##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the Quarterly Period Ended September 30, 2006

or



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

For the transition period fromto

Commission File No. 000-24753



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ECB Bancorp,
Inc.

(Exact name of registrant as specified in its charter)



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



|                                               |  |           
|---------------------------------------------- |  | ----------
|Post Office Box 337, Engelhard, North Carolina |  | 27824     
|(Address of principal executive offices)       |  | (Zip Code)

(252) 925-9411

(Registrants telephone number, including area code)



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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

As of November 10, 2006, 2,902,242 shares of the registrants common stock, $3.50 par value, were outstanding.

This Form 10-Q has 33 pages.



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##### Table of Contents

Table of Contents



|                                                                                                             |  |               
|------------------------------------------------------------------------------------------------------------ |  | --------------
|Index                                                                                                        |  | Begins on Page
|Part 1  Financial Information                                                                               |  |               
|                                                                                                             | 
|Item 1. Financial Statements:                                                                                |  |               
|                                                                                                             | 
|Consolidated Balance Sheets at September 30, 2006 and December 31, 2005                                      |  | 3             
|                                                                                                             | 
|Consolidated Income Statements for Three and Nine Months Ended September 30, 2006 and 2005                   |  | 4             
|                                                                                                             | 
|Consolidated Statements of Changes in Shareholders Equity for Nine Months Ended September 30, 2006 and 2005 |  | 5             
|                                                                                                             | 
|Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2006 and 2005                      |  | 6             
|                                                                                                             | 
|Notes to Consolidated Financial Statements                                                                   |  | 7             
|                                                                                                             | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 14            
|                                                                                                             | 
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                           |  | 27            
|                                                                                                             | 
|Item 4. Controls and Procedures                                                                              |  | 28            
|                                                                                                             | 
|Part II  Other Information                                                                                  |  |               
|                                                                                                             | 
|Item 1. Legal Proceedings                                                                                    |  | 28            
|                                                                                                             | 
|Item 1A. Risk Factors                                                                                        |  | 28            
|                                                                                                             | 
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                          |  | 28            
|                                                                                                             | 
|Item 3. Defaults upon Senior Securities                                                                      |  | 28            
|                                                                                                             | 
|Item 4. Submission of Matters to a Vote of Security Holders                                                  |  | 28            
|                                                                                                             | 
|Item 5. Other Information                                                                                    |  | 28            
|                                                                                                             | 
|Item 6. Exhibits                                                                                             |  | 28            
|                                                                                                             | 
|Signatures                                                                                                   |  | 29            
|                                                                                                             | 
|Exhibit Index                                                                                                |  | 30            
|                                                                                                             | 
|EX- 31.1                                                                                                     |  |               
|                                                                                                             | 
|EX- 31.2                                                                                                     |  |               
|                                                                                                             | 
|EX- 32                                                                                                       |  |               



2



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2006 and December 31, 2005

(Dollars in thousands, except for
per share data)



|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ------------------ | - | ------- | -
|                                                                                                                                                                 |  | September 30, 2006 |         |   | December 31, 2005* |  
|                                                                                                                                                                 |  | (unaudited)        |         |   |                    |  
|Assets                                                                                                                                                           |  |                    |         |   |                    |   |         |  
|Non-interest bearing deposits and cash                                                                                                                           |  | $                  | 15,053  |   |                    | $ | 17,927  |  
|Interest bearing deposits                                                                                                                                        |  |                    | 878     |   |                    |   | 912     |  
|Overnight investments                                                                                                                                            |  |                    | 6,775   |   |                    |   |        |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Total cash and cash equivalents                                                                                                                                  |  |                    | 22,706  |   |                    |   | 18,839  |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Investment securities                                                                                                                                            |  |                    |         |   |                    |   |         |  
|Available-for-sale, at market value (cost of $116,678 and $107,084 at September 30, 2006 and December 31, 2005,
respectively)                                    |  |                    | 114,449 |   |                    |   | 104,723 |  
|                                                                                                                                                                 |  |                   
|Loans                                                                                                                                                            |  |                    | 422,975 |   |                    |   | 386,786 |  
|Allowance for loan losses                                                                                                                                        |  |                    | (4,858  | ) |                    |   | (4,650  | )
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Loans, net                                                                                                                                                       |  |                    | 418,117 |   |                    |   | 382,136 |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Real estate and repossessions acquired in settlement of loans, net                                                                                               |  |                    | 315     |   |                    |   |        |  
|Federal Home Loan Bank common stock, at cost                                                                                                                     |  |                    | 2,354   |   |                    |   | 1,948   |  
|Bank premises and equipment, net                                                                                                                                 |  |                    | 21,181  |   |                    |   | 18,859  |  
|Accrued interest receivable                                                                                                                                      |  |                    | 4,524   |   |                    |   | 3,562   |  
|Bank owned life insurance                                                                                                                                        |  |                    | 7,663   |   |                    |   | 7,436   |  
|Other assets                                                                                                                                                     |  |                    | 8,225   |   |                    |   | 10,183  |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Total                                                                                                                                                            |  | $                  | 599,534 |   |                    | $ | 547,686 |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Liabilities and Shareholders Equity                                                                                                                             |  |                    |         |   |                    |   |         |  
|Deposits                                                                                                                                                         |  |                    |         |   |                    |   |         |  
|Demand, noninterest bearing                                                                                                                                      |  | $                  | 99,100  |   |                    | $ | 98,890  |  
|Demand, interest bearing                                                                                                                                         |  |                    | 87,738  |   |                    |   | 94,423  |  
|Savings                                                                                                                                                          |  |                    | 21,400  |   |                    |   | 22,818  |  
|Time                                                                                                                                                             |  |                    | 265,994 |   |                    |   | 249,077 |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Total deposits                                                                                                                                                   |  |                    | 474,232 |   |                    |   | 465,208 |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Accrued interest payable                                                                                                                                         |  |                    | 2,240   |   |                    |   | 1,524   |  
|Short-term borrowings                                                                                                                                            |  |                    | 46,184  |   |                    |   | 23,598  |  
|Long-term obligations                                                                                                                                            |  |                    | 10,310  |   |                    |   | 18,310  |  
|Other liabilities                                                                                                                                                |  |                    | 4,795   |   |                    |   | 4,481   |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Total liabilities                                                                                                                                                |  |                    | 537,761 |   |                    |   | 513,121 |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Shareholders equity                                                                                                                                             |  |                    |         |   |                    |   |         |  
|Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,902,242 at September 30, 2006 and
2,040,042 at December 31, 2005 |  |                    | 10,119  |   |                    |   | 7,140   |  
|Capital surplus                                                                                                                                                  |  |                    | 26,572  |   |                    |   | 5,408   |  
|Retained earnings                                                                                                                                                |  |                    | 26,453  |   |                    |   | 23,724  |  
|Deferred compensation - restricted stock                                                                                                                         |  |                    |        |   |                    |   | (255    | )
|Accumulated other comprehensive loss                                                                                                                             |  |                    | (1,371  | ) |                    |   | (1,452  | )
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Total shareholders equity                                                                                                                                       |  |                    | 61,773  |   |                    |   | 34,565  |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  
|Total                                                                                                                                                            |  | $                  | 599,534 |   |                    | $ | 547,686 |  
|                                                                                                                                                                 |  |                    |         |   |                    |   |         |  

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

See
accompanying notes to consolidated financial statements.



3



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For the three and nine months ended September 30, 2006 and 2005

(Dollars in thousands, except for per share data)



|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|--------------------------------------------------- |  | -------------------------------- | --------- | ------------------------------- | - | --------- |  | ---- | --------- |  | - | ---------
|                                                    |  | Three months ended September 30, |           | Nine months ended September 30,
|                                                    |  | 2006                             |           | 2005                            |   | 2006      |  | 2005
|                                                    |  | (unaudited)                      |           | (unaudited)                    
|Interest income:                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Interest and fees on loans                          |  | $                                | 8,176     |                                 | $ | 6,316     |  | $    | 22,923    |  | $ | 17,181   
|Interest on investment securities:                  |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Interest exempt from federal income taxes           |  |                                  | 263       |                                 |   | 288       |  |      | 795       |  |   | 861      
|Taxable interest income                             |  |                                  | 855       |                                 |   | 794       |  |      | 2,505     |  |   | 2,290    
|Dividend income                                     |  |                                  |          |                                 |   |          |  |      |          |  |   | 37       
|FHLB stock dividends                                |  |                                  | 24        |                                 |   | 24        |  |      | 100       |  |   | 57       
|Other interest                                      |  |                                  | 49        |                                 |   | 110       |  |      | 270       |  |   | 188      
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Total interest income                               |  |                                  | 9,367     |                                 |   | 7,532     |  |      | 26,593    |  |   | 20,614   
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Interest expense:                                   |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Deposits:                                           |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Demand accounts                                     |  |                                  | 357       |                                 |   | 135       |  |      | 901       |  |   | 373      
|Savings                                             |  |                                  | 27        |                                 |   | 29        |  |      | 83        |  |   | 87       
|Time                                                |  |                                  | 2,971     |                                 |   | 1,887     |  |      | 8,397     |  |   | 4,688    
|Short-term borrowings                               |  |                                  | 161       |                                 |   | 109       |  |      | 377       |  |   | 343      
|Long-term obligations                               |  |                                  | 446       |                                 |   | 405       |  |      | 1,301     |  |   | 1,157    
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Total interest expense                              |  |                                  | 3,962     |                                 |   | 2,565     |  |      | 11,059    |  |   | 6,648    
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Net interest income                                 |  |                                  | 5,405     |                                 |   | 4,967     |  |      | 15,534    |  |   | 13,966   
|Provision for loan losses                           |  |                                  | 50        |                                 |   | 150       |  |      | 450       |  |   | 340      
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Net interest income after provision for loan losses |  |                                  | 5,355     |                                 |   | 4,817     |  |      | 15,084    |  |   | 13,626   
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Noninterest income:                                 |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Service charges on deposit accounts                 |  |                                  | 656       |                                 |   | 837       |  |      | 2,269     |  |   | 2,471    
|Other service charges and fees                      |  |                                  | 769       |                                 |   | 600       |  |      | 1,812     |  |   | 1,523    
|Net gain on sale of securities                      |  |                                  |          |                                 |   |          |  |      |          |  |   | 90       
|Income from investments in SBICs                   |  |                                  | 235       |                                 |   |          |  |      | 235       |  |   |         
|Income from bank owned life insurance               |  |                                  | 70        |                                 |   | 65        |  |      | 227       |  |   | 190      
|Other operating income                              |  |                                  | 23        |                                 |   | 35        |  |      | 74        |  |   | 89       
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Total noninterest income                            |  |                                  | 1,753     |                                 |   | 1,537     |  |      | 4,617     |  |   | 4,363    
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Noninterest expenses:                               |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Salaries                                            |  |                                  | 1,901     |                                 |   | 1,713     |  |      | 5,519     |  |   | 4,962    
|Retirement and other employee benefits              |  |                                  | 681       |                                 |   | 663       |  |      | 2,013     |  |   | 1,976    
|Occupancy                                           |  |                                  | 408       |                                 |   | 381       |  |      | 1,218     |  |   | 1,061    
|Equipment                                           |  |                                  | 424       |                                 |   | 430       |  |      | 1,292     |  |   | 1,299    
|Professional fees                                   |  |                                  | 78        |                                 |   | 114       |  |      | 157       |  |   | 385      
|Supplies                                            |  |                                  | 78        |                                 |   | 90        |  |      | 236       |  |   | 252      
|Telephone                                           |  |                                  | 133       |                                 |   | 121       |  |      | 370       |  |   | 386      
|Postage                                             |  |                                  | 53        |                                 |   | 51        |  |      | 167       |  |   | 157      
|Other operating expenses                            |  |                                  | 835       |                                 |   | 792       |  |      | 2,527     |  |   | 2,411    
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Total noninterest expenses                          |  |                                  | 4,591     |                                 |   | 4,355     |  |      | 13,499    |  |   | 12,889   
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Income before income taxes                          |  |                                  | 2,517     |                                 |   | 1,999     |  |      | 6,202     |  |   | 5,100    
|Income taxes                                        |  |                                  | 822       |                                 |   | 632       |  |      | 1,994     |  |   | 1,515    
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Net income                                          |  | $                                | 1,695     |                                 | $ | 1,367     |  | $    | 4,208     |  | $ | 3,585    
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Net income per share - basic                        |  | $                                | 0.59      |                                 | $ | 0.68      |  | $    | 1.60      |  | $ | 1.78     
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Net income per share - diluted                      |  | $                                | 0.58      |                                 | $ | 0.67      |  | $    | 1.58      |  | $ | 1.75     
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Weighted average shares outstanding - basic         |  |                                  | 2,886,440 |                                 |   | 2,014,874 |  |      | 2,638,050 |  |   | 2,014,878
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          
|Weighted average shares outstanding - diluted       |  |                                  | 2,910,721 |                                 |   | 2,047,098 |  |      | 2,663,337 |  |   | 2,047,607
|                                                    |  |                                  |           |                                 |   |           |  |      |           |  |   |          

See accompanying notes to consolidated financial statements.



