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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES
EXCHANGE ACT OF 1934



For the Quarterly Period Ended June
30, 2003



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 No. 2017-6



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ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)



|North Carolina                                                 |  | 56-2090738                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



Post Office Box 337,
Engelhard, North Carolina 27824

(Address of principal executive offices) (Zip Code)



(252) 925-9411

(Registrants telephone number, including area code)



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. Yes     x    No ̈



APPLICABLE ONLY TO CORPORATE ISSUERS:



Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.



As of August 8, 2003, 2,037,929 shares of the registrants common stock,
$3.50 par value, were outstanding.



This Form 10-QSB has 25 pages.



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Part I.    FINANCIAL INFORMATION

Item 1.    Financial Statements



ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2003 and December 31, 2002



|Assets                                                                                                                                              |  |   | June 30, 2003 |   |  |   | December 31, 2002* |  
|--------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------------- | - |  | - | ------------------ | -
|                                                                                                                                                    |  |   | (unaudited)   |   |  |   |                    |  
|Non-interest bearing deposits and cash                                                                                                              |  | $ | 24,856,819    |   |  | $ | 18,345,006         |  
|Federal funds sold                                                                                                                                  |  |   | 2,475,000     |   |  |   | 2,000,000          |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Total cash and cash equivalents                                                                                                                     |  |   | 27,331,819    |   |  |   | 20,345,006         |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Investment securities                                                                                                                               |  |   |               |   |  |   |                    |  
|Available-for-sale, at market value (cost of $107,922,614 and$117,115,368 at June 30, 2003 and December 31, 2002,
respectively)                     |  |   | 110,522,904   |   |  |   | 120,316,725        |  
|                                                                                                                                                    |  |  
|Loans                                                                                                                                               |  |   | 256,635,532   |   |  |   | 227,882,860        |  
|Allowance for probable loan losses                                                                                                                  |  |   | (3,339,243    | ) |  |   | (3,150,000         | )
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Loans, net                                                                                                                                          |  |   | 253,296,289   |   |  |   | 224,732,860        |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Real estate acquired in settlement of loans, net                                                                                                    |  |   | 45,000        |   |  |   | 25,820             |  
|Federal Home Loan Bank common stock, at cost                                                                                                        |  |   | 1,250,000     |   |  |   | 1,427,500          |  
|Bank premises and equipment, net                                                                                                                    |  |   | 10,384,016    |   |  |   | 8,615,827          |  
|Accrued interest receivable                                                                                                                         |  |   | 2,443,638     |   |  |   | 2,320,964          |  
|Other assets                                                                                                                                        |  |   | 9,118,070     |   |  |   | 8,519,947          |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Total                                                                                                                                               |  | $ | 414,391,736   |   |  | $ | 386,304,649        |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|                                                                                                                                                    |  |  
|Liabilities and Shareholders' Equity                                                                                                                |  |   |               |   |  |   |                    |  
|Deposits                                                                                                                                            |  |   |               |   |  |   |                    |  
|Demand, noninterest bearing                                                                                                                         |  | $ | 79,896,948    |   |  | $ | 66,883,915         |  
|Demand interest bearing                                                                                                                             |  |   | 80,176,734    |   |  |   | 71,255,529         |  
|Savings                                                                                                                                             |  |   | 17,797,160    |   |  |   | 17,064,211         |  
|Time                                                                                                                                                |  |   | 149,515,377   |   |  |   | 146,057,622        |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Total deposits                                                                                                                                      |  |   | 327,386,219   |   |  |   | 301,261,277        |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Accrued interest payable                                                                                                                            |  |   | 655,955       |   |  |   | 729,148            |  
|Short-term borrowings                                                                                                                               |  |   | 21,980,502    |   |  |   | 20,221,127         |  
|Long-term obligations                                                                                                                               |  |   | 32,000,000    |   |  |   | 32,000,000         |  
|Other liabilities                                                                                                                                   |  |   | 1,774,667     |   |  |   | 2,454,852          |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Total liabilities                                                                                                                                   |  |   | 383,797,343   |   |  |   | 356,666,404        |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Shareholders' equity                                                                                                                                |  |   |               |   |  |   |                    |  
|Common stock, par value $3.50 per share; authorized10,000,000 shares; issued and outstanding 2,037,929and 2,040,016 in
2003 and 2002, respectively. |  |   | 7,132,752     |   |  |   | 7,140,057          |  
|Capital surplus                                                                                                                                     |  |   | 5,359,981     |   |  |   | 5,410,102          |  
|Retained earnings                                                                                                                                   |  |   | 16,679,677    |   |  |   | 15,171,819         |  
|Deferred compensationrestricted stock                                                                                                              |  |   | (177,195      | ) |  |   | (52,568            | )
|Accumulated other comprehensive income                                                                                                              |  |   | 1,599,178     |   |  |   | 1,968,835          |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Total shareholders' equity                                                                                                                          |  |   | 30,594,393    |   |  |   | 29,638,245         |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  
|Commitments                                                                                                                                         |  |   |               |   |  |   |                    |  
|Total                                                                                                                                               |  | $ | 414,391,736   |   |  | $ | 386,304,649        |  
|                                                                                                                                                    |  |   |               |   |  |   |                    |  



|See |  | accompanying notes to consolidated financial statements.
|--- |  | --------------------------------------------------------

|* |  | Derived from audited consolidated financial statements.
|- |  | -------------------------------------------------------





2



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For the three and six months ended June 30,
2003 and 2002

(unaudited)



