##### 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 March 31, 2005



or



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



For the transition period from  to



Commission File No. 2017-6



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ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)



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



Post Office Box 337,
Engelhard, North Carolina 27824

(Address of principal executive offices) (Zip Code)



(252) 925-9411

(Registrants telephone number, including area code)



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



Indicate by check mark whether the registrant is an accelerated
filer (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 May 12, 2005 2,038,242 shares of the registrants common stock, $3.50 par value, were outstanding.



This Form 10-Q has 21 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 March 31, 2005 and December 31, 2004                                      |  | 3             
|Consolidated Income Statements for the Three Months Ended March 31, 2005 and 2004                     |  | 4             
|Consolidated Statements of Changes in Shareholders Equity Three Months Ended March 31, 2005 and 2004 |  | 5             
|Consolidated Statements of Cash Flows Three Months Ended March 31, 2005 and 2004                      |  | 6             
|Notes to Consolidated Financial Statements                                                            |  | 7             
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations         |  | 11            
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                    |  | 18            
|Item 4. Controls and Procedures                                                                       |  | 18            
|                                                                                                      | 
|Part II  Other Information                                                                           |  |               
|Item 6. Exhibits                                                                                      |  | 19            
|Signatures                                                                                            |  | 20            
|Exhibit Index                                                                                         |  | 21            
|EX- 31.1                                                                                              |  |               
|EX- 31.2                                                                                              |  |               
|EX- 32.1                                                                                              |  |               
|EX- 32.2                                                                                              |  |               



2



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

March 31, 2005 and December 31, 2004



|                                                                                                                                  |  |                |             |   |                   |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                  |  | March 31, 2005 |             |   | December 31,2004* |  
|                                                                                                                                  |  | (unaudited)    |             |   |                   |  
|Assets                                                                                                                            |  |                |             |   |                   |   |             |  
|Non-interest bearing deposits and cash                                                                                            |  | $              | 37,859,783  |   |                   | $ | 28,263,268  |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Total cash and cash equivalents                                                                                                   |  |                | 37,859,783  |   |                   |   | 28,263,268  |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Investment securities                                                                                                             |  |                |             |   |                   |   |             |  
|Available-for-sale, at market value (cost of $110,873,983 and $112,787,121 at March 31, 2005 and December 31, 2004,
respectively) |  |                | 109,093,467 |   |                   |   | 112,321,137 |  
|                                                                                                                                  |  |               
|Loans                                                                                                                             |  |                | 336,429,382 |   |                   |   | 329,530,355 |  
|Allowance for probable loan losses                                                                                                |  |                | (4,380,495  | ) |                   |   | (4,300,000  | )
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Loans, net                                                                                                                        |  |                | 332,048,887 |   |                   |   | 325,230,355 |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Real estate and repossessions acquired in settlement of loans, net                                                                |  |                | 159,500     |   |                   |   | 34,500      |  
|Federal Home Loan Bank common stock, at cost                                                                                      |  |                | 2,082,700   |   |                   |   | 1,946,500   |  
|Bank premises and equipment, net                                                                                                  |  |                | 17,463,807  |   |                   |   | 16,939,045  |  
|Accrued interest receivable                                                                                                       |  |                | 2,626,286   |   |                   |   | 2,758,558   |  
|Other assets                                                                                                                      |  |                | 15,000,711  |   |                   |   | 14,396,467  |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Total                                                                                                                             |  | $              | 516,335,141 |   |                   | $ | 501,889,830 |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Liabilities and Shareholders Equity                                                                                              |  |                |             |   |                   |   |             |  
|Deposits                                                                                                                          |  |                |             |   |                   |   |             |  
|Demand, noninterest bearing                                                                                                       |  | $              | 91,024,010  |   |                   | $ | 86,215,997  |  
|Demand, interest bearing                                                                                                          |  |                | 91,372,332  |   |                   |   | 94,924,075  |  
|Savings                                                                                                                           |  |                | 23,819,580  |   |                   |   | 23,178,796  |  
|Time                                                                                                                              |  |                | 214,742,890 |   |                   |   | 206,814,091 |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Total deposits                                                                                                                    |  |                | 420,958,812 |   |                   |   | 411,132,959 |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Accrued interest payable                                                                                                          |  |                | 1,083,045   |   |                   |   | 970,081     |  
|Short-term borrowings                                                                                                             |  |                | 27,983,439  |   |                   |   | 23,006,740  |  
|Long-term obligations                                                                                                             |  |                | 31,310,000  |   |                   |   | 31,310,000  |  
|Other liabilities                                                                                                                 |  |                | 3,080,932   |   |                   |   | 3,392,837   |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Total liabilities                                                                                                                 |  |                | 484,416,228 |   |                   |   | 469,812,617 |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Shareholders equity                                                                                                              |  |                |             |   |                   |   |             |  
|Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,038,242 in 2005 and 2004.         |  |                | 7,133,848   |   |                   |   | 7,133,848   |  
|Capital surplus                                                                                                                   |  |                | 5,360,003   |   |                   |   | 5,360,003   |  
|Retained earnings                                                                                                                 |  |                | 20,802,187  |   |                   |   | 20,176,100  |  
|Deferred compensation - restricted stock                                                                                          |  |                | (282,108    | ) |                   |   | (306,157    | )
|Accumulated other comprehensive loss                                                                                              |  |                | (1,095,017  | ) |                   |   | (286,581    | )
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Total shareholders equity                                                                                                        |  |                | 31,918,913  |   |                   |   | 32,077,213  |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Commitments                                                                                                                       |  |                |             |   |                   |   |             |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  
|Total                                                                                                                             |  | $              | 516,335,141 |   |                   | $ | 501,889,830 |  
|                                                                                                                                  |  |                |             |   |                   |   |             |  



See accompanying notes to consolidated
financial statements.

