-month period commencing on January 1 and ending on December 31 of each year.

1.12       “ Separation from Service ” means the Director’s service as a director and independent contractor to the Bank and any member of a controlled group, as defined in Code section 414, terminates for any reason, other than because of a leave of absence approved by the Bank or the Director’s death. For purposes of this Agreement, if there is a dispute about the status of the Director or the date of the Director’s Separation from Service, the Bank shall have the sole and absolute right to decide the dispute unless a Change in Control shall have occurred.

1.13       “ Termination with Cause ” or “ Cause ” means the Director is not nominated by the board or nominating committee for reelection as a director after the expiration of the Director’s current term, or the Director is removed from the board of directors, in either case –

(a)        because of the Director’s gross negligence or gross neglect of duties, or

(b)        because of the Director’s commission of a felony, or commission of a misdemeanor involving moral turpitude, or

(c)        because of the Director’s fraud, disloyalty, dishonesty, or willful violation of any law or significant policy of the Bank committed in connection with the Director’s service and resulting in an adverse effect on the Bank, or a breach of the Director’s fiduciary duties for personal profit, or

(d)        because the Director is removed from service or permanently prohibited from participating in the Bank’s affairs by an order issued under section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act [12 U.S.C. 1818(e)(4) or (g)(1)].

A RTICLE 2

L IFETIME B ENEFIT

2.1        Normal Retirement . Unless Separation from Service occurs before Normal Retirement Age and unless the Director shall have received the benefit under section 2.4 after a Change in Control, when the Director attains Normal Retirement Age the Bank shall pay to the Director the benefit described in this section 2.1 instead of any other benefit under this Agreement. If the Director’s Separation from Service after payment of benefits under this section 2.1 commences is a Termination with Cause or if this Agreement terminates under Article 5, no further benefits shall be paid to the Director.

2.1.1     Amount of benefit . The annual benefit under this section 2.1 is $10,000.

2.1.2     Payment of benefit . Beginning with the month immediately after the month in which the Director attains Normal Retirement Age, the Bank shall pay the annual benefit to the Director in equal monthly installments on the first day of each month. The annual benefit shall be paid to the Director for ten years.

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2.2        Early Termination . Unless the Director shall have received the benefit under section 2.4 after a Change in Control, upon Early Termination the Bank shall pay to the Director the benefit described in this section 2.2 instead of any other benefit under this Agreement. However, no benefits shall be payable if this Agreement terminates under Article 5.

2.2.1     Amount of benefit . The annual benefit under this section 2.2 is calculated as the amount that fully amortizes the Accrual Balance existing at the end of the month immediately before the month in which Separation from Service occurs, amortizing that Accrual Balance over ten years and taking into account interest at the discount rate or rates established by the Plan Administrator.

2.2.2     Payment of benefit . Beginning with the month immediately after the month in which the Director attains Normal Retirement Age, the Bank shall pay the annual benefit to the Director in equal monthly installments on the first day of each month. However, if when Separation from Service occurs the Director is a specified employee within the meaning of Code section 409A, payment shall begin on the later of ( x ) the seventh month after the month in which the Director’s Separation from Service occurs or ( y ) the month immediately after the month in which the Director attains Normal Retirement Age. The annual benefit shall be paid to the Director for ten years.

2.3        Disability . Unless the Director shall have received the benefit under section 2.4 after a Change in Control, upon the Director’s Separation from Service because of Disability before Normal Retirement Age the Bank shall pay to the Director the benefit described in this section 2.3 instead of any other benefit under this Agreement.

2.3.1     Amount of benefit . The annual benefit under this section 2.3 is calculated as the amount that fully amortizes the Accrual Balance existing at the end of the month immediately before the month in which Separation from Service occurs, amortizing that Accrual Balance over ten years and taking into account interest at the discount rate or rates established by the Plan Administrator.

2.3.2     Payment of benefit . Beginning with the month immediately after the month in which the Director attains Normal Retirement Age, the Bank shall pay the annual benefit to the Director in equal monthly installments on the first day of each month. However, if when Separation from Service occurs the Director is a specified employee within the meaning of Code section 409A, payment shall begin on the later of ( x ) the seventh month after the month in which the Director’s Separation from Service occurs or ( y ) the month immediately after the month in which the Director attains Normal Retirement Age. The annual benefit shall be paid to the Director for ten years.

2.4        Change in Control . If a Change in Control occurs both before the Director’s Normal Retirement Age and before the Director’s Separation from Service, the Bank shall pay to the Director the benefit described in this section 2.4 instead of any other benefit under this Agreement.

2.4.1     Amount of benefit . The benefit under this section 2.4 is the Accrual Balance on the date of the Change in Control.

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2.4.2     Payment of benefit . The Bank shall pay the benefit under this section 2.4 to the Director in a single lump sum within three business days after the Change in Control. If the Director receives the benefit under this section 2.4 because of the occurrence of a Change in Control, the Director shall not be entitled to claim additional benefits under section 2.4 if an additional Change in Control occurs thereafter.

2.5        Lump-Sum Payout of Remaining Normal Retirement Benefit, Early Termination Benefit, or Disability Benefit When a Change in Control Occurs . If a Change in Control occurs while the Director is receiving the Normal Retirement Age benefit under section 2.1, the Bank shall pay the remaining benefits to the Director in a single lump sum within three business days after the Change in Control. If a Change in Control occurs after Separation from Service but while the Director is receiving or is entitled at Normal Retirement Age to receive the Early Termination benefit under section 2.2 or the Disability benefit under section 2.3, the Bank shall pay the remaining benefits to the Director in a single lump sum within three business days after the Change in Control or, if the Director is a specified employee within the meaning of Code section 409A, on the later of ( x ) the date of the Change in Control or ( y ) the first day of the seventh month after the month in which the Director’s Separation from Service occurs. The lump-sum payment due to the Director as a result of a Change in Control shall be an amount equal to the Accrual Balance amount corresponding to the particular benefit when the Change in Control occurs.

2.6        Annual Benefit Statement . Within 120 days after the end of each Plan Year the Plan Administrator shall provide or cause to be provided to the Director an annual benefit statement showing benefits payable or potentially payable to the Director under this Agreement. Each annual benefit statement shall supersede the previous year’s annual benefit statement. If there is a contradiction between this Agreement and the annual benefit statement concerning the amount of a particular benefit payable or potentially payable to the Director under sections 2.2, 2.3, or 2.4 hereof, the amount of the benefit determined under the Agreement shall control.

2.7        Savings Clause Relating to Compliance with Code Section 409A . Despite any contrary provision of this Agreement, if when the Director’s Separation from Service occurs the Director is a specified employee, as defined in Code section 409A, and if any payments under Article 2 of this Agreement will result in additional tax or interest to the Director because of section 409A, the Director shall not be entitled to the payments under Ar