|                                                             |  | Three months ended June, 30 |           | Six months ended June, 30
|------------------------------------------------------------ |  | --------------------------- | --------- | -------------------------
|                                                             |  |                             | 2003      |                          
|Interest income:                                             |  |                             |           |                          
|Interest and fees on loans                                   |  | $                           | 3,979,341 |                          
|Interest on investment securities:                           |  |                             |           |                          
|Interest exempt from federal income taxes                    |  |                             | 187,199   |                          
|Taxable interest income                                      |  |                             | 923,315   |                          
|Dividend income                                              |  |                             | 40,619    |                          
|FHLB stock dividends                                         |  |                             | 17,172    |                          
|Interest on federal funds sold                               |  |                             | 13,736    |                          
|                                                             |  |                             |           |                          
|Total interest income                                        |  |                             | 5,161,382 |                          
|                                                             |  |                             |           |                          
|Interest expense:                                            |  |                             |           |                          
|Deposits:                                                    |  |                             |           |                          
|Demand accounts                                              |  |                             | 122,603   |                          
|Savings                                                      |  |                             | 24,307    |                          
|Time                                                         |  |                             | 776,439   |                          
|Short-term borrowings                                        |  |                             | 73,956    |                          
|Long-term obligations                                        |  |                             | 337,854   |                          
|                                                             |  |                             |           |                          
|Total interest expense                                       |  |                             | 1,335,159 |                          
|                                                             |  |                             |           |                          
|Net interest income                                          |  |                             | 3,826,223 |                          
|Provision for probable loan losses                           |  |                             | 120,000   |                          
|                                                             |  |                             |           |                          
|Net interest income after provision for probable loan losses |  |                             | 3,706,223 |                          
|                                                             |  |                             |           |                          
|                                                             |  |                             |           |                          
|Noninterest income:                                          |  |                             |           |                          
|Service charges on deposit accounts                          |  |                             | 886,908   |                          
|Other service charges and fees                               |  |                             | 456,832   |                          
|Net gain (loss) on sale of securities                        |  |                             | (33,014   | )                        
|Income from bank owned life insurance                        |  |                             | 61,575    |                          
|Other operating income                                       |  |                             | 15,458    |                          
|                                                             |  |                             |           |                          
|Total noninterest income                                     |  |                             | 1,387,759 |                          
|                                                             |  |                             |           |                          
|                                                             |  |                             |           |                          
|Noninterest expenses:                                        |  |                             |           |                          
|Salaries                                                     |  |                             | 1,329,646 |                          
|Retirement and other employee benefits                       |  |                             | 539,713   |                          
|Occupancy                                                    |  |                             | 299,984   |                          
|Equipment                                                    |  |                             | 336,723   |                          
|Professional fees                                            |  |                             | 124,365   |                          
|Supplies                                                     |  |                             | 96,924    |                          
|Telephone                                                    |  |                             | 151,160   |                          
|Postage                                                      |  |                             | 52,886    |                          
|Other operating expenses                                     |  |                             | 707,546   |                          
|                                                             |  |                             |           |                          
|Total noninterest expenses                                   |  |                             | 3,638,947 |                          
|                                                             |  |                             |           |                          
|                                                             |  |                             |           |                          
|Income before income taxes                                   |  |                             | 1,455,035 |                          
|Income taxes                                                 |  |                             | 445,000   |                          
|                                                             |  |                             |           |                          
|Net income                                                   |  | $                           | 1,010,035 |                          
|                                                             |  |                             |           |                          
|Net income per sharebasic                                   |  | $                           | 0.50      |                          
|Net income per sharediluted                                 |  | $                           | 0.49      |                          
|Weighted average shares outstandingbasic                    |  |                             | 2,020,274 |                          
|Weighted average shares outstandingdiluted                  |  |                             | 2,041,986 |                          



See accompanying notes to consolidated
financial statements.



3



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Shareholders' Equity

Six months ended June 30,
2003 and 2002

(unaudited)



|                                                         |  | Common stock |           |   | Capital surplus |   |           | Retained earnings |  |   | Deferred compensation- restricted stock |   |  | Accumulated other comprehensive income |          |   | Comprehensive income |   |           | Total | 
|-------------------------------------------------------- |  | ------------ | --------- | - | --------------- | - | --------- | ----------------- |  | - | --------------------------------------- | - |  | -------------------------------------- | -------- | - | -------------------- | - | --------- | ----- | 
|Balance January 1, 2002                                  |  | $            | 7,230,619 |   |                 | $ | 5,762,477 |                   |  | $ | 12,507,403                              |   |  | $                                      | (75,896  | ) |                      | $ | 101,322   |       | 
|Unrealized gains, net of income tax expense of $465,871  |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        |          |   |                      |   | 743,861   |       | 
|Net income                                               |  |              |           |   |                 |   |           |                   |  |   | 1,417,554                               |   |  |                                        |          |   |                      |   |           |       | 
|Total comprehensive income                               |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        |          |   |                      |   |           |       | 
|Recognition of deferred compensationrestricted stock    |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        | 11,664   |   |                      |   |           |       | 
|Cash dividends ($.20 per share)                          |  |              |           |   |                 |   |           |                   |  |   | (413,179                                | ) |  |                                        |          |   |                      |   |           |       | 
|                                                         |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        |          |   |                      |   |           |       | 
|Balance June 30, 2002                                    |  | $            | 7,230,619 |   |                 | $ | 5,762,477 |                   |  | $ | 13,511,778                              |   |  | $                                      | (64,232  | ) |                      | $ | 845,183   |       | 
|                                                         |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        |          |   |                      |   |           |       | 
|                                                         |  |              |           |   |                 |   |          
|                                                         |  | Common stock |           |   | Capital surplus |   |           | Retained earnings |  |   | Deferred compensation- restricted stock |   |  | Accumulated other comprehensive income |          |   | Comprehensive income |   |           | Total | 
|Balance January 1, 2003                                  |  | $            | 7,140,057 |   |                 | $ | 5,410,102 |                   |  | $ | 15,171,819                              |   |  | $                                      | (52,568  | ) |                      | $ | 1,968,835 |       | 
|Unrealized losses, net of income tax benefit of $231,411 |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        |          |   |                      |   | (369,657  | )     | 
|Net income                                               |  |              |           |   |                 |   |           |                   |  |   | 2,017,343                               |   |  |                                        |          |   |                      |   |           |       | 
|Total comprehensive income                               |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        |          |   |                      |   |           |       | 
|Deferred compensationrestricted stock issuance          |  |              | 29,445    |   |                 |   | 121,989   |                   |  |   |                                         |   |  |                                        | (151,434 | ) |                      |   |           |       | 
|Recognition of deferred compensationrestricted stock    |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        | 26,807   |   |                      |   |           |       | 
|Repurchase of common stock                               |  |              | (36,750   | ) |                 |   | (172,110  | )                 |  |   |                                         |   |  |                                        |          |   |                      |   |           |       | 
|Cash dividends ($.25 per share)                          |  |              |           |   |                 |   |           |                   |  |   | (509,485                                | ) |  |                                        |          |   |                      |   |           |       | 
|                                                         |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        |          |   |                      |   |           |       | 
|Balance June 30, 2003                                    |  | $            | 7,132,752 |   |                 | $ | 5,359,981 |                   |  | $ | 16,679,677                              |   |  | $                                      | (177,195 | ) |                      | $ | 1,599,178 |       | 
|                                                         |  |              |           |   |                 |   |           |                   |  |   |                                         |   |  |                                        |          |   |                      |   |           |       | 



See accompanying notes to consolidated
financial statements.