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



3



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For the three months ended March 31, 2005 and 2004

(unaudited)



|                                                             |  |                              |           |      |   |          
|------------------------------------------------------------ |  | ---------------------------- | --------- | ---- | - | ---------
|                                                             |  | Three months ended March 31,
|                                                             |  | 2005                         |           | 2004
|Interest income:                                             |  |                              |           |      |   |          
|Interest and fees on loans                                   |  | $                            | 5,145,670 |      | $ | 4,099,449
|Interest on investment securities:                           |  |                              |           |      |   |          
|Interest exempt from federal income taxes                    |  |                              | 289,195   |      |   | 249,983  
|Taxable interest income                                      |  |                              | 752,692   |      |   | 781,268  
|Dividend income                                              |  |                              | 18,352    |      |   | 34,587   
|FHLB stock dividends                                         |  |                              | 12,459    |      |   | 9,756    
|Interest on federal funds sold                               |  |                              | 22,917    |      |   | 22,940   
|                                                             |  |                              |           |      |   |          
|Total interest income                                        |  |                              | 6,241,285 |      |   | 5,197,983
|                                                             |  |                              |           |      |   |          
|Interest expense:                                            |  |                              |           |      |   |          
|Deposits:                                                    |  |                              |           |      |   |          
|Demand accounts                                              |  |                              | 111,608   |      |   | 81,921   
|Savings                                                      |  |                              | 28,958    |      |   | 26,891   
|Time                                                         |  |                              | 1,260,233 |      |   | 791,363  
|Short-term borrowings                                        |  |                              | 101,886   |      |   | 47,326   
|Long-term obligations                                        |  |                              | 364,481   |      |   | 339,896  
|                                                             |  |                              |           |      |   |          
|Total interest expense                                       |  |                              | 1,867,166 |      |   | 1,287,397
|                                                             |  |                              |           |      |   |          
|Net interest income                                          |  |                              | 4,374,119 |      |   | 3,910,586
|Provision for probable loan losses                           |  |                              | 100,000   |      |   | 150,000  
|                                                             |  |                              |           |      |   |          
|Net interest income after provision for probable loan losses |  |                              | 4,274,119 |      |   | 3,760,586
|                                                             |  |                              |           |      |   |          
|Noninterest income:                                          |  |                              |           |      |   |          
|Service charges on deposit accounts                          |  |                              | 795,413   |      |   | 792,477  
|Other service charges and fees                               |  |                              | 323,456   |      |   | 277,345  
|Net gain on sale of securities                               |  |                              |          |      |   | 36,911   
|Income from bank owned life insurance                        |  |                              | 69,099    |      |   | 61,575   
|Other operating income                                       |  |                              | 19,425    |      |   | 337,042  
|                                                             |  |                              |           |      |   |          
|Total noninterest income                                     |  |                              | 1,207,393 |      |   | 1,505,350
|                                                             |  |                              |           |      |   |          
|Noninterest expenses:                                        |  |                              |           |      |   |          
|Salaries                                                     |  |                              | 1,569,818 |      |   | 1,395,805
|Retirement and other employee benefits                       |  |                              | 640,824   |      |   | 589,578  
|Occupancy                                                    |  |                              | 331,003   |      |   | 359,493  
|Equipment                                                    |  |                              | 455,414   |      |   | 422,172  
|Professional fees                                            |  |                              | 187,139   |      |   | 86,679   
|Supplies                                                     |  |                              | 82,704    |      |   | 89,218   
|Telephone                                                    |  |                              | 133,093   |      |   | 118,682  
|Postage                                                      |  |                              | 47,088    |      |   | 55,234   
|Other operating expenses                                     |  |                              | 718,465   |      |   | 775,141  
|                                                             |  |                              |           |      |   |          
|Total noninterest expenses                                   |  |                              | 4,165,548 |      |   | 3,892,002
|                                                             |  |                              |           |      |   |          
|Income before income taxes                                   |  |                              | 1,315,964 |      |   | 1,373,934
|Income taxes                                                 |  |                              | 363,758   |      |   | 400,000  
|                                                             |  |                              |           |      |   |          
|Net income                                                   |  | $                            | 952,206   |      | $ | 973,934  
|                                                             |  |                              |           |      |   |          
|Net income per share - basic                                 |  | $                            | 0.47      |      | $ | 0.48     
|Net income per share - diluted                               |  | $                            | 0.47      |      | $ | 0.48     
|Weighted average shares outstanding - basic                  |  |                              | 2,014,874 |      |   | 2,021,694
|Weighted average shares outstanding - diluted                |  |                              | 2,044,430 |      |   | 2,046,972



See accompanying notes to consolidated
financial statements.