4



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders Equity

Nine months ended September 30, 2006 and 2005

(Dollars in thousands, except for per share data)



|                                                                                                |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | ------------ | - |  | --------------- | ------ | - | ----------------- | - | ------ | --------------------------------------- |  | - | ------------------------------------ | - |  | -------------------- | ---- | - | ----- | - | ------ | - |  | - | ----- | - |  | - | ------ | -
|                                                                                                |  | Common Stock |   |  | Capital surplus |        |   | Retained earnings |   |        | Deferred compensation- restricted stock |  |   | Accumulated other comprehensive loss |   |  | Comprehensive income |      |   | Total |  
|                                                                                                |  | Number       |   |  | Amount          |        |   |                   |   |        |                                         | 
|Balance January 1, 2005                                                                         |  | 2,038,242    |   |  | $               | 7,134  |   |                   | $ | 5,360  |                                         |  | $ | 20,176                               |   |  | $                    | (306 | ) |       | $ | (287   | ) |  |   |       |   |  | $ | 32,077 |  
|Unrealized loss, net of income tax benefit of $228                                              |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   | (365   | ) |  | $ | (365  | ) |  |   | (365   | )
|Net income                                                                                      |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   | 3,585                                |   |  |                      |      |   |       |   |        |   |  |   | 3,585 |   |  |   | 3,585  |  
|                                                                                                |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                      |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  | $ | 3,220 |   |  |   |        |  
|                                                                                                |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   |        |  
|Deferred compensation - restricted stock issuance                                               |  | 1,800        |   |  |                 | 6      |   |                   |   | 48     |                                         |  |   |                                      |   |  |                      | (54  | ) |       |   |        |   |  |   |       |   |  |   |        |  
|Recognition of deferred compensation - restricted stock                                         |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      | 77   |   |       |   |        |   |  |   |       |   |  |   | 77     |  
|Cash dividends ($.48 per share)                                                                 |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   | (979                                 | ) |  |                      |      |   |       |   |        |   |  |   | (979  | ) |  |   |        |  
|                                                                                                |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   |        |  
|Balance September 30, 2005                                                                      |  | 2,040,042    |   |  | $               | 7,140  |   |                   | $ | 5,408  |                                         |  | $ | 22,782                               |   |  | $                    | (283 | ) |       | $ | (652   | ) |  |   |       |   |  | $ | 34,395 |  
|                                                                                                |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   |        |  
|                                                                                                |  |              |   |  |                 |        |  
|                                                                                                |  | Common Stock |   |  | Capital surplus |        |   | Retained earnings |   |        | Deferred compensation- restricted stock |  |   | Accumulated other comprehensive loss |   |  | Comprehensive income |      |   | Total |  
|                                                                                                |  | Number       |   |  | Amount          |        |   |                   |   |        |                                         | 
|Balance January 1, 2006                                                                         |  | 2,040,042    |   |  | $               | 7,140  |   |                   | $ | 5,408  |                                         |  | $ | 23,724                               |   |  | $                    | (255 | ) |       | $ | (1,452 | ) |  |   |       |   |  | $ | 34,565 |  
|Unrealized gain, net of income tax of $ (51)                                                    |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   | 81     |   |  | $ | 81    |   |  |   | 81     |  
|Net income                                                                                      |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   | 4,208                                |   |  |                      |      |   |       |   |        |   |  |   | 4,208 |   |  |   | 4,208  |  
|                                                                                                |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                      |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  | $ | 4,289 |   |  |   |        |  
|                                                                                                |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   |        |  
|Issuance of common stock                                                                        |  | 862,500      |   |  |                 | 3,019  |   |                   |   | 23,503 |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   | 26,522 |  
|Expenses related to issuance of common stock                                                    |  |              |   |  |                 |        |   |                   |   | (2,258 | )                                       |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   | (2,258 | )
|Stock based compensation                                                                        |  | (300         | ) |  |                 | 18     |   |                   |   | 116    |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   | 134    |  
|Reclass of deferred restricted stock compensation due to adoption of SFAS No. 123R (See note 4) |  |              |   |  |                 | (58    | ) |                   |   | (197   | )                                       |  |   |                                      |   |  |                      | 255  |   |       |   |        |   |  |   |       |   |  |   |        |  
|Cash dividends ($.51 per share)                                                                 |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   | (1,479                               | ) |  |                      |      |   |       |   |        |   |  |   |       |   |  |   | (1,479 | )
|                                                                                                |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   |        |  
|Balance September 30, 2006                                                                      |  | 2,902,242    |   |  | $               | 10,119 |   |                   | $ | 26,572 |                                         |  | $ | 26,453                               |   |  | $                    |     |   |       | $ | (1,371 | ) |  |   |       |   |  | $ | 61,773 |  
|                                                                                                |  |              |   |  |                 |        |   |                   |   |        |                                         |  |   |                                      |   |  |                      |      |   |       |   |        |   |  |   |       |   |  |   |        |  

See accompanying notes to consolidated financial statements.



5



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Nine months ended September 30, 2006 and 2005

(Dollars in thousands)



|                                                                                   |  |                                 |         |   |      |   |         |  
|---------------------------------------------------------------------------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                   |  | Nine months ended September 30, |        
|                                                                                   |  | 2006                            |         |   | 2005 |  
|                                                                                   |  | (unaudited)                     |        
|Cash flows from operating activities:                                              |  |                                 |         |   |      |   |         |  
|Net income                                                                         |  | $                               | 4,208   |   |      | $ | 3,585   |  
|Adjustments to reconcile net income to net cash provided by operating activities:  |  |                                 |         |   |      |   |         |  
|Depreciation                                                                       |  |                                 | 906     |   |      |   | 854     |  
|Amortization of premium on investment securities, net                              |  |                                 | 85      |   |      |   | 194     |  
|Provision for loan losses                                                          |  |                                 | 450     |   |      |   | 340     |  
|Net charge-offs on loans                                                           |  |                                 | (2      | ) |      |   | (52     | )
|Gain on sale of securities                                                         |  |                                 |        |   |      |   | (90     | )
|Stock based compensation                                                           |  |                                 | 134     |   |      |   | 77      |  
|Increase in accrued interest receivable                                            |  |                                 | (962    | ) |      |   | (784    | )
|(Gain) on disposal of premises and equipment                                       |  |                                 |        |   |      |   | (3      | )
|(Gain) on sale of real estate acquired in settlement of loans                      |  |                                 |        |   |      |   | (17     | )
|Income from Bank owned life insurance                                              |  |                                 | (227    | ) |      |   | (190    | )
|Decrease (increase) in other assets                                                |  |                                 | 1,958   |   |      |   | (831    | )
|Increase in accrued interest payable                                               |  |                                 | 716     |   |      |   | 439     |  
|(Decrease) increase in other liabilities, net                                      |  |                                 | (144    | ) |      |   | 895     |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                          |  |                                 | 7,122   |   |      |   | 4,417   |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Cash flows from investing activities:                                              |  |                                 |         |   |      |   |         |  
|Proceeds from sales of investment securities classified as available-for-sale      |  |                                 |        |   |      |   | 4,367   |  
|Proceeds from maturities of investment securities classified as available-for-sale |  |                                 | 6,629   |   |      |   | 9,329   |  
|Purchases of investment securities classified as available-for-sale                |  |                                 | (16,308 | ) |      |   | (15,357 | )
|Purchase of Federal Home Loan Bank common stock                                    |  |                                 | (406    | ) |      |   | (1      | )
|Purchases of premises and equipment                                                |  |                                 | (3,228  | ) |      |   | (2,105  | )
|Purchases of life insurance                                                        |  |                                 |        |   |      |   | (490    | )
|Net loan originations                                                              |  |                                 | (36,504 | ) |      |   | (41,293 | )
|                                                                                   |  |                                 |         |   |      |   |         |  
|Net cash used by investing activities                                              |  |                                 | (49,817 | ) |      |   | (45,550 | )
|                                                                                   |  |                                 |         |   |      |   |         |  
|Cash flows from financing activities:                                              |  |                                 |         |   |      |   |         |  
|Net increase in deposits                                                           |  |                                 | 9,024   |   |      |   | 45,926  |  
|Net increase (decrease) in borrowings                                              |  |                                 | 14,586  |   |      |   | (8,494  | )
|Dividends paid                                                                     |  |                                 | (1,312  | ) |      |   | (943    | )
|Net proceeds from issuance of common stock                                         |  |                                 | 24,264  |   |      |   |        |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Net cash provided by financing activities                                          |  |                                 | 46,562  |   |      |   | 36,489  |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                                   |  |                                 | 3,867   |   |      |   | (4,644  | )
|Cash and cash equivalents at beginning of period                                   |  |                                 | 18,839  |   |      |   | 28,263  |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                         |  | $                               | 22,706  |   |      | $ | 23,619  |  
|                                                                                   |  |                                 |         |   |      |   |         |  
|Cash paid during the period:                                                       |  |                                 |         |   |      |   |         |  
|Interest                                                                           |  | $                               | 10,343  |   |      | $ | 6,210   |  
|Taxes                                                                              |  |                                 | 833     |   |      |   | 2,181   |  
|Supplemental disclosures of noncash financing and investing activities:            |  |                                 |         |   |      |   |         |  
|Cash dividends declared but not paid                                               |  | $                               | 493     |   |      | $ | 326     |  
|Unrealized gain (loss) on available-for-sale securities, net of deferred taxes     |  |                                 | 81      |   |      |   | (365    | )
|Restricted stock issuance                                                          |  |                                 |        |   |      |   | 54      |  
|Reserve transferred from allowance for loan losses to other liabilities            |  |                                 | 240     |   |      |   |        |  
|Transfer from loans to real estate acquired in settlement of loans                 |  |                                 | 315     |   |      |   |        |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

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 loan losses. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties held as
collateral for loans.

All adjustments considered necessary for a fair presentation of the results for the interim periods presented have
been included (such adjustments are normal and recurring in nature). The footnotes in Bancorps 2005 Annual Report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the three and
nine-month period ended September 30, 2006, are not necessarily indicative of the results that may be expected for the year ending December 31, 2006.

