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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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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 September 30, 2004



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 ̈



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 November 10,
2004 2,038,242 shares of the registrants common stock, $3.50 par value, were outstanding.



This Form 10-QSB has 25 pages.





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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2004 and December 31, 2003



|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ----------- | - | ------------------ | - | ----------- | -
|Assets                                                                                                                                                            |  | September 30, 2004 |             |   | December 31, 2003* |  
|                                                                                                                                                                  | 
|                                                                                                                                                                  |  | (unaudited)        |             |   |                    |  
|Non-interest bearing deposits and cash                                                                                                                            |  | $                  | 24,831,437  |   |                    | $ | 27,384,112  |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Total cash and cash equivalents                                                                                                                                   |  |                    | 24,831,437  |   |                    |   | 27,384,112  |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Investment securities                                                                                                                                             |  |                    |             |   |                    |   |             |  
|Available-for-sale, at market value (cost of $119,457,884 and $101,428,313 at September 30, 2004 and December 31, 2003,
respectively)                             |  |                    | 118,645,661 |   |                    |   | 101,820,909 |  
|                                                                                                                                                                  |  |                   
|Loans                                                                                                                                                             |  |                    | 332,355,166 |   |                    |   | 281,581,346 |  
|Allowance for probable loan losses                                                                                                                                |  |                    | (4,101,299  | ) |                    |   | (3,550,000  | )
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Loans, net                                                                                                                                                        |  |                    | 328,253,867 |   |                    |   | 278,031,346 |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Real estate acquired in settlement of loans, net                                                                                                                  |  |                    | 34,500      |   |                    |   | 24,000      |  
|Federal Home Loan Bank common stock, at cost                                                                                                                      |  |                    | 1,200,000   |   |                    |   | 1,100,000   |  
|Bank premises and equipment, net                                                                                                                                  |  |                    | 15,604,361  |   |                    |   | 11,880,400  |  
|Accrued interest receivable                                                                                                                                       |  |                    | 2,961,701   |   |                    |   | 2,623,464   |  
|Other assets                                                                                                                                                      |  |                    | 14,636,799  |   |                    |   | 12,099,778  |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Total                                                                                                                                                             |  | $                  | 506,168,326 |   |                    | $ | 434,964,009 |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Liabilities and Shareholders Equity                                                                                                                              |  |                    |             |   |                    |   |             |  
|Deposits                                                                                                                                                          |  |                    |             |   |                    |   |             |  
|Demand, noninterest bearing                                                                                                                                       |  | $                  | 93,172,055  |   |                    | $ | 79,660,488  |  
|Demand interest bearing                                                                                                                                           |  |                    | 94,456,550  |   |                    |   | 81,421,156  |  
|Savings                                                                                                                                                           |  |                    | 23,335,073  |   |                    |   | 21,295,920  |  
|Time                                                                                                                                                              |  |                    | 204,221,441 |   |                    |   | 170,556,204 |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Total deposits                                                                                                                                                    |  |                    | 415,185,119 |   |                    |   | 352,933,768 |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Accrued interest payable                                                                                                                                          |  |                    | 733,320     |   |                    |   | 694,004     |  
|Short-term borrowings                                                                                                                                             |  |                    | 23,200,471  |   |                    |   | 18,299,409  |  
|Long-term obligations                                                                                                                                             |  |                    | 31,310,000  |   |                    |   | 29,310,000  |  
|Other liabilities                                                                                                                                                 |  |                    | 3,525,114   |   |                    |   | 3,084,563   |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Total liabilities                                                                                                                                                 |  |                    | 473,954,024 |   |                    |   | 404,321,744 |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Shareholders equity                                                                                                                                              |  |                    |             |   |                    |   |             |  
|Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,038,242 at September 30, 2004 and 2,037,929 at
December 31, 2003. |  |                    | 7,133,848   |   |                    |   | 7,132,752   |  
|Capital surplus                                                                                                                                                   |  |                    | 5,360,003   |   |                    |   | 5,359,978   |  
|Retained earnings                                                                                                                                                 |  |                    | 20,550,174  |   |                    |   | 18,058,476  |  
|Deferred compensation - restricted stock                                                                                                                          |  |                    | (330,206    | ) |                    |   | (150,388    | )
|Accumulated other comprehensive income (loss)                                                                                                                     |  |                    | (499,517    | ) |                    |   | 241,447     |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Total shareholders equity                                                                                                                                        |  |                    | 32,214,302  |   |                    |   | 30,642,265  |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  
|Total                                                                                                                                                             |  | $                  | 506,168,326 |   |                    | $ | 434,964,009 |  
|                                                                                                                                                                  |  |                    |             |   |                    |   |             |  

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



See accompanying notes to consolidated financial statements.



2



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For three and nine months ended September 30, 2004 and
2003

(unaudited)



