##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the Quarterly Period Ended June 30, 2006

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)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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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 ̈

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2
of the Exchange Act. (Check one):

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes ̈No  x

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 11, 2006 2,902,242
shares of the registrants common stock, $3.50 par value, were outstanding.

This Form 10-Q has 35 pages.



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##### Table of Contents

Table of Contents



|                                                                                                       |  |              
|------------------------------------------------------------------------------------------------------ |  | -------------
|Index                                                                                                  |  | Beginson Page
|Part 1  Financial Information                                                                         |  |              
|Item 1. Financial Statements:                                                                          |  |              
|Consolidated Balance Sheets at June 30, 2006 and December 31, 2005                                     |  | 3            
|Consolidated Income Statements for Three and Six Months Ended June 30, 2006 and 2005                   |  | 4            
|Consolidated Statements of Changes in Shareholders Equity for Six Months Ended June 30, 2006 and 2005 |  | 5            
|Consolidated Statements of Cash Flows for Six Months Ended June 30, 2006 and 2005                      |  | 6            
|Notes to Consolidated Financial Statements                                                             |  | 7            
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations          |  | 14           
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                     |  | 28           
|Item 4. Controls and Procedures                                                                        |  | 28           
|                                                                                                       | 
|Part II  Other Information                                                                            |  |              
|Item 1. Legal Proceedings                                                                              |  | 29           
|Item 1A. Risk Factors                                                                                  |  | 29           
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                    |  | 29           
|Item 3. Defaults upon Senior Securities                                                                |  | 29           
|Item 4. Submission of Matters to a Vote of Security Holders                                            |  | 29           
|Item 5. Other Information                                                                              |  | 30           
|Item 6. Exhibits                                                                                       |  | 30           
|Signatures                                                                                             |  | 31           
|Exhibit Index                                                                                          |  | 32           
|EX- 31.1                                                                                               |  |              
|EX- 31.2                                                                                               |  |              
|EX- 32                                                                                                 |  |              



2



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2006 and December 31, 2005



|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                             |  | June 30, 2006 |         |   | December 31,2005* |  
|                                                                                                                                                             |  | (unaudited)   |         |   |                   |  
|Assets                                                                                                                                                       |  |               |         |   |                   |   |         |  
|Non-interest bearing deposits and cash                                                                                                                       |  | $             | 20,980  |   |                   | $ | 17,927  |  
|Interest bearing deposits                                                                                                                                    |  |               | 933     |   |                   |   | 912     |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total cash and cash equivalents                                                                                                                              |  |               | 21,913  |   |                   |   | 18,839  |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Investment securities                                                                                                                                        |  |               |         |   |                   |   |         |  
|Available-for-sale, at market value (cost of $108,826 and $107,084 at June 30, 2006 and December 31, 2005,
respectively)                                     |  |               | 104,672 |   |                   |   | 104,723 |  
|                                                                                                                                                             |  |              
|Loans                                                                                                                                                        |  |               | 413,432 |   |                   |   | 386,786 |  
|Allowance for loan losses                                                                                                                                    |  |               | (4,999  | ) |                   |   | (4,650  | )
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Loans, net                                                                                                                                                   |  |               | 408,433 |   |                   |   | 382,136 |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Federal Home Loan Bank common stock, at cost                                                                                                                 |  |               | 1,814   |   |                   |   | 1,948   |  
|Bank premises and equipment, net                                                                                                                             |  |               | 21,452  |   |                   |   | 18,859  |  
|Accrued interest receivable                                                                                                                                  |  |               | 3,723   |   |                   |   | 3,562   |  
|Bank owned life insurance                                                                                                                                    |  |               | 7,593   |   |                   |   | 7,436   |  
|Other assets                                                                                                                                                 |  |               | 9,537   |   |                   |   | 10,183  |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total                                                                                                                                                        |  | $             | 579,137 |   |                   | $ | 547,686 |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Liabilities and Shareholders Equity                                                                                                                         |  |               |         |   |                   |   |         |  
|Deposits                                                                                                                                                     |  |               |         |   |                   |   |         |  
|Demand, noninterest bearing                                                                                                                                  |  | $             | 104,407 |   |                   | $ | 98,890  |  
|Demand, interest bearing                                                                                                                                     |  |               | 94,615  |   |                   |   | 94,423  |  
|Savings                                                                                                                                                      |  |               | 21,674  |   |                   |   | 22,818  |  
|Time                                                                                                                                                         |  |               | 257,558 |   |                   |   | 249,077 |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total deposits                                                                                                                                               |  |               | 478,254 |   |                   |   | 465,208 |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Accrued interest payable                                                                                                                                     |  |               | 2,049   |   |                   |   | 1,524   |  
|Short-term borrowings                                                                                                                                        |  |               | 17,052  |   |                   |   | 23,598  |  
|Long-term obligations                                                                                                                                        |  |               | 18,310  |   |                   |   | 18,310  |  
|Other liabilities                                                                                                                                            |  |               | 4,132   |   |                   |   | 4,481   |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total liabilities                                                                                                                                            |  |               | 519,797 |   |                   |   | 513,121 |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Shareholders equity                                                                                                                                         |  |               |         |   |                   |   |         |  
|Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,902,242 at June 30, 2006 and 2,040,042 at
December 31, 2005. |  |               | 10,119  |   |                   |   | 7,140   |  
|Capital surplus                                                                                                                                              |  |               | 26,526  |   |                   |   | 5,408   |  
|Retained earnings                                                                                                                                            |  |               | 25,250  |   |                   |   | 23,724  |  
|Deferred compensation - restricted stock                                                                                                                     |  |               |        |   |                   |   | (255    | )
|Accumulated other comprehensive loss                                                                                                                         |  |               | (2,555  | ) |                   |   | (1,452  | )
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total shareholders equity                                                                                                                                   |  |               | 59,340  |   |                   |   | 34,565  |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  
|Total                                                                                                                                                        |  | $             | 579,137 |   |                   | $ | 547,686 |  
|                                                                                                                                                             |  |               |         |   |                   |   |         |  

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

See accompanying
notes to consolidated financial statements.



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For the three and six months ended June 30, 2006 and 2005



|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|--------------------------------------------------- |  | --------------------------- | --------- | ------------------------- | - | ----------- |  | ----------- | --------- |  | - | ---------
|                                                    |  | Three months ended June 30, |           | Six months ended June 30,
|                                                    |  | 2006                        |           | 2005                      |   | 2006        |  | 2005       
|                                                    |  | (unaudited)                 |           | (unaudited)               |   | (unaudited) |  | (unaudited)
|Interest income:                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Interest and fees on loans                          |  | $                           | 7,687     |                           | $ | 5,719       |  | $           | 14,747    |  | $ | 10,865   
|Interest on investment securities:                  |  |                             |           |                           |   |             |  |             |           |  |   |          
|Interest exempt from federal income taxes           |  |                             | 266       |                           |   | 284         |  |             | 532       |  |   | 573      
|Taxable interest income                             |  |                             | 852       |                           |   | 744         |  |             | 1,650     |  |   | 1,497    
|Dividend income                                     |  |                             |          |                           |   | 18          |  |             |          |  |   | 36       
|FHLB stock dividends                                |  |                             | 26        |                           |   | 21          |  |             | 76        |  |   | 33       
|Other interest                                      |  |                             | 98        |                           |   | 55          |  |             | 221       |  |   | 78       
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Total interest income                               |  |                             | 8,929     |                           |   | 6,841       |  |             | 17,226    |  |   | 13,082   
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Interest expense:                                   |  |                             |           |                           |   |             |  |             |           |  |   |          
|Deposits:                                           |  |                             |           |                           |   |             |  |             |           |  |   |          
|Demand accounts                                     |  |                             | 301       |                           |   | 126         |  |             | 544       |  |   | 238      
|Savings                                             |  |                             | 28        |                           |   | 29          |  |             | 56        |  |   | 58       
|Time                                                |  |                             | 2,793     |                           |   | 1,541       |  |             | 5,426     |  |   | 2,801    
|Short-term borrowings                               |  |                             | 104       |                           |   | 132         |  |             | 216       |  |   | 234      
|Long-term obligations                               |  |                             | 441       |                           |   | 388         |  |             | 855       |  |   | 752      
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Total interest expense                              |  |                             | 3,667     |                           |   | 2,216       |  |             | 7,097     |  |   | 4,083    
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Net interest income                                 |  |                             | 5,262     |                           |   | 4,625       |  |             | 10,129    |  |   | 8,999    
|Provision for loan losses                           |  |                             | 200       |                           |   | 90          |  |             | 400       |  |   | 190      
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Net interest income after provision for loan losses |  |                             | 5,062     |                           |   | 4,535       |  |             | 9,729     |  |   | 8,809    
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Noninterest income:                                 |  |                             |           |                           |   |             |  |             |           |  |   |          
|Service charges on deposit accounts                 |  |                             | 820       |                           |   | 839         |  |             | 1,613     |  |   | 1,634    
|Other service charges and fees                      |  |                             | 613       |                           |   | 599         |  |             | 1,043     |  |   | 923      
|Net gain on sale of securities                      |  |                             |          |                           |   | 90          |  |             |          |  |   | 90       
|Income from bank owned life insurance               |  |                             | 92        |                           |   | 56          |  |             | 157       |  |   | 125      
|Other operating income                              |  |                             | 24        |                           |   | 35          |  |             | 51        |  |   | 54       
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Total noninterest income                            |  |                             | 1,549     |                           |   | 1,619       |  |             | 2,864     |  |   | 2,826    
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Noninterest expenses:                               |  |                             |           |                           |   |             |  |             |           |  |   |          
|Salaries                                            |  |                             | 1,847     |                           |   | 1,655       |  |             | 3,618     |  |   | 3,249    
|Retirement and other employee benefits              |  |                             | 670       |                           |   | 697         |  |             | 1,332     |  |   | 1,314    
|Occupancy                                           |  |                             | 415       |                           |   | 349         |  |             | 810       |  |   | 680      
|Equipment                                           |  |                             | 450       |                           |   | 414         |  |             | 868       |  |   | 869      
|Professional fees                                   |  |                             | 30        |                           |   | 84          |  |             | 79        |  |   | 271      
|Supplies                                            |  |                             | 75        |                           |   | 79          |  |             | 158       |  |   | 162      
|Telephone                                           |  |                             | 130       |                           |   | 132         |  |             | 237       |  |   | 265      
|Postage                                             |  |                             | 55        |                           |   | 59          |  |             | 114       |  |   | 106      
|Other operating expenses                            |  |                             | 834       |                           |   | 900         |  |             | 1,692     |  |   | 1,619    
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Total noninterest expenses                          |  |                             | 4,506     |                           |   | 4,369       |  |             | 8,908     |  |   | 8,535    
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Income before income taxes                          |  |                             | 2,105     |                           |   | 1,785       |  |             | 3,685     |  |   | 3,100    
|Income taxes                                        |  |                             | 690       |                           |   | 519         |  |             | 1,172     |  |   | 882      
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Net income                                          |  | $                           | 1,415     |                           | $ | 1,266       |  | $           | 2,513     |  | $ | 2,218    
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Net income per share - basic                        |  | $                           | 0.49      |                           | $ | 0.63        |  | $           | 1.00      |  | $ | 1.10     
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Net income per share - diluted                      |  | $                           | 0.49      |                           | $ | 0.62        |  | $           | 0.99      |  | $ | 1.08     
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Weighted average shares outstanding - basic         |  |                             | 2,885,988 |                           |   | 2,014,872   |  |             | 2,507,027 |  |   | 2,014,861
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          
|Weighted average shares outstanding - diluted       |  |                             | 2,910,804 |                           |   | 2,044,091   |  |             | 2,529,584 |  |   | 2,045,074
|                                                    |  |                             |           |                           |   |             |  |             |           |  |   |          

See accompanying notes to consolidated financial statements.