Reclassification

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

(2) Allowance for Loan Losses

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



|                                       |  |                                 |       |   |      |   |       |  
|-------------------------------------- |  | ------------------------------- | ----- | - | ---- | - | ----- | -
|                                       |  | Nine months ended September 30, |      
|                                       |  | 2006                            |       |   | 2005 |  
|                                       |  | (Dollars in thousands)          |      
|Balance at the beginning of the period |  | $                               | 4,650 |   |      | $ | 4,300 |  
|Provision for loan losses              |  |                                 | 450   |   |      |   | 340   |  
|Charge-offs                            |  |                                 | (90   | ) |      |   | (85   | )
|Recoveries                             |  |                                 | 88    |   |      |   | 33    |  
|Net charge-offs                        |  |                                 | (2    | ) |      |   | (52   | )
|Adjustment for unfunded loans (1)      |  |                                 | (240  | ) |      |   |      |  
|Balance at end of the period           |  | $                               | 4,858 |   |      | $ | 4,588 |  

---

|(1) | $240 thousand allocated to approximately $80 million of committed but unfunded loan obligations was reclassed to other liabilities from the Banks allowance for loan losses.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(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.



7



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##### Table of Contents

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, 2006 and 2005, diluted weighted average shares outstanding increased by 16,207 and 17,377, respectively, due to the dilutive impact of restricted
stock. For the three months ended September 30, 2006 and 2005, diluted weighted average shares outstanding increased by 15,802 and 17,267, 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,
2006 and 2005, diluted weighted average shares outstanding increased by 9,080 and 15,352, respectively, due to the dilutive impact of options. For the three months ended September 30, 2006 and 2005, diluted weighted average shares outstanding
increased by 8,479 and 14,957, 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 for the nine months ended September 30.



|                              |  |                                               |       |                      |           |                  |   |     
|----------------------------- |  | --------------------------------------------- | ----- | -------------------- | --------- | ---------------- | - | ----
|                              |  | Nine months ended September 30, 2006         
|                              |  | Income (Numerator)                            |       | Shares (Denominator) |           | Per Share Amount
|                              |  | (Dollars in thousands, except per share data)
|Basic net income per share    |  | $                                             | 4,208 |                      | 2,638,050 |                  | $ | 1.60
|                              |  |                                               |       |                      |           |                  |   |     
|Effect of dilutive securities |  |                                               |      |                      | 25,287    |                  |   |     
|                              |  |                                               |       |                      |           |                  |   |     
|Diluted net income per share  |  | $                                             | 4,208 |                      | 2,663,337 |                  | $ | 1.58
|                              |  |                                               |       |                      |           |                  |   |     
|                              | 
|                              |  | Nine months ended September 30, 2005         
|                              |  | Income (Numerator)                            |       | Shares (Denominator) |           | Per Share Amount
|                              |  | (Dollars in thousands, except per share data)
|Basic net income per share    |  | $                                             | 3,585 |                      | 2,014,878 |                  | $ | 1.78
|                              |  |                                               |       |                      |           |                  |   |     
|Effect of dilutive securities |  |                                               |      |                      | 32,729    |                  |   |     
|                              |  |                                               |       |                      |           |                  |   |     
|Diluted net income per share  |  | $                                             | 3,585 |                      | 2,047,607 |                  | $ | 1.75
|                              |  |                                               |       |                      |           |                  |   |     



8



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##### Table of Contents

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



|                              |  |                                               |       |                      |           |                  |   |     
|----------------------------- |  | --------------------------------------------- | ----- | -------------------- | --------- | ---------------- | - | ----
|                              |  | Three months ended September 30, 2006        
|                              |  | Income (Numerator)                            |       | Shares (Denominator) |           | Per Share Amount
|                              |  | (Dollars in thousands, except per share data)
|Basic net income per share    |  | $                                             | 1,695 |                      | 2,886,440 |                  | $ | 0.59
|                              |  |                                               |       |                      |           |                  |   |     
|Effect of dilutive securities |  |                                               |      |                      | 24,281    |                  |   |     
|                              |  |                                               |       |                      |           |                  |   |     
|Diluted net income per share  |  | $                                             | 1,695 |                      | 2,910,721 |                  | $ | 0.58
|                              |  |                                               |       |                      |           |                  |   |     
|                              | 
|                              |  | Three months ended September 30, 2005        
|                              |  | Income (Numerator)                            |       | Shares (Denominator) |           | Per Share Amount
|                              |  | (Dollars in thousands, except per share data)
|Basic net income per share    |  | $                                             | 1,367 |                      | 2,014,874 |                  | $ | 0.68
|                              |  |                                               |       |                      |           |                  |   |     
|Effect of dilutive securities |  |                                               |      |                      | 32,224    |                  |   |     
|                              |  |                                               |       |                      |           |                  |   |     
|Diluted net income per share  |  | $                                             | 1,367 |                      | 2,047,098 |                  | $ | 0.67
|                              |  |                                               |       |                      |           |                  |   |     

(4) Stock Option Plan

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

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

Compensation cost charged to income was approximately $134 thousand for the nine months ended
September 30, 2006 as a result of the implementation of SFAS No. 123R. No income tax benefit was recognized for share-based compensation, as the Company does not have any outstanding nonqualified stock options.

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

During 1998, the Company adopted an Omnibus Stock Ownership and Long-Term Incentive Plan (the Omnibus Plan) which provides for the issuance of up to an aggregate of 159,000 shares of common stock of the Company
pursuant to stock options and other awards granted or issued under its terms. It is the Companys policy to issue new shares to satisfy option exercises. Stock options generally vest one-third each year beginning three years after the grant
date and expire after 10 years. However, certain grants vest one-third each year, beginning one year after the grant date. Restricted stock generally vest one-third each year beginning three years after the grant date.



9



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##### Table of Contents

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

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



|                                  |  |                                               |  |                                 |       |                                    |            |                           |   |    
|--------------------------------- |  | --------------------------------------------- |  | ------------------------------- | ----- | ---------------------------------- | ---------- | ------------------------- | - | ---
|                                  |  | Options Outstanding                           |  | Weighted Average Exercise Price |       | Average Remaining Contractual Term |            | Aggregate Intrinsic Value
|                                  |  | (Dollars in thousands, except per share data)
|Outstanding at December 31, 2005  |  | 43,389                                        |  | $                               | 19.04 |                                    |            |                           |   |    
|Granted                           |  | 18,087                                        |  | $                               | 28.52 |                                    |            |                           |   |    
|Forfeited                         |  |                                              |  | $                               | n/a   |                                    |            |                           |   |    
|Exercised                         |  |                                              |  | $                               | n/a   |                                    |            |                           |   |    
|                                  |  |                                               |  |                                 |       |                                    |            |                           |   |    
|Outstanding at September 30, 2006 |  | 61,476                                        |  | $                               | 21.83 |                                    | 6.65 years |                           | $ | 686
|                                  |  |                                               |  |                                 |       |                                    |            |                           |   |    
|Exercisable at September 30, 2006 |  | 25,587                                        |  | $                               | 13.77 |                                    | 3.73 years |                           | $ | 492
|                                  |  |                                               |  |                                 |       |                                    |            |                           |   |    

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



|                                  |  |                                               |   |  |                                        |      
|--------------------------------- |  | --------------------------------------------- | - |  | -------------------------------------- | -----
|                                  |  | Non-vested Shares                             |   |  | Weighted Average Grant Date Fair Value
|                                  |  | (Dollars in thousands, except per share data)
|Outstanding at December 31, 2005  |  | 21,543                                        |   |  | $                                      | 22.73
|Granted                           |  |                                              |   |  | $                                      | n/a  
|Forfeited                         |  | (300                                          | ) |  | $                                      | 30.00
|Vested                            |  | (5,441                                        | ) |  | $                                      | 16.66
|                                  |  |                                               |   |  |                                        |      
|Outstanding at September 30, 2006 |  | 15,802                                        |   |  | $                                      | 24.68
|                                  |  |                                               |   |  |                                        |      

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



|                              |  |                        |     |                         |   |       |  |   |    
|----------------------------- |  | ---------------------- | --- | ----------------------- | - | ----- |  | - | ---
|                              |  | Stock Options          |     | Restricted Stock Grants |   | Total
|                              |  | (Dollars in thousands)
|October 1  December 31, 2006 |  | $                      | 22  |                         | $ | 24    |  | $ | 46 
|2007                          |  |                        | 84  |                         |   | 96    |  |   | 180
|2008                          |  |                        | 67  |                         |   | 57    |  |   | 124
|2009                          |  |                        | 34  |                         |   |      |  |   | 34 
|2010                          |  |                        | 21  |                         |   |      |  |   | 21 
|2011                          |  |                        | 1   |                         |   |      |  |   | 1  
|                              |  |                        |     |                         |   |       |  |   |    
|Total                         |  | $                      | 229 |                         | $ | 177   |  | $ | 406
|                              |  |                        |     |                         |   |       |  |   |    



10



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

Consolidated Income Statement for the Nine Months Ended
September 30, 2006

(Dollars in thousands except per share data)



|                               |  |   |       |  
|------------------------------ |  | - | ----- | -
|Income before income taxes     |  | $ | (63   | )
|Net income                     |  |   | (63   | )
|                               |  |   |       |  
|Net income per share  basic   |  |   | (0.02 | )
|                               |  |   |       |  
|Net income per share  diluted |  | $ | (0.02 | )
|                               |  |   |       |  

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

(Dollars in thousands except per share data)



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

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



|                                                                                                                                            |  |                                               |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ----- | -
|                                                                                                                                            |  | Nine months ended September 30, 2005          |      
|                                                                                                                                            |  | (Dollars in thousands, except per share data) |      
|Net income, as reported                                                                                                                     |  | $                                             | 3,585 |  
|Total stock-based employee compensation included in net income                                                                              |  |                                               | 77    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                               | (90   | )
|                                                                                                                                            |  |                                               |       |  
|Proforma net income                                                                                                                         |  | $                                             | 3,572 |  
|                                                                                                                                            |  |                                               |       |  
|Earnings per share:                                                                                                                         |  |                                               |       |  
|Basic  as reported                                                                                                                         |  | $                                             | 1.78  |  
|                                                                                                                                            |  |                                               |       |  
|Basic  proforma                                                                                                                            |  |                                               | 1.77  |  
|                                                                                                                                            |  |                                               |       |  
|Diluted  as reported                                                                                                                       |  |                                               | 1.75  |  
|                                                                                                                                            |  |                                               |       |  
|Diluted  proforma                                                                                                                          |  |                                               | 1.74  |  
|                                                                                                                                            |  |                                               |       |  



11



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##### Table of Contents

|                                                                                                                                            |  |                                               |       |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------- | ----- | -
|                                                                                                                                            |  | Three months ended September 30, 2005         |      
|                                                                                                                                            |  | (Dollars in thousands, except per share data) |      
|Net income, as reported                                                                                                                     |  | $                                             | 1,367 |  
|Total stock-based employee compensation included in net income                                                                              |  |                                               | 29    |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                                               | (39   | )
|                                                                                                                                            |  |                                               |       |  
|Proforma net income                                                                                                                         |  | $                                             | 1,357 |  
|                                                                                                                                            |  |                                               |       |  
|Earnings per share:                                                                                                                         |  |                                               |       |  
|Basic  as reported                                                                                                                         |  | $                                             | 0.68  |  
|                                                                                                                                            |  |                                               |       |  
|Basic  proforma                                                                                                                            |  |                                               | 0.67  |  
|                                                                                                                                            |  |                                               |       |  
|Diluted  as reported                                                                                                                       |  |                                               | 0.67  |  
|                                                                                                                                            |  |                                               |       |  
|Diluted  proforma                                                                                                                          |  |                                               | 0.66  |  
|                                                                                                                                            |  |                                               |       |  