|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|------------------------------------------------------------ |  | ------------------------------- | --------- | ------------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                                             |  | Three months endedSeptember 30, |           | Nine months ended September 30,
|                                                             |  | 2004                            |           | 2003                            |   | 2004      |  | 2003
|Interest income:                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Interest and fees on loans                                   |  | $                               | 4,716,671 |                                 | $ | 4,011,232 |  | $    | 13,122,337 |  | $ | 11,761,298
|Interest on investment securities:                           |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Interest exempt from federal income taxes                    |  |                                 | 259,194   |                                 |   | 197,671   |  |      | 804,980    |  |   | 578,928   
|Taxable interest income                                      |  |                                 | 825,904   |                                 |   | 808,378   |  |      | 2,474,453  |  |   | 2,813,139 
|Dividend income                                              |  |                                 | 18,956    |                                 |   | 34,519    |  |      | 71,912     |  |   | 124,188   
|FHLB stock dividends                                         |  |                                 | 12,123    |                                 |   | 13,614    |  |      | 32,480     |  |   | 46,220    
|Interest on federal funds sold                               |  |                                 | 21,619    |                                 |   | 18,766    |  |      | 52,572     |  |   | 49,269    
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Total interest income                                        |  |                                 | 5,854,467 |                                 |   | 5,084,180 |  |      | 16,558,734 |  |   | 15,373,042
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Interest expense:                                            |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Deposits:                                                    |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Demand accounts                                              |  |                                 | 102,376   |                                 |   | 87,245    |  |      | 275,794    |  |   | 331,765   
|Savings                                                      |  |                                 | 29,205    |                                 |   | 26,153    |  |      | 83,972     |  |   | 74,218    
|Time                                                         |  |                                 | 977,621   |                                 |   | 739,795   |  |      | 2,636,753  |  |   | 2,334,933 
|Short-term borrowings                                        |  |                                 | 53,031    |                                 |   | 61,154    |  |      | 157,046    |  |   | 207,801   
|Long-term obligations                                        |  |                                 | 361,048   |                                 |   | 338,785   |  |      | 1,051,534  |  |   | 1,036,040 
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Total interest expense                                       |  |                                 | 1,523,281 |                                 |   | 1,253,132 |  |      | 4,205,099  |  |   | 3,984,757 
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Net interest income                                          |  |                                 | 4,331,186 |                                 |   | 3,831,048 |  |      | 12,353,635 |  |   | 11,388,285
|Provision for probable loan losses                           |  |                                 | 175,000   |                                 |   | 225,000   |  |      | 575,000    |  |   | 465,000   
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Net interest income after provision for probable loan losses |  |                                 | 4,156,186 |                                 |   | 3,606,048 |  |      | 11,778,635 |  |   | 10,923,285
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Noninterest income:                                          |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Service charges on deposit accounts                          |  |                                 | 849,515   |                                 |   | 795,735   |  |      | 2,548,735  |  |   | 2,555,530 
|Other service charges and fees                               |  |                                 | 530,666   |                                 |   | 563,840   |  |      | 1,261,331  |  |   | 1,342,837 
|Net gain (loss) on sale of securities                        |  |                                 | 3,977     |                                 |   | 42,112    |  |      | 296,116    |  |   | 47,681    
|Income from bank owned life insurance                        |  |                                 | 69,099    |                                 |   | 61,575    |  |      | 219,198    |  |   | 184,725   
|Other operating income                                       |  |                                 | 31,360    |                                 |   | 30,370    |  |      | 484,523    |  |   | 87,146    
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Total noninterest income                                     |  |                                 | 1,484,617 |                                 |   | 1,493,632 |  |      | 4,809,903  |  |   | 4,217,919 
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Noninterest expenses:                                        |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Salaries                                                     |  |                                 | 1,498,522 |                                 |   | 1,342,867 |  |      | 4,375,107  |  |   | 3,933,389 
|Retirement and other employee benefits                       |  |                                 | 609,745   |                                 |   | 574,653   |  |      | 1,809,091  |  |   | 1,669,658 
|Occupancy                                                    |  |                                 | 318,222   |                                 |   | 325,148   |  |      | 978,503    |  |   | 916,947   
|Equipment                                                    |  |                                 | 415,794   |                                 |   | 329,908   |  |      | 1,280,281  |  |   | 993,897   
|Professional fees                                            |  |                                 | 70,098    |                                 |   | 62,767    |  |      | 221,214    |  |   | 254,676   
|Supplies                                                     |  |                                 | 100,138   |                                 |   | 66,199    |  |      | 253,991    |  |   | 265,283   
|Telephone                                                    |  |                                 | 75,130    |                                 |   | 110,012   |  |      | 284,389    |  |   | 374,462   
|Postage                                                      |  |                                 | 47,253    |                                 |   | 51,453    |  |      | 166,242    |  |   | 150,092   
|Other operating expenses                                     |  |                                 | 838,096   |                                 |   | 762,872   |  |      | 2,431,301  |  |   | 2,181,656 
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Total noninterest expenses                                   |  |                                 | 3,972,998 |                                 |   | 3,625,879 |  |      | 11,800,119 |  |   | 10,740,060
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Income before income taxes                                   |  |                                 | 1,667,805 |                                 |   | 1,473,801 |  |      | 4,788,419  |  |   | 4,401,144 
|Income taxes                                                 |  |                                 | 500,000   |                                 |   | 435,000   |  |      | 1,425,000  |  |   | 1,345,000 
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Net income                                                   |  | $                               | 1,167,805 |                                 | $ | 1,038,801 |  | $    | 3,363,419  |  | $ | 3,056,144 
|                                                             |  |                                 |           |                                 |   |           |  |      |            |  |   |           
|Net income per share - basic                                 |  | $                               | 0.58      |                                 | $ | 0.51      |  | $    | 1.67       |  | $ | 1.51      
|Net income per share - diluted                               |  | $                               | 0.57      |                                 | $ | 0.51      |  | $    | 1.65       |  | $ | 1.50      
|Weighted average shares outstanding - basic                  |  |                                 | 2,014,874 |                                 |   | 2,020,274 |  |      | 2,017,286  |  |   | 2,022,935 
|Weighted average shares outstanding - diluted                |  |                                 | 2,041,232 |                                 |   | 2,042,834 |  |      | 2,043,932  |  |   | 2,044,111 



See accompanying notes to consolidated
financial statements.



3



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Shareholders Equity

Nine months ended September 30,
2004 and 2003

(unaudited)



|                                                          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   |            |  
|--------------------------------------------------------- |  | ----------- | --------- | - | -------------- | - | --------- | ---------------- |  | - | --------------------------------------- | - |  | ------------------------------------ | -------- | - | -------------------- | - | ---------- | ----- |  | - | ---------- | - |  | - | ---------- | -
|                                                          |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferred compensation- restricted stock |   |  | Accumulated othercomprehensiveincome |          |   | Comprehensive income |   |            | Total | 
|Balance January 1, 2003                                   |  | $           | 7,140,057 |   |                | $ | 5,410,102 |                  |  | $ | 15,171,819                              |   |  | $                                    | (52,568  | ) |                      | $ | 1,968,835  |       |  |   |            |   |  | $ | 29,638,245 |  
|Unrealized losses, net of income tax benefit of $ 937,723 |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   | (1,497,925 | )     |  | $ | (1,497,925 | ) |  |   | (1,497,925 | )
|Net income                                                |  |             |           |   |                |   |           |                  |  |   | 3,056,144                               |   |  |                                      |          |   |                      |   |            |       |  |   | 3,056,144  |   |  |   | 3,056,144  |  
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   |            |  
|Total comprehensive income                                |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  | $ | 1,558,219  |   |  |   |            |  
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   |            |  
|Deferred compensation - restricted stock issuance         |  |             | 29,445    |   |                |   | 121,989   |                  |  |   |                                         |   |  |                                      | (151,434 | ) |                      |   |            |       |  |   |            |   |  |   |           |  
|Recognition of deferred compensation - restricted stock   |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      | 40,210   |   |                      |   |            |       |  |   |            |   |  |   | 40,210     |  
|Repurchase of common stock                                |  |             | (36,750   | ) |                |   | (172,113  | )                |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   | (208,863   | )
|Cash dividends ($.375 per share)                          |  |             |           |   |                |   |           |                  |  |   | (764,228                                | ) |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   | (764,228   | )
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   |            |  
|Balance September 30, 2003                                |  | $           | 7,132,752 |   |                | $ | 5,359,978 |                  |  | $ | 17,463,735                              |   |  | $                                    | (163,792 | ) |                      | $ | 470,910    |       |  |   |            |   |  | $ | 30,263,583 |  
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   |            |  
|                                                          |  |             |           |   |                |   |          
|                                                          |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferred compensation- restricted stock |   |  | Accumulatedothercomprehensiveloss    |          |   | Comprehensiveincome  |   |            | Total | 
|Balance January 1, 2004                                   |  | $           | 7,132,752 |   |                | $ | 5,359,978 |                  |  | $ | 18,058,476                              |   |  | $                                    | (150,388 | ) |                      | $ | 241,447    |       |  |   |            |   |  | $ | 30,642,265 |  
|Unrealized losses, net of income tax benefit of $ 463,856 |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   | (740,964   | )     |  | $ | (740,964   | ) |  |   | (740,964   | )
|Net income                                                |  |             |           |   |                |   |           |                  |  |   | 3,363,419                               |   |  |                                      |          |   |                      |   |            |       |  |   | 3,363,419  |   |  |   | 3,363,419  |  
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   |            |  
|Total comprehensive income                                |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  | $ | 2,622,455  |   |  |   |            |  
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   |            |  
|Deferred compensation - restricted stock issuance         |  |             | 31,196    |   |                |   | 222,825   |                  |  |   |                                         |   |  |                                      | (254,021 | ) |                      |   |            |       |  |   |            |   |  |   |           |  
|Recognition of deferred compensation - restricted stock   |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      | 74,203   |   |                      |   |            |       |  |   |            |   |  |   | 74,203     |  
|Repurchase of common stock                                |  |             | (30,100   | ) |                |   | (222,800  | )                |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   | (252,900   | )
|Cash dividends ($.4275 per share)                         |  |             |           |   |                |   |           |                  |  |   | (871,721                                | ) |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   | (871,721   | )
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   |            |  
|Balance September 30, 2004                                |  | $           | 7,133,848 |   |                | $ | 5,360,003 |                  |  | $ | 20,550,174                              |   |  | $                                    | (330,206 | ) |                      | $ | (499,517   | )     |  |   |            |   |  | $ | 32,214,302 |  
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                      |   |            |       |  |   |            |   |  |   |            |  



See accompanying notes to consolidated
financial statements.