4



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Six months ended June 30, 2003 and 2002

(Unaudited)



|                                                                                                    |  | Six Months Ended June 30, |            
|--------------------------------------------------------------------------------------------------- |  | ------------------------- | -----------
|                                                                                                    |  | 2003                      |            
|Cash flows from operating activities:                                                               |  |                           |            
|Net income                                                                                          |  | $                         | 2,017,343  
|Adjustments to reconcile net income to net cash provided by operating activities:                   |  |                           |            
|Depreciation                                                                                        |  |                           | 400,053    
|Amortization of premium on investment securities, net                                               |  |                           | 244,426    
|Provision for probable loan losses                                                                  |  |                           | 240,000    
|Gain on sale of securities                                                                          |  |                           | (5,569     
|Deferred compensationrestricted stock                                                              |  |                           | 26,807     
|Decrease (increase) in accrued interest receivable                                                  |  |                           | (122,674   
|(Gain) loss on disposal of premises and equipment                                                   |  |                           | (991       
|Loss on sale of real estate acquired in settlement of loans                                         |  |                           | 4,820      
|Increase in other assets                                                                            |  |                           | (622,123   
|Decrease in accrued interest payable                                                                |  |                           | (73,193    
|Decrease in other liabilities, net                                                                  |  |                           | (499,516   
|                                                                                                    |  |                           |            
|Net cash provided by operating activities                                                           |  |                           | 1,609,383  
|                                                                                                    |  |                           |            
|Cash flows from investing activities:                                                               |  |                           |            
|Proceeds from sales of investment securities classified as available-for-sale                       |  |                           | 5,139,365  
|Proceeds from maturities of investment securities classified as available-for-sale                  |  |                           | 23,005,838 
|Purchases of investment securities classified as available-for-sale                                 |  |                           | (19,191,305
|Redemption of Federal Home Loan Bank common stock                                                   |  |                           | 177,500    
|Proceeds from disposal of premises and equipment                                                    |  |                           | 3,300      
|Purchases of premises and equipment                                                                 |  |                           | (2,170,551 
|Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale |  |                           |           
|Net loan originations                                                                               |  |                           | (28,803,429
|                                                                                                    |  |                           |            
|Net cash used by investing activities                                                               |  |                           | (21,839,282
|                                                                                                    |  |                           |            
|Cash flows from financing activities:                                                               |  |                           |            
|Net increase in deposits                                                                            |  |                           | 26,124,942 
|Net increase (decrease) in short-term borrowings                                                    |  |                           | 1,759,375  
|Increase in long-term obligations                                                                   |  |                           |           
|Dividends paid                                                                                      |  |                           | (458,745   
|Repurchase of common stock                                                                          |  |                           | (208,860   
|                                                                                                    |  |                           |            
|Net cash provided by financing activities                                                           |  |                           | 27,216,712 
|                                                                                                    |  |                           |            
|Increase in cash and cash equivalents                                                               |  |                           | 6,986,813  
|Cash and cash equivalents at beginning of period                                                    |  |                           | 20,345,006 
|                                                                                                    |  |                           |            
|Cash and cash equivalents at end of period                                                          |  | $                         | 27,331,819 
|                                                                                                    |  |                           |            
|Cash paid during the period:                                                                        |  |                           |            
|Interest                                                                                            |  | $                         | 2,804,818  
|Taxes                                                                                               |  |                           | 1,436,740  
|Supplemental disclosures of noncash financing and investing activities:                             |  |                           |            
|Cash dividends declared but not paid                                                                |  | $                         | 254,743    
|Unrealized (losses) gains on available-for-sale securities, net of deferred taxes                   |  |                           | (369,657   
|Restricted stock issuance                                                                           |  |                           | 151,434    



See accompanying notes
to consolidated financial statements.



5



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ECB BANCORP, INC. AND SUBSIDIARIES



Notes to Consolidated Financial Statements



(1)    Basis of Presentation



The consolidated financial statements include the accounts of ECB Bancorp, Inc. (Bancorp) and its wholly-owned subsidiaries, The
East Carolina Bank (the Bank) and ECB Statutory Trust I (collectively referred to hereafter as the Company). The Bank has two wholly-owned subsidiaries. ECB Realty, Inc. holds title to five of the Banks branch offices
which it leases to the Bank. The second subsidiary, ECB Financial Services, Inc. formerly provided courier services to the Bank but is currently inactive. All intercompany transactions and balances are eliminated in consolidation.



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 of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the
balance sheets and the reported amounts of income and expenses for the periods presented. 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 probable loan losses. In
connection with the determination of the allowance for probable loan losses, management obtains independent appraisals for significant properties held as collateral for loans.



All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such
adjustments are normal and recurring in nature). The footnotes in Bancorps annual report on Form 10-KSB should be referenced when reading these unaudited interim financial statements. Operating results for the period ended June 30, 2003, are
not necessarily indicative of the results that may be expected for the year ending December 31, 2003.



Certain prior period amounts have been reclassified in the financial statements to conform with the current period presentation. The reclassifications had no effect on previously reported net income or
shareholders equity.



(2)    Allowance for
Probable Loan Losses



The following table summarizes the activity in the
allowance for probable loan losses for the six-month periods ended June 30, 2003 and 2002, respectively.



|                                       |  | Six-months ended June 30, |          
|-------------------------------------- |  | ------------------------- | ---------
|                                       |  | 2003                      |          
|Balance at the beginning of the period |  | $                         | 3,150,000
|Provision for probable loan losses     |  |                           | 240,000  
|Charge-offs                            |  |                           | (82,299  
|Recoveries                             |  |                           | 31,542   
|Net Charge-offs                        |  |                           | (50,757  
|Balance at end of the period           |  | $                         | 3,339,243



6



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(3)    Net Income Per Share



Basic net income per share is calculated by dividing net income by the weighted average number of common shares outstanding during the
period. For purposes of basic net income per share, restricted stock is considered contingently issuable and is not included in the weighted average number of common shares outstanding.



Diluted net income per share is computed by assuming the issuance of common shares for all
dilutive potential common shares outstanding during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized
is considered proceeds using the treasury stock method. For the six months ended June 30, 2003 and 2002, diluted weighted average shares outstanding increased by 9,016 and 4,957, respectively, due to the dilutive impact of restricted
stock. For the three months ended June 30, 2003 and 2002, diluted weighted average shares outstanding increased by 9,790 and 5,384, respectively, due to the dilutive impact of restricted stock.



In computing diluted net income per share, it is assumed that all dilutive stock options are
exercised during the reporting period at their respective exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The
difference between the number of shares assumed to be exercised and the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net
income per share for the Company. For the six months ended June 30, 2003 and 2002, diluted weighted average shares outstanding increased by 10,604 and 4,251, respectively, due to the dilutive impact of options. For the three months ended June 30,
2003 and 2002, diluted weighted average shares outstanding increased by 11,922 and 7,197, respectively, due to the dilutive impact of options.