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders Equity

Six months ended June 30, 2006 and 2005



|                                                                                                |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ------------ | - |  | -------------- | ------ | - | ---------------- | - | ------ | ------------------------------------ |  | - | ----------------------------------- | - |  | ------------------- | ---- | - | ----- | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                                |  | Common Stock |   |  | Capitalsurplus |        |   | Retainedearnings |   |        | Deferredcompensation-restrictedstock |  |   | Accumulatedcomprehensive other loss |   |  | Comprehensiveincome |      |   | Total |  
|                                                                                                |  | Number       |   |  | Amount         |        |   |                  |   |        |                                      | 
|Balance January 1, 2005                                                                         |  | 2,038,242    |   |  | $              | 7,134  |   |                  | $ | 5,360  |                                      |  | $ | 20,176                              |   |  | $                   | (306 | ) |       | $ | (287   | ) |  |   |        |   |  | $ | 32,077 |  
|Unrealized loss, net of income tax of $ 34                                                      |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   | (53    | ) |  | $ | (53    | ) |  |   | (53    | )
|Net income                                                                                      |  |              |   |  |                |        |   |                  |   |        |                                      |  |   | 2,218                               |   |  |                     |      |   |       |   |        |   |  |   | 2,218  |   |  |   | 2,218  |  
|                                                                                                |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                      |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  | $ | 2,165  |   |  |   |        |  
|                                                                                                |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Deferred compensation - restricted stock issuance                                               |  | 1,800        |   |  |                | 6      |   |                  |   | 48     |                                      |  |   |                                     |   |  |                     | (54  | ) |       |   |        |   |  |   |        |   |  |   |        |  
|Recognition of deferred compensation - restricted stock                                         |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     | 48   |   |       |   |        |   |  |   |        |   |  |   | 48     |  
|Cash dividends ($.32 per share)                                                                 |  |              |   |  |                |        |   |                  |   |        |                                      |  |   | (653                                | ) |  |                     |      |   |       |   |        |   |  |   |        |   |  |   | (653   | )
|                                                                                                |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Balance June 30, 2005                                                                           |  | 2,040,042    |   |  | $              | 7,140  |   |                  | $ | 5,408  |                                      |  | $ | 21,741                              |   |  | $                   | (312 | ) |       | $ | (340   | ) |  |   |        |   |  | $ | 33,637 |  
|                                                                                                |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|                                                                                                |  |              |   |  |                |        |  
|                                                                                                |  | Common Stock |   |  | Capitalsurplus |        |   | Retainedearnings |   |        | Deferredcompensation-restrictedstock |  |   | Accumulated othercomprehensive
loss |   |  | Comprehensiveincome |      |   | Total |  
|                                                                                                |  | Number       |   |  | Amount         |        |   |                  |   |        |                                      | 
|Balance January 1, 2006                                                                         |  | 2,040,042    |   |  | $              | 7,140  |   |                  | $ | 5,408  |                                      |  | $ | 23,724                              |   |  | $                   | (255 | ) |       | $ | (1,452 | ) |  |   |        |   |  | $ | 34,565 |  
|Unrealized loss, net of income tax of $ 690                                                     |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   | (1,103 | ) |  | $ | (1,103 | ) |  |   | (1,103 | )
|Net income                                                                                      |  |              |   |  |                |        |   |                  |   |        |                                      |  |   | 2,513                               |   |  |                     |      |   |       |   |        |   |  |   | 2,513  |   |  |   | 2,513  |  
|                                                                                                |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                                      |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  | $ | 1,410  |   |  |   |        |  
|                                                                                                |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Issuance of common stock                                                                        |  | 862,500      |   |  |                | 3,019  |   |                  |   | 23,503 |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   | 26,522 |  
|Expenses related to issuance of common stock                                                    |  |              |   |  |                |        |   |                  |   | (2,258 | )                                    |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   | (2,258 | )
|Stock based compensation                                                                        |  | (300         | ) |  |                | 18     |   |                  |   | 70     |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   | 88     |  
|Reclass of deferred restricted stock compensation due to adoption of SFAS No. 123R (See note 4) |  |              |   |  |                | (58    | ) |                  |   | (197   | )                                    |  |   |                                     |   |  |                     | 255  |   |       |   |        |   |  |   |        |   |  |   |        |  
|Cash dividends ($.34 per share)                                                                 |  |              |   |  |                |        |   |                  |   |        |                                      |  |   | (987                                | ) |  |                     |      |   |       |   |        |   |  |   |        |   |  |   | (987   | )
|                                                                                                |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Balance June 30, 2006                                                                           |  | 2,902,242    |   |  | $              | 10,119 |   |                  | $ | 26,526 |                                      |  | $ | 25,250                              |   |  | $                   |     |   |       | $ | (2,555 | ) |  |   |        |   |  | $ | 59,340 |  
|                                                                                                |  |              |   |  |                |        |   |                  |   |        |                                      |  |   |                                     |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  

See accompanying notes to consolidated financial statements.



5



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Six months ended June 30, 2006 and 2005



|                                                                                   |  |                           |         |   |             |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ----------- | - | ------- | -
|                                                                                   |  | Six months ended June 30, |        
|                                                                                   |  | 2006                      |         |   | 2005        |  
|                                                                                   |  | (unaudited)               |         |   | (unaudited) |  
|Cash flows from operating activities:                                              |  |                           |         |   |             |   |         |  
|Net income                                                                         |  | $                         | 2,513   |   |             | $ | 2,218   |  
|Adjustments to reconcile net income to net cash provided by operating activities:  |  |                           |         |   |             |   |         |  
|Depreciation                                                                       |  |                           | 605     |   |             |   | 531     |  
|Amortization of premium on investment securities, net                              |  |                           | 58      |   |             |   | 138     |  
|Provision for loan losses                                                          |  |                           | 400     |   |             |   | 190     |  
|Net charge-offs on loans                                                           |  |                           | (51     | ) |             |   | (41     | )
|Gain on sale of securities                                                         |  |                           |        |   |             |   | (90     | )
|Stock based compensation                                                           |  |                           | 88      |   |             |   | 48      |  
|Decrease in accrued interest receivable                                            |  |                           | (161    | ) |             |   | (104    | )
|(Gain) on disposal of premises and equipment                                       |  |                           |        |   |             |   | (3      | )
|(Gain) on sale of real estate acquired in settlement of loans                      |  |                           |        |   |             |   | (5      | )
|Income from Bank owned life insurance                                              |  |                           | (157    | ) |             |   | (125    | )
|(Increase) decrease in other assets                                                |  |                           | 646     |   |             |   | (829    | )
|Increase in accrued interest payable                                               |  |                           | 525     |   |             |   | 302     |  
|Increase in other liabilities, net                                                 |  |                           | 173     |   |             |   | 500     |  
|                                                                                   |  |                           |         |   |             |   |         |  
|Net cash provided by operating activities                                          |  |                           | 4,639   |   |             |   | 2,730   |  
|                                                                                   |  |                           |         |   |             |   |         |  
|Cash flows from investing activities:                                              |  |                           |         |   |             |   |         |  
|Proceeds from sales of investment securities classified as available-for-sale      |  |                           |        |   |             |   | 4,367   |  
|Proceeds from maturities of investment securities classified as available-for-sale |  |                           | 4,523   |   |             |   | 6,153   |  
|Purchases of investment securities classified as available-for-sale                |  |                           | (6,323  | ) |             |   | (2,781  | )
|Purchase (redemption) of Federal Home Loan Bank common stock                       |  |                           | 134     |   |             |   | (136    | )
|Purchases of premises and equipment                                                |  |                           | (3,198  | ) |             |   | (1,127  | )
|Purchases of life insurance                                                        |  |                           |        |   |             |   | (490    | )
|Net loan originations                                                              |  |                           | (26,646 | ) |             |   | (32,134 | )
|                                                                                   |  |                           |         |   |             |   |         |  
|Net cash used by investing activities                                              |  |                           | (31,510 | ) |             |   | (26,148 | )
|                                                                                   |  |                           |         |   |             |   |         |  
|Cash flows from financing activities:                                              |  |                           |         |   |             |   |         |  
|Net increase in deposits                                                           |  |                           | 13,046  |   |             |   | 44,489  |  
|Repayment of short-term borrowings                                                 |  |                           | (6,546  | ) |             |   | (7,608  | )
|Dividends paid                                                                     |  |                           | (819    | ) |             |   | (617    | )
|Net proceeds from issuance of common stock                                         |  |                           | 24,264  |   |             |   |        |  
|                                                                                   |  |                           |         |   |             |   |         |  
|Net cash provided by financing activities                                          |  |                           | 29,945  |   |             |   | 36,264  |  
|                                                                                   |  |                           |         |   |             |   |         |  
|Increase in cash and cash equivalents                                              |  |                           | 3,074   |   |             |   | 12,846  |  
|Cash and cash equivalents at beginning of period                                   |  |                           | 18,839  |   |             |   | 28,263  |  
|                                                                                   |  |                           |         |   |             |   |         |  
|Cash and cash equivalents at end of period                                         |  | $                         | 21,913  |   |             | $ | 41,109  |  
|                                                                                   |  |                           |         |   |             |   |         |  
|Cash paid during the period:                                                       |  |                           |         |   |             |   |         |  
|Interest                                                                           |  | $                         | 6,572   |   |             | $ | 3,780   |  
|Taxes                                                                              |  |                           | 94      |   |             |   | 1,406   |  
|Supplemental disclosures of noncash financing and investing activities:            |  |                           |         |   |             |   |         |  
|Cash dividends declared but not paid                                               |  | $                         | 493     |   |             | $ | 326     |  
|Unrealized losses on available-for-sale securities, net of deferred taxes          |  |                           | (1,103  | ) |             |   | (808    | )
|Restricted stock issuance                                                          |  |                           |        |   |             |   | 54      |  

See accompanying notes to consolidated financial statements.



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ECB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(Dollars in thousands, except for per share data)

(1) Basis of Presentation

The consolidated financial
statements include the accounts of ECB Bancorp, Inc. (Bancorp) and its wholly-owned subsidiary, The East Carolina Bank (the Bank) (Bancorp and the Bank 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 loan losses. In connection with the determination of the allowance for 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 2005 Annual Report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the period
ended June 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

Reclassification

Certain reclassifications have been made to the prior years consolidated financial statements to
place them on a comparable basis with the current year. Net income and shareholders equity previously reported were not affected by these reclassifications.

(2) Allowance for Loan Losses

The following table summarizes the activity in the allowance for loan losses for the
six-month periods ended June 30, 2006 and 2005, respectively.



|                                       |  |                          |       |   |      |   |       |  
|-------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | -
|                                       |  | Six-months endedJune 30, |      
|                                       |  | 2006                     |       |   | 2005 |  
|Balance at the beginning of the period |  | $                        | 4,650 |   |      | $ | 4,300 |  
|Provision for loan losses              |  |                          | 400   |   |      |   | 190   |  
|Charge-offs                            |  |                          | (69   | ) |      |   | (67   | )
|Recoveries                             |  |                          | 18    |   |      |   | 26    |  
|Net charge-offs                        |  |                          | (51   | ) |      |   | (41   | )
|Balance at end of the period           |  | $                        | 4,999 |   |      | $ | 4,449 |  



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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, 2006 and 2005, diluted weighted average shares outstanding increased by 16,497 and 14,653, respectively, due
to the dilutive impact of restricted stock. For the three months ended June 30, 2006 and 2005, diluted weighted average shares outstanding increased by 16,392 and 14,359, 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,
2006 and 2005, diluted weighted average shares outstanding increased by 6,060 and 15,560, respectively, due to the dilutive impact of options. For the three months ended June 30, 2006 and 2005, diluted weighted average shares outstanding
increased by 8,424 and 14,860, respectively, due to the dilutive impact of options. There were 18,087 anti-dilutive (not in the money) options outstanding for the three months ended June 30, 2005 and there were no anti-dilutive options
outstanding for the three months ended June 30, 2006. There were no ant-dilutive options outstanding for the six month periods ended June 30, 2006 and 2005.