4



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Nine months ended September 30, 2004 and 2003

(Unaudited)



|                                                                                   |  |                                 |             |   |      |   |             |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                   |  | Nine Months Ended September 30, |            
|                                                                                   |  | 2004                            |             |   | 2003 |  
|Cash flows from operating activities:                                              |  |                                 |             |   |      |   |             |  
|Net income                                                                         |  | $                               | 3,363,419   |   |      | $ | 3,056,144   |  
|Adjustments to reconcile net income to net cash provided by operating activities:  |  |                                 |             |   |      |   |             |  
|Depreciation                                                                       |  |                                 | 755,723     |   |      |   | 718,481     |  
|Amortization of premium on investment securities, net                              |  |                                 | 271,258     |   |      |   | 389,543     |  
|Provision for probable loan losses                                                 |  |                                 | 575,000     |   |      |   | 465,000     |  
|Gain on sale of securities                                                         |  |                                 | (296,116    | ) |      |   | (47,681     | )
|Deferred compensation - restricted stock                                           |  |                                 | 74,203      |   |      |   | 40,210      |  
|Decrease (increase) in accrued interest receivable                                 |  |                                 | (338,237    | ) |      |   | (522,285    | )
|(Gain) loss on disposal of premises and equipment                                  |  |                                 | 4,263       |   |      |   | (991        | )
|Loss on sale of real estate acquired in settlement of loans                        |  |                                 |            |   |      |   | 4,820       |  
|Increase in other assets                                                           |  |                                 | (2,537,021  | ) |      |   | (1,242,700  | )
|Decrease in accrued interest payable                                               |  |                                 | 39,316      |   |      |   | (94,828     | )
|Increase (decrease) in other liabilities, net                                      |  |                                 | 868,700     |   |      |   | 365,500     |  
|                                                                                   |  |                                 |             |   |      |   |             |  
|Net cash provided by operating activities                                          |  |                                 | 2,780,508   |   |      |   | 3,131,213   |  
|                                                                                   |  |                                 |             |   |      |   |             |  
|Cash flows from investing activities:                                              |  |                                 |             |   |      |   |             |  
|Proceeds from sales of investment securities classified as available-for-sale      |  |                                 | 22,276,278  |   |      |   | 10,864,349  |  
|Proceeds from maturities of investment securities classified as available-for-sale |  |                                 | 16,852,382  |   |      |   | 39,300,350  |  
|Purchases of investment securities classified as available-for-sale                |  |                                 | (57,133,374 | ) |      |   | (40,256,695 | )
|(Purchase) Redemption of Federal Home Loan Bank common stock                       |  |                                 | (100,000    | ) |      |   | 177,500     |  
|Proceeds from disposal of premises and equipment                                   |  |                                 |            |   |      |   | 3,300       |  
|Purchases of premises and equipment                                                |  |                                 | (4,483,947  | ) |      |   | (3,199,697  | )
|Net loan originations                                                              |  |                                 | (50,808,021 | ) |      |   | (41,523,338 | )
|                                                                                   |  |                                 |             |   |      |   |             |  
|Net cash used by investing activities                                              |  |                                 | (73,396,682 | ) |      |   | (34,634,231 | )
|                                                                                   |  |                                 |             |   |      |   |             |  
|Cash flows from financing activities:                                              |  |                                 |             |   |      |   |             |  
|Net increase in deposits                                                           |  |                                 | 62,251,351  |   |      |   | 27,396,180  |  
|Net (decrease) increase in short-term borrowings                                   |  |                                 | 4,901,062   |   |      |   | 5,779,918   |  
|Origination of long-term obligations                                               |  |                                 | 2,000,000   |   |      |   |            |  
|Dividends paid                                                                     |  |                                 | (836,014    | ) |      |   | (713,488    | )
|Repurchase of common stock                                                         |  |                                 | (252,900    | ) |      |   | (208,863    | )
|                                                                                   |  |                                 |             |   |      |   |             |  
|Net cash provided by financing activities                                          |  |                                 | 68,063,499  |   |      |   | 32,253,747  |  
|                                                                                   |  |                                 |             |   |      |   |             |  
|(Decrease) increase in cash and cash equivalents                                   |  |                                 | (2,552,675  | ) |      |   | 750,729     |  
|Cash and cash equivalents at beginning of period                                   |  |                                 | 27,384,112  |   |      |   | 20,345,006  |  
|                                                                                   |  |                                 |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                         |  | $                               | 24,831,437  |   |      | $ | 21,095,735  |  
|                                                                                   |  |                                 |             |   |      |   |             |  
|Cash paid during the period:                                                       |  |                                 |             |   |      |   |             |  
|Interest                                                                           |  | $                               | 4,165,783   |   |      | $ | 4,079,585   |  
|Taxes                                                                              |  |                                 | 1,542,331   |   |      |   | 1,436,740   |  
|                                                                                   |  |                                
|Supplemental disclosures of noncash financing and investing activities:            |  |                                 |             |   |      |   |             |  
|Cash dividends declared but not paid                                               |  | $                               | 290,450     |   |      | $ | 254,743     |  
|Unrealized (losses) gains on available-for-sale securities, net of deferred taxes  |  |                                 | (740,964    | ) |      |   | (1,479,925  | )
|Restricted stock issuance                                                          |  |                                 | 254,021     |   |      |   | 151,434     |  
|Transfer of assets to OREO                                                         |  |                                 | (10,500     | ) |      |   |            |  



See accompanying notes to consolidated
financial statements.



5



---

ECB BANCORP, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



(1) Basis of Presentation



The consolidated financial statements include the accounts of ECB Bancorp, Inc. (Bancorp) and its wholly-owned 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 probable loan losses. In
connection with the determination of the allowance for probable loan losses, management obtains independent appraisals for significant properties held as collateral for loans.



All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such
adjustments are normal and recurring in nature). The footnotes in Bancorps annual report on Form 10-KSB should be referenced when reading these unaudited interim financial statements. Operating results for the period ended September 30, 2004,
are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.



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



(2) Allowance for Probable Loan Losses



The following table summarizes the activity in the allowance for probable
loan losses for the nine-month periods ended September 30, 2004 and 2003, respectively.



|                                       |  |                                 |           |   |      |   |           |  
|-------------------------------------- |  | ------------------------------- | --------- | - | ---- | - | --------- | -
|                                       |  | Nine-months ended September 30, |          
|                                       |  | 2004                            |           |   | 2003 |  
|Balance at the beginning of the period |  | $                               | 3,550,000 |   |      | $ | 3,150,000 |  
|Provision for probable loan losses     |  |                                 | 575,000   |   |      |   | 465,000   |  
|Charge-offs                            |  |                                 | (144,740  | ) |      |   | (156,238  | )
|Recoveries                             |  |                                 | 121,039   |   |      |   | 61,840    |  
|Net Charge-offs                        |  |                                 | (23,701   | ) |      |   | (94,398   | )
|Balance at end of the period           |  | $                               | 4,101,299 |   |      | $ | 3,520,602 |  



6



---

(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 nine months ended September 30, 2004 and 2003, diluted weighted average shares outstanding increased by 11,855 and 9,987, respectively, due to the dilutive impact of restricted stock. For the three months ended
September 30, 2004 and 2003, diluted weighted average shares outstanding increased by 11,704 and 10,474, 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 nine months
ended September 30, 2004 and 2003, diluted weighted average shares outstanding increased by 14,791 and 11,189, respectively, due to the dilutive impact of options. For the three months ended September 30, 2004 and 2003, diluted weighted average
shares outstanding increased by 14,654 and 12,086, respectively, due to the dilutive impact of options