The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per Share.



|                              |  | Six months ended June 30, 2003
|----------------------------- |  | ------------------------------
|                              |  | Income(Numerator)             
|Basic net income per share    |  | $                             
|                              |  |                               
|Effect of dilutive securities |  |                               
|                              |  |                               
|Diluted net income per share  |  | $                             
|                              |  |                               
|                              | 
|                              |  | Six months ended June 30, 2002
|                              |  | Income(Numerator)             
|Basic net income per share    |  | $                             
|                              |  |                               
|Effect of dilutive securities |  |                               
|                              |  |                               
|Diluted net income per share  |  | $                             
|                              |  |                               





7



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The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per
Share.



|                              |  | Three months ended June 30, 2003
|----------------------------- |  | --------------------------------
|                              |  | Income (Numerator)              
|Basic net income per share    |  | $                               
|                              |  |                                 
|Effect of dilutive securities |  |                                 
|                              |  |                                 
|Diluted net income per share  |  | $                               
|                              |  |                                 
|                              | 
|                              |  | Three months ended June 30, 2002
|                              |  | Income (Numerator)              
|Basic net income per share    |  | $                               
|Effect of dilutive securities |  |                                 
|                              |  |                                 
|Diluted net income per share  |  | $                               
|                              |  |                                 



(4)    Stock
Option Plan



During 1998, the Company adopted an Omnibus Stock Ownership
and Long-Term Incentive Plan (the Omnibus Plan) which provides for the issuance of up to an aggregate of 159,000 shares of common stock of the Company pursuant to stock options and other awards granted or issued under its terms. Stock options vest
one-third each year beginning three years after the grant date and expire after 10 years. Restricted stock vests over 4 years.



The Company accounts for its awards pursuant to the Omnibus Plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB Opinion No. 25),
Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the market price of the underlying stock on the date of grant exceeds the exercise price. SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), recommends that entities recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.



8



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Stock options of 8,100 shares were granted during the six months ended June 30, 2002. There were no options granted in
the first six months of 2003. The per share weighted-average fair value of options granted during 2002 was $2.63 on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                         |  | 2002 |  
|------------------------ |  | ---- | -
|Expected dividend yield  |  | 3.0  | %
|Risk-free interest rate  |  | 4.8  | %
|Expected life (in years) |  | 6    |  
|Expected volatility      |  | 20   | %



The Company awarded 8,413 shares of
restricted stock during the six months ended June 30, 2003, resulting in an increase to deferred compensation-restricted stock of $151,434.



If the Company had elected to recognize compensation cost for its stock-based compensation plans in accordance with the fair value based accounting method of SFAS No.
123, net income and earnings per share (EPS) would have been as follows:



|                                                                                                                                          |  | Six months ended June 30, |          
|----------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ---------
|                                                                                                                                          |  |                           | 2003     
|Net income, as reported                                                                                                                   |  | $                         | 2,017,343
|                                                                                                                                          |  |                           |          
|Deduct: Total stock-based employee compensation expense determinedunder fair value based methodfor all awards, net of
related tax effects |  |                           | (4,359   
|                                                                                                                                          |  |                           |          
|Proforma net income                                                                                                                       |  | $                         | 2,012,984
|                                                                                                                                          |  |                           |          
|Earnings per share:                                                                                                                       |  |                           |          
|Basicas reported                                                                                                                         |  | $                         | 1.00     
|                                                                                                                                          |  |                           |          
|Basicproforma                                                                                                                            |  |                           | 1.00     
|                                                                                                                                          |  |                           |          
|Dilutedas reported                                                                                                                       |  |                           | 0.99     
|                                                                                                                                          |  |                           |          
|Dilutedproforma                                                                                                                          |  |                           | 0.99     
|                                                                                                                                          |  |                           |          



|                                                                                                                                          | 
|----------------------------------------------------------------------------------------------------------------------------------------- | 
|                                                                                                                                          | 
|                                                                                                                                          | 
|Net income, as reported                                                                                                                   | 
|Deduct: Total stock-based employee compensation expense determinedunder fair value based methodfor all awards, net of
related tax effects | 
|                                                                                                                                          | 
|Proforma net income                                                                                                                       | 
|                                                                                                                                          | 
|Earnings per share:                                                                                                                       | 
|Basicas reported                                                                                                                         | 
|                                                                                                                                          | 
|Basicproforma                                                                                                                            | 
|                                                                                                                                          | 
|Dilutedas reported                                                                                                                       | 
|                                                                                                                                          | 
|Dilutedproforma                                                                                                                          | 
|                                                                                                                                          | 



9



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(5) Long-term Obligations



On June 26, 2002 the Company completed a private issuance of $10 million in trust preferred securities as part of a pooled re-securitization
transaction with several other financial institutions. The trust preferred securities bear a floating rate of interest of 3.45% over the three-month LIBOR rate, and the initial coupon, set at 5.34%, is payable quarterly. ECB Bancorp intends to use
the net proceeds for the opportunistic acquisition of fee income producing entities, market expansion, the repurchase of Bancorp stock and for other corporate and strategic purposes.



The trust preferred securities were issued by a wholly-owned finance subsidiary of ECB Bancorp, Inc., and ECB Bancorp has fully and
unconditionally guaranteed the repayment of those securities. The proceeds from the issuance of trust preferred securities were invested in debentures issued by ECB Bancorp, Inc. and that investment became the sole asset of the trust. ECB Bancorp
may redeem the trust preferred securities in whole or in part on or after June 26, 2007. The trust preferred securities mature on June 26, 2032.



(6) New Accounting Pronouncements



In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company adopted SFAS No. 143 on
January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on the Companys consolidated financial statements.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of
this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 did not have a material effect on the Companys consolidated financial
statements.



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have
a material effect on the Companys consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, this Statement amends the



10



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disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.
This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January
31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For public enterprises, such as the Company, with a variable interest in a variable interest entity created before February 1, 2003, the
Interpretation is applied to the enterprise no later than the end of the first interim reporting period beginning after June 15, 2003. The application of this Interpretation did not have a and is not expected to have a material effect on the
Companys consolidated financial statements.



Statement No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities, amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.This Statement is effective for contracts entered into or modified after June 30, 2003, except
certain hedging relationships designated after June 30, 2003, as defined in the Statement. In addition, except as defined in the Statement, all provisions of this Statement should be applied prospectively. The Statement is not expected to have a
material impact on the consolidated financial statements.



Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued in May 2003. This Statement establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously
classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing
at the beginning of the interim period of adoption. Restatement is not permitted. This Statement is not expected to have a material impact on the consolidated financial statements.