(5) Postretirement Benefits

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

The following tables provide
information relating to the Companys postretirement benefit plan:



|                                         |  |                                  |    |      |   |   
|---------------------------------------- |  | -------------------------------- | -- | ---- | - | --
|                                         |  | Nine months ended September 30, 
|                                         |  | 2006                             |    | 2005
|                                         |  | (Dollars in thousands)          
|Components of net periodic cost:         |  |                                  |    |      |   |   
|Service cost                             |  | $                                | 6  |      | $ | 5 
|Interest cost                            |  |                                  | 33 |      |   | 32
|Amortization of loss                     |  |                                  |   |      |   |  
|                                         |  |                                  |    |      |   |   
|Net periodic postretirement benefit cost |  | $                                | 39 |      | $ | 37
|                                         |  |                                  |    |      |   |   
|                                         | 
|                                         |  | Three months ended September 30,
|                                         |  | 2006                             |    | 2005
|                                         |  | (Dollars in thousands)          
|Components of net periodic cost:         |  |                                  |    |      |   |   
|Service cost                             |  | $                                | 2  |      | $ | 2 
|Interest cost                            |  |                                  | 11 |      |   | 11
|Amortization of loss                     |  |                                  |   |      |   |  
|                                         |  |                                  |    |      |   |   
|Net periodic postretirement benefit cost |  | $                                | 13 |      | $ | 13
|                                         |  |                                  |    |      |   |   



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

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

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

Impairment of
Certain Investments in Debt and Equity Securities



|                                                              |  |                        |       |                     |   |            |  |                   |        |            |   |                   |  |   |        |  |   |      
|------------------------------------------------------------- |  | ---------------------- | ----- | ------------------- | - | ---------- |  | ----------------- | ------ | ---------- | - | ----------------- |  | - | ------ |  | - | -----
|                                                              |  | Less than 12 months    |       | 12 months or longer |   | Total     
|Description of Securities                                     |  | Fair Value             |       | Unrealized Losses   |   | Fair Value |  | Unrealized Losses |        | Fair Value |   | Unrealized Losses
|                                                              |  | (Dollars in thousands)
|Securities of other U.S. government agencies and corporations |  | $                      | 4,424 |                     | $ | 8          |  | $                 | 22,827 |            | $ | 359               |  | $ | 27,251 |  | $ | 367  
|Obligations of states and political subdivisions              |  |                        | 3,258 |                     |   | 21         |  |                   | 13,236 |            |   | 428               |  |   | 16,494 |  |   | 449  
|Mortgage-backed securities                                    |  |                        |      |                     |   |           |  |                   | 46,690 |            |   | 1,540             |  |   | 46,690 |  |   | 1,540
|                                                              |  |                        |       |                     |   |            |  |                   |        |            |   |                   |  |   |        |  |   |      
|Total                                                         |  | $                      | 7,682 |                     | $ | 29         |  | $                 | 82,753 |            | $ | 2,327             |  | $ | 90,435 |  | $ | 2,356
|                                                              |  |                        |       |                     |   |            |  |                   |        |            |   |                   |  |   |        |  |   |      

As of September 30, 2006, management has concluded that the unrealized losses above (which consisted of 125
securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost. The losses above are on
securities that have contractual maturity dates and are primarily related to market interest rates. Securities that have been in an unrealized loss position for longer than 1 year include forty-six (46) municipal obligations, thirty-nine
(39) mortgage-backed securities and twenty-two (22) securities of U.S. government agencies. The unrealized losses associated with these securities are not considered to be other-than-temporary, because they are related to changes in
interest rates and do not affect the expected cash flows of the underlying collateral or the issuer.

(7) Comprehensive Income

A summary of comprehensive income is as follows:



|                                                                                                  |  |                                  |       |      |                                 |       |      |  |      |       |  |   |       |  
|------------------------------------------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | ------------------------------- | ----- | ---- |  | ---- | ----- |  | - | ----- | -
|                                                                                                  |  | Three Months Ended September 30, |       |      | Nine Months Ended September 30, |      
|                                                                                                  |  | 2006                             |       | 2005 |                                 |       | 2006 |  | 2005 |      
|                                                                                                  |  | (Dollars in thousands)           |      
|Net Income                                                                                        |  | $                                | 1,695 |      | $                               | 1,367 |      |  | $    | 4,208 |  | $ | 3,585 |  
|Other comprehensive income (loss):                                                                |  |                                  |       |      |                                 |       |      |  |      |       |  |   |       |  
|Net increase (decrease) in the fair value of investment securities available for sale, net of tax |  |                                  | 1,184 |      |                                 | (312  | )    |  |      | 81    |  |   | (365  | )
|                                                                                                  |  |                                  |       |      |                                 |       |      |  |      |       |  |   |       |  
|Total comprehensive income                                                                        |  | $                                | 2,879 |      | $                               | 1,055 |      |  | $    | 4,289 |  | $ | 3,220 |  
|                                                                                                  |  |                                  |       |      |                                 |       |      |  |      |       |  |   |       |  

(8) New Accounting Pronouncements

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

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



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Instruments and Hedging Activities, and SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. This Statement resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.
SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entitys first fiscal year that begins after September 15, 2006. The Company does not expect the adoption of SFAS No. 155 to
have a material effect on the consolidated financial statements.

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

FASB Interpretation
No. 48 Accounting for Uncertainty in Income Taxes (FIN No. 48) was issued in June 2006 to clarify the accounting for uncertainty in income taxes recognized in the financial statements in accordance with SFAS No. 109
Accounting for Income Taxes. The interpretation defines a criterion that an individual tax position must meet for any part of the benefit of that position to be recognized in the financial statements. It also provides guidance on
measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Interpretation is effective for fiscal years beginning after December 15, 2006. The Company has not determined the
effect, if any, that the adoption of FIN No.48 will have on the Companys financial position or results of operation.

FASB issued
SFAS No. 157 Fair Value Measurements (SFAS No. 157) in September 2006 effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The
statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Company does not expect the adoption of SFAS No. 157 to have a material effect on the consolidated
financial statements.

In September 2006, FASB issued SFAS No. 158 Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans (SFAS No. 158), an amendment of FASB Statements No. 87, 88, 106, and 132 (R). For fiscal years ending after December 15, 2006, SFAS No. 158 requires an employer to recognize the funded status of a
benefit plan on its balance sheet and to recognize the gains or losses and prior service costs, not already recognized, as a component of other comprehensive income, net of taxes. SFAS No. 158 also requires that the defined benefit plan assets
and obligations be measured as of the date of the employers fiscal year-end balance sheet effective for fiscal years ending after December 15, 2008. At December 31, 2005, the Companys postretirement plan was underfunded by $738
thousand, of which $661 thousand was recorded in other liabilities. Had the Company adopted SFAS N0. 158 as of December 31, 2005, an additional $77 thousand would have been recognized as a liability. A similar amount is expected for
December 31, 2006, which will be recorded as a liability under SFAS No. 158.

The Emerging Issues Task Force issued abstract EITF
06-4 Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements in September 2006, effective for fiscal years beginning after December 15, 2006. The abstract
determined that an employer should recognize a liability for the deferred compensation or postretirement or postemployment aspects of an endorsement split-dollar life insurance arrangement in accordance with SFAS 106 Employers Accounting
for Postretirement Benefits Other Than Pensions. The abstract will have no affect on the December 31, 2006 financial statements. Management is in the process of identifying the impact the abstract will have on the December 31, 2007
financial statements.

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

Executive Summary

ECB Bancorp, Inc. is a bank holding company headquartered in Engelhard, North Carolina. Our wholly owned subsidiary, The East Carolina
Bank (the Bank) is a state-chartered community bank that was founded in 1919. For the



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purpose of this discussion, we, us and our refers to the Bank and the bank holding
company as a single, consolidated entity unless the context otherwise indicates.

As of September 30, 2006, we had consolidated assets
of approximately $599.5 million, total loans of approximately $423.0 million, total deposits of approximately $474.2 million and shareholders equity of approximately $61.8 million. For the three months ended September 30, 2006, we had net
income of $1.7 million or $0.59 basic and $0.58 diluted earnings per share, compared to net income of $1.4 million, or $0.68 basic and $0.67 diluted earnings per share for the three months ended September 30, 2005. For the nine months ended
September 30, 2006, we had net income of $4.2 million or $1.60 basic and $1.58 diluted earnings per share, compared to net income of $3.6 million or $1.78 basic and $1.75 diluted earnings per share for the nine months ended September 30,
2005.

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

Critical Accounting Policies

Our significant accounting policies are set forth in Note 1 to the Consolidated Financial
Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2005. Of these significant accounting policies, we consider our policy regarding the allowance for loan losses to be our 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. We have 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. Our
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 our allowance for loan losses and related matters, see Asset Quality.

RESULTS OF OPERATIONS

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

Condensed Consolidated Statements of Income



|                                                    |  |                                               |        |                             |   |       |                                             |  |                             |        |  |   |        |  |   |       |  |     
|--------------------------------------------------- |  | --------------------------------------------- | ------ | --------------------------- | - | ----- | ------------------------------------------- |  | --------------------------- | ------ |  | - | ------ |  | - | ----- |  | ----
|                                                    |  | For the Three Months Ended September 30, 2006 |        | Changes from the Prior Year |   |       | For the Nine Months Ended September 30,2006 |  | Changes from the Prior Year
|                                                    |  |                                               | Amount |                             |   | %     |                                             |  |                             | Amount |  | %
|                                                    |  | (Dollars in thousands)                       
|Gross interest income                               |  | $                                             | 9,367  |                             | $ | 1,835 |                                             |  | 24.4                        |        |  | $ | 26,593 |  | $ | 5,979 |  | 29.0
|Gross interest expense                              |  |                                               | 3,962  |                             |   | 1,397 |                                             |  | 54.5                        |        |  |   | 11,059 |  |   | 4,411 |  | 66.4
|                                                    |  |                                               |        |                             |   |       |                                             |  |                             |        |  |   |        |  |   |       |  |     
|Net interest income                                 |  |                                               | 5,405  |                             |   | 438   |                                             |  | 8.8                         |        |  |   | 15,534 |  |   | 1,568 |  | 11.2
|Provision for loan losses                           |  |                                               | 50     |                             |   | (100  | )                                           |  | (66.7                       | )      |  |   | 450    |  |   | 110   |  | 32.4
|                                                    |  |                                               |        |                             |   |       |                                             |  |                             |        |  |   |        |  |   |       |  |     
|Net interest income after provision for loan losses |  |                                               | 5,355  |                             |   | 538   |                                             |  | 11.2                        |        |  |   | 15,084 |  |   | 1,458 |  | 10.7
|Noninterest income                                  |  |                                               | 1,753  |                             |   | 216   |                                             |  | 14.1                        |        |  |   | 4,617  |  |   | 254   |  | 5.8 
|Noninterest expense                                 |  |                                               | 4,591  |                             |   | 236   |                                             |  | 5.4                         |        |  |   | 13,499 |  |   | 610   |  | 4.7 
|                                                    |  |                                               |        |                             |   |       |                                             |  |                             |        |  |   |        |  |   |       |  |     
|Income before income taxes                          |  |                                               | 2,517  |                             |   | 518   |                                             |  | 25.9                        |        |  |   | 6,202  |  |   | 1,102 |  | 21.6
|Income tax provision                                |  |                                               | 822    |                             |   | 190   |                                             |  | 30.1                        |        |  |   | 1,994  |  |   | 479   |  | 31.6
|                                                    |  |                                               |        |                             |   |       |                                             |  |                             |        |  |   |        |  |   |       |  |     
|Net income                                          |  | $                                             | 1,695  |                             | $ | 328   |                                             |  | 24.0                        |        |  | $ | 4,208  |  | $ | 623   |  | 17.4
|                                                    |  |                                               |        |                             |   |       |                                             |  |                             |        |  |   |        |  |   |       |  |     



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Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of
operating income. Net interest income for the three months ended September 30, 2006 was $5.4 million, an increase of $438 thousand or 8.8% when compared to net interest income of $5.0 million for the three months ended September 30, 2005.
For the nine months ended September 30, 2006, net interest income was $15.5 million, an increase of $1.6 million or 11.2% when compared to net interest income of $14.0 million for the period in 2005.