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



|                              |  |                                      |           |                      |           |                  |   |     
|----------------------------- |  | ------------------------------------ | --------- | -------------------- | --------- | ---------------- | - | ----
|                              |  | Nine months ended September 30, 2004
|                              |  | Income (Numerator)                   |           | Shares (Denominator) |           | Per Share Amount
|Basic net income per share    |  | $                                    | 3,363,419 |                      | 2,017,286 |                  | $ | 1.67
|                              |  |                                      |           |                      |           |                  |   |     
|Effect of dilutive securities |  |                                      |          |                      | 26,646    |                  |   |     
|                              |  |                                      |           |                      |           |                  |   |     
|Diluted net income per share  |  | $                                    | 3,363,419 |                      | 2,043,932 |                  | $ | 1.65
|                              |  |                                      |           |                      |           |                  |   |     
|                              |  | Nine months ended September 30,
2003
|                              |  | Income (Numerator)                   |           | Shares (Denominator) |           | Per Share Amount
|Basic net income per share    |  | $                                    | 3,056,144 |                      | 2,022,935 |                  | $ | 1.51
|                              |  |                                      |           |                      |           |                  |   |     
|Effect of dilutive securities |  |                                      |          |                      | 21,176    |                  |   |     
|                              |  |                                      |           |                      |           |                  |   |     
|Diluted net income per share  |  | $                                    | 3,056,144 |                      | 2,044,111 |                  | $ | 1.50
|                              |  |                                      |           |                      |           |                  |   |     



7



---

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



|                              |  |                                       |           |                     |           |                 |   |     
|----------------------------- |  | ------------------------------------- | --------- | ------------------- | --------- | --------------- | - | ----
|                              |  | Three months ended September 30, 2004
|                              |  | Income(Numerator)                     |           | Shares(Denominator) |           | Per ShareAmount
|Basic net income per share    |  | $                                     | 1,167,805 |                     | 2,014,874 |                 | $ | 0.58
|                              |  |                                       |           |                     |           |                 |   |     
|Effect of dilutive securities |  |                                       |          |                     | 26,358    |                 |   |     
|                              |  |                                       |           |                     |           |                 |   |     
|Diluted net income per share  |  | $                                     | 1,167,805 |                     | 2,041,232 |                 | $ | 0.57
|                              |  |                                       |           |                     |           |                 |   |     
|                              |  | Three months ended September 30,
2003
|                              |  | Income(Numerator)                     |           | Shares(Denominator) |           | PerShareAmount 
|Basic net income per share    |  | $                                     | 1,038,801 |                     | 2,020,274 |                 | $ | 0.51
|                              |  |                                       |           |                     |           |                 |   |     
|Effect of dilutive securities |  |                                       |          |                     | 22,560    |                 |   |     
|                              |  |                                       |           |                     |           |                 |   |     
|Diluted net income per share  |  | $                                     | 1,038,801 |                     | 2,042,834 |                 | $ | 0.51
|                              |  |                                       |           |                     |           |                 |   |     



(4) Stock Option Plan



During 1998, the Company adopted an Omnibus Stock Ownership and Long-Term
Incentive Plan (the Omnibus Plan) which provides for the issuance of up to an aggregate of 159,000 shares of common stock of the Company pursuant to stock options and other awards granted or issued under its terms. Stock options vest one-third each
year beginning three years after the grant date and expire after 10 years. Restricted stock vests over 5 years.



The Company accounts for its awards pursuant to the Omnibus Plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB Opinion No. 25),
Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the date of grant only if the market price of the underlying stock on the date of grant exceeds the exercise price. SFAS
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), recommends that entities recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been
applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. There were no options granted in the first nine months of 2004 or 2003.



The Company awarded 8,913 and 8,413 shares of restricted stock during the nine months ended
September 30, 2004 and 2003, respectively, resulting in an increase to deferred compensation-restricted stock of $254,021 and $151,434, respectively.



8



---

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



|                                                                                                                                            |  |                                  |           |   |      |           |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | --------- | - | ---- | --------- | -
|                                                                                                                                            |  | Nine months ended September 30,  |          
|                                                                                                                                            |  | 2004                             |           |   | 2003 |          
|Net income, as reported                                                                                                                     |  | $                                | 3,363,419 |   |      | 3,056,144 |  
|Deduct: Total stock-based employee Compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                  | (4,939    | ) |      | (6,538    | )
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Proforma net income                                                                                                                         |  | $                                | 3,358,480 |   |      | 3,049,606 |  
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Earnings per share:                                                                                                                         |  |                                  |           |   |      |           |  
|Basic  as reported                                                                                                                         |  | $                                | 1.67      |   |      | 1.51      |  
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Basic  proforma                                                                                                                            |  |                                  | 1.66      |   |      | 1.51      |  
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Diluted  as reported                                                                                                                       |  |                                  | 1.65      |   |      | 1.50      |  
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Diluted  proforma                                                                                                                          |  |                                  | 1.64      |   |      | 1.49      |  
|                                                                                                                                            |  |                                  |           |   |      |           |  
|                                                                                                                                            |  | Three months ended September 30, |          
|                                                                                                                                            |  | 2004                             |           |   | 2003 |          
|Net income, as reported                                                                                                                     |  | $                                | 1,167,805 |   |      | 1,038,801 |  
|Deduct: Total stock-based employee Compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                  | (1,646    | ) |      | (2,179    | )
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Proforma net income                                                                                                                         |  | $                                | 1,166,159 |   |      | 1,036,622 |  
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Earnings per share:                                                                                                                         |  |                                  |           |   |      |           |  
|Basic  as reported                                                                                                                         |  | $                                | 0.58      |   |      | 0.51      |  
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Basic  proforma                                                                                                                            |  |                                  | 0.58      |   |      | 0.51      |  
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Diluted  as reported                                                                                                                       |  |                                  | 0.57      |   |      | 0.51      |  
|                                                                                                                                            |  |                                  |           |   |      |           |  
|Diluted  proforma                                                                                                                          |  |                                  | 0.57      |   |      | 0.51      |  
|                                                                                                                                            |  |                                  |           |   |      |           |  



(5) Long-term Obligations



Sale of Preferred Trust Securities.On June 26,
2002, a business trust subsidiary that we formed (ECB Statutory Trust I) privately sold $10.0 million in preferred trust securities as part of a pooled re-securitization transaction with several other financial institutions. The proceeds from that
sale, together with the proceeds from the Trusts sale of all its common securities to us, were used to purchase an aggregate of $10.3 million in junior subordinated debentures that we issued. The debentures call for interest payable quarterly
at a variable annual rate equal to the three-month LIBOR plus 3.45%, with principal payable in full on June 26, 2032. We own all of our Trust subsidiarys common securities and, subject to certain limitations, we have fully and unconditionally
guaranteed the Trust subsidiarys obligations under its preferred trust securities. Substantially all the proceeds from the Trusts sale of preferred securities are currently being counted as Tier 1 capital on our books and
have been or will be used by



9



---

us to supplement the Banks and our capital and support our continued operations and growth. Since its organization,
we had treated the Trust as our consolidated subsidiary for financial statement purposes, and the Trusts assets and liabilities had been included in our consolidated financial statements. However, as a result of the application of Financial
Accounting Standards Board Interpretation No. 46 (FIN 46), as subsequently amended, as of December 31, 2003, we have deconsolidated the Trust. Under de-consolidation accounting, only the amount owed by the Company to the trusts is
reported in the consolidated financial statements. The receivables recorded by the trusts as being due from the Company and the amounts payable by the trusts to the third-party purchasers of the trust preferred securities remain on the trusts
books and are not included in the Companys consolidated financial statements. The net effect is that the Company now describes its borrowings as being due to the trusts instead of the third-party purchasers of the trust preferred securities.
There is no change to the terms of the borrowings or the amounts owed.