4



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Shareholders Equity

Three months ended March 31, 2005 and 2004

(unaudited)



|                                                        |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   |            |  
|------------------------------------------------------- |  | ----------- | --------- | - | -------------- | - | --------- | ---------------- |  | - | --------------------------------------- | - |  | ------------------------------------ | -------- | - | ------------------- | - | ---------- | ----- |  | - | --------- | - |  | - | ---------- | -
|                                                        |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferred compensation- restricted stock |   |  | Accumulated othercomprehensiveincome |          |   | Comprehensiveincome |   |            | Total | 
|Balance January 1, 2004                                 |  | $           | 7,132,752 |   |                | $ | 5,359,978 |                  |  | $ | 18,058,476                              |   |  | $                                    | (150,388 | ) |                     | $ | 241,447    |       |  |   |           |   |  | $ | 30,642,265 |  
|Unrealized gains, net of income tax of $312,101         |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   | 498,552    |       |  | $ | 498,552   |   |  |   | 498,552    |  
|Net income                                              |  |             |           |   |                |   |           |                  |  |   | 973,934                                 |   |  |                                      |          |   |                     |   |            |       |  |   | 973,934   |   |  |   | 973,934    |  
|                                                        |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   |            |  
|Total comprehensive income                              |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  | $ | 1,472,486 |   |  |   |            |  
|                                                        |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   |            |  
|Deferred compensation - restricted stock issuance       |  |             | 31,196    |   |                |   | 222,825   |                  |  |   |                                         |   |  |                                      | (254,021 | ) |                     |   |            |       |  |   |           |   |  |   |           |  
|Recognition of deferred compensation - restricted stock |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      | 26,105   |   |                     |   |            |       |  |   |           |   |  |   | 26,105     |  
|Repurchase of common stock                              |  |             | (21,000   | ) |                |   | (153,900  | )                |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   | (174,900   | )
|Cash dividends ($.1425 per share)                       |  |             |           |   |                |   |           |                  |  |   | (290,821                                | ) |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   | (290,821   | )
|                                                        |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   |            |  
|Balance March 31, 2004                                  |  | $           | 7,142,948 |   |                | $ | 5,428,903 |                  |  | $ | 18,741,589                              |   |  | $                                    | (378,304 | ) |                     | $ | 739,999    |       |  |   |           |   |  | $ | 31,675,135 |  
|                                                        |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   |            |  
|                                                        |  |             |           |   |                |   |          
|                                                        |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferredcompensation-restrictedstock    |   |  | Accumulatedothercomprehensiveloss    |          |   | Comprehensiveincome |   |            | Total | 
|Balance January 1, 2005                                 |  | $           | 7,133,848 |   |                | $ | 5,360,003 |                  |  | $ | 20,176,100                              |   |  | $                                    | (306,157 | ) |                     | $ | (286,581   | )     |  |   |           |   |  | $ | 32,077,213 |  
|Unrealized loss, net of income tax of $506,095          |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   | (808,436   | )     |  | $ | (808,436  | ) |  |   | (808,436   | )
|Net income                                              |  |             |           |   |                |   |           |                  |  |   | 952,206                                 |   |  |                                      |          |   |                     |   |            |       |  |   | 952,206   |   |  |   | 952,206    |  
|                                                        |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   |            |  
|Total comprehensive income                              |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  | $ | 143,770   |   |  |   |            |  
|                                                        |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   |            |  
|Recognition of deferred compensation - restricted stock |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      | 24,049   |   |                     |   |            |       |  |   |           |   |  |   | 24,049     |  
|Cash dividends ($.16 per share)                         |  |             |           |   |                |   |           |                  |  |   | (326,119                                | ) |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   | (326,119   | )
|                                                        |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   |            |  
|Balance March 31, 2005                                  |  | $           | 7,133,848 |   |                | $ | 5,360,003 |                  |  | $ | 20,802,187                              |   |  | $                                    | (282,108 | ) |                     | $ | (1,095,017 | )     |  |   |           |   |  | $ | 31,918,913 |  
|                                                        |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                      |          |   |                     |   |            |       |  |   |           |   |  |   |            |  



5



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Three months ended March 31, 2005 and 2004

(Unaudited)