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

Interest income increased $1.8 million or 24.4% for the three months ended September 30, 2006
compared to the same three months of 2005. Interest income increased $6.0 million or 29.0% for the nine months ended September 30, 2006 compared to the same nine months of 2005. The increases for the three and nine months ended
September 30, 2006 are due to increases in average interest rates earned on our average earning assets and increases in volume of average earning assets of $39.6 million and $62.3 million, respectively, as compared to the same periods in 2005.
We funded the increases in interest-earning assets primarily with in-market certificates of deposit and additional wholesale certificates of deposit obtained through an Internet bulletin board service. Supplementing the additional earnings from
increased volumes of earning assets was the increase in yield on earning assets. The tax equivalent yield on average earning assets increased 91 basis points for the quarter ended September 30, 2006 to 7.22% from 6.31% for the same period in
2005. For the first nine months of 2006, the yield on average earning assets, on a tax-equivalent basis, increased 96 basis points to 7.04% compared to 6.08% at September 30, 2005. Management attributes the increase in the yield on our earning
assets to the increase in short-term market interest rates. Approximately $250.3 million or 59.3% of our loan portfolio consists of variable rate loans that adjust with the movement of the national prime rate. As a result, composite yield on our
loans increased approximately 86 basis points for the third quarter of 2006 compared to the third quarter of 2005 and 97 basis points for the nine-month period ended September 30, 2006 as compared to the nine-month period ended
September 30, 2005.

Conversely, our average cost of funds during the third quarter of 2006 was 3.81%, an increase of 125 basis points
when compared to 2.56% for the third quarter of 2005. Average rates paid on bank certificates of deposit increased 131 basis points from 3.20% for the quarter ended September 30, 2005 to 4.51% for the quarter ended September 30, 2006,
while our average cost of borrowed funds increased 211 basis points during the third quarter of 2006 compared to the same period in 2005. Average rates paid on NOW, savings and money market accounts for the quarter ended September 30, 2006
increased 77 basis points when compared to the third quarter of 2005. Total interest expense increased $1.4 million or 54.5% during the third quarter of 2006 compared to the same period in 2005, primarily the result of increased market rates paid on
borrowed funds and certificates of deposit. For the nine months ended September 30, 2006, our cost of funds was 3.52%, an increase of 123 basis points when compared to 2.29% for the same period of 2005. Average rates paid on bank certificates
of deposit increased 144 basis points from 2.80% to 4.24% for the first nine months of 2006, while our cost of borrowed funds increased 176 basis points compared to the same period a year ago. Average rates paid on NOW, savings and money market
accounts for the nine months ended September 30, 2006 increased 59 basis points when compared to same period of 2005. Total interest expense increased $4.4 million or 66.4% during the nine months of 2006 compared to the same period in 2005, the
result of increased volume of interest-bearing liabilities and increased market rates paid on these liabilities. The volume of average interest-bearing liabilities increased approximately $31.6 million for the nine months of 2006 compared with the
same period in 2005.

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

Our annualized net interest margin, on a tax-equivalent
basis and net of the allowance for loan losses, for the three months ended September 30, 2006 was 4.21% compared to 4.20% in the third quarter of 2005. For the nine months ended September 30, 2006, our net interest margin, on a
tax-equivalent basis and net of allowance for loan losses, was 4.15% compared to 4.16% in the nine months of 2005. Average interest-bearing liabilities as a percentage of interest-earning assets were 79.0% for the quarter ended September 30,
2006, compared to 82.3% for the same period in 2005. For the nine months



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##### Table of Contents

ended September 30, 2006, average interest-bearing liabilities as a percentage of interest-earning assets were 82.0%
compared to 86.4% for the nine months ended September 30, 2005.

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

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

For the Three Months Ended September 30, 2006 compared to 2005



|                                                                       |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|---------------------------------------------------------------------- |  | ---------------------- | ------- | ----------- | ----- | - | --------------- | - | --------------- |  | ----------- | ------- |  | --------------- | - |  | - | -----
|                                                                       |  | 2006                   |         | 2005       
|                                                                       |  | Average Balance        |         | Yield/ Rate |       |   | Income/ Expense |   | Average Balance |  | Yield/ Rate |         |  | Income/ Expense
|                                                                       |  | (Dollars in thousands)
|Assets                                                                 |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|Loans  net (1)                                                        |  | $                      | 413,628 |             | 7.84  | % |                 | $ | 8,176           |  | $           | 358,739 |  | 6.98            | % |  | $ | 6,316
|Taxable securities                                                     |  |                        | 78,653  |             | 4.46  | % |                 |   | 879             |  |             | 80,417  |  | 4.04            | % |  |   | 818  
|Non-taxable securities (2)                                             |  |                        | 28,650  |             | 5.52  | % |                 |   | 398             |  |             | 31,104  |  | 5.57            | % |  |   | 436  
|Other investments                                                      |  |                        | 1,613   |             | 12.05 | % |                 |   | 49              |  |             | 12,733  |  | 3.46            | % |  |   | 110  
|                                                                       |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|Total interest- earning assets                                         |  |                        | 522,544 |             | 7.22  | % |                 | $ | 9,502           |  |             | 482,993 |  | 6.31            | % |  | $ | 7,680
|Cash and due from banks                                                |  |                        | 16,365  |             |       |   |                 |   |                 |  |             | 20,824  |  |                 |   |  |   |      
|Bank premises and equipment, net                                       |  |                        | 21,352  |             |       |   |                 |   |                 |  |             | 17,938  |  |                 |   |  |   |      
|Other assets                                                           |  |                        | 17,501  |             |       |   |                 |   |                 |  |             | 16,795  |  |                 |   |  |   |      
|                                                                       |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|Total assets                                                           |  | $                      | 577,762 |             |       |   |                 |   |                 |  | $           | 538,550 |  |                 |   |  |   |      
|                                                                       |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|Liabilities and Shareholders Equity                                   |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|Interest-bearing deposits                                              |  | $                      | 375,940 |             | 3.54  | % |                 | $ | 3,355           |  | $           | 350,753 |  | 2.32            | % |  | $ | 2,051
|Short-term borrowings                                                  |  |                        | 14,558  |             | 4.31  | % |                 |   | 161             |  |             | 15,239  |  | 2.81            | % |  |   | 109  
|Long-term obligations                                                  |  |                        | 22,344  |             | 7.92  | % |                 |   | 446             |  |             | 31,310  |  | 5.13            | % |  |   | 405  
|                                                                       |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|Total interest- bearing liabilities                                    |  |                        | 412,842 |             | 3.81  | % |                 |   | 3,962           |  |             | 397,302 |  | 2.56            | % |  |   | 2,565
|Non-interest-bearing deposits                                          |  |                        | 100,067 |             |       |   |                 |   |                 |  |             | 103,658 |  |                 |   |  |   |      
|Other liabilities                                                      |  |                        | 4,349   |             |       |   |                 |   |                 |  |             | 3,783   |  |                 |   |  |   |      
|Shareholders equity                                                   |  |                        | 60,504  |             |       |   |                 |   |                 |  |             | 33,807  |  |                 |   |  |   |      
|                                                                       |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|Total liabilities and Shareholders equity                             |  | $                      | 577,762 |             |       |   |                 |   |                 |  | $           | 538,550 |  |                 |   |  |   |      
|                                                                       |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|Net interest income and net yield on interest-earning assets (FTE) (3) |  |                        |         |             | 4.21  | % |                 | $ | 5,540           |  |             |         |  | 4.20            | % |  | $ | 5,115
|                                                                       |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      
|Interest rate spread (FTE) (4)                                         |  |                        |         |             | 3.41  | % |                 |   |                 |  |             |         |  | 3.75            | % |  |   |      
|                                                                       |  |                        |         |             |       |   |                 |   |                 |  |             |         |  |                 |   |  |   |      

---

|(1) | Average loans include non-accruing loans, net of allowance for loan losses. Amortization of deferred loan fees of $125 thousand and $170 thousand for periods ended
September 30, 2006 and 2005, respectively, are included in interest income.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $135
thousand and $148 thousand for periods ended September 30, 2006 and 2005, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



17



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##### Table of Contents

For the Nine Months Ended September 30, 2006 compared to 2005



|                                                                       |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 
|---------------------------------------------------------------------- |  | ---------------------- | ------- | ----------- | ---- | - | --------------- | - | --------------- |  | ----------- | ------- |  | --------------- | - |  | - | ------ |  | 
|                                                                       |  | 2006                   |         | 2005       
|                                                                       |  | Average Balance        |         | Yield/ Rate |      |   | Income/ Expense |   | Average Balance |  | Yield/ Rate |         |  | Income/ Expense
|                                                                       |  | (Dollars in thousands)
|Assets                                                                 |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |       
|Loans - net (1)                                                        |  | $                      | 400,666 |             | 7.65 | % |                 | $ | 22,923          |  | $           | 343,658 |  | 6.68            | % |  | $ | 17,181
|Taxable securities                                                     |  |                        | 76,574  |             | 4.55 | % |                 |   | 2,605           |  |             | 78,464  |  | 4.02            | % |  |   | 2,359 
|Non-taxable securities (2)                                             |  |                        | 28,826  |             | 5.59 | % |                 |   | 1,205           |  |             | 33,044  |  | 5.44            | % |  |   | 1,345 
|Overnight investments                                                  |  |                        | 5,217   |             | 5.12 | % |                 |   | 270             |  |             | 7,904   |  | 3.20            | % |  |   | 188   
|                                                                       |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 
|Total interest-earning assets                                          |  |                        | 511,283 |             | 7.04 | % |                 | $ | 27,003          |  |             | 463,070 |  | 6.08            | % |  | $ | 21,073
|Cash and due from banks                                                |  |                        | 19,283  |             |      |   |                 |   |                 |  |             | 21,312  |  |                 |   |  |   |       
|Bank premises and equipment, net                                       |  |                        | 20,253  |             |      |   |                 |   |                 |  |             | 17,551  |  |                 |   |  |   |       
|Other assets                                                           |  |                        | 19,454  |             |      |   |                 |   |                 |  |             | 15,940  |  |                 |   |  |   |       
|                                                                       |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 
|Total assets                                                           |  | $                      | 570,273 |             |      |   |                 |   |                 |  | $           | 517,873 |  |                 |   |  |   |       
|                                                                       |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 
|Liabilities and Shareholders Equity                                   |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 
|Interest-bearing deposits                                              |  | $                      | 381,075 |             | 3.29 | % |                 | $ | 9,381           |  | $           | 338,374 |  | 2.03            | % |  | $ | 5,148 
|Short-term borrowings                                                  |  |                        | 11,248  |             | 4.48 | % |                 |   | 377             |  |             | 18,170  |  | 2.52            | % |  |   | 343   
|Long-term obligations                                                  |  |                        | 27,167  |             | 6.40 | % |                 |   | 1,301           |  |             | 31,310  |  | 4.94            | % |  |   | 1,157 
|                                                                       |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 
|Total interest-bearing liabilities                                     |  |                        | 419,490 |             | 3.52 | % |                 |   | 11,059          |  |             | 387,854 |  | 2.29            | % |  |   | 6,648 
|Non-interest-bearing deposits                                          |  |                        | 94,352  |             |      |   |                 |   |                 |  |             | 93,666  |  |                 |   |  |   |       
|Other liabilities                                                      |  |                        | 3,738   |             |      |   |                 |   |                 |  |             | 3,407   |  |                 |   |  |   |       
|Shareholders equity                                                   |  |                        | 52,693  |             |      |   |                 |   |                 |  |             | 32,946  |  |                 |   |  |   |       
|                                                                       |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 
|Total liabilities and Shareholders equity                             |  | $                      | 570,273 |             |      |   |                 |   |                 |  | $           | 517,873 |  |                 |   |  |   |       
|                                                                       |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 
|Net interest income and net yield on interest-earning assets (FTE) (3) |  |                        |         |             | 4.15 | % |                 | $ | 15,944          |  |             |         |  | 4.16            | % |  | $ | 14,425
|                                                                       |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 
|Interest rate spread (FTE) (4)                                         |  |                        |         |             | 3.52 | % |                 |   |                 |  |             |         |  | 3.79            | % |  |   |       
|                                                                       |  |                        |         |             |      |   |                 |   |                 |  |             |         |  |                 |   |  |   |        |  | 