(6)
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. Net periodic postretirement benefit cost include the following components:



|                                         |  |                                 |        |      |   |        |  
|---------------------------------------- |  | ------------------------------- | ------ | ---- | - | ------ | -
|                                         |  | Nine months ended September 30, |       
|                                         |  | 2004                            |        | 2003 |  
|Service cost                             |  | $                               | 4,767  |      | $ | 6,714  |  
|Interest cost                            |  |                                 | 31,956 |      |   | 31,905 |  
|Amortization of (gain) loss              |  |                                 | 3,216  |      |   | (159   | )
|Net periodic postretirement benefit cost |  | $                               | 39,939 |      | $ | 38,460 |  



|                                         |  |                                  |        |      |   |        |  
|---------------------------------------- |  | -------------------------------- | ------ | ---- | - | ------ | -
|                                         |  | Three months ended September 30, |       
|                                         |  | 2004                             |        | 2003 |  
|Service cost                             |  | $                                | 1,589  |      | $ | 2,238  |  
|Interest cost                            |  |                                  | 10,652 |      |   | 10,635 |  
|Amortization of (gain) loss              |  |                                  | 1,072  |      |   | (53    | )
|Net periodic postretirement benefit cost |  | $                                | 13,313 |      | $ | 12,820 |  



(7) 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 September 30, 2004:



|                                                              |  |                     |            |                     |         |            |            |                  |           |            |            |                  |          
|------------------------------------------------------------- |  | ------------------- | ---------- | ------------------- | ------- | ---------- | ---------- | ---------------- | --------- | ---------- | ---------- | ---------------- | ---------
|                                                              |  | Less than 12 months |            | 12 months or longer |         | Total     
|Description of Securities                                     |  | Fair Value          |            | UnrealizedLosses    |         | Fair Value |            | UnrealizedLosses |           | Fair Value |            | UnrealizedLosses
|Securities of other U.S. government agencies and corporations |  | $                   | 982,500    |                     | 213     |            | 988,440    |                  | 11,560    |            | 1,970,940  |                  | 11,773   
|Obligations of states and political subdivisions              |  |                     | 8,151,804  |                     | 249,461 |            |           |                  |          |            | 8,151,804  |                  | 249,461  
|Mortgage-backed securities                                    |  |                     | 19,964,979 |                     | 159,522 |            | 19,375,776 |                  | 293,470   |            | 39,340,755 |                  | 452,992  
|                                                              |  |                     |            |                     |         |            |            |                  |           |            |            |                  |          
|Subtotal, debt securities                                     |  |                     | 29,099,283 |                     | 409,196 |            | 20,364,216 |                  | 305,030   |            | 49,463,499 |                  | 714,226  
|                                                              |  |                     |            |                     |         |           
|Preferred stock                                               |  |                     |           |                     |        |            | 4,524,495  |                  | 1,140,505 |            | 4,524,495  |                  | 1,140,505
|                                                              |  |                     |            |                     |         |            |            |                  |           |            |            |                  |          
|Total                                                         |  |                     | 29,099,283 |                     | 409,196 |            | 24,888,711 |                  | 1,445,535 |            | 53,987,994 |                  | 1,854,731
|                                                              |  |                     |            |                     |         |            |            |                  |           |            |            |                  |          



10



---

As the above table represents, the overall total dollar amount of unrealized losses within the Banks investment
portfolio during the first nine months of 2004, increased $592,720 or 46.97% when compared to unrealized losses of $1,262,011 at December 31, 2003. The increase in unrealized losses is the result of a continued rise in interest rates. The duration
of the investment portfolio has averaged about 3.25 years and comparable bond rates rose almost 1% during the period. As a result, 3 year bond price and the portfolio value declined accordingly. The amount of unrealized losses 12 months or longer
increased as agency preferred stock losses increased $528,563 or 86.37% to $1,140,505 from $611,942 at December 31, 2003.



While floating rate agency issued preferred stocks are technically equity securities, they are, in substance, debt-like instruments. They do not benefit from improvements
in earnings or common stock prices. Instead, their owners hold the same rights as holders of long-term subordinated debt. The decline in values can be demonstrated to be a result of interest rate movements. A rise in interest rates should cause the
securities to rise in value and, if the underlying Treasury indices rise to approximately their levels at issuance, the preferred stocks should see their market prices rise to near par. There has been no credit deterioration (actual ratings changes
or market perceptions) of issuers.



(8) New Accounting Pronouncements



In December 2003, FASB Statement No. 132 (revised), Employers
Disclosures about Pensions and Other Postretirement Benefits, was issued. Statement 132 (revised) prescribes employers disclosures about pension plans and other postretirement benefit plans; it does not change the measurement or
recognition of those plans. The Statement retains and revises the disclosure requirements contained in the original Statement 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of
defined benefit pension plans and other postretirement benefit plans. The Statement generally is effective for fiscal years ending after December 15, 2003. The adoption of SFAS No. 132 (revised) did not have a material impact on the consolidated
financial statements. The interim disclosure requirements of Statement 132 (revised) are contained in Note 6 to the financial statements.



On December 12, 2003, the American Institute of Certified Public Accountants (AICPA) released Statement of Position (SOP) 03-03, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer. This statement of position addresses accounting for differences between contractual cash flows and cash flows expected to be collected from investors initial investment in loans or debt securities (loans)
acquired in a transfer if those differences are attributable, at least in part, to credit quality. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 is not expected to have a
material impact on the consolidated financial statements.



In January 2003, the
FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entitiesan Interpretation of Accounting Research Bulletin 51Consolidated Financial Statements. This interpretation provides guidance related
to identifying variable interest entities and determining whether such entities should be consolidated. FIN 46 requires an enterprise to consolidate a variable interest entity when the enterprise (a) absorbs a majority of the variable interest
entitys expected losses, (b) receives a majority of the entitys expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity. Prior to the effective date of FIN 46, entities were
generally consolidated by an enterprise that had control through ownership of a majority voting interest in the entity. FIN 46 originally applied immediately to variable interest entities created or obtained after January 31, 2003. During 2003, the
Bank did not participate in the creation of, or obtain a new variable interest in, any variable interest entity. In December 2003, the FASB issued FIN 46R, a revision to FIN 46, which modified certain requirements of FIN 46 and allowed for the
optional deferral of the effective date of FIN 46R for annual or interim periods ending after March 15, 2004. As disclosed in the Quarterly Report on Form 10-QSB for the period ended September 30, 2003, the Company completed its assessment of the
trust preferred securities and determined that these statutory business trusts should no longer be consolidated entities. Accordingly, the statutory business trusts were reclassified to debt in accordance with FIN 46. The remaining provisions of FIN
46R did not have a material impact on the consolidated results of operations or consolidated financial condition of the Company.



On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB 105). SAB
105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock commitments (IRLC), subject to SFAS No. 149 and



11



---

Derivative Implementation Group Issue C13, Scope Exceptions: When a Loan Commitment is included in the Scope of
Statement 133. Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible assets in the initial and subsequent IRLC valuation. The provisions of SAB 105 were effective for loan
commitments entered into after March 31, 2004. The Company adopted the provisions of SAB 105 effective April 1, 2004. Since the provisions of SAB 105 affect only the timing of the recognition of mortgage banking income, management does not
anticipate that this guidance will have a material adverse effect on either the Companys consolidated financial position or consolidated results of operations.



In the second quarter of 2004, the Emerging Issues Task Force (EITF) released EITF Issue 03-01, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments. The Issue provided guidance for evaluating whether an investment is other-than-temporarily impaired and requires certain disclosures with respect to these investments.
On September 30, 2004, the EITF delayed the effective date of paragraphs 10-20 of EITF Issue 03-01. As of September 30, 2004, the Company held certain investment positions that it purchased at premiums with unrealized losses that, in the aggregate,
were not material to the Companys consolidated financial position or consolidated results of operations. These investments were in U.S. government agency obligations and local government obligations, the cash flows of which are guaranteed by
the U.S. government agencies or the taxing authority of the local government and, therefore, it is expected that the securities would not be settled at a price less than their amortized cost. Because the decline in market value was caused by
interest rate increases and not credit quality, and because the Company has the ability and intent to hold these investments until a recovery of fair value, which may be maturity, the Company has not recognized any other-than-temporary impairment in
connection with these investments.