The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per Share for the six months ended June 30.



|                              |  |                                |       |                     |           |                |   |     
|----------------------------- |  | ------------------------------ | ----- | ------------------- | --------- | -------------- | - | ----
|                              |  | Six months ended June 30, 2006
|                              |  | Income(Numerator)              |       | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                              | 2,513 |                     | 2,507,027 |                | $ | 1.00
|                              |  |                                |       |                     |           |                |   |     
|Effect of dilutive securities |  |                                |      |                     | 22,557    |                |   |     
|                              |  |                                |       |                     |           |                |   |     
|Diluted net income per share  |  | $                              | 2,513 |                     | 2,529,584 |                | $ | 0.99
|                              |  |                                |       |                     |           |                |   |     
|                              | 
|                              |  | Six months ended June 30, 2005
|                              |  | Income(Numerator)              |       | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                              | 2,218 |                     | 2,014,861 |                | $ | 1.10
|                              |  |                                |       |                     |           |                |   |     
|Effect of dilutive securities |  |                                |      |                     | 30,213    |                |   |     
|                              |  |                                |       |                     |           |                |   |     
|Diluted net income per share  |  | $                              | 2,218 |                     | 2,045,074 |                | $ | 1.08
|                              |  |                                |       |                     |           |                |   |     



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The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per
Share for the three months ended June 30.



|                              |  |                                  |       |                      |           |                |   |     
|----------------------------- |  | -------------------------------- | ----- | -------------------- | --------- | -------------- | - | ----
|                              |  | Three months ended June 30, 2006
|                              |  | Income(Numerator)                |       | Shares (Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                                | 1,415 |                      | 2,885,988 |                | $ | 0.49
|                              |  |                                  |       |                      |           |                |   |     
|Effect of dilutive securities |  |                                  |      |                      | 24,816    |                |   |     
|                              |  |                                  |       |                      |           |                |   |     
|Diluted net income per share  |  | $                                | 1,415 |                      | 2,910,804 |                | $ | 0.49
|                              |  |                                  |       |                      |           |                |   |     
|                              | 
|                              |  | Three months ended June 30, 2005
|                              |  | Income(Numerator)                |       | Shares (Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                                | 1,266 |                      | 2,014,872 |                | $ | 0.63
|                              |  |                                  |       |                      |           |                |   |     
|Effect of dilutive securities |  |                                  |      |                      | 29,219    |                |   |     
|                              |  |                                  |       |                      |           |                |   |     
|Diluted net income per share  |  | $                                | 1,266 |                      | 2,044,091 |                | $ | 0.62
|                              |  |                                  |       |                      |           |                |   |     

(4) Stock Option Plan (dollars in thousands, except per share data)

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, (SFAS
No. 123R) which was issued by the Financial Accounting Standards Board (FASB) in December 2004. SFAS No. 123R revises SFAS No. 123 Accounting for Stock Based Compensation, and supersedes APB No. 25, Accounting
for Stock Issued to Employees, (APB No. 25) and its related interpretations. SFAS No. 123R requires recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements over
the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). SFAS No. 123R also requires measurement of the cost of employee services received in exchange for an award based on the
grant-date fair value of the award. SFAS No. 123R also amends SFAS No. 95 Statement of Cash Flows, to require that excess tax benefits be reported as financing cash inflows, rather than as a reduction of taxes paid, which is
included within operating cash flows.

The Company adopted SFAS No. 123R using the modified prospective application as permitted under
SFAS No. 123R. Accordingly, prior period amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously
granted awards that remain outstanding at the date of adoption.

Compensation cost charged to income was approximately $88 for the six
months ended June 30, 2006 as a result of the implementation of SFAS No. 123R. No income tax benefit was recognized for share-based compensation, as the Company does not have any outstanding nonqualified stock options.

Prior to the adoption of SFAS No. 123R, the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no
compensation expense for options granted with exercise prices equal to the fair market value of the Companys common stock on the date of grant.



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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. It is the Companys policy to issue new shares to satisfy
option exercises. Stock options generally vest one-third each year beginning three years after the grant date and expire after 10 years. However, certain grants vest one-third each year, beginning one year after the grant date. Restricted stock
generally vest one-third each year beginning three years after the grant date.

The weighted average fair value of each stock option grant
is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants for the six months ended June 30, 2006: dividend yield of 2.40%; expected volatility of 30.37%;
risk-free interest rates of 4.52%; and expected lives of 7.01 years. The fair value of stock options granted during the period was $8.75.

A summary of option activity under the Plan as of June 30, 2006, and changes during the six-month period ended June 30, 2006 is presented below:



|                                 |  |                    |  |                              |       |                                 |            |                         |   |    
|-------------------------------- |  | ------------------ |  | ---------------------------- | ----- | ------------------------------- | ---------- | ----------------------- | - | ---
|                                 |  | OptionsOutstanding |  | WeightedAverageExercisePrice |       | AverageRemainingContractualTerm |            | AggregateIntrinsicValue
|Outstanding at December 31, 2005 |  | 43,389             |  | $                            | 19.04 |                                 |            |                         |   |    
|Granted                          |  | 18,087             |  | $                            | 28.52 |                                 |            |                         |   |    
|Forfeited                        |  |                   |  | $                            | n/a   |                                 |            |                         |   |    
|Exercised                        |  |                   |  | $                            | n/a   |                                 |            |                         |   |    
|Outstanding at June 30, 2006     |  | 61,476             |  | $                            | 21.83 |                                 | 6.90 years |                         | $ | 815
|                                 |  |                    |  |                              |       |                                 |            |                         |   |    
|Exercisable at June 30, 2006     |  | 25,587             |  | $                            | 13.77 |                                 | 3.94 years |                         | $ | 546
|                                 |  |                    |  |                              |       |                                 |            |                         |   |    

A summary of activity related to non-vested restricted stock during the six-month period ended
June 30, 2006 is presented below:



|                                 |  |                  |   |  |                                     |      
|-------------------------------- |  | ---------------- | - |  | ----------------------------------- | -----
|                                 |  | Non-vestedShares |   |  | WeightedAverageGrant DateFair Value
|Outstanding at December 31, 2005 |  | 21,543           |   |  | $                                   | 22.73
|Granted                          |  |                 |   |  | $                                   | n/a  
|Forfeited                        |  | (300             | ) |  | $                                   | 30.00
|Vested                           |  | (5,441           | ) |  | $                                   | 16.66
|Outstanding at June 30, 2006     |  | 15,802           |   |  | $                                   | 24.68

Anticipated total unrecognized compensation cost related to outstanding non-vested stock options
and restricted stock grants will be recognized over the following periods:



|                           |  |              |     |                       |   |       |  |   |    
|-------------------------- |  | ------------ | --- | --------------------- | - | ----- |  | - | ---
|                           |  | StockOptions |     | RestrictedStockGrants |   | Total
|July 1  December 31, 2006 |  | $            | 44  |                       | $ | 48    |  | $ | 92 
|2007                       |  |              | 84  |                       |   | 96    |  |   | 180
|2008                       |  |              | 67  |                       |   | 57    |  |   | 124
|2009                       |  |              | 34  |                       |   |      |  |   | 34 
|2010                       |  |              | 21  |                       |   |      |  |   | 21 
|2011                       |  |              | 1   |                       |   |      |  |   | 1  
|                           |  |              |     |                       |   |       |  |   |    
|Total                      |  | $            | 251 |                       | $ | 201   |  | $ | 452
|                           |  |              |     |                       |   |       |  |   |    



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The adoption of SFAS No. 123R and its fair value compensation cost recognition provisions had the
following effect (increase/ (decrease)) on our consolidated financial statements:

Consolidated Income Statement for the Six Months Ended June 30,
2006



|                               |  |   |       |  
|------------------------------ |  | - | ----- | -
|Income before income taxes     |  | $ | (41   | )
|Net income                     |  |   | (41   | )
|                               |  |   |       |  
|Net income per share  basic   |  |   | (0.02 | )
|                               |  |   |       |  
|Net income per share  diluted |  | $ | (0.02 | )
|                               |  |   |       |  

Consolidated Income Statement for the Three Months Ended June 30, 2006



|                               |  |   |       |  
|------------------------------ |  | - | ----- | -
|Income before income taxes     |  | $ | (22   | )
|Net income                     |  |   | (22   | )
|                               |  |   |       |  
|Net income per share  basic   |  |   | (0.01 | )
|                               |  |   |       |  
|Net income per share  diluted |  | $ | (0.01 | )
|                               |  |   |       |  

The following table illustrates the effect on net income if the Company had applied the fair value
recognition provisions of SFAS No. 123:



|                                                                                                                                            |  |                                  |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | -
|                                                                                                                                            |  | Six months endedJune 30, 2005    |      
|Net income, as reported                                                                                                                     |  | $                                | 2,218 |  
|Total stock-based employee compensation included in net income                                                                              |  |                                  | 48    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                  | (53   | )
|                                                                                                                                            |  |                                  |       |  
|Proforma net income                                                                                                                         |  | $                                | 2,213 |  
|                                                                                                                                            |  |                                  |       |  
|Earnings per share:                                                                                                                         |  |                                  |       |  
|Basic  as reported                                                                                                                         |  | $                                | 1.10  |  
|                                                                                                                                            |  |                                  |       |  
|Basic  proforma                                                                                                                            |  |                                  | 1.10  |  
|                                                                                                                                            |  |                                  |       |  
|Diluted  as reported                                                                                                                       |  |                                  | 1.08  |  
|                                                                                                                                            |  |                                  |       |  
|Diluted  proforma                                                                                                                          |  |                                  | 1.07  |  
|                                                                                                                                            |  |                                  |       |  
|                                                                                                                                            | 
|                                                                                                                                            |  | Three months ended June 30, 2005 |      
|Net income, as reported                                                                                                                     |  | $                                | 1,266 |  
|Total stock-based employee compensation included in net income                                                                              |  |                                  | 24    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                  | (26   | )
|                                                                                                                                            |  |                                  |       |  
|Proforma net income                                                                                                                         |  | $                                | 1,264 |  
|                                                                                                                                            |  |                                  |       |  
|Earnings per share:                                                                                                                         |  |                                  |       |  
|Basic  as reported                                                                                                                         |  | $                                | 0.63  |  
|                                                                                                                                            |  |                                  |       |  
|Basic  proforma                                                                                                                            |  |                                  | 0.63  |  
|                                                                                                                                            |  |                                  |       |  
|Diluted  as reported                                                                                                                       |  |                                  | 0.62  |  
|                                                                                                                                            |  |                                  |       |  
|Diluted  proforma                                                                                                                          |  |                                  | 0.62  |  
|                                                                                                                                            |  |                                  |       |  



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(5) Postretirement Benefits

The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. For additional information related to the plan, refer
to the Companys Form 10-K for the year ended December 31, 2005.



|                                         |  |                             |    |      |   |   
|---------------------------------------- |  | --------------------------- | -- | ---- | - | --
|                                         |  | Six months ended June 30,  
|                                         |  | 2006                        |    | 2005
|Components of net periodic cost:         |  |                             |    |      |   |   
|Service cost                             |  | $                           | 4  |      | $ | 4 
|Interest cost                            |  |                             | 22 |      |   | 21
|Amortization of loss                     |  |                             |   |      |   |  
|                                         |  |                             |    |      |   |   
|Net periodic postretirement benefit cost |  | $                           | 26 |      | $ | 25
|                                         |  |                             |    |      |   |   
|                                         | 
|                                         |  | Three months ended June 30,
|                                         |  | 2006                        |    | 2005
|Components of net periodic cost:         |  |                             |    |      |   |   
|Service cost                             |  | $                           | 2  |      | $ | 2 
|Interest cost                            |  |                             | 11 |      |   | 10
|Amortization of loss                     |  |                             |   |      |   |  
|                                         |  |                             |    |      |   |   
|Net periodic postretirement benefit cost |  | $                           | 13 |      | $ | 12
|                                         |  |                             |    |      |   |   

Employer Contributions

The Company expects to contribute $52 to its postretirement benefit plan in 2006. No contributions were made in the first six months of 2006.