---

|(1) | Average loans include non-accruing loans, net of allowance of loan losses. Amortization of deferred loan fees of $397 thousand and $462 thousand for periods ended September 30,
2006 and 2005, respectively, are included in interest income.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $410
thousand and $457 thousand for periods ended September 30, 2006 and 2005, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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



18



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##### Table of Contents

Change in Interest Income and Expense on Tax Equivalent Basis

For the three months ended September 30, 2006 and 2005

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



|                           |  |                        |       |   |          |   |       |     |  |   |       |  
|-------------------------- |  | ---------------------- | ----- | - | -------- | - | ----- | --- |  | - | ----- | -
|                           |  | 2006 compared to 2005  |      
|                           |  | Volume (1)             |       |   | Rate (1) |   |       | Net | 
|                           |  | (Dollars in thousands) |      
|Loans                      |  | $                      | 1,026 |   |          | $ | 834   |     |  | $ | 1,860 |  
|Taxable securities         |  |                        | (24   | ) |          |   | 85    |     |  |   | 61    |  
|Non-taxable securities (2) |  |                        | (34   | ) |          |   | (4    | )   |  |   | (38   | )
|Other investments          |  |                        | (217  | ) |          |   | 156   |     |  |   | (61   | )
|                           |  |                        |       |   |          |   |       |     |  |   |       |  
|Interest income            |  |                        | 751   |   |          |   | 1,071 |     |  |   | 1,822 |  
|Interest-bearing deposits  |  |                        | 186   |   |          |   | 1,118 |     |  |   | 1,304 |  
|Short-term borrowings      |  |                        | (4    | ) |          |   | 56    |     |  |   | 52    |  
|Long-term obligations      |  |                        | (148  | ) |          |   | 189   |     |  |   | 41    |  
|                           |  |                        |       |   |          |   |       |     |  |   |       |  
|Interest expense           |  |                        | 34    |   |          |   | 1,363 |     |  |   | 1,397 |  
|                           |  |                        |       |   |          |   |       |     |  |   |       |  
|Net interest income        |  | $                      | 717   |   |          | $ | (292  | )   |  | $ | 425   |  
|                           |  |                        |       |   |          |   |       |     |  |   |       |  

---

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

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $135
thousand and $148 thousand for periods ended September 30, 2006 and 2005, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For the Nine Months Ended
September 30, 2006 and 2005

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



|                           |  |                        |       |   |          |   |       |     |  |   |       |  
|-------------------------- |  | ---------------------- | ----- | - | -------- | - | ----- | --- |  | - | ----- | -
|                           |  | 2006 compared to 2005  |      
|                           |  | Volume (1)             |       |   | Rate (1) |   |       | Net | 
|                           |  | (Dollars in thousands) |      
|Loans                      |  | $                      | 3,056 |   |          | $ | 2,686 |     |  | $ | 5,742 |  
|Taxable securities         |  |                        | (61   | ) |          |   | 307   |     |  |   | 246   |  
|Non-taxable securities (2) |  |                        | (174  | ) |          |   | 34    |     |  |   | (140  | )
|Overnight investments      |  |                        | (101  | ) |          |   | 183   |     |  |   | 82    |  
|                           |  |                        |       |   |          |   |       |     |  |   |       |  
|Interest income            |  |                        | 2,720 |   |          |   | 3,210 |     |  |   | 5,930 |  
|Interest-bearing deposits  |  |                        | 850   |   |          |   | 3,383 |     |  |   | 4,233 |  
|Short-term borrowings      |  |                        | (181  | ) |          |   | 215   |     |  |   | 34    |  
|Long-term obligations      |  |                        | (176  | ) |          |   | 320   |     |  |   | 144   |  
|                           |  |                        |       |   |          |   |       |     |  |   |       |  
|Interest expense           |  |                        | 493   |   |          |   | 3,918 |     |  |   | 4,411 |  
|                           |  |                        |       |   |          |   |       |     |  |   |       |  
|Net interest income        |  | $                      | 2,227 |   |          | $ | (708  | )   |  | $ | 1,519 |  
|                           |  |                        |       |   |          |   |       |     |  |   |       |  

---

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

|2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $410
thousand and $459 thousand for periods ended September 30, 2006 and 2005, respectively.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



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##### Table of Contents

Provision for Loan Losses

The provision for loan losses charged to operations during the three months ended September 30, 2006 and 2005 was $50 thousand and $150 thousand respectively. Net recoveries for the third quarter of 2006 totaled
$49 thousand compared to $11 thousand net charge-offs during the third quarter of 2005. The provision for loan losses charged to operations during the nine months ended September 30, 2006 and 2005 was $450 thousand and $340 thousand,
respectively. Net charge-offs for the nine months ended September 30, 2006 totaled $2 thousand compared to net charge-offs of $52 thousand during the same period of 2005. The increase in amount of provision for loan losses charged for the
nine-month period ended September 30, 2006, is due principally to our loan growth. We use the results of our allowance for loan loss model to estimate the dollar amount of provision expense needed to maintain the adequacy of our allowance for
loan losses. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as necessary.

Noninterest Income

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



|                                      |  |                                              |       |                             |   |      |                                             |  |                             |   |  |   |       |  |   |      |   |  |        |  
|------------------------------------- |  | -------------------------------------------- | ----- | --------------------------- | - | ---- | ------------------------------------------- |  | --------------------------- | - |  | - | ----- |  | - | ---- | - |  | ------ | -
|                                      |  | For the Three Months Ended September 30,2006 |       | Changes from the Prior Year |   |      | For the Nine Months Ended September 30,2006 |  | Changes from the Prior Year |  
|                                      |  | Amount                                       |       |                             | % |      |                                             |  | Amount                      |   |  | % |      
|                                      |  | (Dollars in thousands)                       |      
|Service charges on deposit accounts   |  | $                                            | 656   |                             | $ | (181 | )                                           |  | (21.6                       | ) |  | $ | 2,269 |  | $ | (202 | ) |  | (8.2   | )
|Other service charges and fees        |  |                                              | 769   |                             |   | 169  |                                             |  | 28.2                        |   |  |   | 1,812 |  |   | 289  |   |  | 19.0   |  
|Net gain on securities                |  |                                              |      |                             |   |     |                                             |  |                            |   |  |   |      |  |   | (90  | ) |  | (100.0 | )
|Income from investment in SBICs      |  |                                              | 235   |                             |   | 235  |                                             |  | 100.0                       |   |  |   | 235   |  |   | 235  |   |  | 100.0  |  
|Income from bank owned life insurance |  |                                              | 70    |                             |   | 5    |                                             |  | 7.7                         |   |  |   | 227   |  |   | 37   |   |  | 19.5   |  
|Other operating income                |  |                                              | 23    |                             |   | (12  | )                                           |  | (34.3                       | ) |  |   | 74    |  |   | (15  | ) |  | (16.9  | )
|                                      |  |                                              |       |                             |   |      |                                             |  |                             |   |  |   |       |  |   |      |   |  |        |  
|Total noninterest income              |  | $                                            | 1,753 |                             | $ | 216  |                                             |  | 14.1                        |   |  | $ | 4,617 |  | $ | 254  |   |  | 5.8    |  
|                                      |  |                                              |       |                             |   |      |                                             |  |                             |   |  |   |       |  |   |      |   |  |        |  

Noninterest income increased $216 thousand or 14.1% to $1.8 million for the third quarter of this
year compared to the same period in 2005. For the nine months ended September 30, 2006, noninterest income increased $254 thousand or 5.8% to $4.6 million compared to $4.4 million for the same period in 2005. A major contributor to increased
noninterest income for the three and nine months ended September 30, 2006 over the prior year period was an income distribution from an investment in a Small Business Investment Company (SBIC) received during the third quarter of 2006.
Distributions from SBICs are generated whenever a company in which the SBIC has invested in is sold or otherwise successfully exits the financing provided by the SBIC. Future distributions are expected but their dollar level and frequency can
not be determined by management. For the three and nine months ended September 30, 2006, decreases in service charges on deposit accounts of $181 thousand and $202 thousand compared to the three and nine months ended September 30, 2005
were driven by decreases in Overdraft Banking Privilege (ODP) fees of $177 thousand and $165 thousand, respectively. Management believes that an enhancement to the Banks account statement information to provide customers with ODP fees paid
year-to-date has altered the usage of our ODP service, and we anticipate a continued decline in ODP fee income in the fourth quarter of 2006. Other service charges and fees in both the three and nine months ended September 30, 2006 increased
$169 thousand and $289 thousand when compared to the same periods of 2005. Brokerage fees generated by our mortgage origination units increased $102 thousand and $172 thousand in the respective periods, a result of additional locations and staff
from the previous year. Other operating income decreased $12 thousand during the third quarter of 2006 compared to 2005 and decreased $15 thousand compared on a nine month basis due principally to a $12 thousand gain on the sale of other real estate
owned realized during the third quarter of 2005.