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



General



ECB Bancorp, Inc. (Bancorp) is a bank holding company headquartered in Engelhard, North Carolina. Bancorps two
wholly-owned subsidiaries are The East Carolina Bank (the Bank or ECB) and ECB Statutory Trust I collectively referred to hereafter as the Company. The Bank is a state-chartered community bank which was founded in
1919. The Bank offers a full range of banking services through 18 branches serving eastern North Carolina, including the communities of Engelhard, Swan Quarter, Columbia, Creswell, Fairfield, Nags Head, Manteo, Southern Shores, Currituck, Avon,
Hatteras, Ocracoke, Washington, Hertford, New Bern, Greenville (two branches), Williamston and newly opened loan production offices located in Morehead City and Wilmington.



ECB Statutory Trust I is a business trust subsidiary of Bancorp formed during 2002 which privately sold $10.0 million in preferred trust
securities as part of a pooled re-securitization transaction with several other financial institutions. The proceeds from that sale, together with the proceeds from the Trusts sale of all its common securities to Bancorp, were used to purchase
an aggregate of $10.3 million in junior subordinated debentures issued by Bancorp. The debentures call for interest payable quarterly at a variable annual rate equal to the three-month LIBOR plus 3.45%, with principal payable in full on June 26,
2032. Subject to certain limitations, Bancorp has fully and unconditionally guaranteed its Trust subsidiarys obligations under the preferred trust securities. Substantially all the proceeds from the transaction are being counted as Tier
1 capital on Bancorps books and have been or will be used by Bancorp to supplement Bancorps and the Banks capital and support their continued operations and growth.



The operations of the Company and depository institutions in general are significantly
influenced by general economic conditions and by related monetary, fiscal and other policies of depository institution regulatory agencies, including the Federal Reserve Board, the Federal Deposit Insurance Corporation (the FDIC) and the
North Carolina State Banking Commission. Deposit flows and costs of funds are influenced by interest rates on competing investments and general market rates of interest. Lending activities are affected by the demand for financing of real estate and
other types of loans, which in turn are affected by the interest rates at which such financing may be offered and other factors affecting local demand and availability of funds.



Comparison of the Results of Operations for the Six Month Periods Ended June 30, 2003 and 2002



Summary



For the six months ended June 30, 2003, the Company had net income of $2,017,343 or $1.00 basic and $0.99 diluted earnings per share,
compared to $1,417,554, or $0.69 basic and diluted earnings per share for the six months ended June 30, 2002. Net interest income increased $900,965 or 13.54% to $7,557,237 in the first half of 2003 from $6,656,272 in the first half of 2002, and
noninterest income increased $607,663 or 28.71% when compared to the same period last year. Noninterest expense increased $601,839 or 9.24% for the six month period ended June 30, 2003 as compared to the same period in 2002, as salary and employee
benefits expense increased $316,469 to $3,685,527 compared to $3,369,058 during the first half of 2002.



Net interest income



Net
interest income for the six months ended June 30, 2003 was $7,557,237, an increase of $900,965 or 13.54% when compared to net interest income of $6,656,272 for the prior year period. The Companys net interest margin, on a tax-equivalent basis,
for the six months ended June 30, 2003 was 4.35% compared to 4.88% for the first half of 2002. Management attributes a portion of the decrease in the Banks net interest margin the decrease in yield on earning assets. The yield on average
earning assets, on a tax-equivalent basis, for the six months ended June 30, 2003 was 5.88% compared to 6.70% in 2002, a decrease of 82 basis points.



12



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Total interest income increased $1,068,032 for the six months ended June 30, 2003 compared to the six months ended June
30, 2002, due to an increase of $76.6 million in average earning assets. Average loans outstanding increased $44.9 million as real estate loans increased $20.1 million. During the third quarter of 2002, management implemented a cost recovery
strategy to leverage its newly acquired capital through borrowings from the Federal Home Loan Bank and the concomitant purchase of wholesale assets at a spread, and as a result the Banks average investment portfolio increased by $32.3 million.



Total interest expense increased $167,067 for the six months ended June 30,
2003 compared to the six months ended June 30, 2002, as interest-bearing liabilities increased on average $72.3 million. The cost of funds for the Company during the six months ended June 30, 2003 was 1.84%; a decrease of 43 basis points when
compared to 2.27% for the six months ended June 30, 2002.



Provision for
probable loan losses



The provision for probable loan losses charged
to operations during the six months ended June 30, 2003 was $240,000, compared to $320,000 during the six months ended June 30, 2002. Net charge-offs for the period ended June 30, 2003 totaled $50,757, compared to net charge-offs of $203,868 during
the first six months of 2002. The higher provision expense for probable loan loss in the first half of 2002 reflects the charge-off activity that occurred during the first half of 2002 as the Bank charged-off $150,000 on a single commercial credit.
The amount charged for provision for probable loan losses is the result of managements review and evaluation of the portfolio, which considers current conditions, past due loans, and prior loan loss experience.



Noninterest income



Noninterest income increased $607,663 or 28.71% to $2,724,287 for the six months ended June
30, 2003 compared to $2,116,624 for the same period in 2002. This is principally due to an increase of $427,033 in Overdraft Banking Privilege fees generated from a new banking product, designed to automatically advance funds to assist in the event
of checking account overdrafts, introduced by the Bank in December of 2001. Other service charges and fees increased $203,151 over the prior year period due to increases of mortgage loan origination fees of $137,627, increased accounts receivable
fees of $32,300 and increased brokerage fees of $33,355. During the first half of 2003, the Bank had a net gain on the sale of securities of $5,569 compared to $61,184 during the same period last year.



Noninterest expense



Noninterest expense increased $601,839 or 9.24% to $7,114,181 for the six months ended June
30, 2003 from the same period in 2002. This increase is principally due to general increases in salary and employee benefits expense of $316,469 or 9.39%. Salary expense increased $247,110 over the prior year period as a result of general staffing
increases of $137,514 and additional salary expense of $109,596 associated with the Banks recently opened office in Williamston and loan production offices in Morehead City and Wilmington. Employee benefit expense increased $69,359 over the
prior year period as the Company increased its incentive pay accrual by $54,876. Occupancy expense increased $105,901 or 21.79% principally as the result of accelerated depreciation expense of $64,942 on the Banks home office branch facility
as the Bank plans to replace the existing branch structure with a new corporate and branch office in 2003. Bank supplies increased $54,474 from the prior year period primarily as the result of increased forms and PC related supplies. Telephone and
data communications expense increased $106,220 over the prior year period, as the Bank has implemented a new voice and data system, upgraded to provide bank-wide voicemail and additional bandwidth to promote the Banks network capabilities.
Other operating expenses increased $29,725 from $1,389,059 for the six months ended June 30, 2002 to $1,418,784 for the six months ended June 30, 2003. Increases in ATM expense of $45,869, increased dues and membership fees of $45,229, increased
advertising expense of $32,839 and increased outside services of $28,761were offset by a decrease in Loss on Sale of Other Assets and Repossessions. During the second quarter of 2002, the Company had a write-down on repossessed loan
collateral of $144,894.