(6) Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities

The
following table sets forth the amount of unrealized losses (that is, the amount by which cost or amortized cost exceeds fair value), and the related fair value of investments with unrealized losses, none of which are considered to be other than
temporarily impaired. The table is segregated into investments that have been in continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for more than 12 months, as of
June 30, 2006:



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##### Table of Contents

Impairment of Certain Investments in Debt and Equity Securities



|                                                              |  |                     |        |                     |   |           |  |                  |        |           |   |                   |  |   |        |  |   |      
|------------------------------------------------------------- |  | ------------------- | ------ | ------------------- | - | --------- |  | ---------------- | ------ | --------- | - | ----------------- |  | - | ------ |  | - | -----
|                                                              |  | Less than 12 months |        | 12 months or longer |   | Total    
|Description of Securities                                     |  | FairValue           |        | UnrealizedLosses    |   | FairValue |  | UnrealizedLosses |        | FairValue |   | Unrealized Losses
|Securities of other U.S. government agencies and corporations |  | $                   | 13,421 |                     | $ | 269       |  | $                | 13,489 |           | $ | 464               |  | $ | 26,910 |  | $ | 733  
|Obligations of states and political subdivisions              |  |                     | 10,619 |                     |   | 191       |  |                  | 11,644 |           |   | 562               |  |   | 22,263 |  |   | 753  
|Mortgage-backed securities                                    |  |                     | 8,408  |                     |   | 259       |  |                  | 41,377 |           |   | 2,483             |  |   | 49,785 |  |   | 2,742
|                                                              |  |                     |        |                     |   |           |  |                  |        |           |   |                   |  |   |        |  |   |      
|Total                                                         |  | $                   | 32,448 |                     | $ | 719       |  | $                | 66,510 |           | $ | 3,509             |  | $ | 98,958 |  | $ | 4,228
|                                                              |  |                     |        |                     |   |           |  |                  |        |           |   |                   |  |   |        |  |   |      

As of June 30, 2006, management has concluded that the unrealized losses above (which consisted of 147
securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost. The losses above are on
securities that have contractual maturity dates and are primarily related to market interest rates. Securities that have been in an unrealized loss position for longer than 1 year include forty-one (41) municipal obligations, thirty-two
(32) mortgage-backed securities and fourteen (14) securities of U.S. government agencies. The unrealized losses associated with these securities are not considered to be other-than-temporary, because they are related to changes in interest
rates and do not affect the expected cash flows of the underlying collateral or the issuer.

(7) Comprehensive Income

A summary of comprehensive income is as follows:



|                                                                                                  |  |                            |       |                          |      |   |       |  |   |        |   |  |   |       |  
|------------------------------------------------------------------------------------------------- |  | -------------------------- | ----- | ------------------------ | ---- | - | ----- |  | - | ------ | - |  | - | ----- | -
|                                                                                                  |  | Three Months EndedJune 30, |       | Six Months EndedJune 30, |     
|                                                                                                  |  | 2006                       |       |                          | 2005 |   | 2006  |  |   | 2005   |  
|Net Income                                                                                        |  | $                          | 1,415 |                          |      | $ | 1,266 |  | $ | 2,513  |   |  | $ | 2,218 |  
|Other comprehensive income (loss):                                                                |  |                            |       |                          |      |   |       |  |   |        |   |  |   |       |  
|Net increase (decrease) in the fair value of Investment securities available for sale, net of tax |  |                            | (822  | )                        |      |   | 754   |  |   | (1,103 | ) |  |   | (54   | )
|                                                                                                  |  |                            |       |                          |      |   |       |  |   |        |   |  |   |       |  
|Total comprehensive income                                                                        |  | $                          | 593   |                          |      | $ | 2,020 |  | $ | 1,410  |   |  | $ | 2,164 |  
|                                                                                                  |  |                            |       |                          |      |   |       |  |   |        |   |  |   |       |  

(8) New Accounting Pronouncements

In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (SFAS No. 154), Accounting Changes and Error
Corrections, which replaces APB Opinion No. 20 Accounting Changes and FASB Statement No. 3 Reporting Accounting Changes in Interim Financial Statements. SFAS No. 154 changes the requirements for the
accounting for and reporting of a change in an accounting principle. SFAS No. 154 requires retrospective application for voluntary changes in an accounting principle unless it is impracticable to do so. SFAS No. 154 is effective for
accounting changes made in fiscal years beginning after December 15, 2005. The Company adopted SFAS No. 154 on January 1, 2006 with no material effect on its consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instrumentsan amendment of FASB Statements
No. 133 and 140. This Statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging



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Activities, and SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This
Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. SFAS No. 155 is effective for all financial instruments
acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. Management believes that the adoption of SFAS No. 155 will not have a material impact on its financial position, results of
operations or cash flows.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assetsan
amendment of FASB Statement No. 140. This Statement amends FASB No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately
recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing
contract; requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable; permits an entity to choose its subsequent measurement methods for each class of separately recognized
servicing assets and servicing liabilities; at its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment
of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entitys exposure to changes in fair value of servicing assets or servicing liabilities
that a servicer elects to subsequently measure at fair value; and requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for
all separately recognized servicing assets and servicing liabilities. An entity should adopt SFAS No. 156 as of the beginning of its first fiscal year that begins after September 15, 2006. Management believes the adoption of SFAS
No. 156 will not have a material impact on its financial position, results of operations or cash flows.

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

Forward-Looking
Statements

Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of
results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ
materially from those currently anticipated due to a number of factors, which include, but are not limited to, risk factors discussed in our Annual Report on Form 10-K and in other documents filed by us with the Securities and Exchange Commission
from time to time. Forward-looking statements may be identified by terms such as may, will, should, could, expects, plans, intends, anticipates,
believes, estimates, predicts, forecasts, potential or continue, or similar terms or the negative of these terms, or other statements concerning opinions or judgments of the
Companys 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 our customers, actions of government
regulators, the level of market interest rates, weather and similar conditions, particularly the effect of hurricanes on our banking and operations facilities and on our customers and the communities in which we do business, changes in the real
estate market, and general economic conditions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. We have no
obligation to update these forward-looking statements.

Executive Summary

ECB Bancorp, Inc. is a bank holding company headquartered in Engelhard, North Carolina. Our wholly owned subsidiary, The East Carolina Bank (the
Bank), is a state-chartered community bank that was founded in 1919. For the purpose of this discussion, we, us and our refers to the Bank and the bank holding company as a single, consolidated entity
unless the context otherwise indicates.



14



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As of June 30, 2006, we had consolidated assets of approximately $579.1 million, total loans of
approximately $413.4 million, total deposits of approximately $478.3 million and shareholders equity of approximately $59.3 million. For the three months ended June 30, 2006, we had net income of $1.4 million or $0.49 basic and diluted
earnings per share, compared to net income of $1.3 million, or $0.63 basic and $0.62 diluted earnings per share for the three months ended June 30, 2005. For the six months ended June 30, 2006, we had net income of $2.5 million or $1.00
basic and $0.99 diluted earnings per share, compared to net income of $2.2 million or $1.10 basic and $1.08 diluted earnings per share for the six months ended June 30, 2005.

During the first quarter of 2006, management successfully completed a sale of 862,500 additional shares of common equity for $26.5 million. The proceeds
will be used to support the Banks various strategic initiatives for expansion and growth over the next several years.

Critical Accounting
Policies

The Companys significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained
in the Form 10-K Annual Report for the fiscal year ended December 31, 2005. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it
requires managements most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The
Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The
Companys assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the
issuance of the consolidated financial statements. For additional discussion concerning the Companys allowance for loan losses and related matters, see Asset Quality.



15



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##### Table of Contents

Results of Operations

The following table summarizes components of income and expense and the changes in those components for the three- and six-month periods ended June 30, 2006 as compared to the same periods in 2005.

Condensed Consolidated Statements of Income



|                                                    |  |                                          |        |                            |   |       |                                       |  |                            |        |  |   |        |  |   |       |  |      
|--------------------------------------------------- |  | ---------------------------------------- | ------ | -------------------------- | - | ----- | ------------------------------------- |  | -------------------------- | ------ |  | - | ------ |  | - | ----- |  | -----
|                                                    |  | For the Three Months Ended June 30,
2006 |        | Changes from thePrior Year |   |       | For the SixMonths Ended June 30, 2006 |  | Changes from thePrior Year
|                                                    |  |                                          | Amount |                            |   | %     |                                       |  |                            | Amount |  | %
|Gross interest income                               |  | $                                        | 8,929  |                            | $ | 2,088 |                                       |  | 30.5                       |        |  | $ | 17,226 |  | $ | 4,144 |  | 31.7 
|Gross interest expense                              |  |                                          | 3,667  |                            |   | 1,451 |                                       |  | 65.5                       |        |  |   | 7,097  |  |   | 3,014 |  | 73.8 
|                                                    |  |                                          |        |                            |   |       |                                       |  |                            |        |  |   |        |  |   |       |  |      
|Net interest income                                 |  |                                          | 5,262  |                            |   | 637   |                                       |  | 13.8                       |        |  |   | 10,129 |  |   | 1,130 |  | 12.6 
|Provision for loan losses                           |  |                                          | 200    |                            |   | 110   |                                       |  | 122.2                      |        |  |   | 400    |  |   | 210   |  | 110.5
|                                                    |  |                                          |        |                            |   |       |                                       |  |                            |        |  |   |        |  |   |       |  |      
|Net interest income after Provision for loan losses |  |                                          | 5,062  |                            |   | 527   |                                       |  | 11.6                       |        |  |   | 9,729  |  |   | 920   |  | 10.4 
|                                                    |  |                                          |        |                            |   |      
|Noninterest income                                  |  |                                          | 1,549  |                            |   | (70   | )                                     |  | (4.3                       | )      |  |   | 2,864  |  |   | 38    |  | 1.3  
|Noninterest expense                                 |  |                                          | 4,506  |                            |   | 137   |                                       |  | 3.1                        |        |  |   | 8,908  |  |   | 373   |  | 4.4  
|                                                    |  |                                          |        |                            |   |       |                                       |  |                            |        |  |   |        |  |   |       |  |      
|Income before income taxes                          |  |                                          | 2,105  |                            |   | 320   |                                       |  | 17.9                       |        |  |   | 3,685  |  |   | 585   |  | 18.9 
|Income tax provision                                |  |                                          | 690    |                            |   | 171   |                                       |  | 33.0                       |        |  |   | 1,172  |  |   | 290   |  | 32.9 
|                                                    |  |                                          |        |                            |   |       |                                       |  |                            |        |  |   |        |  |   |       |  |      
|Net income                                          |  | $                                        | 1,415  |                            | $ | 149   |                                       |  | 11.8                       |        |  | $ | 2,513  |  | $ | 295   |  | 13.3 
|                                                    |  |                                          |        |                            |   |       |                                       |  |                            |        |  |   |        |  |   |       |  |      

Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of
operating income. Net interest income for the three months ended June 30, 2006 was $5.3 million, an increase of $637 or 13.8% when compared to net interest income of $4.6 million for the three months ended June 30, 2005. For the six months
ended June 30, 2006, net interest income was $10.1 million, an increase of $1.1 million or 12.6% when compared to net interest income of $9.0 million for the period in 2005.

The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and the various rate spreads between
our interest-earning assets and our interest-bearing liabilities. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or
decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as
non-interest-bearing deposits.