On May 19, 2004, the FASB released FASB
Staff Position (FSP) FAS No. 106-2 Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. The Medicare Prescription Drug Improvement and Modernization Act of 2003
provides a subsidy for employers that sponsor postretirement health care plans that provide prescription drug benefits. The net periodic postretirement benefit cost disclosed does not reflect any amount associated with the subsidy because the
Company has been unable to conclude whether the benefits provided by the plan are actuarially equivalent to Medicare Part D under the Act.



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



General



ECB Bancorp, Inc. (Bancorp) is a bank holding company headquartered in Engelhard, North Carolina. Bancorps wholly-owned subsidiary, The East Carolina
Bank (the Bank) (Bancorp and the Bank collectively referred to hereafter as the Company), is a state-chartered community bank which was founded in 1919. We offer a full range of banking services through 20 branches serving
eastern North Carolina, including the communities of Engelhard, Swan Quarter, Columbia, Creswell, Fairfield, Nags Head, Manteo, Southern Shores, Currituck, Avon, Hatteras, Ocracoke, Washington, Greenville (two branches), New Bern, Hertford,
Williamston, Morehead City and Wilmington.



Sale of Preferred Trust
Securities. On June 26, 2002, a business trust subsidiary that we formed (ECB Statutory Trust I) privately sold $10.0 million in preferred trust securities as part of a pooled re-securitization transaction with several other financial
institutions. The proceeds from that sale, together with the proceeds from the Trusts sale of all its common securities to us, were used to purchase an aggregate of $10.3 million in junior subordinated debentures that we issued. The debentures
call for interest payable quarterly at a variable annual rate equal to the three-month LIBOR plus 3.45%, with principal payable in full on June 26, 2032. We own all of our Trust subsidiarys common securities and, subject to certain
limitations, we have fully and unconditionally guaranteed the Trust subsidiarys obligations under its preferred trust securities. Substantially all the proceeds from the Trusts sale of preferred securities are currently being counted as
Tier 1 capital on our books and have been or will be used by us to supplement the Banks and our capital and support our continued operations and growth. Since its organization, we had treated the Trust as our consolidated
subsidiary for financial statement purposes, and the Trusts assets and liabilities had been included in our consolidated financial statements. However, as a result of the application of Financial Accounting Standards Board Interpretation No.
46 (FIN 46), as subsequently amended, as of December 31, 2003, we have deconsolidated the Trust. Under de-consolidation accounting, only the amount owed



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by the Company to the trusts is reported in the consolidated financial statements. The receivables recorded by the trusts
as being due from the Company and the amounts payable by the trusts to the third-party purchasers of the trust preferred securities remain on the trusts books and are not included in the Companys consolidated financial statements. The
net effect is that the Company now describes its borrowings as being due to the trusts instead of the third-party purchasers of the trust preferred securities. There is no change to the terms of the borrowings or the amounts owed.



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



Critical Accounting Policies



The Corporations significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-KSB Annual Report for the
fiscal year ended December 31, 2003. Of these significant accounting policies, the Corporation 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 Corporation 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 Corporation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 Corporations allowance for loan losses and related matters, see Asset Quality.



Comparison of the Results of Operations for the Nine Month Periods Ended September 30, 2004 and 2003



Summary



For the nine months ended September 30, 2004, we had net income of $3,363,419 or $1.67 basic and $1.65 diluted earnings per share, compared
to $3,056,144 or $1.51 basic and $1.50 diluted earnings per share for the nine months ended September 30, 2003. Net interest income increased $965,350 or 8.48% to $12,353,635 in the nine months of 2004 from $11,388,285 in the nine months of 2003,
and noninterest income increased $591,984 or 14.03% when compared to the same period last year. Noninterest expense increased $1,060,059 or 9.87% for the nine months period ended September 30, 2004 as compared to the same period in 2003 as salary
and employee benefits expense increased $581,151 or 10.37% to $6,184,198 compared to $5,603,047 during the nine months of 2003.



Net interest income



Net interest income for the nine months ended September 30, 2004 was $12,353,635, an increase of $965,350 or 8.48% when compared to net interest income of $11,388,285 for
the prior year period. Our net interest margin, on a tax-equivalent basis, for the nine months ended September 30, 2004 was 3.95% compared to 4.27% for the first nine months of 2003. Management attributes the decrease in our net interest margin to a
low interest rate environment throughout all of 2004. Many of our rate sensitive liabilities, especially interest-bearing transaction accounts such as NOW and Money Market accounts, reached minimum rates such that additional rate reductions were not
practical, thus reducing our ability to lower our cost of funds. At the same time, our rate sensitive assets such as loans and investment securities continued to mature and pay out and these earning assets were reinvested at lower rates. The yield
on average earning assets, on a tax-equivalent basis, for the nine months ended September 30, 2004 was 5.25% compared to 5.72% in 2003, a decrease of 47 basis points.



13



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Total interest income increased $1,185,692 for the nine months ended September 30, 2004 compared to the nine months ended
September 30, 2003, as average earning assets increased by $65.3 million. Average loans outstanding increased $56.0 million as real estate loans increased $32.0 million.



Total interest expense increased $220,342 or 5.53% for the nine months ended September 30, 2004 when compared to the nine months ended
September 30, 2003 as interest-bearing liabilities increased on average $57.8 million. Our cost of funds during the nine months ended September 30, 2004 was 1.56%; a decrease of 20 basis points when compared to 1.76% for the nine months ended
September 30, 2003.



Provision for probable loan losses



The provision for probable loan losses charged to operations during the
nine months ended September 30, 2004 was $575,000 compared to $465,000 during the nine months ended September 30, 2003. Net charge-offs for the period ended September 30, 2004 totaled $23,701 compared to net charge-offs of $94,398 during the first
nine months of 2003. The higher provision expense for probable loan loss in the nine months of 2004 is primarily the result of loan growth that occurred during the first nine months of 2004 as our loan portfolio grew $50.8 million since December 31,
2003. The amount charged for provision for probable loan losses is the result of managements review and evaluation of the portfolio, which considers current conditions, past due loans, prior loan loss experience and dollar amount of loan
growth.



Noninterest income



Noninterest income increased $591,984 or 14.03% to $4,809,903 for the nine months ended
September 30, 2004 compared to $4,217,919 for the same period in 2003. This is principally due to a gain on insurance proceeds of $316,924 for property damage sustained during Hurricane Isabel, net gain on the sale of securities of $296,116 and an
insurance recovery of $79,440 on a wire transfer fraud that was charged off in late 2003. Service charges on deposit accounts decreased $6,795 or 0.27% as Overdraft Banking Privilege fee income decreased slightly when compared to the first nine
months of 2003. Other service charges and fees decreased $81,506 or 6.07% over the prior year period due to decreases of mortgage loan origination fees of $99,771, the result of an overall slowdown in the number of refinancing in the mortgage
industry. During the nine months of 2004, the Bank had a net gain on the sale of securities of $296,116 compared to net gain of $184,725 during the same period last year.