13



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Income taxes



Income tax expense for the six months ended June 30, 2003 and 2002 was $910,000 and $523,000, respectively, resulting in effective tax rates of 31.09% and 26.95%,
respectively. The increase in the Banks effective tax rate for 2003 is the result of an increased state tax liability. Changes in the mix of investments within the Banks investment portfolio during 2002 away from state tax exempt
securities resulted in a higher state tax liability. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



Comparison of the Results of Operations for the Three Month Periods Ended June 30, 2003 and 2002



Summary



For the three months ended June 30, 2003, the Company had net income of $1,010,035 or $0.50 basic and $0.49 diluted earnings per share,
compared to $757,586, or $0.37 basic and diluted earnings per share for the three months ended June 30, 2002. Net interest income increased $398,388 or 11.62% to $3,826,233 in the second quarter of 2003 from $3,427,835 in the second quarter of 2002,
and noninterest income increased $243,420 or 21.27% when compared to the same period last year. Noninterest expense increased $219,986 or 6.43% for the three month period ended June 30, 2003 as compared to the same period in 2002, as salary expense
increased $140,571 to $1,329,646 compared to $1,189,075 during the second quarter of 2002.



Net interest income



Net
interest income for the three months ended June 30, 2003 was $3,826,223, an increase of $398,388 or 11.62% when compared to net interest income of $3,427,835 for the prior year period. The Companys net interest margin, on a tax-equivalent
basis, for the three months ended June 30, 2003 was 4.33% compared to 4.91% in the second quarter of 2002. Management attributes a portion of the decrease in the Banks net interest margin the decrease in yield on earning assets resulting from
continued decreases in interest rates.



Total interest income increased
$504,887 for the three months ended June 30, 2003 compared to the three months ended June 30, 2002, due to an increase of $76.1million in average earning assets. Average loans outstanding increased $47.5 million as real estate loans increased $19.2
million. During the third quarter of 2002, management implemented a cost recovery strategy to leverage its newly acquired capital through borrowings from the Federal Home Loan Bank and the concomitant purchase of wholesale assets at a spread. As a
result, the Banks average investment portfolio increased by $29.1million when compared to the second quarter of 2002. The yield on average earning assets, on a tax-equivalent basis, for the three months ended June 30, 2003 was 5.80% compared
to 6.62% in 2002.



Total interest expense increased $106,499 for the three
months ended June 30, 2003 compared to the three months ended June 30, 2002, as interest-bearing liabilities increased on average $73.2 million. The cost of funds for the Company during the three months ended June 30, 2003 was 1.77%; a decrease of
38 basis points when compared to 2.15% for the three months ended June 30, 2002.



Provision for probable loan losses



The provision for
probable loan losses charged to operations during the three months ended June 30, 2003 and 2002 was $120,000. Net charge-offs for the quarter ended June 30, 2003 totaled $39,514, compared to net charge-offs of $44,533 during the second quarter of
2002. The amount charged for provision for probable loan losses is the result of managements review and evaluation of the portfolio, which considers current conditions, past due loans, and prior loan loss experience.



Noninterest income



Noninterest income increased $243,420 or 21.27% to $1,387,759 for the three months ended
June 30, 2003 compared to $1,144,339 for the same period in 2002. This is principally due to an increase of $201,298 in



14



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Overdraft Banking Privilege fees generated from a new banking product, designed to automatically advance funds to assist
in the event of checking account overdrafts, introduced by the Bank in December of 2001. Other service charges and fees increased $100,371 over the prior year period due to increases of mortgage loan origination fees of $73,161 and increased
brokerage fees of $11,672. During the second quarter of 2003, the Bank had a net loss on the sale of securities of $33,014 compared to net gain of $15,155 during the same period last year.



Noninterest expense



Noninterest expense increased $219,986 or 6.43% to $3,638,947 for the three months ended
June 30, 2003 from the same period in 2002. This increase is principally due to general increases in salary expense of $140,571 or 11.82%. Salary expense increased over the prior year period as a result of general salary increases of $51,242 and
additional staffing expense within home office and mortgage departments of $55,700. Additional salary expenses of $57,929 are associated with the Banks recently opened office in Williamston and loan production offices in Morehead City and
Wilmington. Occupancy expense increased $39,552 or 15.19% principally as the result of accelerated depreciation expense of $32,471 on the Banks home office branch facility, as the Bank plans to replace the existing branch structure with a new
corporate and branch office in 2003. Professional fees increased $58,882 from the prior year period primarily as the result of increased consulting expense in connection with a second quarter 2003 review of the Companys internal control and
procedures and loan related legal fees. Telephone and data communications expense increased $71,771 over the prior year period, as the Bank is mid-stream with its implementation of a new voice and data system, upgraded to provide bank-wide voicemail
and additional bandwidth to promote the Banks network capabilities. Other operating expenses decreased $88,923 from $796,469 for the three months ended June 30, 2002 to $707,546 for the three months ended June 30, 2003. The decrease is
primarily due to a decrease in Loss on Sale of Other Assets and Repossessions. During the second quarter of 2002, the Company had a write-down on repossessed loan collateral of $144,894.



Income taxes



Income tax expense for the three months ended June 30, 2003 and 2002 was $445,000 and $275,627, respectively, resulting in effective tax
rates of 30.58% and 26.67%, respectively. The increase in the Banks effective tax rate for 2003 is the result of an increased state tax liability. Changes in the mix of investments within the Banks investment portfolio during 2002 away
from state tax exempt securities resulted in a higher state tax liability. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



Comparison of Financial Condition at June 30, 2003 and December 31, 2002



Total assets increased $28.1 million to $414.4 million, an increase of 7.27% when
compared to $386.3 million at December 31, 2002. Asset growth was driven by an increase in non-interest-bearing demand deposits of $13.0 million, an increase in interest-bearing demand deposits of $8.9 million and increased time deposits of $3.5
million. A large portion of the growth in transaction accounts is reflective of the Banks seasonal tourist business on the Outer Banks of North Carolina where the Bank has six branches.



Loans receivable have increased $28.8 million or 12.62% from $227.9 million at December 31,
2002 to $256.3 million at June 30, 2003. The Bank has experienced steady loan demand from all of its markets and its loan production offices have contributed throughout the quarter . During the quarter, deposits increased $16.1 million as the Bank
acquired $10 million in brokered certificates of deposit.