Interest income increased $2.1 million or 30.5% for the three months ended June 30, 2006 compared to
the same three months of 2005. Interest income increased $4.1 million or 31.7% for the six months ended June 30, 2006 compared to the same six months of 2005. The increases for the three and six months ended June 30, 2006 are due to
increases in average interest rates earned on our average earning assets and increases in volume of average earning assets of $56.7 million and $57.5 million, respectively, as compared to the same periods in 2005. We funded the increases in
interest-earning assets primarily with in-market certificates of deposit and additional wholesale certificates of deposit obtained through an Internet bulletin board service. Supplementing the additional earnings from increased volumes of earning
assets was the increase in yield on earning assets. The tax equivalent yield on average earning assets increased 94 basis points for the quarter ended June 30, 2006 to 7.04% from 6.10% for the



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same period in 2005. For the first six months of 2006, the yield on average earning assets, on a tax-equivalent basis, increased 96 basis points to 6.97%
compared to 6.01% at June 30, 2005. Management attributes the increase in the yield on our earning assets to the increase in short-term market interest rates. Approximately $243.3 million or 59.2% of our loan portfolio consists of variable rate
loans that adjust with the movement of the national prime rate. As a result, composite yield on our loans increased approximately 103 basis points for the second quarter of 2006 compared to the second quarter of 2005 and 103 basis points for the
six-month periods ended June 30, 2006 and 2005.

Conversely, our average cost of funds during the second quarter of 2006 was 3.53%, an
increase of 124 basis points when compared to 2.29% for the second quarter of 2005. Average rates paid on bank certificates of deposit increased 148 basis points from 2.77% for the quarter ended June 30, 2005 to 4.25% for the quarter ended
June 30, 2006, while our average cost of borrowed funds increased 223 basis points during the second quarter of 2006 compared to the same period in 2005. Average rates paid on transaction accounts (NOW, Savings and Money Market) for the quarter
ended June 30, 2006 increased 57 basis points when compared to the second quarter of 2005. Total interest expense increased $1.5 million or 65.5% during the second quarter of 2006 compared to the same period in 2005, primarily the result of
increased market rates paid on borrowed funds and certificates of deposit. For the six months ended June 30, 2006, our cost of funds was 3.39% for the six months ended June 30, 2006, an increase of 124 basis points when compared to 2.15%
for the same period of 2005. Average rates paid on bank certificates of deposit increased 152 basis points from 2.58% to 4.10% for the first six months of 2006, while our cost of borrowed funds increased 163 basis points compared to the same period
a year ago. Average rates paid on transaction accounts (NOW, savings and Money Market) for the six months ended June 30, 2006 increased 50 basis points when compared to same period of 2005. Total interest expense increased $3.0 million or 73.8%
during the six months of 2006 compared to the same period in 2005, the result of increased volume of interest-bearing liabilities and increased market rates paid on these liabilities. The volume of average interest-bearing liabilities increased
approximately $39.5 million for the six months of 2006 compared with the same period in 2005.

The banking industry uses two key ratios to
measure profitability of net interest income: net interest rate spread and net interest margin. The net interest rate spread measures the difference between the average yield on earning assets and the average rate paid on interest-bearing
liabilities. The net interest rate spread does not consider the impact of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is defined as net interest income as a
percentage of total average earning assets and takes into account the positive effects of investing non-interest-bearing deposits in earning assets.

Our annualized net interest margin, on a tax-equivalent basis and net of the allowance for loan losses, for the three months ended June 30, 2006 was 4.19% compared to 4.17% in the second quarter of 2005. For the
six months ended June 30, 2006, our net interest margin, on a tax-equivalent basis and net of allowance for loan losses, was 4.14% compared to 4.18% in the six months of 2005. Average interest-bearing liabilities as a percentage of
interest-earning assets were 80.6% for the quarter ended June 30, 2006, compared to 84.4% for the same period in 2005. For the six months ended June 30, 2006, average interest-bearing liabilities as a percentage of interest-earning assets
were 83.5% compared to 85.4% for the six months ended June 30, 2005.

Throughout 2006, we believe our net interest margin will improve
or remain relatively stable due to short-term utilization of our equity offering proceeds to pay-out expensive FHLB advances and wholesale certificates of deposit. However, this expectation may not be realized and our net interest margin could
decline if competitive deposit pricing pressure from the increases in interest rates by the Federal Reserve Board causes us to increase the rates we pay on interest-bearing deposits to a greater degree than we currently anticipate.



17



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##### Table of Contents

Average Consolidated Balance Sheets and Net Interest Analysis Fully on Tax Equivalent Basis

For the three months ended June 30, 2006 compared to 2005



|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|---------------------------------------------------------------------- |  | -------------- | ------- | ---------- | ---- | - | -------------- | - | -------------- |  | ---------- | ------- |  | -------------- | - |  | - | -----
|                                                                       |  | 2006           |         | 2005      
|                                                                       |  | AverageBalance |         | Yield/Rate |      |   | Income/Expense |   | AverageBalance |  | Yield/Rate |         |  | Income/Expense
|Assets                                                                 |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|Loans  net (1)                                                        |  | $              | 401,774 |            | 7.67 | % |                | $ | 7,687          |  | $          | 345,449 |  | 6.64           | % |  | $ | 5,719
|Taxable securities                                                     |  |                | 79,526  |            | 4.43 | % |                |   | 878            |  |            | 76,641  |  | 4.03           | % |  |   | 770  
|Non-taxable securities (2)                                             |  |                | 28,814  |            | 5.61 | % |                |   | 403            |  |            | 32,676  |  | 5.52           | % |  |   | 450  
|Other investments                                                      |  |                | 6,264   |            | 6.28 | % |                |   | 98             |  |            | 4,916   |  | 4.49           | % |  |   | 55   
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|Total interest- earning assets                                         |  |                | 516,378 |            | 7.04 | % |                | $ | 9,066          |  |            | 459,682 |  | 6.10           | % |  | $ | 6,994
|Cash and due from banks                                                |  |                | 19,517  |            |      |   |                |   |                |  |            | 23,747  |  |                |   |  |   |      
|Bank premises and equipment, net                                       |  |                | 20,123  |            |      |   |                |   |                |  |            | 17,352  |  |                |   |  |   |      
|Other assets                                                           |  |                | 17,495  |            |      |   |                |   |                |  |            | 15,946  |  |                |   |  |   |      
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|Total assets                                                           |  | $              | 573,513 |            |      |   |                |   |                |  | $          | 516,727 |  |                |   |  |   |      
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|Liabilities and Shareholders Equity                                   |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|Interest-bearing deposits                                              |  | $              | 381,490 |            | 3.28 | % |                | $ | 3,122          |  | $          | 336,101 |  | 2.02           | % |  | $ | 1,696
|Short-term borrowings                                                  |  |                | 8,608   |            | 4.85 | % |                |   | 104            |  |            | 17,468  |  | 3.03           | % |  |   | 132  
|Long-term obligations                                                  |  |                | 26,310  |            | 6.72 | % |                |   | 441            |  |            | 34,310  |  | 4.54           | % |  |   | 388  
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|Total interest- bearing liabilities                                    |  |                | 416,408 |            | 3.53 | % |                |   | 3,667          |  |            | 387,879 |  | 2.29           | % |  |   | 2,216
|Non-interest-bearing deposits                                          |  |                | 94,221  |            |      |   |                |   |                |  |            | 93,360  |  |                |   |  |   |      
|Other liabilities                                                      |  |                | 3,224   |            |      |   |                |   |                |  |            | 2,821   |  |                |   |  |   |      
|Shareholders equity                                                   |  |                | 59,660  |            |      |   |                |   |                |  |            | 32,667  |  |                |   |  |   |      
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|Total liabilities and Shareholders equity                             |  | $              | 573,513 |            |      |   |                |   |                |  | $          | 516,727 |  |                |   |  |   |      
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|Net interest income and net yield on Interest-earning Assets (FTE) (3) |  |                |         |            | 4.19 | % |                | $ | 5,399          |  |            |         |  | 4.17           | % |  | $ | 4,778
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      
|Interest rate spread (FTE) (4)                                         |  |                |         |            | 3.51 | % |                |   |                |  |            |         |  | 3.81           | % |  |   |      
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |      

---

|(1) | Average loans include non-accruing loans, net of allowance for loan losses. Amortization of deferred loan fees of $136 and $148 for periods ended June 30, 2006 and 2005,
respectively, are included in interest income.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $137
and $156 for periods ended June 30, 2006 and 2005, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Net interest margin is computed by dividing net interest income by total earning assets.
|--- | ----------------------------------------------------------------------------------------

|(4) | Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
|--- | ----------------------------------------------------------------------------------------------



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For the six months ended June 30, 2006 compared to 2005



|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|---------------------------------------------------------------------- |  | -------------- | ------- | ---------- | ---- | - | -------------- | - | -------------- |  | ---------- | ------- |  | -------------- | - |  | - | ------
|                                                                       |  | 2006           |         | 2005      
|                                                                       |  | AverageBalance |         | Yield/Rate |      |   | Income/Expense |   | AverageBalance |  | Yield/Rate |         |  | Income/Expense
|Assets                                                                 |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|Loans - net (1)                                                        |  | $              | 394,097 |            | 7.55 | % |                | $ | 14,747         |  | $          | 336,202 |  | 6.52           | % |  | $ | 10,865
|Taxable securities                                                     |  |                | 76,362  |            | 4.56 | % |                |   | 1,726          |  |            | 75,431  |  | 4.12           | % |  |   | 1,540 
|Non-taxable securities (2)                                             |  |                | 28,915  |            | 5.62 | % |                |   | 806            |  |            | 34,005  |  | 5.37           | % |  |   | 906   
|Overnight investments                                                  |  |                | 7,050   |            | 6.32 | % |                |   | 221            |  |            | 3,298   |  | 4.77           | % |  |   | 78    
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|Total interest-earning assets                                          |  |                | 506,424 |            | 6.97 | % |                | $ | 17,500         |  |            | 448,936 |  | 6.01           | % |  | $ | 13,389
|Cash and due from banks                                                |  |                | 20,837  |            |      |   |                |   |                |  |            | 23,730  |  |                |   |  |   |       
|Bank premises and equipment, net                                       |  |                | 19,695  |            |      |   |                |   |                |  |            | 17,453  |  |                |   |  |   |       
|Other assets                                                           |  |                | 19,607  |            |      |   |                |   |                |  |            | 17,567  |  |                |   |  |   |       
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|Total assets                                                           |  | $              | 566,563 |            |      |   |                |   |                |  | $          | 507,686 |  |                |   |  |   |       
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|Liabilities and Shareholders Equity                                   |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|Interest-bearing deposits                                              |  | $              | 383,644 |            | 3.17 | % |                | $ | 6,026          |  | $          | 332,139 |  | 1.88           | % |  | $ | 3,097 
|Short-term borrowings                                                  |  |                | 12,753  |            | 3.42 | % |                |   | 216            |  |            | 16,759  |  | 2.82           | % |  |   | 234   
|Long-term obligations                                                  |  |                | 26,310  |            | 6.55 | % |                |   | 855            |  |            | 34,310  |  | 4.42           | % |  |   | 752   
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|Total interest-bearing liabilities                                     |  |                | 422,707 |            | 3.39 | % |                |   | 7,097          |  |            | 383,208 |  | 2.15           | % |  |   | 4,083 
|Non-interest-bearing deposits                                          |  |                | 81,305  |            |      |   |                |   |                |  |            | 88,671  |  |                |   |  |   |       
|Other liabilities                                                      |  |                | 3,424   |            |      |   |                |   |                |  |            | 3,296   |  |                |   |  |   |       
|Shareholders equity                                                   |  |                | 59,127  |            |      |   |                |   |                |  |            | 32,511  |  |                |   |  |   |       
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|Total liabilities and Shareholders equity                             |  | $              | 566,563 |            |      |   |                |   |                |  | $          | 507,686 |  |                |   |  |   |       
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|Net interest income and net yield on interest-earning assets (FTE) (3) |  |                |         |            | 4.14 | % |                | $ | 10,403         |  |            |         |  | 4.18           | % |  | $ | 9,306 
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       
|Interest rate spread (FTE) (4)                                         |  |                |         |            | 3.58 | % |                |   |                |  |            |         |  | 3.86           | % |  |   |       
|                                                                       |  |                |         |            |      |   |                |   |                |  |            |         |  |                |   |  |   |       

---

|(1) | Average loans include non-accruing loans, net of allowance of loan losses. Amortization of deferred loan fees of $271 and $292 for periods ended June 30, 2006 and 2005,
respectively, are included in interest income.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $274
and $308 for periods ended June 30, 2006 and 2005, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Net interest margin is computed by dividing net interest income by total earning assets.
|--- | ----------------------------------------------------------------------------------------

|(4) | Interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
|--- | ----------------------------------------------------------------------------------------------

The following tables present the relative impact on net interest income of average outstanding balances (volume) of earning assets and interest-bearing
liabilities and the rates earned and paid by us on such assets and liabilities. Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amount of the change in each category.