|                                                                                   |  |                              |            |   |      |   |             |  
|---------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ----------- | -
|                                                                                   |  | Three Months Ended March 31, |           
|                                                                                   |  | 2005                         |            |   | 2004 |  
|Cash flows from operating activities:                                              |  |                              |            |   |      |   |             |  
|Net income                                                                         |  | $                            | 952,206    |   |      | $ | 973,934     |  
|Adjustments to reconcile net income to net cash provided by operating activities:  |  |                              |            |   |      |   |             |  
|Depreciation                                                                       |  |                              | 262,663    |   |      |   | 300,957     |  
|Amortization of premium on investment securities, net                              |  |                              | 67,917     |   |      |   | 81,994      |  
|Provision for probable loan losses                                                 |  |                              | 100,000    |   |      |   | 150,000     |  
|Gain on sale of securities                                                         |  |                              |           |   |      |   | (36,711     | )
|Deferred compensation - restricted stock                                           |  |                              | 24,049     |   |      |   | 26,105      |  
|Decrease in accrued interest receivable                                            |  |                              | 132,272    |   |      |   | 96,768      |  
|Loss on disposal of premises and equipment                                         |  |                              |           |   |      |   | 4,263       |  
|Increase in other assets                                                           |  |                              | (612,847   | ) |      |   | (185,000    | )
|(Decrease) increase in accrued interest payable                                    |  |                              | 112,964    |   |      |   | (18,044     | )
|Increase (decrease) in other liabilities, net                                      |  |                              | 158,892    |   |      |   | (583,534    | )
|                                                                                   |  |                              |            |   |      |   |             |  
|Net cash provided by operating activities                                          |  |                              | 1,198,116  |   |      |   | 810,732     |  
|                                                                                   |  |                              |            |   |      |   |             |  
|Cash flows from investing activities:                                              |  |                              |            |   |      |   |             |  
|Proceeds from sales of investment securities classified as available-for-sale      |  |                              |           |   |      |   | 3,020,000   |  
|Proceeds from maturities of investment securities classified as available-for-sale |  |                              | 2,481,147  |   |      |   | 6,287,215   |  
|Purchases of investment securities classified as available-for-sale                |  |                              | (635,925   | ) |      |   | (33,888,063 | )
|Purchase of Federal Home Loan Bank common stock                                    |  |                              | (136,200   | ) |      |   | (250,000.00 | )
|Purchases of premises and equipment                                                |  |                              | (787,425   | ) |      |   | (996,916    | )
|Net loan originations                                                              |  |                              | (7,043,532 | ) |      |   | (8,205,742  | )
|                                                                                   |  |                              |            |   |      |   |             |  
|Net cash used by investing activities                                              |  |                              | (6,121,935 | ) |      |   | (34,033,506 | )
|                                                                                   |  |                              |            |   |      |   |             |  
|Cash flows from financing activities:                                              |  |                              |            |   |      |   |             |  
|Net increase in deposits                                                           |  |                              | 9,825,853  |   |      |   | 43,164,604  |  
|Net (decrease) increase in short-term borrowings                                   |  |                              | 4,976,699  |   |      |   | (980,799    | )
|Increase in long-term obligations                                                  |  |                              |           |   |      |   | 5,000,000   |  
|Dividends paid                                                                     |  |                              | (290,821   | ) |      |   | (254,743    | )
|Repurchase of common stock                                                         |  |                              |           |   |      |   | (174,900    | )
|                                                                                   |  |                              |            |   |      |   |             |  
|Net cash provided by financing activities                                          |  |                              | 14,511,731 |   |      |   | 46,754,162  |  
|                                                                                   |  |                              |            |   |      |   |             |  
|Increase in cash and cash equivalents                                              |  |                              | 9,596,515  |   |      |   | 13,531,388  |  
|Cash and cash equivalents at beginning of period                                   |  |                              | 28,263,268 |   |      |   | 27,384,112  |  
|                                                                                   |  |                              |            |   |      |   |             |  
|Cash and cash equivalents at end of period                                         |  | $                            | 37,859,783 |   |      | $ | 40,915,500  |  
|                                                                                   |  |                              |            |   |      |   |             |  
|Cash paid during the period:                                                       |  |                              |            |   |      |   |             |  
|Interest                                                                           |  | $                            | 1,754,202  |   |      | $ | 1,305,441   |  
|Taxes                                                                              |  |                              | 457,781    |   |      |   | 529,840     |  
|                                                                                   |  |                             
|Supplemental disclosures of noncash financing and investing activities:            |  |                              |            |   |      |   |             |  
|Cash dividends declared but not paid                                               |  | $                            | 326,119    |   |      | $ | 290,821     |  
|Unrealized (losses) gains on available-for-sale securities, net of deferred taxes  |  |                              | (808,436   | ) |      |   | 498,552     |  
|Restricted stock issuance                                                          |  |                              |           |   |      |   | 254,021     |  



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



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



(2) Allowance for Probable Loan Losses



The following table summarizes the activity in the allowance for probable loan losses for the three-month periods ended March 31, 2005 and 2004, respectively.



|                                       |  |                              |           |   |      |   |           |  
|-------------------------------------- |  | ---------------------------- | --------- | - | ---- | - | --------- | -
|                                       |  | Three-months ended March 31, |          
|                                       |  | 2005                         |           |   | 2004 |  
|Balance at the beginning of the period |  | $                            | 4,300,000 |   |      | $ | 3,150,000 |  
|Provision for probable loan losses     |  |                              | 100,000   |   |      |   | 150,000   |  
|Charge-offs                            |  |                              | (26,488   | ) |      |   | (59,575   | )
|Recoveries                             |  |                              | 6,983     |   |      |   | 10,010    |  
|Net Charge-offs                        |  |                              | (19,505   | ) |      |   | (49,565   | )
|Balance at end of the period           |  | $                            | 4,380,495 |   |      | $ | 3,650,435 |  



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(3) Net Income Per Share



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



Diluted net income per share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding
during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized is considered proceeds using the
treasury stock method. For the three months ended March 31, 2005 and 2004, diluted weighted average shares outstanding increased by 14,128 and 10,350, 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 three months ended March 31, 2005 and 2004, diluted weighted average shares outstanding increased by 15,428 and 14,928, 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.



|                              |  |                                   |         |                      |           |                  |   |     
|----------------------------- |  | --------------------------------- | ------- | -------------------- | --------- | ---------------- | - | ----
|                              |  | Three months ended March 31, 2005
|                              |  | Income (Numerator)                |         | Shares (Denominator) |           | Per Share Amount
|Basic net income per share    |  | $                                 | 952,206 |                      | 2,014,874 |                  | $ | 0.47
|                              |  |                                   |         |                      |           |                  |   |     
|Effect of dilutive securities |  |                                   |        |                      | 29,556    |                  |   |     
|                              |  |                                   |         |                      |           |                  |   |     
|Diluted net income per share  |  | $                                 | 952,206 |                      | 2,044,430 |                  | $ | 0.47
|                              |  |                                   |         |                      |           |                  |   |     
|                              | 
|                              |  | Three months ended March 31, 2004
|                              |  | Income (Numerator)                |         | Shares(Denominator)  |           | Per Share Amount
|Basic net income per share    |  | $                                 | 973,934 |                      | 2,021,694 |                  | $ | 0.48
|                              |  |                                   |         |                      |           |                  |   |     
|Effect of dilutive securities |  |                                   |        |                      | 25,278    |                  |   |     
|                              |  |                                   |         |                      |           |                  |   |     
|Diluted net income per share  |  | $                                 | 973,934 |                      | 2,046,972 |                  | $ | 0.48
|                              |  |                                   |         |                      |           |                  |   |     



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(4) Stock Option Plan



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



The Company accounts for its awards pursuant to the
Omnibus Plan in accordance with the provisions of Accounting Principles Board Opinion No. 25 (APB Opinion No. 25), Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense is recorded on the
date of grant only if the market price of the underlying stock on the date of grant exceeds the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123), recommends that entities recognize as expense over the
vesting period the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per
share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions
of SFAS No. 123. There were no options granted in the first three months of 2005 or 2004.