Shareholders
equity increased by $956,148 from December 31, 2002 to June 30, 2003, as the Company generated net income of $2,017,343 and experienced a decrease of net unrealized gains on available-for-sale securities of $369,657 and recognition of deferred
compensationrestricted stock of $26,807. During the first half of the year, the Company repurchased 10,500 shares or $208,860 of its stock. The Company declared cash dividends of $509,485 or 25.0 cents per share, during the first half of 2003
compared to 20.0 cents per share in the prior year period.



15



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Asset Quality



Allowance for probable loan losses



The allowance for probable loan losses (AFLL) is established through a provision for probable loan losses charged against earnings. The level of the allowance for
probable loan losses reflects managements best estimate of probable losses inherent in the portfolio as of the balance sheet date and is based on managements evaluation of the risks in the loan portfolio and changes in the nature and
volume of loan activity. Managements evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers the loans risk grades, the estimated fair value of the underlying
collateral, current economic conditions, historical loan loss experience and other current factors that warrant consideration in determining an adequate allowance. The Banks objective is to maintain a loan portfolio that is diverse in terms of
loan type, industry concentration, and borrower concentration in order to manage overall credit risk by minimizing the adverse impact of any single event or combination of related events.



Reserve Policy and Methodology



The allowance for probable loan losses is composed of general reserves, specific reserves and an unallocated reserve. General reserves are established for the loan
portfolio using loss percentages that are determined based on managements evaluation of the losses inherent in the various risk grades of loans. Loans are categorized as one of eight risk grades based on managements assessment of the
overall credit quality of the loan, including the payment history, the financial position of the borrower, underlying collateral, internal credit reviews and the results of external regulatory examinations. The general reserve percentages are then
applied to the loan balances within each risk grade to estimate the necessary allowance for probable losses in each risk category.



The general reserve percentages used have been determined by management to be appropriate based primarily on historical loan losses and the level of risk assumed for the
various risk grades. The reserve percentages for Special Mention, Substandard and Doubtful are based on rates used by banking regulators in conjunction with their examination of the Bank.



The process of classifying loans into the appropriate risk grades is performed initially as a component of the approval of the loan by the
appropriate credit officer. Based on the size of the loan, senior credit officers and/or the loan committee may review the classification to ensure accuracy and consistency of classification. To determine the most appropriate risk grade
classification for each loan, credit officers examine the borrowers liquidity level, the quality of any collateral, the amount of the borrowers other indebtedness, cash flow, earnings, sources of financing and existing lending
relationships. Loan classifications are periodically reviewed by internal credit examiners to determine if any changes in the circumstances of the loan require a different risk grade. An independent vendor engaged by the Bank on an annual basis
conducts an external review of loan classifications as part of their credit review process.



Specific reserves are provided on impaired commercial loans and are determined on a loan-by-loan basis based on managements evaluation of the Banks loss exposure for each credit, given the current payment
status of the loan and the value of any underlying collateral. Loans for which specific reserves are provided are excluded from the general allowance calculations described above to prevent duplicate reserves. The calculations of specific reserves
on commercial loans incorporate the results of measuring impaired loans pursuant to the requirements of Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan. SFAS
No. 114, as amended, requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loans effective interest rate, at the loans observable market price, or the fair value of the
collateral if the loan is collateral-dependent. A loan is impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. When
the measurement of the impaired loan is less than the recorded investment in the loan, the amount of the impairment is recorded through a specific reserve. It is the Banks policy to classify and disclose all commercial loans that are on
nonaccrual status as impaired loans. Substantially all other loans made by the



16



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Bank are excluded from the scope of SFAS No. 114 as they are comprised of large groups of smaller balance homogeneous
loans (e.g., residential mortgage and consumer installment) that are evaluated collectively for impairment in the general reserves estimation process discussed above.



There are two primary components considered in determining an appropriate level for the unallocated reserve. A portion of the unallocated
reserve is established to cover the elements of imprecision and estimation risk inherent in the calculations of the general and specific reserves described above. The remaining portion of the unallocated reserve is determined based on
managements evaluation of various conditions that are not directly measured by any other component of the reserve, including current general economic and business conditions affecting key lending areas, credit quality trends, collateral
values, loan volumes and concentrations, seasoning of the loan portfolio, the findings of internal credit examinations and results from external bank regulatory examinations.



While management uses the best information available to establish the allowance for probable loan losses, future adjustments to the
allowance or to the reserving methodology may be necessary if economic conditions differ substantially from the assumptions used in making the valuations or if required by regulators, based upon information at the time of their examinations. Such
adjustments to original estimates, as necessary, are made in the period in which these factors and other relevant considerations indicate that loss levels may vary from previous estimates.



Nonperforming assets consist of loans not accruing interest, restructured debt and real
estate acquired in settlement of loans and other repossessed collateral. It is the Banks policy to place loans on nonaccrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal
and interest become doubtful. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction of the remaining principal
balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collectibility of principal or interest is no longer
doubtful. Nonperforming assets were $616,237 and $472,157 at June 30, 2003 and December 31, 2002, respectively. At June 30, 2003, the Company had $492,779 invested in loans considered to be impaired under SFAS No. 114 compared to none at December
31, 2002, all of which were on a non-accrual basis. Trends and dollar amounts of nonperforming loans are used by management in evaluating the overall adequacy of the allowance for probable loan losses. The allowance for probable loan losses as a
percentage of loans outstanding was 1.30% and 1.38% at June 30, 2003 and December 31, 2002, respectively. Management has allowed the AFLL to represent a slightly smaller percentage of total loans outstanding not only due to overall improvement of
asset quality, but also the effect of seasonal lines of credit.



Regulatory Matters



Management is not presently aware
of any current recommendations to the Company by regulatory authorities which, if they were to be implemented, would have a material effect on the Companys liquidity, capital resources or operations.



Liquidity



The Company relies on the investment portfolio as a source of liquidity, with maturities designed to provide needed cash flows. Further,
retail deposits generated throughout the branch network have enabled management to fund asset growth and maintain liquidity. External sources of funds include the ability to access advances from the Federal Home Loan Bank of Atlanta, wholesale CD
(brokered deposits) market, internet deposit bulletin boards and Fed Fund lines with correspondent banks. Short-term borrowings increased $1.8 million during the first half of 2003.