19



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##### Table of Contents

Change in Interest Income and Expense on Tax Equivalent Basis

For the three months ended June 30, 2006 and 2005

Increase (Decrease) in interest income and expense due to changes in:



|                           |  |                       |       |   |          |   |       |     |  |   |       |  
|-------------------------- |  | --------------------- | ----- | - | -------- | - | ----- | --- |  | - | ----- | -
|                           |  | 2006 compared to 2005 |      
|                           |  | Volume (1)            |       |   | Rate (1) |   |       | Net | 
|Loans                      |  | $                     | 1,005 |   |          | $ | 963   |     |  | $ | 1,968 |  
|Taxable securities         |  |                       | 30    |   |          |   | 78    |     |  |   | 108   |  
|Non-taxable securities (2) |  |                       | (53   | ) |          |   | 6     |     |  |   | (47   | )
|Other investments          |  |                       | 18    |   |          |   | 25    |     |  |   | 43    |  
|                           |  |                       |       |   |          |   |       |     |  |   |       |  
|Interest income            |  |                       | 1,000 |   |          |   | 1,072 |     |  |   | 2,072 |  
|                           |  |                       |      
|Interest-bearing deposits  |  |                       | 300   |   |          |   | 1,126 |     |  |   | 1,426 |  
|Short-term borrowings      |  |                       | (87   | ) |          |   | 59    |     |  |   | (28   | )
|Long-term obligations      |  |                       | (112  | ) |          |   | 165   |     |  |   | 53    |  
|                           |  |                       |       |   |          |   |       |     |  |   |       |  
|Interest expense           |  |                       | 101   |   |          |   | 1,350 |     |  |   | 1,451 |  
|                           |  |                       |       |   |          |   |       |     |  |   |       |  
|Net interest income        |  | $                     | 899   |   |          | $ | (278  | )   |  | $ | 621   |  
|                           |  |                       |       |   |          |   |       |     |  |   |       |  

---

|(1) | The combined rate/volume variance for each category has been allocated equally between rate and volume variances.
|--- | -----------------------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $137
and $156 for periods ended June 30, 2006 and 2005, respectively.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the six months ended June 30, 2006 and 2005

Increase (Decrease) in interest income and expense due to changes in:



|                           |  |                       |       |   |          |   |       |     |  |   |       |  
|-------------------------- |  | --------------------- | ----- | - | -------- | - | ----- | --- |  | - | ----- | -
|                           |  | 2006 compared to 2005 |      
|                           |  | Volume (1)            |       |   | Rate (1) |   |       | Net | 
|Loans                      |  | $                     | 2,019 |   |          | $ | 1,863 |     |  | $ | 3,882 |  
|Taxable securities         |  |                       | 20    |   |          |   | 166   |     |  |   | 186   |  
|Non-taxable securities (2) |  |                       | (139  | ) |          |   | 39    |     |  |   | (100  | )
|Overnight investments      |  |                       | 103   |   |          |   | 40    |     |  |   | 143   |  
|                           |  |                       |       |   |          |   |       |     |  |   |       |  
|Interest income            |  |                       | 2,003 |   |          |   | 2,108 |     |  |   | 4,111 |  
|                           |  |                       |      
|Interest-bearing deposits  |  |                       | 645   |   |          |   | 2,284 |     |  |   | 2,929 |  
|Short-term borrowings      |  |                       | (62   | ) |          |   | 44    |     |  |   | (18   | )
|Long-term obligations      |  |                       | (218  | ) |          |   | 321   |     |  |   | 103   |  
|                           |  |                       |       |   |          |   |       |     |  |   |       |  
|Interest expense           |  |                       | 365   |   |          |   | 2,649 |     |  |   | 3,014 |  
|                           |  |                       |       |   |          |   |       |     |  |   |       |  
|Net interest income        |  | $                     | 1,638 |   |          | $ | (541  | )   |  | $ | 1,097 |  
|                           |  |                       |       |   |          |   |       |     |  |   |       |  

---

|1) | The combined rate/volume variance for each category has been allocated equally between rate and volume variances.
|-- | -----------------------------------------------------------------------------------------------------------------

|2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $274
and $308 for periods ended June 30, 2006 and 2005, respectively.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Provision for loan losses

The provision for loan losses charged to operations during the three months ended June 30, 2006 and 2005 was $200 and $90, respectively. Net charge-offs for the second quarter of 2006 totaled $53 compared to $21
net charge-offs during the second quarter of 2005. The provision for loan losses charged to operations during the six months ended June 30, 2006 and 2005 was $400 and $190, respectively. Net charge-offs for the six months ended June 30,
2006 totaled $51 compared to net charge-offs of $41 during the same period of 2005. The increase in amount of provision for loan losses charged during the period is due principally to our loan growth. We use the results of our allowance for loan
loss model to estimate the dollar amount of provision expense needed to maintain the adequacy of our allowance for loan losses. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are
made as necessary.

Noninterest income

Noninterest income, principally charges and fees assessed for the use of our services, is a significant contributor to net income. The following table presents the components of noninterest income for the three- and six-months ended
June 30, 2006 and 2005.



|                                      |  |                                         |        |                             |   |     |                                       |  |                             |        |  |   |       |  |   |     |   |  |      |  
|------------------------------------- |  | --------------------------------------- | ------ | --------------------------- | - | --- | ------------------------------------- |  | --------------------------- | ------ |  | - | ----- |  | - | --- | - |  | ---- | -
|                                      |  | For the ThreeMonths Ended June 30, 2006 |        | Changes from the Prior Year |   |     | For the SixMonths Ended June 30, 2006 |  | Changes from the Prior Year |       
|                                      |  |                                         | Amount |                             |   | %   |                                       |  |                             | Amount |  |   | %     | 
|Service charges on deposit accounts   |  | $                                       | 820    |                             | $ | (19 | )                                     |  | (2.3                        | )      |  | $ | 1,613 |  | $ | (21 | ) |  | (1.3 | )
|Other service charges and fees        |  |                                         | 613    |                             |   | 14  |                                       |  | 2.3                         |        |  |   | 1,043 |  |   | 120 |   |  | 13.0 |  
|Net gain on securities                |  |                                         |       |                             |   | (90 | )                                     |  | (100                        | )      |  |   |      |  |   | (90 | ) |  | (100 | )
|Income from bank owned life insurance |  |                                         | 92     |                             |   | 36  |                                       |  | 64.3                        |        |  |   | 157   |  |   | 32  |   |  | 25.6 |  
|Other operating income                |  |                                         | 24     |                             |   | (11 | )                                     |  | (31.4                       | )      |  |   | 51    |  |   | (3  | ) |  | (5.6 | )
|                                      |  |                                         |        |                             |   |     |                                       |  |                             |        |  |   |       |  |   |     |   |  |      |  
|Total noninterest income              |  | $                                       | 1,549  |                             | $ | (70 | )                                     |  | (4.3                        | )      |  | $ | 2,864 |  | $ | 38  |   |  | 1.3  |  
|                                      |  |                                         |        |                             |   |     |                                       |  |                             |        |  |   |       |  |   |     |   |  |      |  

Noninterest income decreased $70 or 4.3% to $1.5 million for the second quarter of this year
compared to $1.6 million for the same period in 2005. For the six months ended June 30, 2006, noninterest income increased $38 or 1.3% to $2.9 million compared to $2.9 million for the same period in 2005. The decrease in noninterest income in
the second quarter of 2006 is primarily due to net gain of $90 realized on sale of securities during the second quarter of 2005 compared to none in the second quarter of 2006. Service charges on deposit accounts decreased slightly in the second
quarter of 2006 relative to the same period in 2005 but were offset by an increase in bank owned life insurance income of $36 during the second quarter of 2006 compared to the prior year period. The year to date increase in noninterest income is
primarily due to increased brokerage fees generated by our mortgage origination units and our financial services units of approximately $69 and $48 , respectively, in the first half of 2006 compared to the first half of 2005.

Noninterest expense

Noninterest expense increased
3.1% and 4.4%, respectively for the three and six months ended June 30, 2006, as compared to the same periods in 2005. The increase in the three-month and six month periods are principally due to general increases in salary and benefits expense
of $165 and $387, respectively. The following table presents the components of noninterest expense for the three- and six-months ended June 30, 2006 and dollar and percentage changes from the prior year.



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##### Table of Contents

|                                       |  |                                         |        |                            |   |     |                                       |  |                            |        |  |   |       |  |   |      |   |  |       |  
|-------------------------------------- |  | --------------------------------------- | ------ | -------------------------- | - | --- | ------------------------------------- |  | -------------------------- | ------ |  | - | ----- |  | - | ---- | - |  | ----- | -
|                                       |  | For the ThreeMonths Ended June 30, 2006 |        | Changes from thePrior Year |   |     | For the SixMonths Ended June 30, 2006 |  | Changes from thePrior Year |       
|                                       |  |                                         | Amount |                            |   | %   |                                       |  |                            | Amount |  |   | %     | 
|Salaries                               |  | $                                       | 1,847  |                            | $ | 192 |                                       |  | 11.6                       |        |  | $ | 3,618 |  | $ | 369  |   |  | 11.4  |  
|Retirement and other employee benefits |  |                                         | 670    |                            |   | (27 | )                                     |  | (3.9                       | )      |  |   | 1,332 |  |   | 18   |   |  | 1.4   |  
|Occupancy                              |  |                                         | 415    |                            |   | 66  |                                       |  | 18.9                       |        |  |   | 810   |  |   | 130  |   |  | 19.1  |  
|Equipment                              |  |                                         | 450    |                            |   | 36  |                                       |  | 8.7                        |        |  |   | 868   |  |   | (1   | ) |  | (0.1  | )
|Professional fees                      |  |                                         | 30     |                            |   | (54 | )                                     |  | (64.3                      | )      |  |   | 79    |  |   | (192 | ) |  | (70.8 | )
|Supplies                               |  |                                         | 75     |                            |   | (4  | )                                     |  | (5.1                       | )      |  |   | 158   |  |   | (4   | ) |  | (2.5  | )
|Telephone                              |  |                                         | 130    |                            |   | (2  | )                                     |  | (1.5                       | )      |  |   | 237   |  |   | (28  | ) |  | (10.6 | )
|Postage                                |  |                                         | 55     |                            |   | (4  | )                                     |  | (6.8                       | )      |  |   | 114   |  |   | 8    |   |  | 7.5   |  
|Other operating expenses               |  |                                         | 834    |                            |   | (66 | )                                     |  | (7.3                       | )      |  |   | 1,692 |  |   | 73   |   |  | 4.5   |  
|                                       |  |                                         |        |                            |   |     |                                       |  |                            |        |  |   |       |  |   |      |   |  |       |  
|Total noninterest expenses             |  | $                                       | 4,506  |                            | $ | 137 |                                       |  | 3.1                        |        |  | $ | 8,908 |  | $ | 373  |   |  | 4.4   |  
|                                       |  |                                         |        |                            |   |     |                                       |  |                            |        |  |   |       |  |   |      |   |  |       |  

Salaries and benefits increased 7.0% and 8.5%, respectively for the three- and six-months ended
June 30, 2006, as compared to the same periods in 2005. The increase in salaries and benefits is related to staff additions to accommodate our growth and we continued to add business development officers in some of our newer markets. We adopted
SFAS No. 123R on January 1, 2006 that requires us to recognize compensation expense related to stock awards. See note 4 for additional information. As of June 30, 2006, we had 200 full time equivalent employees and operated 20 full
service banking offices and three mortgage loan origination offices.