The Company awarded 8,913 shares of restricted stock during the three months ended March 31, 2004, resulting in an increase to deferred compensation-restricted stock of $254,021. No restricted stock was awarded by the
Company in the 2005.



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



|                                                                                                                                            |  |                              |         |   |      |         |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------- | - | ---- | ------- | -
|                                                                                                                                            |  | Three months ended March 31, |        
|                                                                                                                                            |  | 2005                         |         |   | 2004 |        
|Net income, as reported                                                                                                                     |  | $                            | 952,206 |   |      | 973,934 |  
|Deduct: Total stock-based employee Compensation expense determined Under fair value based method for All awards, net of related tax
effects |  |                              | (703    | ) |      | (1,646  | )
|                                                                                                                                            |  |                              |         |   |      |         |  
|Proforma net income                                                                                                                         |  | $                            | 951,503 |   |      | 972,288 |  
|                                                                                                                                            |  |                              |         |   |      |         |  
|Earnings per share:                                                                                                                         |  |                              |         |   |      |         |  
|Basic  as reported                                                                                                                         |  | $                            | 0.47    |   |      | 0.48    |  
|                                                                                                                                            |  |                              |         |   |      |         |  
|Basic  proforma                                                                                                                            |  |                              | 0.47    |   |      | 0.48    |  
|                                                                                                                                            |  |                              |         |   |      |         |  
|Diluted  as reported                                                                                                                       |  |                              | 0.47    |   |      | 0.48    |  
|                                                                                                                                            |  |                              |         |   |      |         |  
|Diluted  proforma                                                                                                                          |  |                              | 0.47    |   |      | 0.47    |  
|                                                                                                                                            |  |                              |         |   |      |         |  



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(5) Postretirement Benefits



The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that
have met minimum age and service requirements. Net periodic postretirement benefit cost include the following components:



|                                         |  |                              |        |      |   |       
|---------------------------------------- |  | ---------------------------- | ------ | ---- | - | ------
|                                         |  | Three months ended March 31,
|                                         |  | 2005                         |        | 2004
|Service cost                             |  | $                            | 1,712  |      | $ | 1,589 
|Interest cost                            |  |                              | 10,618 |      |   | 10,652
|Amortization of loss                     |  |                              | 71     |      |   | 1,072 
|Net periodic postretirement benefit cost |  | $                            | 12,401 |      | $ | 13,313



(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 March 31, 2005:



|                                                              |  |                     |            |                     |           |            |            |                  |         |            |            |                  |          
|------------------------------------------------------------- |  | ------------------- | ---------- | ------------------- | --------- | ---------- | ---------- | ---------------- | ------- | ---------- | ---------- | ---------------- | ---------
|                                                              |  | Less than 12 months |            | 12 months or longer |           | Total     
|Description of Securities                                     |  | Fair Value          |            | UnrealizedLosses    |           | Fair Value |            | UnrealizedLosses |         | Fair Value |            | UnrealizedLosses
|Securities of other U.S. government agencies And corporations |  | $                   | 10,774,500 |                     | 202,289   |            |           |                  |        |            | 10,774,500 |                  | 202,289  
|Obligations of states and political subdivisons               |  |                     | 17,470,628 |                     | 431,284   |            | 935,736    |                  | 72,113  |            | 18,406,364 |                  | 503,397  
|Mortgage-backed securities                                    |  |                     | 42,299,491 |                     | 1,017,940 |            | 20,034,551 |                  | 555,836 |            | 62,334,042 |                  | 1,573,776
|                                                              |  |                     |            |                     |           |            |            |                  |         |            |            |                  |          
|Subtoal, debt securities                                      |  |                     | 70,544,619 |                     | 1,651,513 |            | 20,970,287 |                  | 627,949 |            | 91,514,906 |                  | 2,279,462
|                                                              |  |                     |            |                     |           |           
|Agency preferred stock                                        |  |                     |           |                     |          |            | 2,157,100  |                  | 43,545  |            | 2,157,100  |                  | 43,545   
|                                                              |  |                     |            |                     |           |            |            |                  |         |            |            |                  |          
|Total                                                         |  | $                   | 70,544,619 |                     | 1,651,513 |            | 23,127,387 |                  | 671,494 |            | 93,672,006 |                  | 2,323,007
|                                                              |  |                     |            |                     |           |            |            |                  |         |            |            |                  |          



As of March 31, 2005, management has
concluded that the unrealized losses above (which consisted of 112 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, with the exception of the agency preferred stock, 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 three (3) municipal obligations, twelve (12) mortgage-backed securities and two (2) agency preferred stock issues of FNMA. 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.



Management has formulated an exit strategy for and is in the process of liquidating its holdings in agency preferred stock of FNMA and
FHLMC. The above issues of FNMA preferred stock were liquidated in April of 2005 and the Company recorded a gain on the sale of approximately $15,000.