20



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##### Table of Contents

Noninterest Expense

Noninterest expense increased 5.4% and 4.7%, respectively for the three and nine months ended September 30, 2006, as compared to the same periods in 2005. The increase in the three-month and nine-month periods
are principally due to general increases in salary and benefits expense of $206 thousand and $594 thousand, respectively. The following table presents the components of noninterest expense for the three and nine months ended September 30, 2006
and dollar and percentage changes from the prior year.



|                                       |  |                                              |       |                             |   |     |                                             |  |                             |   |  |   |        |  |   |      |   |  |       |  
|-------------------------------------- |  | -------------------------------------------- | ----- | --------------------------- | - | --- | ------------------------------------------- |  | --------------------------- | - |  | - | ------ |  | - | ---- | - |  | ----- | -
|                                       |  | For the Three Months Ended September 30,2006 |       | Changes from the Prior Year |   |     | For the Nine Months Ended September 30,2006 |  | Changes from the Prior Year |  
|                                       |  | Amount                                       |       |                             | % |     |                                             |  | Amount                      |   |  | % |       
|                                       |  | (Dollars in thousands)                       |      
|Salaries                               |  | $                                            | 1,901 |                             | $ | 188 |                                             |  | 11.0                        |   |  | $ | 5,519  |  | $ | 557  |   |  | 11.2  |  
|Retirement and other employee benefits |  |                                              | 681   |                             |   | 18  |                                             |  | 2.7                         |   |  |   | 2,013  |  |   | 37   |   |  | 1.9   |  
|Occupancy                              |  |                                              | 408   |                             |   | 27  |                                             |  | 7.1                         |   |  |   | 1,218  |  |   | 157  |   |  | 14.8  |  
|Equipment                              |  |                                              | 424   |                             |   | (6  | )                                           |  | (1.4                        | ) |  |   | 1,292  |  |   | (7   | ) |  | (0.5  | )
|Professional fees                      |  |                                              | 78    |                             |   | (36 | )                                           |  | (31.6                       | ) |  |   | 157    |  |   | (228 | ) |  | (59.2 | )
|Supplies                               |  |                                              | 78    |                             |   | (12 | )                                           |  | (13.3                       | ) |  |   | 236    |  |   | (16  | ) |  | (6.3  | )
|Telephone                              |  |                                              | 133   |                             |   | 12  |                                             |  | 9.9                         |   |  |   | 370    |  |   | (16  | ) |  | (4.1  | )
|Postage                                |  |                                              | 53    |                             |   | 2   |                                             |  | 3.9                         |   |  |   | 167    |  |   | 10   |   |  | 6.4   |  
|Other operating expenses               |  |                                              | 835   |                             |   | 43  |                                             |  | 5.4                         |   |  |   | 2,527  |  |   | 116  |   |  | 4.8   |  
|                                       |  |                                              |       |                             |   |     |                                             |  |                             |   |  |   |        |  |   |      |   |  |       |  
|Total noninterest expenses             |  | $                                            | 4,591 |                             | $ | 236 |                                             |  | 5.4                         |   |  | $ | 13,499 |  | $ | 610  |   |  | 4.7   |  
|                                       |  |                                              |       |                             |   |     |                                             |  |                             |   |  |   |        |  |   |      |   |  |       |  

Our increase in salaries and benefits of 8.7% and 8.6%, respectively for the three and nine months
ended September 30, 2006, as compared to the same periods in 2005 is related to staff additions to accommodate our growth and the addition of business development officers in some of our newer markets. We adopted SFAS No. 123R on
January 1, 2006 that requires us to recognize compensation expense related to stock awards. See note 4 for additional information. As of September 30, 2006, we had 202 full time equivalent employees and operated 20 full service banking
offices and three mortgage loan origination offices.

Occupancy expense increased $27 thousand during the third quarter of 2006 compared to
the third quarter of 2005 and $157 thousand for the nine months ended September 30, 2006 when compared to the same period in 2005. The largest component of the increase was building depreciation expense, which increased $44 thousand and $81
thousand, respectively, for the three and nine months ended September 30, 2006, as compared to the same periods in 2005. A portion of the increase in depreciation expense in the third quarter and nine months of 2006 was due to our new corporate
office, which we moved into during 2005. Increased property taxes and building rental expense accounted for the remaining portion of occupancy expense increase during the three and nine months ended September 30, 2006, as compared to the same
periods in 2005.

Equipment expense for the three and nine months ended September 30, 2006 remained relatively unchanged when compared
to the same periods of 2005.

Professional fees, which include audit, legal and consulting fees, decreased $36 thousand or 31.6% to $78
thousand for the three months ended September 30, 2006 from $114 thousand in the prior year period. The largest portion of the decrease, $22 thousand, resulted from decreased consulting fees compared to the same three-month period of 2005. For
the nine months ended September 30, 2006 compared to the same period of 2005, professional fees decreased $228 thousand or 59.2%. Audit and accounting fees for nine months of 2006 decreased by $139 thousand over the prior year period while
consultation fees decreased $107 thousand when compared to the same nine months of 2005. At September 30, 2005, management had accrued $82 thousand in audit and accounting fees. No such accrual was deemed necessary at September 30, 2006.
Consultation fees totaling approximately $85 thousand related to strategic planning and independent credit review which were charged during the nine months of 2005 did not recur during the nine months of 2006. Legal fees



21



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##### Table of Contents

increased $6 thousand and $18 thousand respectively, for the three and nine months ended September 30, 2006, as
compared to the same periods in 2005 due to increased general corporate reporting and disclosure matters.

Other operating expenses
increased $43 thousand or 5.4% from $792 thousand for the three months ended September 30, 2005 to $835 thousand for the three months ended September 30, 2006. A portion of the increase is due to an increase of approximately $33 thousand
in other outside services relating to on-line banking services provided by our vendor. For the nine-month period ended September 30, 2006 and 2005, other operating expense increased $116 thousand or 4.8% as on-line banking services increased by
$55 thousand, courier services increased $30 thousand and NASDAQ fees increased $26 thousand.

Income Taxes

Income tax expense for the three months ended September 30, 2006 and 2005 was $822 thousand and $632 thousand, respectively, resulting in effective
tax rates of 32.7% and 31.6%, respectively. For the nine-month period ending September 30, 2006 and 2005, tax expense was $2.0 million compared to $1.5 million for the same period of 2005 which resulted in effective tax rates of 32.2% and
29.7%, respectively. The increased effective tax rate in 2006 is due to a decline in the ratio of tax-exempt to taxable investment income compared to 2005. The effective tax rates in both years differ from the federal statutory rate of 34.0%
primarily due to tax-exempt interest income.

STATEMENT OF FINANCIAL CONDITION

Our total assets were $599.5 million at September 30, 2006, $547.7 million at December 31, 2005 and $542.8 million at September 30, 2005.
Our asset growth is primarily funded by deposit growth and retained earnings. For the nine and twelve months ended September 30, 2006, we grew our loans $36.2 million and $52.1 million, respectively. For the nine and twelve months ended
September 30, 2005, we grew our deposits $9.0 million and $17.2 million, respectively, through marketing of core deposits and wholesale certificates of deposit, the proceeds of which were invested in interest-earning assets. Year-over-year, our
earning assets grew primarily through loan originations.

Loans

As of September 30, 2006, total loans had increased to $423.0 million, up 9.4% from total loans of $386.8 million at December 31, 2005 and up 14.1% from total loans of $370.9 million at September 30,
2005. The increase in loan demand is due, in part, to new businesses that are opening in our markets to take advantage of opportunities in our coastal communities where growth is being driven by a combination of increased tourism and an influx of
retirees. Loan growth can also be attributed to our branching efforts and the efforts of our lending team. We believe that general loan growth will remain strong in the near term, although rising market interest rates may reduce loan demand. Funding
of future loan growth may be restricted by our ability to raise core deposits, although we will use alternative funding sources if we deem it necessary and cost effective.

Asset Quality

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

Net charge-offs for the period ended
September 30, 2006, totaled $2 thousand compared to net charge-offs of $52 thousand for the same period of 2005. The provision for loan losses charged to operations for the nine months ended September 30, 2006 and 2005 was $450 thousand
and $340 thousand, respectively. We had $240 thousand reserved for unfunded loan commitments which was included in the allowance for loan losses. During the quarter we reclassified the $240 thousand from the allowance to other liabilities resulting
in a decrease to allowance for loan losses to loans at period end from 1.24% at September 30, 2005 to 1.15% at September 30, 2006.



22



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##### Table of Contents

The following table presents an analysis of the changes in the allowance for loan losses for the nine
months ended September 30, 2006 and 2005.

Analysis of Changes in Allowance for Loan Losses



|                                                               |  |                                         |         |   |      |   |         |  
|-------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                               |  | For the nine months Ended September 30, |        
|                                                               |  | 2006                                    |         |   | 2005 |  
|                                                               |  | (Dollars in thousands)                  |        
|Total loans outstanding at end of period-gross                 |  | $                                       | 422,975 |   |      | $ | 370,875 |  
|                                                               |  |                                         |         |   |      |   |         |  
|Average loans outstanding-gross                                |  | $                                       | 405,557 |   |      | $ | 348,068 |  
|                                                               |  |                                         |         |   |      |   |         |  
|Allowance for loan losses at beginning of period               |  | $                                       | 4,650   |   |      | $ | 4,300   |  
|Loans charged off:                                             |  |                                         |         |   |      |   |         |  
|Real estate                                                    |  |                                         | (      | ) |      |   | (12     | )
|Installment loans                                              |  |                                         | (31     | ) |      |   | (42     | )
|Credit cards and related plans                                 |  |                                         | (      | ) |      |   | (31     | )
|Commercial and all other loans                                 |  |                                         | (59     | ) |      |   | (      | )
|                                                               |  |                                         |         |   |      |   |         |  
|Total charge-offs                                              |  |                                         | (90     | ) |      |   | (85     | )
|                                                               |  |                                         |         |   |      |   |         |  
|Recoveries of loans previously charged off:                    |  |                                         |         |   |      |   |         |  
|Real estate                                                    |  |                                         | 7       |   |      |   |        |  
|Installment loans                                              |  |                                         | 13      |   |      |   | 15      |  
|Credit cards and related plans                                 |  |                                         | 3       |   |      |   | 17      |  
|Commercial and all other loans                                 |  |                                         | 65      |   |      |   | 1       |  
|                                                               |  |                                         |         |   |      |   |         |  
|Total recoveries                                               |  |                                         | 88      |   |      |   | 33      |  
|                                                               |  |                                         |         |   |      |   |         |  
|Net charge offs                                                |  |                                         | (2      | ) |      |   | (52     | )
|                                                               |  |                                         |         |   |      |   |         |  
|Provision for loan loses                                       |  |                                         | 450     |   |      |   | 340     |  
|                                                               |  |                                         |         |   |      |   |         |  
|Adjustment for unfunded loan reserve (1)                       |  |                                         | (240    | ) |      |   | (      | )
|                                                               |  |                                         |         |   |      |   |         |  
|Allowance for loan losses at end of period                     |  | $                                       | 4,858   |   |      | $ | 4,588   |  
|                                                               |  |                                         |         |   |      |   |         |  
|Ratios                                                         |  |                                         |         |   |      |   |         |  
|Annualized net charge offs to average loans during the period  |  |                                         | 0.00    | % |      |   | 0.02    | %
|Allowance for loan losses to loans at period end               |  |                                         | 1.15    | % |      |   | 1.24    | %
|Allowance for loan losses to nonperforming loans at period end |  |                                         | 963     | % |      |   | 2,747   | %

---

|(1) | $240 thousand allocated to approximately $80 million of committed but unfunded loan obligations was reclassed to other liabilities from the Banks allowance for loan losses.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Nonperforming Assets

Nonperforming assets consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our policy to place loans on nonaccrual status when any portion of
principal or interest becomes 90 days past due, or earlier if full collection of principal and interest becomes doubtful. When loans are



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placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest
payments received thereafter are applied as a reduction to the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal
and interest and when the collectibility of principal or interest is no longer doubtful. Nonperforming assets were $504 thousand and $65 thousand, or 0.12% and 0.02% of loans outstanding, at September 30, 2006 and December 31, 2005,
respectively. We had no loans considered to be impaired under SFAS No. 114 at September 30, 2006 or December 31, 2005. On September 30, 2006, our nonperforming loans (consisting of nonaccruing and restructured loans) amounted to
approximately $189 thousand, and we had $315 thousand of foreclosed properties and repossessions.