Occupancy expense increased $66 during the second quarter of 2006
compared to the second quarter of 2005 and $130 in the first half of 2006 when compared to the same period in 2005. The largest component of the increase was building depreciation expense, which increased $44 and $81, respectively, for the three-
and six-months ended June 30, 2006, as compared to the same periods in 2005. A portion of the increase in depreciation expense in the second quarter and first half of 2006 was due to our new corporate office, which we moved into during 2005.
Increased property taxes and building rental expense accounted for the remaining portion of occupancy expense increase during the three- and six-months ended June 30, 2006, as compared to the same periods in 2005.

Equipment expense increased during the second quarter of 2006 by $36 or 8.7% compared to the second quarter of 2005 principally due to updates to network
software licenses while equipment expense remained unchanged when compared on a year-to-date basis.

Professional fees, which include
audit, legal and consulting fees, decreased $54 or 64.3% to $30 for the three months ended June 30, 2006 from $84 in the prior year period. The largest portion of the decrease, $36, resulted from audit and accounting fees. At June 30,
2005, management had accrued $29 in audit and accounting fees. No such accrual was deemed necessary at June 30, 2006. For the six months ended June 30, 2006 compared to the same period of 2005, professional fees decreased $192 or 70.8%.
Audit and accounting fees for the first half of 2006 decreased by $119 over the prior year period. Consultation fees totaling approximately $85 related to strategic planning and independent credit review which were charged during the first half of
2005 did not recur during the first half of 2006. Legal fees increased $14 during the first half of 2006 when compared to the same period of 2005 due to increased general corporate reporting and disclosure matters.

Other operating expenses decreased $66 or 7.3% from $900 for the three months ended June 30, 2005 to $834 for the three months ended June 30,
2006. A portion of the decrease is due to a reduction of approximately $45 in debit and credit card fraud during the second quarter of 2006 compared to second quarter of 2005. For the six-month period ended June 30, 2006 and 2005, other
operating expense increased $73 or 4.5% as employee recruiting and outside services expense increased $32 and $25, respectively, during the first half of 2006 compared to the same period in 2005.



22



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##### Table of Contents

Income taxes

Income tax expense for the three months ended June 30, 2006 and 2005 was $690 and $519, respectively, resulting in effective tax rates of 32.8% and 29.1%, respectively. For the six-month period ending June 30, 2006 and 2005, tax
expense was $1.2 million compared to $882 for the same period of 2005 which resulted in effective tax rates of 31.8% and 28.5%, respectively. The increased effective tax rate in 2006 is due to a decline in the ratio of tax-exempt to taxable
investment income compared to 2005. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

Statement of Financial Condition

Our total assets were $579.1 million at June 30, 2006, $547.7
million at December 31, 2005 and $541.1 million at June 30, 2005. Our asset growth is primarily funded by deposit growth and retained earnings. For the six and twelve months ended June 30, 2006, we grew our loans $26.6 million and
$51.7 million, respectively. For the six and twelve months ended June 30, 2006, we grew our deposits $13.1 and $22.7 million, respectively, through marketing of core deposits and wholesale certificates of deposit, the proceeds of which were
invested in interest-earning assets. Year-over-year, our earning assets grew primarily through loan originations.

Loans

As of June 30, 2006, total loans had increased to $413.4 million, up 6.9% from total loans of $386.8 million at December 31, 2005 and up 14.3%
from total loans of $361.7 million at June 30, 2005. The increase in loan demand is due, in part, to new businesses that are opening in our markets to take advantage of opportunities in our coastal communities where growth is being driven by a
combination of increased tourism and an influx of retirees. Loan growth can also be attributed to our branching efforts and the efforts of our lending team. We believe that general loan growth will remain strong in the near term, although rising
market interest rates may reduce loan demand. Funding of future loan growth may be restricted by our ability to raise core deposits, although we will use alternative funding sources if we deem it necessary and cost effective.

Asset Quality

The allowance for loan losses is
established through a provision for loan losses charged against earnings. The level of the allowance for loan losses reflects managements best estimate of 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. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as
necessary. 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 in determining an adequate loan loss allowance. Our 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.

Net charge-offs for the first half of 2006 totaled $51 compared to net charge-offs of $41 during the first half of 2005. The provision for loan losses charged to operations for the six months ended June 30, 2006 and 2005 was $400 and
$190, respectively. The following table presents an analysis of the changes in the allowance for loan losses for the six months ended June 30, 2006 and 2005.



23



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##### Table of Contents

Analysis of Changes in Allowance for Loan Losses



|                                                               |  |                                  |         |   |      |   |         |  
|-------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                               |  | For the six monthsEnded June 30, |        
|                                                               |  | 2006                             |         |   | 2005 |  
|Total loans outstanding at end of period-gross                 |  | $                                | 413,432 |   |      | $ | 361,665 |  
|                                                               |  |                                  |         |   |      |   |         |  
|Average loans outstanding-gross                                |  | $                                | 398,920 |   |      | $ | 340,566 |  
|                                                               |  |                                  |         |   |      |   |         |  
|Allowance for loan losses at beginning of period               |  | $                                | 4,650   |   |      | $ | 4,300   |  
|Loans charged off:                                             |  |                                  |         |   |      |   |         |  
|Real estate                                                    |  |                                  | (      | ) |      |   | (12     | )
|Installment loans                                              |  |                                  | (10     | ) |      |   | (31     | )
|Credit cards and related plans                                 |  |                                  | (      | ) |      |   | (24     | )
|Commercial and all other loans                                 |  |                                  | (59     | ) |      |   | (      | )
|                                                               |  |                                  |         |   |      |   |         |  
|Total charge-offs                                              |  |                                  | (69     | ) |      |   | (67     | )
|                                                               |  |                                  |         |   |      |   |         |  
|Recoveries of loans previously charged off:                    |  |                                  |         |   |      |   |         |  
|Real estate                                                    |  |                                  | 7       |   |      |   |        |  
|Installment loans                                              |  |                                  | 3       |   |      |   | 10      |  
|Credit cards and related plans                                 |  |                                  | 2       |   |      |   | 15      |  
|Commercial and all other loans                                 |  |                                  | 6       |   |      |   | 1       |  
|                                                               |  |                                  |         |   |      |   |         |  
|Total recoveries                                               |  |                                  | 18      |   |      |   | 26      |  
|                                                               |  |                                  |         |   |      |   |         |  
|Net charge offs                                                |  |                                  | (51     | ) |      |   | (41     | )
|                                                               |  |                                  |         |   |      |   |         |  
|Provision for loan loses                                       |  |                                  | 400     |   |      |   | 190     |  
|                                                               |  |                                  |         |   |      |   |         |  
|Allowance for loan losses at end of period                     |  | $                                | 4,999   |   |      | $ | 4,449   |  
|                                                               |  |                                  |         |   |      |   |         |  
|Ratios                                                         |  |                                  |         |   |      |   |         |  
|Annualized net charge offs to average loans during the period  |  |                                  | 0.03    | % |      |   | 0.02    | %
|Allowance for loan losses to loans at period end               |  |                                  | 1.21    | % |      |   | 1.23    | %
|Allowance for loan losses to nonperforming loans at period end |  |                                  | 1,013   | % |      |   | 433     | %

Nonperforming Assets

Nonperforming assets consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our 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 becomes 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 to 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 $493 and $65, or 0.12% and 0.02% of loans outstanding, at June 30, 2006 and December 31, 2005,
respectively. We had no loans considered to be impaired under SFAS No. 114 at June 30, 2006 or December 31, 2005. On June 30, 2006, our nonperforming loans (consisting of nonaccruing and restructured loans) amounted to
approximately $493, and we had no foreclosed properties.

Investment Securities and Other Assets

The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while providing a relatively
stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing liquidity and supplying
securities to pledge as required collateral for certain deposits and borrowed funds. We use two categories to classify our securities: held-to-maturity and available-for-sale.



24



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##### Table of Contents

Currently, none of our investments are classified as held-to-maturity. While we have no plans to liquidate a significant amount of our securities, the
securities classified as available-for-sale may be sold to meet liquidity needs should management deem it to be in our best interest.

Our
investment securities totaled $104.7 million at June 30, 2006, $104.7 million at December 31, 2005 and $104.5 million at June 30, 2005. Additions to the investment securities portfolio depend to a large extent on the availability of
investable funds that are not otherwise needed to satisfy loan demand. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such
considerations as near-term loan demand and liquidity needs.

At June 30, 2006, the securities portfolio had unrealized net losses of
approximately $4.2 million, which are reported in accumulated other comprehensive loss on the consolidated statement of shareholders equity, net of tax. Our securities portfolio at June 30, 2006 consisted of U.S. government agency
securities, collateralized mortgage obligations (CMOs), mortgage-backed securities (MBS) and tax-exempt municipal securities.

We currently
have the ability to hold our available-for-sale investment securities to maturity. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. All securities held are
traded in liquid markets. As of June 30, 2006, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our shareholders equity. As of June 30, 2006 the amortized cost and market value
of the securities from such issuers were as follows:



|                                         |  |                |        |              |   |       
|---------------------------------------- |  | -------------- | ------ | ------------ | - | ------
|                                         |  | Amortized Cost |        | Market Value
|Federal National Mortgage Corporation    |  | $              | 29,519 |              | $ | 27,724
|Federal Home Loan Mortgage Corporation   |  |                | 18,070 |              |   | 17,187
|Federal Home Loan Banks                  |  |                | 22,299 |              |   | 21,720
|Government National Mortgage Association |  |                | 5,939  |              |   | 5,826 

At June 30, 2006, we held $7.6 million in bank owned life insurance, compared to $7.4 million and $7.3
million at December 31, 2005 and June 30, 2005, respectively.

Deposits and Other Borrowings

Deposits

Deposits increased to $478.3 million, up
2.8% as of June 30, 2006 compared to deposits of $465.2 million at December 31, 2005 and up 5.0% compared to deposits of $455.6 million at June 30, 2005. We attribute our deposit growth during the six and twelve months ended
June 30, 2006 to our management team attracting new customers from other financial institutions and our branching efforts. We believe that we can continue to improve our core deposit funding by improving our branching network and providing more
convenient opportunities for customers to bank with us. We anticipate that our deposits will continue to increase throughout 2006.

Other Borrowings

Short-term borrowings include sweep accounts, advances from the Federal Home Loan Bank of Atlanta (the FHLB) having
maturities of one year or less, Federal Funds purchased and repurchase agreements. Our short-term borrowings totaled $17.1 million on June 30, 2006, compared to $23.6 million on December 31, 2005, a decrease of $6.5 million. Federal Funds
purchased, repurchase agreements and sweep accounts collectively decreased $1.5 million from December 31, 2005 to June 30, 2006 while short-term FHLB advances decreased $5.0 million as we repaid a $5.0 million advance during the first half
of 2006.



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##### Table of Contents

Liquidity

Liquidity refers to our continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments, maintain reserve requirements, pay operating expenses and provide funds for payment of dividends, debt service and other
operational requirements. Liquidity is immediately available from five major sources: (a) cash on hand and on deposit at other banks; (b) the outstanding balance of federal funds sold; (c) lines for the purchase of federal funds from
other banks; (d) lines of credit established at the Federal Home Loan Bank, less existing advances; and (e) our investment securities portfolio. All our debt securities are of investment grade quality and, if the need arises, can be
promptly liquidated on the open market or pledged as collateral for short-term borrowing.