(7) New Accounting Pronouncements



On December 12, 2003, the American Institute of Certified Public Accountants (AICPA) released Statement of Position (SOP) 03-03, Accounting for Certain Loans or Debt
Securities Acquired in a Transfer. This statement of position addresses accounting for differences between contractual cash flows and cash flows expected to be



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collected from investors initial investment in loans or debt securities (loans) acquired in a transfer if those
differences are attributable, at least in part, to credit quality. This SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of SOP 03-3 did not have a material impact on the consolidated financial
statements.



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



In December 2004, the FASB issued Statement of Financial Accounting SAFS No.123(R), which revises SFAS No. 123 and supersedes APB 25. SFAS No.123(R) eliminates an
entitys ability to account for share-based payments using APB 25 and requires all such transactions to be accounted for using fair value based method. In addition, although it does not require use of a binomial lattice model, SFAS No. 123(R)
indicates that a binomial lattice model may be more effective in valuing employee stock options than the Black-Scholes model, which was primarily developed to value publicly traded options. In April 2005, the Securities Exchange Commission deferred
the effective date of SFAS No.123(R) from the interim or annual period beginning after June 15, 2005 to the next fiscal year beginning after June 15, 2005. SFAS No.123(R) is not expected to have a material impact on the Companys consolidated
statements of income or balance sheets. If the Company had included the cost of employee stock option compensation in its consolidated financial statements, its net income in the first quarters of 2005 and 2004 would have been lower by $703 and
$1,646, respectively, using a Black-Scholes model.



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



General



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



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



Critical Accounting Policies



The Companys significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-KSB Annual Report for the
fiscal year ended December 31, 2004. Of these significant accounting policies, the Company considers its policy regarding the allowance for probable loan losses to be its most critical accounting policy, because it requires managements most
subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for probable loan losses and therefore the provision for loan losses and results of operations. The Company has developed
appropriate policies and procedures for assessing the adequacy of the allowance for probable loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Companys



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assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations,
and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Companys allowance for probable loan
losses and related matters, see Asset Quality.



Comparison of
the Results of Operations for the Three Month Periods Ended March 31, 2005 and 2004



Summary



For the three months
ended March 31, 2005, we had net income of $952,206 or $0.47 basic and diluted earnings per share, compared to $973,934, or $0.48 basic and diluted earnings per share for the three months ended March 31, 2004. Net interest income increased $463,533
or 11.85% to $4,374,119 in the first quarter of 2005 from $3,910,586 in the first quarter of 2004, and noninterest income decreased $297,957 or 19.79% when compared to the same period last year. The first quarter of 2004 included a $316,924 gain on
insurance proceeds for property damage sustained during Hurricane Isabel in September 2003. Noninterest expense increased $273,546 or 7.03% for the three month period ended March 31, 2005 as compared to the same period in 2004, as salary and
benefits expense increased $225,259 or 11.35% to $2,210,642 compared to $1,985,383 during the first quarter of 2004.



Net interest income



Net interest income for the three months ended March 31, 2005 was $4,374,119, an increase of $463,533 or 11.85% when compared to net interest income of $3,910,586 for the
prior year period. Our net interest margin, on a tax-equivalent basis, for the three months ended March 31, 2005 was 4.11% compared to 3.99% in the first quarter of 2004. Management attributes the increase in our net interest margin to the increase
in short term rates. Since March of 2004, the Federal Open Market Committee (FOMC) has increased short-term rates 200 basis points from 1.00% to 3.00% through a succession of 25 basis point increases. Approximately $203 million or 58% of our loan
portfolio are variable rate loans that adjust with the movement of the national prime rate. As a result, yields on our loans increased approximately 51 basis points compared to first quarter of 2004. The yield on average earning assets, on a
tax-equivalent basis, increased 54 basis points to 5.81% compared to 5.28% at the end of the first quarter of 2004. Total interest income increased $1,043,983 or 20.07% for the three months ended March 31, 2005 compared to the same three months of
2004 as average earning assets increased $39.1 million and the rate on variable rate loans increased 175 basis points since the first quarter of 2004.



Conversely, our cost of funds during the first quarter of 2005 was 2.00%, an increase of 47 basis point when compared to 1.53% at the end of first quarter of 2004. Rates
paid on bank certificate of deposits increased 66 basis points form 1.72% to 2.38% as of March 31, 2005 while our cost of borrowed funds increased 55 basis points compared to the prior year period. Rates paid on accounts such as NOW and Money Market
accounts, increased only 9 basis points when compared to first quarter of last year. Total interest expense increased $579,769 or 45.03% during first quarter of 2005 compared to the same period in 2004, the result of increased interest-bearing
liabilities and increased market rates paid on wholesale certificates of deposits. The volume of average interest-bearing liabilities increased approximately $37.5 million when comparing first quarter of 2005 with that of 2004.



Provision for probable loan losses



The provision for probable loan losses charged to operations during the three months ended
March 31, 2005 and 2004 was $100,000 and $150,000, respectively. Net charge-offs for the quarter ended March 31, 2005 totaled $19,505 compared to net charge-offs of $49,565 during the first quarter of 2004. The decrease in amount of provision for
probable loan losses charged during the period is due to our loan quality and reduced net charge-offs compared to the first quarter of 2004. The amount charged for provision for probable loan losses is the result of managements review and
evaluation of the portfolio, which considers current conditions, past due loans, and prior loan loss experience.



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Noninterest income



Noninterest income decreased $297,957 or 19.79% to $1,207,393 for the three months ended March 31, 2005 compared to $1,505,350 for the same
period in 2004. The decrease is due to a $316,924 gain on insurance proceeds for property damage sustained during Hurricane Isabel in September 2003 that was recorded as other income in the first quarter of 2004. Other service charges and fees
increased $46,111 or 16.63% compared to the prior year period principally due to increased mortgage origination brokerage fees of $18,609. During the first quarter of 2004, we recorded a net gain on the sale of securities of $36,911 compared to none
in the first quarter of 2005.