Investment Securities and Other Assets

The composition of our securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity while
providing a relatively stable source of income. Our securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for investing available funds, furnishing
liquidity and supplying securities to pledge as required collateral for certain deposits and borrowed funds. We use two categories to classify our securities: held-to-maturity and available-for-sale. Currently, none of our
investments are classified as held-to-maturity. While we have no plans to liquidate a significant amount of our securities, the securities classified as available-for-sale may be sold to meet liquidity needs should management deem it to be in our
best interest.

Our investment securities totaled $114.4 million at September 30, 2006, $104.7 million at December 31, 2005 and
$113.3 million at September 30, 2005. Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. Investable funds not otherwise
utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.

At September 30, 2006, the securities portfolio had unrealized net losses of approximately $2.2 million, which are reported in accumulated other
comprehensive loss on the consolidated statement of shareholders equity, net of tax. Our securities portfolio at September 30, 2006 consisted of U.S. government agency securities, collateralized mortgage obligations (CMOs),
mortgage-backed securities (MBS) and tax-exempt municipal securities.

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



|                                       |  |                        |        |              |   |       
|-------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------
|                                       |  | Amortized Cost         |        | Market Value
|                                       |  | (Dollars in thousands)
|Federal National Mortgage Corporation  |  | $                      | 28,603 |              | $ | 27,579
|Federal Home Loan Mortgage Corporation |  |                        | 21,584 |              |   | 21,098
|Federal Home Loan Banks                |  |                        | 25,263 |              |   | 24,978

At September 30, 2006, we held $7.7 million in Bank owned life insurance, compared to $7.4 million and $7.4
million at December 31, 2005 and September 30, 2005, respectively.

Deposits and Other Borrowings

Deposits

Deposits increased to $474.2 million, up
1.9% as of September 30, 2006 compared to deposits of $465.2 million at December 31, 2005 and up 3.8% compared to deposits of $457.1 million at September 30, 2005. We attribute our deposit growth during the nine- and twelve-month
periods ended September 30, 2006 to our management team attracting new customers from other financial institutions and our branching efforts. We believe that we can continue to improve our core deposit funding by improving our branching network
and providing more convenient opportunities for customers to bank with us. We anticipate that our deposits will continue to increase throughout 2006.

Other Borrowings

Short-term borrowings include sweep accounts, advances from the Federal Home Loan Bank of Atlanta (the
FHLB) having maturities of one year or less, Federal Funds purchased and repurchase agreements. Our short-term borrowings totaled $46.2 million on September 30, 2006, compared to $23.6 million on December 31, 2005, an increase
of $22.6 million.



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Federal Funds purchased decreased $2.5 million while repurchase agreements increased $8.0 million and sweep accounts
increased $2.1 million from December 31, 2005 to September 30, 2006 and short-term FHLB advances increased $15.0 million. The increase of repurchase agreements was the result of an investment strategy designed to help protect our interest
margin against declining interest rates by purchasing fixed rate securities funded by adjustable rate funds.

Liquidity

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

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

We are a member of the FHLB. Membership, along with a blanket collateral commitment of our one-to-four family
residential mortgage loan portfolio, as well as our commercial real estate loan portfolio, provided us the ability to draw up to $119.9 million and $109.4 million of advances from the FHLB at September 30, 2006 and December 31, 2005,
respectively. At September 30, 2006, we had outstanding FHLB advances totaling $28.0 million compared to $21.0 million and $21.0 million at December 31, 2005 and September 30, 2005, respectively.

As a requirement for membership, we invest in stock of the FHLB in the amount of 1% of our outstanding residential loans or 5% of our outstanding
advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At September 30, 2006, we owned 23,543 shares of the FHLBs $100 par value capital stock, compared to 19,477 and 20,827
shares at December 31, 2005 and September 30, 2005, respectively. No ready market exists for such stock, which is carried at cost.

We also had unsecured federal funds lines in the aggregate amount of $27.0 million available to us at September 30, 2006 under which we can borrow funds to meet short-term liquidity needs. At September 30, 2006, we had no
borrowings outstanding under these federal funds lines. Another source of funding is loan participations sold to other commercial banks (in which we retain the servicing rights). As of September 30, 2006, we had $1.3 million in loan
participations sold. We believe that our liquidity sources are adequate to meet our operating needs.

Off-Balance Sheet Arrangements and Contractual
Obligations

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

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



|                                     |  |                                            |        |                |   |           |  |           |        |                   |   |       |  |   |       
|------------------------------------ |  | ------------------------------------------ | ------ | -------------- | - | --------- |  | --------- | ------ | ----------------- | - | ----- |  | - | ------
|                                     |  | Amount of Commitment Expiration per Period
|Commercial Commitments               |  | Total                                      |        | 1 year or less |   | 2-3 years |  | 4-5 years |        | More than 5 years
|                                     |  | (Dollars in thousands)                    
|Loan commitments and lines of credit |  | $                                          | 78,305 |                | $ | 37,173    |  | $         | 13,727 |                   | $ | 6,934 |  | $ | 20,471
|Standby letters of credit            |  |                                            | 2,458  |                |   | 2,458     |  |           |       |                   |   |      |  |   |      
|                                     |  |                                            |        |                |   |           |  |           |        |                   |   |       |  |   |       
|Total commercial commitments         |  | $                                          | 80,763 |                | $ | 39,631    |  | $         | 13,727 |                   | $ | 6,934 |  | $ | 20,471
|                                     |  |                                            |        |                |   |           |  |           |        |                   |   |       |  |   |       



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|                              |  |                        |         |                |   |           |  |           |        |                   |   |       |  |   |       
|----------------------------- |  | ---------------------- | ------- | -------------- | - | --------- |  | --------- | ------ | ----------------- | - | ----- |  | - | ------
|                              |  | Payments Due          
|Contractual Obligations       |  | Total                  |         | 1 year or less |   | 2-3 years |  | 4-5 years |        | More than 5 years
|                              |  | (Dollars in thousands)
|Long-term obligations         |  | $                      | 10,310  |                | $ |          |  | $         |       |                   | $ |      |  | $ | 10,310
|Short-term borrowings         |  |                        | 46,184  |                |   | 46,184    |  |           |       |                   |   |      |  |   |      
|Operating leases              |  |                        | 3,125   |                |   | 550       |  |           | 730    |                   |   | 383   |  |   | 1,462 
|Deposits                      |  |                        | 474,232 |                |   | 420,734   |  |           | 52,677 |                   |   | 806   |  |   | 15    
|                              |  |                        |         |                |   |           |  |           |        |                   |   |       |  |   |       
|Total contractual obligations |  | $                      | 533,851 |                | $ | 467,468   |  | $         | 53,407 |                   | $ | 1,189 |  | $ | 11,787
|                              |  |                        |         |                |   |           |  |           |        |                   |   |       |  |   |       

Net cash provided by operations during the nine months ended September 30, 2006 totaled $7.1
million, compared to net cash provided by operations of $4.4 million for the same period in 2005. Net cash used in investing activities increased to $49.8 million for the nine months ended September 30, 2006, as compared to $45.6 million for
the same period in 2005 primarily due to the purchases of available-for-sale investment securities. Net cash provided by financing activities increased to $46.6 million for the nine months ended September 30, 2006, compared to $36.5 million for
the same period in 2005. Cash and cash equivalents at September 30, 2006 was $22.7 million compared to $23.6 million at September 30, 2005.

Shareholders Equity

Shareholders equity increased by approximately $27.2 million to $61.8 million at
September 30, 2006 from $34.6 million at December 31, 2005. Net proceeds of approximately $24.3 million from the sale and issuance during the first quarter of 2006 of 862,500 shares of our common stock accounted for almost all of the
increase. The proceeds will be used to support the Banks various strategic initiatives for expansion and growth over the next several years. In addition to the stock offering, we generated net income of $4.2 million and recognized stock
compensation of $134 thousand on incentive stock awards. We experienced a decrease in net unrealized losses on available-for-sale securities of $81 thousand and we declared cash dividends of $1.5 million or $0.51 per share during the first nine
months of 2006.

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

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

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



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##### Table of Contents

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



|                                         |  |                                                                        |   |  |                                                      |   |  |           |   |  |              |  
|---------------------------------------- |  | ---------------------------------------------------------------------- | - |  | ---------------------------------------------------- | - |  | --------- | - |  | ------------ | -
|                                         |  | To be well capitalized under prompt corrective
action provisions Ratio |   |  | Minimum required for capital adequacy
purposes Ratio |   |  | Our Ratio |   |  | Banks Ratio |  
|As of September 30, 2006:                |  |                                                                        |   |  |                                                      |   |  |           |   |  |              |  
|Tier 1 Capital (to Average Assets)       |  | 35.00                                                                  | % |  | 33.00                                                | % |  | 12.66     | % |  | 9.20         | %
|Tier 1 Capital (to Risk Weighted Assets) |  | 36.00                                                                  | % |  | 34.00                                                | % |  | 14.94     |   |  | 10.87        |  
|Total Capital (to Risk Weighted Assets)  |  | 310.00                                                                 | % |  | 38.00                                                | % |  | 15.94     |   |  | 11.86        |  
|                                         |  |                                                                        |   | 
|As of December 31, 2005:                 |  |                                                                        |   |  |                                                      |   |  |           |   |  |              |  
|Tier 1 Capital (to Average Assets)       |  | 35.00                                                                  | % |  | 33.00                                                | % |  | 8.43      | % |  | 8.39         | %
|Tier 1 Capital (to Risk Weighted Assets) |  | 36.00                                                                  | % |  | 34.00                                                | % |  | 10.32     |   |  | 10.28        |  
|Total Capital (to Risk Weighted Assets)  |  | 310.00                                                                 | % |  | 38.00                                                | % |  | 11.36     |   |  | 11.32        |  
|                                         |  |                                                                        |   | 
|As of September 30, 2005:                |  |                                                                        |   |  |                                                      |   |  |           |   |  |              |  
|Tier 1 Capital (to Average Assets)       |  | 35.00                                                                  | % |  | 33.00                                                | % |  | 8.35      | % |  | 8.30         | %
|Tier 1 Capital (to Risk Weighted Assets) |  | 36.00                                                                  | % |  | 34.00                                                | % |  | 10.46     |   |  | 10.42        |  
|Total Capital (to Risk Weighted Assets)  |  | 310.00                                                                 | % |  | 38.00                                                | % |  | 11.53     |   |  | 11.48        |  

FORWARD-LOOKING STATEMENTS

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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



27



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

Item 4. Controls and Procedures

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, our Chief Executive Officer and Chief Financial Officer 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. We review our disclosure controls and procedures, which may include our internal control over financial reporting, on an ongoing basis and may from
time to time make changes aimed at enhancing their effectiveness. In connection with the above evaluation of our disclosure controls and procedures, no change in our internal control over financial reporting was identified that occurred during the
quarterly period ended September 30, 2006, and 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 1A. Risk Factors

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

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

None.

Item 3. Defaults upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed or furnished with this report:



|               |  |                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------
|Exhibit Number |  | 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)                   



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SIGNATURES

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



|                        |  |                   |  |                              
|----------------------- |  | ----------------- |  | -----------------------------
|                        |  | ECB BANCORP, INC.
|                        |  | (Registrant)     
|                        |  |                  
|Date: November 14, 2006 |  | By                |  | /s/ Arthur H. Keeney III     
|                        |  |                   |  | Arthur H. Keeney III         
|                        |  |                   |  | (President & CEO)            
|                        |  |                  
|Date: November 14, 2006 |  | By                |  | /s/ Gary M. Adams            
|                        |  |                   |  | Gary M. Adams                
|                        |  |                   |  | (Senior Vice President & CFO)



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EXHIBIT INDEX



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



30