Consistent with our general approach to
liquidity management, loans and other assets of the Bank are funded primarily using a core of local deposits, retail repurchase agreements and the Banks capital position. To date, these core funds, supplemented by Federal Home Loan Bank
advances and a modest amount of brokered deposits, have been adequate to fund loan demand in our market areas, while maintaining the desired level of immediate liquidity and an investment securities portfolio available for both immediate and
secondary liquidity purposes. It is anticipated that funding sources in the future will include continued use of brokered deposits and, additionally, institutional deposits obtained through the Internet.

We are a member of the FHLB. Membership, along with a blanket collateral commitment of our one-to-four family residential mortgage loan portfolio, as
well as our commercial real estate loan portfolio, provided us the ability to draw up to $115.8 million and $109.4 million of advances from the FHLB at June 30, 2006 and December 31, 2005, respectively. At June 30, 2006, we had
outstanding FHLB advances totaling $16.0 million compared to $21.0 million and $24.0 million at December 31, 2005 and June 30, 2005, respectively.

As a requirement for membership, we invest in stock of the FHLB in the amount of 1% of our outstanding residential loans or 5% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as
collateral for any FHLB advances drawn by us. At June 30, 2006, we owned 18,143 shares of the FHLBs $100 par value capital stock, compared to 19,477 and 20,827 shares at December 31, 2005 and June 30, 2005, respectively. No
ready market exists for such stock, which is carried at cost.

We also had unsecured federal funds lines in the aggregate amount of $22.0
million available to us at June 30, 2006 under which we can borrow funds to meet short-term liquidity needs. At June 30, 2006, we had no borrowings outstanding under these federal funds lines. Another source of funding is loan
participations sold to other commercial banks (in which we retain the servicing rights). As of June 30, 2006, we had $253 thousand in loan participations sold. We believe that our liquidity sources are adequate to meet our operating needs.

Off-Balance Sheet Arrangements and Contractual Obligations

We have various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the financing needs of our customers. These financial instruments
include commitments to extend credit and standby letters of credit. In addition, we enter into contractual cash obligations and commitments, including certificates of deposit, other borrowings, operating leases and loan commitments in the ordinary
course of our business.

The following tables set forth our commercial commitments and contractual payment obligations as of June 30,
2006.



|                                     |  |                                            |        |                |   |           |  |           |        |                   |   |       |  |   |       
|------------------------------------ |  | ------------------------------------------ | ------ | -------------- | - | --------- |  | --------- | ------ | ----------------- | - | ----- |  | - | ------
|                                     |  | Amount of Commitment Expiration per Period
|Commercial Commitments               |  | Total                                      |        | 1 year or less |   | 2-3 years |  | 4-5 years |        | More than 5 years
|Loan commitments and lines of credit |  | $                                          | 85,521 |                | $ | 42,486    |  | $         | 11,683 |                   | $ | 4,550 |  | $ | 26,442
|Standby letters of credit            |  |                                            | 2,501  |                |   | 2,501     |  |           |       |                   |   |      |  |   |      
|                                     |  |                                            |        |                |   |           |  |           |        |                   |   |       |  |   |       
|Total commercial commitments         |  | $                                          | 88,022 |                | $ | 45,347    |  | $         | 11,683 |                   | $ | 4,550 |  | $ | 26,442
|                                     |  |                                            |        |                |   |           |  |           |        |                   |   |       |  |   |       



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##### Table of Contents

|                              |  |              |         |                |   |           |  |           |        |                   |   |       |  |   |       
|----------------------------- |  | ------------ | ------- | -------------- | - | --------- |  | --------- | ------ | ----------------- | - | ----- |  | - | ------
|                              |  | Payments Due
|Contractual Obligations       |  | Total        |         | 1 year or less |   | 2-3 years |  | 4-5 years |        | More than 5 years
|Long-term obligations         |  | $            | 18,310  |                | $ |          |  | $         | 3,000  |                   | $ |      |  | $ | 15,310
|Short-term borrowings         |  |              | 17,052  |                |   | 17,052    |  |           |       |                   |   |      |  |   |      
|Operating leases              |  |              | 3,263   |                |   | 552       |  |           | 812    |                   |   | 394   |  |   | 1,505 
|Deposits                      |  |              | 478,254 |                |   | 428,879   |  |           | 48,664 |                   |   | 696   |  |   | 15    
|                              |  |              |         |                |   |           |  |           |        |                   |   |       |  |   |       
|Total contractual obligations |  | $            | 516,879 |                | $ | 446,483   |  | $         | 52,476 |                   | $ | 1,090 |  | $ | 16,830
|                              |  |              |         |                |   |           |  |           |        |                   |   |       |  |   |       

Net cash provided by operations during the six months ended June 30, 2006 totaled $4.6
million, compared to net cash provided by operations of $2.7 million for the same period in 2005. Net cash used in investing activities increased to $31.5 million for the six months ended June 30, 2006, as compared to $26.1 million for the same
period in 2005 primarily due to the purchases of available-for-sale investment securities. Net cash provided by financing activities decreased to $29.9 million for the first half of 2006, compared to $36.3 million for the same period in 2005. Cash
and cash equivalents at June 30, 2006 was $21.9 million compared to $41.1 million at June 30, 2005.

Capital Resources

Shareholders Equity

Shareholders equity
increased by approximately $24.8 million to $59.3 million at June 30, 2006 from $34.6 million at December 31, 2005. Net proceeds of approximately $24.4 million from the sale and issuance of 862,500 shares of ECB common stock accounted for
almost all of the increase. The proceeds will be used to support the Banks various strategic initiatives for expansion and growth over the next several years. In addition to the stock offering, we generated net income of $2.5 million and
recognized stock compensation of $88 on incentive stock awards. We experienced an increase in net unrealized losses on available-for-sale securities of $1.1 million and we declared cash dividends of $987 or $0.34 per share during the first six
months of 2006.

We are subject to various regulatory capital requirements administered by our federal banking regulators. Failure to meet
minimum capital requirements can result in certain mandatory, and possibly additional discretionary, actions by these regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, we must meet specific capital guidelines involving quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices.
Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by the FDIC to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets and
of Tier 1 capital to average assets (each as defined in the regulations). As a bank holding company, we also are subject, on a consolidated basis, to the capital adequacy guidelines of the Federal Reserve Board. The capital requirements of the
Federal Reserve Board are similar to those of the FDIC governing the Bank. As of June 30, 2006, we and the Bank met all capital adequacy requirements to which we are subject.

Based on the most recent notification from the FDIC, the Bank is well-capitalized under the regulatory framework for prompt corrective action. To be
categorized as well-capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have
changed the Banks category.



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##### Table of Contents

Our and the Banks actual capital ratios are presented in the following table:



|                                         |  |                                                               |   |  |                                              |   |  |       |   |  |        |  
|---------------------------------------- |  | ------------------------------------------------------------- | - |  | -------------------------------------------- | - |  | ----- | - |  | ------ | -
|                                         |  | To be well capitalizedunder promptcorrective actionprovisions |   |  | Minimum requiredfor capitaladequacy purposes |   |  | Our   |   |  | Banks |  
|                                         |  | Ratio                                                         |   |  | Ratio                                        |   |  | Ratio |   |  | Ratio  |  
|As of June 30, 2006:                     |  |                                                               |   |  |                                              |   |  |       |   |  |        |  
|Tier 1 Capital (to Average Assets)       |  | 35.00                                                         | % |  | 33.00                                        | % |  | 12.54 | % |  | 9.08   | %
|Tier 1 Capital (to Risk Weighted Assets) |  | 36.00                                                         | % |  | 34.00                                        | % |  | 15.12 |   |  | 10.97  |  
|Total Capital (to Risk Weighted Assets)  |  | 310.00                                                        | % |  | 38.00                                        | % |  | 16.17 |   |  | 12.02  |  
|                                         |  |                                                               |   | 
|As of December 31, 2005:                 |  |                                                               |   |  |                                              |   |  |       |   |  |        |  
|Tier 1 Capital (to Average Assets)       |  | 35.00                                                         | % |  | 33.00                                        | % |  | 8.43  | % |  | 8.39   | %
|Tier 1 Capital (to Risk Weighted Assets) |  | 36.00                                                         | % |  | 34.00                                        | % |  | 10.32 |   |  | 10.28  |  
|Total Capital (to Risk Weighted Assets)  |  | 310.00                                                        | % |  | 38.00                                        | % |  | 11.36 |   |  | 11.32  |  
|                                         |  |                                                               |   | 
|As of June 30, 2005:                     |  |                                                               |   |  |                                              |   |  |       |   |  |        |  
|Tier 1 Capital (to Average Assets)       |  | 35.00                                                         | % |  | 33.00                                        | % |  | 8.50  | % |  | 8.44   | %
|Tier 1 Capital (to Risk Weighted Assets) |  | 36.00                                                         | % |  | 34.00                                        | % |  | 10.38 |   |  | 10.33  |  
|Total Capital (to Risk Weighted Assets)  |  | 310.00                                                        | % |  | 38.00                                        | % |  | 11.43 |   |  | 11.38  |  

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk reflects the risk of
economic loss resulting from adverse changes in market price and interest rates. This risk of loss can be reflected in diminished current market values and/or reduced potential net interest income in future periods.

The Companys market risk arises primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the
Companys loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and net interest income. The Company does not maintain a trading account nor is the Company subject to currency
exchange risk or commodity price risk. Interest rate risk is monitored as part of the Companys asset/liability management function.

Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated
fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year ended December 31, 2005.

Item 4. Controls and Procedures

As of June 30, 2006, the end of the period covered by this report,
the Company carried out an evaluation under the supervision and with the participation of the Companys management, including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and
operation of the Companys disclosure controls and procedures. In designing and evaluating the Companys disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and the Companys management necessarily is required to apply its judgment in evaluating and implementing controls and procedures.



28



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##### Table of Contents

Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are
effective to provide reasonable assurance that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commissions rules and forms. In connection with the above evaluation, no change in the Companys internal control over financial reporting was identified that occurred during the quarterly period ended
June 30, 2006 and that had materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting. The Company reviews its disclosure controls and procedures, which may include its
internal control over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business,
financial condition and/or operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

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



|(a) | Our Annual Meeting of Shareholders was held on April 18, 2006.
|--- | --------------------------------------------------------------



|(b) | At our 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.
Our 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, R. S. Spencer, Jr., and Michael D. Weeks
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Voting for Directors was as follows:



|                     |  |           |  |          |  |                
|-------------------- |  | --------- |  | -------- |  | ---------------
|                     |  | For       |  | Withheld |  | Broker Non-vote
|George T. Davis, Jr. |  | 1,556,027 |  | 5,650    |  | none           
|Gregory C. Gibbs     |  | 1,556,027 |  | 5,650    |  | none           
|John F. Hughes, Jr.  |  | 1,556,027 |  | 5,650    |  | 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 Dixon Hughes PLLC as our independent auditors as described under the caption
Ratification of Selection of Independent Auditor in the our Proxy Statement dated March 25, 2006 (approved by an affirmative vote of 1,559,112 shares or 99.9% of the shares that voted, 2,365 negative votes, 200 shares abstaining and
no broker non-votes).



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##### Table of Contents

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed or furnished with this report:



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



30



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##### Table of Contents

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 14, 2006 |  | By:               |  | /s/ Arthur H. Keeney         
|                      |  |                   |  | Arthur H. Keeney, III        
|                      |  |                   |  | (President & CEO)            
|                      |  |                  
|Date: August 14, 2006 |  | By:               |  | /s/ Gary M. Adams            
|                      |  |                   |  | Gary M. Adams                
|                      |  |                   |  | (Senior Vice President & CFO)



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##### Table of Contents

EXHIBIT INDEX



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



32