Noninterest expense



Noninterest expense increased $273,546 or 7.03% to $4,165,548 for the three months ended
March 31, 2005 from $3,892,002 incurred in the same period in 2004. This increase is principally due to general increases in salary and benefits expense of $225,259 or 11.35%. Salary expense increased $174,013 over the prior year period as a result
of additional staffing expense within our home office and mortgage origination department of $60,824 and $47,699, respectively. Additional salary expenses of $38,729 are associated with our recently opened full service office in Wilmington. Benefits
during first quarter 2005 compared to 2004 increased $51,246 or 8.69% principally due to an increase in employee FICA tax and employee group insurance premiums of $15,006 and $13,824, respectively. Equipment expense increased $33,242 or 7.87% over
the first quarter of 2004. Miscellaneous equipment expense increased $27,778 while equipment maintenance increased $22,224 as the result of upgrades to our network technology. Professional fees increased $100,460 or 115.90% to $187,139 for the three
months ended March 31, 2005 from $86,218 in the prior year period. Consulting fees increased $66,212 for services pertaining to strategy planning and independent credit review performed during the first quarter of 2005 while audit and accounting
fees increased by $23,500 over the prior year period. Other operating expenses decreased $56,676 from $775,141 for the three months ended March 31, 2004 to $718,465 for the three months ended March 31, 2005. The decrease is primarily due to the sale
of a repossessed boat during the first quarter of 2004 that resulted in a $50,500 loss.



Income taxes



Income tax expense for the three months
ended March 31, 2005 and 2004 was $363,758 and $400,000, respectively, resulting in effective tax rates of 27.76% and 29.11%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to
tax-exempt interest income.



The valuation allowance for deferred tax assets
was $534,486 for the periods ended March 31, 2005 and December 31, 2004. The valuation allowance required at December 31, 2004 was for certain unrealized capital losses related to perpetual preferred stock issued by Federal National Mortgage
Association and Federal Home Loan Mortgage Corporation. These losses are capital in character and the corporation may not have current capital gain capacity to offset these losses.



Comparison of Financial Condition at March 31, 2005 and December 31, 2004



Total assets increased $14.5 million to $516.4 million, an increase of 2.88% when compared
to $501.9 million at December 31, 2004. Asset growth was funded by increases in certificates of deposit of $7.9 million and demand deposits of $4.8 million. Approximately all of the growth in certificates of deposit was public funds.



Gross loans increased $6.9 million or 2.09% from $329.5 million at December 31, 2004 to
$336.4 million at March 31, 2005. The increase in loans in the first quarter was the result of increased lines of credit of $6.7 million as local farmers and businesses located on the Outer Banks prepare for the upcoming season. Construction lending
increased $4.6 million during the quarter but was offset by a decrease in real estate loans of $6.2 million.



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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. In general, because of loan funding needs, proceeds from investment maturities and calls were diverted to this purpose, leading to a reduction in the level of investment securities at March 31, 2005
of $3.2 million or 2.87% compared to $112,321,137 at December 31, 2004. 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.



Shareholders equity decreased by $158,300 from December 31, 2004 to March 31, 2005, due to net income of $952,206 and the recognition of deferred compensation of $24,049 on restricted stock awards, which was substantially offset by an
increase of net unrealized losses on available-for-sale securities of $808,436. We declared cash dividends of $326,119, or 16.0 cents per share, during 2005 compared to 14.25 cents per share in the prior year period.



Asset Quality



Allowance for probable loan losses



The allowance for probable loan losses (AFLL) is established through a provision for probable loan losses charged against earnings. The level of the allowance for
probable loan losses reflects managements best estimate of probable losses inherent in the portfolio as of the balance sheet date and is based on managements evaluation of the risks in the loan portfolio and changes in the nature and
volume of loan activity. Managements evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers the loans risk grades, the estimated fair value of the underlying
collateral, current economic conditions, historical loan loss experience and other current factors that warrant consideration in determining an adequate allowance. Our objective is to maintain a loan portfolio that is diverse in terms of loan type,
industry concentration, and borrower concentration in order to manage overall credit risk by minimizing the adverse impact of any single event or combination of related events. The allowance for probable loan losses as a percentage of loans
outstanding was 1.30% at March 31, 2005 and 1.31% at December 31, 2004.



Reserve Policy and Methodology



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



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



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



Specific reserves are provided on
impaired commercial loans and are determined on a loan-by-loan basis based on our evaluation of our loss exposure for each credit, given the current payment status of the loan and the value of any underlying collateral. Loans for which specific
reserves are provided are excluded from the general allowance calculations described above to prevent duplicate reserves. The calculations of specific reserves on commercial loans incorporate the results of measuring impaired loans pursuant to the
requirements of Statement of Financial



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



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



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



Nonperforming assets consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our policy to place loans on nonaccrual status when any portion of
principal or interest becomes 90 days past due, or earlier if full collection of principal and interest become doubtful. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period.
Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both
principal and interest and when the collectibility of principal or interest is no longer doubtful. Nonperforming assets were $246,709 and $137,585 which represented .07% and .04% of loans outstanding at March 31, 2005 and December 31, 2004,
respectively. We had no loans considered to be impaired under SFAS No. 114 at March 31, 2005 or at December 31, 2004. Trends and dollar amounts of nonperforming loans are used by management in evaluating the overall adequacy of the allowance for
probable loan losses.