Capital Resources



Bancorp and the Bank are subject to the capital requirements of the Federal Reserve, the FDIC and the North Carolina State Banking Commission. The FDIC requires the Bank
to maintain minimum ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 4% and 8%,



17



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respectively. To be well capitalized, the FDIC requires ratios of Tier I capital to total risk-weighted
assets and total capital to risk-weighted assets of 6% and 10%, respectively. Tier I capital consists of total stockholders equity calculated in accordance with generally accepted accounting principles excluding unrealized gains or losses, net
of income taxes, on securities available-for-sale, and total capital is comprised of Tier I capital plus certain adjustments, the only one of which applicable to the Bank is the allowance for probable loan losses. Risk-weighted assets reflect the
Banks on- and off-balance sheet exposures after such exposures have been adjusted for their relative risk levels using formulas set forth in FDIC regulations. As of June 30, 2003, the Bank was in compliance with all of the aforementioned
capital requirements and meets the well-capitalized definition that is used by the FDIC in its evaluation of member banks. Additionally, at June 30, 2003, Bancorp was also in compliance with the similar capital requirements set forth by
the Federal Reserve and was classified as well-capitalized.



As of June 30,
2003, $9.6 million of the trust preferred securities issued on June 26, 2002 qualifies as Tier 1 capital for regulatory capital adequacy requirements for Bancorp. The entire original $10 million was infused into the Bank, increasing the Banks
Tier 1 capital by $10 million. As of June 30, 2003, the Banks Leverage Ratio was 9.47%, compared to 9.98% at December 31, 2002, and Bancorps Leverage Ratio was 9.46% on June 30, 2003, compared to 9.51% at December 31, 2002. As of June
30, 2003, the Banks Tier 1 Risk-based Capital Ratio was 12.73%, compared to 12.94% at December 31, 2002. Bancorps Tier 1 Risk-based Capital Ratio was 11.68% on June 30, 2003 compared to 12.67% at December 31, 2002. These capital ratios
reflect the impact of the issuance of $10 million in trust preferred securities during the second quarter of 2002.



Current Accounting Issues



The Financial Accounting Standards Board (FASB) issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are
subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of
the Company and monitors the status of changes to issued exposure drafts and to proposed effective dates.



Forward-Looking Statements



This
discussion may contain statements that could be deemed forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act, which statements are inherently subject to
risks and uncertainties. Forward-looking statements are statements that include projections, predictions, expectations, or beliefs about future events or results or otherwise are not statements of historical fact. Such statements are often
characterized by the use of qualifying words (and their derivatives) such as expect, believe, estimate, plan, project, anticipate, or other statements concerning opinions or
judgment of Bancorp and its management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of Bancorps customers,
actions of government regulators, the level of market interest rates, general economic conditions and unexpected loan losses.



ITEM 3. CONTROLS AND PROCEDURES



An evaluation of the effectiveness of our disclosure controls and procedures was performed under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by
this report.



There has been no change in our internal controls over financial
reporting that occurred during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



18



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings



None.



Item 2. Changes in Securities and Use of Proceeds



Not
applicable.



Item 3. Defaults upon Senior Securities



Not applicable.



Item 4. Submission of Matters to a Vote of Security Holders



|(a) |  | The Registrants Annual Meeting of Shareholders was held on April 16, 2003.
|--- |  | ---------------------------------------------------------------------------



|(b) |  | At the Annual Meeting, the three Directors listed in the following table were elected for terms of three years or until their respective successors are duly elected and qualified.
Registrants incumbent Directors whose terms of office continued after the meeting are; Arthur H. Keeney III; Bryant Kittrell III, Joseph T. Lamb, Jr., B. Martelle Marshall, Ray M. Spencer and R. S. Spencer, Jr.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Voting for Directors was as follows:

|                     |  | For       |  | Withheld |  | Broker Non-vote |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|-------------------- |  | --------- |  | -------- |  | --------------- |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|George T. Davis, Jr. |  | 1,623,491 |  | 4,600    |  | none            |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|Gregory C. Gibbs     |  | 1,626,091 |  | 2,000    |  | none            |  |  |  |  |  |  |  |  |  |  |  |  |  | 
|John F. Hughes, Jr.  |  | 1,626,091 |  | 2,000    |  | none            |  |  |  |  |  |  |  |  |  |  |  |  |  | 



In addition to the
election of Directors, the following proposal was voted on and approved at the Annual Meeting:



| | 1. |  | Proposal to ratify the selection of KPMG LLP as independent auditors for the Registrant as described under the caption Ratification of Selection of Independent Auditor
in the Registrants Proxy Statement dated March 19, 2003 (approved by an affirmative vote of 1,623,413 shares or 99.71% of the shares that voted, 2,000 negative votes and 2,678 shares withheld).
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 5. Other Information



Not applicable.



19



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Item 6. Exhibits and Reports on Form 8-K



|(a) |  | Exhibits:
|--- |  | ---------



|Exhibit Number |  | Description                                                                         
|-------------- |  | ------------------------------------------------------------------------------------
|               | 
|31.1           |  | Certification of Chief Executive Officer required by Rule 13a-14(a) (filed herewith)
|               | 
|31.2           |  | Certification of Chief Financial Officer required by Rule 13a-14(a) (filed herewith)
|               | 
|32             |  | Certification pursuant to 18 U.S.C. Section 1350 (filed herewith)                   



|(b) |  | Reports on Form 8-K
|--- |  | -------------------



Registrant filed a Current Report on Form 8-K which was dated June 18, 2003 and reported that its Board of Directors had declared a cash dividend of
$0.125 per share of its common stock, payable on July 14, 2003, to its shareholders of record on June 30, 2003.



20



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SIGNATURES



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



|                      |  | ECB BANCORP, INC. (Registrant)                                   
|--------------------- |  | -----------------------------------------------------------------
|                      | 
|                      |  |                                                                  
|Date: August 12, 2003 |  | By: /s/ Arthur H. Keeney IIIArthur H. Keeney, III President &
CEO
|                      | 
|                      |  |                                                                  
|Date: August 12, 2003 |  | By:/s/ Gary M. AdamsGary M. Adams Senior Vice President &
CFO    
|                      |  |                                                                  
|                      |  |                                                                  
|                      |  |                                                                  
|                      |  |                                                                  
|                      |  |                                                                  
|                      |  |                                                                  
|                      |  |                                                                  









21



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EXHIBIT INDEX



|Exhibit Number |  | Description                                                                         
|-------------- |  | ------------------------------------------------------------------------------------
|               | 
|31.1           |  | Certification of Chief Executive Officer required by Rule 13a-14(a) (filed herewith)
|               | 
|31.2           |  | Certification of Chief Financial Officer required by Rule 13a-14(a) (filed herewith)
|               | 
|32             |  | Certification pursuant to 18 U.S.C. Section 1350 (filed herewith)                   



22