Noninterest expense



Noninterest expense increased $1,060,059 or 9.87% to $11,800,119 for the nine months ended September 30, 2004 from $10,740,060 in the same period in 2003. This increase
is principally due to general increases in salary and benefits expense of $581,151 or 10.37%. Salary expense increased $441,718 over the prior year period as a result of general salary increases of $123,308 and additional staffing expense within our
mortgage department and home office of $83,278 and $72,591, respectively. Additional salary expenses of $162,541 are associated with our recently opened full service offices in Williamston, Morehead City and Wilmington. Benefits during first nine
months of 2004 compared to 2003 increased $139,433 or 8.35% principally due to an increase in premiums for employee group insurance of $48,868 and employee FICA taxes of $34,245. Restricted stock incentive expense increased $33,992 over the prior
year period. Occupancy expense increased $61,556 or 6.71% principally as the result of accelerated depreciation expense of approximately $66,000 on the Banks flood damaged accounting and operations facility. As the result of furniture and
equipment purchased for our new operation center in Engelhard, equipment expense increased $286,384 or 28.81% over the first nine months of 2003. In addition, equipment maintenance and depreciation expense increased by $92,863 and $25,610,
respectively. Long distance telephone expense decreased $60,217 or 103.51% over the prior year period, as we received a credit adjustment of $33,062 due to being over charged by our long distance carrier in prior billing periods. Other operating
expenses increased $249,645 from $2,181,656 for the nine months ended September 30, 2003 to $2,431,301 for the nine months ended September 30, 2004. The increase is primarily due to the charge-off of $92,201 in checks paid into overdraft that were
deemed non-collectible in the current period. However, it is anticipated that a portion of the write-off will be recovered in a future period. We experienced losses on sale of repossessed assets during the first quarter of 2004 that amounted to
$52,600.



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Income taxes



Income tax expense for the nine months ended September 30, 2004 and 2003 was $1,425,000 and $1,345,000, respectively, resulting in effective tax rates of 29.76% and
30.58%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



Comparison of the Results of Operations for the Three Month Periods Ended September 30, 2004 and 2003



Summary



For the three months ended September 30, 2004, we had net income of $1,167,805 or $0.58 basic and $0.57 diluted earnings per share, compared
to $1,038,801, or $0.51 basic and $0.51 diluted earnings per share for the three months ended September 30, 2003. Net interest income increased $500,138 or 13.05% to $4,331,186 in the third quarter of 2004 from $3,831,048 in the third quarter of
2003, and noninterest income decreased $9,015 or 0.60% when compared to the same period last year. Noninterest expense increased $347,119 or 9.57% for the three month period ended September 30, 2004 as compared to the same period in 2003, as salary
and benefits expense increased $190,747 or 9.95% to $2,108,267 compared to $1,917,520 during the third quarter of 2003.



Net interest income



Net interest income for the three months ended September 30, 2004 was $4,331,186, an increase of $500,138 or 13.05% when compared to net interest income of $3,831,048 for
the prior year period. Our net interest margin, on a tax-equivalent basis, for the three months ended September 30, 2004 was 3.94% compared to 4.14% in the third quarter of 2003. Management attributes the decrease in our net interest margin to a low
interest rate environment throughout all of 2004. Many of our rate sensitive liabilities, especially interest-bearing transaction accounts such as NOW and Money Market accounts, reached minimum rates such that additional rate reductions were not
practical, thus reducing our ability to lower our cost of funds. While our rate sensitive assets such as loans and investment securities continued to mature and pay out, subsequently, these earning assets were reinvested at lower rates. The yield on
average earning assets, on a tax-equivalent basis, fell 18 basis points to 5.28% compared to 5.46% at the end of the third quarter of 2003.



Total interest income increased $770,287 or 15.15% for the three months ended September 30, 2004 compared to the same three months of 2003 as average earning assets
increased $73.1 million and the rate on variable rate loans increased 75 basis points during the third quarter of 2004. Approximately half of our loans are variable rate loans that adjust with the movement of the national prime rate.



Total interest expense increased $270,149 or 21.56% during third quarter of 2004 compared to
the same period in 2003, the result of increased interest-bearing liabilities and increased market rates paid on wholesale certificates of deposits. The volume of average interest-bearing liabilities increased approximately $66.8 million when
comparing third quarter of 2004 with that of 2003. Our cost of funds during the third quarter of 2004 was 1.62%, a decrease of just one basis point when compared to 1.63% at the end of third quarter of 2003.



Provision for probable loan losses



The provision for probable loan losses charged to operations during the three months ended
September 30, 2004 and 2003 was $175,000 and $225,000, respectively. Net charge-offs for the quarter ended September 30, 2004 totaled $130, compared to net charge-offs of $43,641 during the third quarter of 2003. The amount of provision for probable
loan losses charged during the period is due to loan growth of $17.2 million that occurred during the third quarter of 2004. The amount charged for provision for probable loan losses is the result of managements review and evaluation of the
portfolio, which considers current conditions, past due loans, and prior loan loss experience.



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Noninterest income



Noninterest income decreased $9,015 or 0.60% to $1,484,617 for the three months ended September 30, 2004 compared to $1,493,632 for the same
period in 2003. Service charges on deposit accounts increased $53,780 or 6.76% as the volume in Overdraft Banking Privilege fees increased $50,946 compared to the third quarter of 2003. Other service charges and fees decreased $33,174 compared to
the prior year period due to decreases in mortgage origination brokerage fees of $36,505, the result of an overall slowdown in the number of refinancing in the mortgage industry. During the third quarter of 2004, we had a net gain on the sale of
securities of $3,977 compared to net gain of $42,112 during the same period last year, a decrease of $38,135 or 90.56%.



Noninterest expense



Noninterest expense increased $347,119 or 9.57% to $3,972,998 for the three months ended September 30, 2004 from the same period in 2003. This increase is principally due
to general increases in salary and benefits expense of $190,747 or 9.95%. Salary expense increased $155,655 over the prior year period as a result of general salary increases of $47,103, additional staffing expense within our home office of $30,843
and within the mortgage department of $31,874. Additional salary expenses of $47,103 are associated with our recently opened full service offices in Morehead City and Wilmington. Benefits during third quarter 2004 compared to 2003 increased $35,092
or 6.11% principally due to an increase in employee FICA tax and employee group insurance premiums of $12,307 and $11,527, respectively. Restricted stock incentive expense increased $10,645 during the third quarter of 2004 compared to third quarter
of 2003. Equipment expense increased $85,886 or 26.03% over the third quarter of 2003. Equipment maintenance increased $35,134, the result of upgraded core and item processing equipment. Equipment rental expense increased $42,901 as we implemented a
new voice and data system, upgraded to provide bank-wide voicemail and additional bandwidth to promote our network capabilities. Telephone expense decreased $34,882 or 31.71% over the prior year period, as we received a credit adjustment of $33,062
due to being over charged by our long distance carrier in prior billing periods. Other operating expenses increased $75,224 from $762,872 for the three months ended September 30, 2003 to $838,096 for the three months ended September 30, 2004. The
increase is primarily due to the charge-off of $92,201 in checks paid into overdraft that were deemed non-collectible in the current period. However, it is anticipated that a portion of the write-off will be recovered in a future period.



Income taxes



Income tax expense for the three months ended September 30, 2004 and 2003 was $500,000 and $435,000, respectively, resulting in effective
tax rates of 29.98% and 29.52%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



Comparison of Financial Condition at September 30, 2004 and December 31, 2003



Total assets increased $71.2 million to $506.2 million, an increase of 16.37% when compared
to $435.0 million at December 31, 2003. Asset growth was funded by increases in certificates of deposit of $33.7 million and demand deposits of $26.6 million. Approximately $26.4 million or 78.3% of the growth in certificates of deposit was
wholesale funds.



Gross loans increased $50.8 million or 18.03% from $281.6
million at December 31, 2003 to $332.4 million at September 30, 2004. We experienced steady loan demand from all of our markets during the first nine months of 2004.



Shareholders equity increased by $1,572,037 from December 31, 2003 to September 30, 2004, due to net income of $3,363,419 and the
recognition of deferred compensation of $74,203 on restricted stock awards, which was partially offset by an increase of net unrealized losses on available-for-sale securities of $740,964. During the nine months of 2004, we repurchased 8,600 shares
or $252,900 of our stock. We declared cash dividends of $871,721, or 42.75 cents per share, during 2004 compared to 37.50 cents per share in the prior year period.



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Asset Quality



Allowance for probable loan losses



The allowance for probable loan losses (AFLL) is established through a provision for probable loan losses charged against earnings. The level of the allowance for
probable loan losses reflects managements best estimate of probable losses inherent in the portfolio as of the balance sheet date and is based on managements evaluation of the risks in the loan portfolio and changes in the nature and
volume of loan activity. Managements evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers the loans risk grades, the estimated fair value of the underlying
collateral, current economic conditions, historical loan loss experience and other current factors that warrant consideration in determining an adequate allowance. 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. The allowance for probable loan losses as a percentage of loans
outstanding was 1.23% at September 30, 2004 and 1.26% at December 31, 2003.



Reserve Policy and Methodology



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



The general reserve percentages used have been
determined by management to be appropriate based primarily on historical loan losses and the level of risk assumed for the various risk grades.



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



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



17



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



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



Nonperforming assets consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans and other
repossessed collateral. It is 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 become doubtful. When loans are placed on
nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate
collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collectibility of principal or interest is no longer doubtful. Nonperforming assets were $139,347 and
$444,098 which represented .04% and .16% of loans outstanding at September 30, 2004 and December 31, 2003, respectively. At September 30, 2004, we had no loans considered to be impaired under SFAS No. 114 compared to $61,285 at December 31, 2003,
all of which were on a non-accrual basis. Trends and dollar amounts of nonperforming loans are used by management in evaluating the overall adequacy of the allowance for probable loan losses.



The provision for probable loan losses charged to operations during the nine months ended
September 30, 2004 was $575,000, compared to $465,000 for the same period in 2003. Net charge-offs during the first nine months of 2004 totaled $23,701, compared to net charge-offs of $94,398 during the same period in 2003. The amount charged for
provision for probable loan losses is the result of our review and evaluation of the portfolio, which considers current economic conditions, past due loans, and prior loan loss experience.



Liquidity



The Company relies on the investment portfolio as a source of liquidity, with maturities designed to provide needed cash flows. Further,
retail deposits generated throughout the branch network have enabled management to fund asset growth and maintain liquidity. External sources of funds include the ability to access advances from the Federal



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Home Loan Bank of Atlanta, wholesale CD (brokered deposits) market, internet deposit bulletin boards and Fed Fund lines
with correspondent banks. Short-term borrowings increased $4.9 million during the first nine months of 2004.



Capital Resources



Bancorp and
the Bank are subject to the capital requirements of the Federal Reserve, the FDIC and the North Carolina State Banking Commission. The FDIC requires the Bank to maintain minimum ratios of Tier I capital to total risk-weighted assets and total
capital to risk-weighted assets of 4% and 8%, respectively. To be well capitalized, the FDIC requires ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 6% and 10%, respectively. Tier I
capital consists of total stockholders equity calculated in accordance with generally accepted accounting principles excluding unrealized gains or losses (net of deferred income taxes) on securities available-for-sale, and total capital is
comprised of Tier I capital plus certain adjustments, the only one of which applicable to the Bank is the allowance for probable loan losses. Risk-weighted assets reflect the Banks on- and off-balance sheet exposures after such exposures have
been adjusted for their relative risk levels using formulas set forth in FDIC regulations. As of September 30, 2004, the Bank was in compliance with all of the aforementioned capital requirements and meets the well-capitalized definition
that is used by the FDIC in its evaluation of insured banks. Additionally, at September 30, 2004, Bancorp was also in compliance with the similar capital requirements set forth by the Federal Reserve and was classified as well-capitalized.



The following table lists Bancorps regulatory capital ratios at
September 30, 2004 and December 31, 2003.



|                                                                                                            |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|----------------------------------------------------------------------------------------------------------- |  | --------------------- | - |  | -------------------------------- | - |  | ------------------------- | - |  | -------------------------- | -
|                                                                                                            |  | Minimum Requiredratio |   |  | Required to be wellcapitalized |   |  | Bancorpsratio at 9-30-04 |   |  | Bancorpsratio at 12-31-03 |  
|Risk-based capital ratios:                                                                                  |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|Tier 1 capital to risk-weighted assets                                                                      |  | 4.0                   | % |  | 6.0                              | % |  | 10.78                     | % |  | 11.41                      | %
|Total capital to risk-weighted assets                                                                       |  | 8.0                   | % |  | 10.0                             | % |  | 11.84                     | % |  | 12.52                      | %
|Leverage capital ratio                                                                                      |  | 3.0                   | % |  | 5.0                              | % |  | 8.29                      | % |  | 9.31                       | %
|                                                                                                           
|The following table lists the Banks regulatory capital ratios at September 30, 2004 and
December 31, 2003. | 
|                                                                                                            |  | Minimum Requiredratio |   |  | Required to be wellcapitalized |   |  | Banks ratio at 9-30-04   |   |  | Banks ratio at 12-31-03   |  
|Risk-based capital ratios:                                                                                  |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|Tier 1 capital to risk-weighted assets                                                                      |  | 4.0                   | % |  | 6.0                              | % |  | 10.72                     | % |  | 11.32                      | %
|Total capital to risk-weighted assets                                                                       |  | 8.0                   | % |  | 10.0                             | % |  | 11.79                     | % |  | 12.34                      | %
|Leverage capital ratio                                                                                      |  | 3.0                   | % |  | 5.0                              | % |  | 8.24                      | % |  | 9.25                       | %



As of September 30, 2004 all of the
trust preferred securities issued on June 26, 2002 qualify as Tier 1 capital for regulatory capital adequacy requirements for Bancorp. The entire original $10 million was infused into the Bank, increasing the Banks Tier 1 capital by $10
million.



Regulatory Matters



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



The Sarbanes-Oxley Act of 2002 is sweeping federal legislation that was signed into law on July 30, 2002 and that addresses accounting,
corporate governance and disclosure issues relating to public companies. Some of the provisions of the Act became effective immediately, while others are still in the process of being implemented. In general, the Act mandates important new corporate
governance, financial reporting and disclosure requirements intended to enhance the accuracy and transparency of public companies reported financial results. It establishes new responsibilities for corporate chief executive officers and chief
financial officers and boards of directors in the financial reporting process, and it creates a new regulatory body to oversee auditors of public companies. The economic and operational effects of the Act on public companies, including the Company,
have been and will continue to be significant in terms of the increased time, resources and costs associated with complying with the new law. Because the Act, for the most part, applies equally to large and small public companies, it will continue
to present the Company with particular challenges, and increased audit fees and compliance costs associated with the Act could have a negative effect on our results of operations.



Current Accounting Issues



The Financial Accounting Standards Board (FASB) issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are
subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of
the Company and monitors the status of changes to issued exposure drafts and to proposed effective dates. See footnote 8 of the Notes to Consolidated Financial Statements for discussion on new accounting pronouncements.



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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, 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.



Item 3. Controls and Procedures



Our Management, with the participation of our Chief Executive Officer and Chief Financial
Officer have evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934 (the Exchange Act). Based on their evaluation, the Chief
Executive Officer and Chief Financial Officer, have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in enabling us to record, process, summarize and report in a timely manner
the information required to be disclosed in reports we file under the Exchange Act.



No change in our internal control over financial reporting occurred during the three months ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



None.



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



Not applicable.



Item 3. Defaults upon Senior Securities



Not applicable.



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



None.



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Item 5. Other Information



Not applicable.



Item 6. Exhibits



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



21



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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)                   



22