The provision for probable loan losses charged to
operations during the nine months ended March 31, 2005 was $100,000, compared to $150,000 for the same period in 2004. Net charge-offs during the first quarter of 2005 totaled $19,505, compared to net charge-offs of $49,565 during the same period in
2004. The amount charged for provision for probable loan losses is the result of our review and evaluation of the portfolio, which considers current economic conditions, past due loans, and prior loan loss experience.



Liquidity



Liquidity for the Bank refers to their continuing ability to meet deposit withdrawals, fund loan and capital expenditure commitments,
maintain reserve requirements, pay operating expenses and provide funds to Bancorp 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) the lines of credit established at the Federal Home Loan Bank, less existing advances, and (e) the investment
securities portfolio. All 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.



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Consistent with the general approach to liquidity, loans and other assets of the subsidiary bank are based primarily on 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
the Banks market area, 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 an increased use of brokered deposits and, additionally, institutional deposits obtained from secured websites on the internet. Short-term borrowings increased $5.0 million during the first quarter of 2005.



Commitments, Contingencies and Off-Balance Sheet Risk



In the normal course of business, various commitments are outstanding that are not reflected
in the consolidated financial statements. Significant commitments at March 31, 2005 are discussed below.



Commitments of the Bank to extend credit and undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At
March 31, 2005, total commitments to extend credit and undisbursed advances on customer lines of credit amounted to $67,625,000. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
many commitments expire without being drawn, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary, upon extension of credit is based on the credit evaluation of the borrower.



The Bank issues standby letters of credit whereby the Bank guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year
and may be automatically renewed depending on the terms of the guarantee. All standby letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge
of assets. The maximum potential amount of undiscounted future payments related to standby letters of credit was $1,298,000 at March 31, 2005 and $998,000 at March 31, 2004. Due to insignificance, the Company has recorded no liability at March 31,
2005 for the current carrying amount of the obligation to perform as a guarantor.



Asset/Liability Management and Interest Rate Sensitivity



One of the primary objectives of asset/liability management is to maximize the net interest margin while minimizing the earnings risk associated with changes in interest rates. One method used to manage interest rate sensitivity is to
measure, over various time periods, the interest rate sensitivity positions, or gaps; however, this method addresses only the magnitude of timing differences and does not address earnings or market value. Therefore, management uses an earnings
simulation model to prepare, on a regular basis, earnings projections based on a range of interest rate scenarios in order to more accurately measure interest rate risk.



The Companys balance sheet was asset-sensitive at March 31, 2005. An asset-sensitive position means that, for cumulative gap
measurement periods of one year or less, there are more assets than liabilities subject to immediate repricing as market rates change. Because immediately rate sensitive assets exceed rate sensitive interest-bearing liabilities, the earnings
position could improve in a rising rate environment and could deteriorate in a declining rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within
90 days is a portion of the interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators.



Capital Resources



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



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capitalized, the FDIC requires ratios of Tier I capital to total risk-weighted assets and total capital to
risk-weighted assets of 6% and 10%, respectively. Tier I capital consists of total stockholders equity calculated in accordance with generally accepted accounting principles excluding unrealized gains or losses (net of deferred income taxes)
on securities available-for-sale, and total capital is comprised of Tier I capital plus certain adjustments, the only one of which applicable to the Bank is the allowance for probable loan losses. Risk-weighted assets reflect the Banks on- and
off-balance sheet exposures after such exposures have been adjusted for their relative risk levels using formulas set forth in FDIC regulations. As of March 31, 2005, the Bank was in compliance with all of the aforementioned capital requirements and
meets the well-capitalized definition that is used by the FDIC in its evaluation of insured banks. Additionally, at March 31, 2005, Bancorp was also in compliance with the similar capital requirements set forth by the Federal Reserve and
was classified as well-capitalized.



The following table lists Bancorps
regulatory capital ratios at March 31, 2005 and December 31, 2004.



|                                       |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|-------------------------------------- |  | --------------------- | - |  | -------------------------------- | - |  | ------------------------- | - |  | -------------------------- | -
|                                       |  | Minimum Requiredratio |   |  | Required to be wellcapitalized |   |  | Bancorpsratio at 3-31-05 |   |  | Bancorpsratio at 12-31-04 |  
|Risk-based capital ratios:             |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|Tier 1 capital to risk-weighted assets |  | 4.0                   | % |  | 6.0                              | % |  | 10.81                     | % |  | 10.86                      | %
|Total capital to risk-weighted assets  |  | 8.0                   | % |  | 10.0                             | % |  | 11.94                     | % |  | 11.96                      | %
|Leverage capital ratio                 |  | 3.0                   | % |  | 5.0                              | % |  | 8.64                      | % |  | 8.43                       | %



The following table lists the
Banks regulatory capital ratios at March 31, 2005 and December 31, 2004.



|                                       |  |                       |   |  |                                  |   |  |                         |   |  |                          |  
|-------------------------------------- |  | --------------------- | - |  | -------------------------------- | - |  | ----------------------- | - |  | ------------------------ | -
|                                       |  | Minimum Requiredratio |   |  | Required to be wellcapitalized |   |  | Banks ratio at 3-31-05 |   |  | Banks ratio at 12-31-04 |  
|Risk-based capital ratios:             |  |                       |   |  |                                  |   |  |                         |   |  |                          |  
|Tier 1 capital to risk-weighted assets |  | 4.0                   | % |  | 6.0                              | % |  | 10.76                   | % |  | 10.73                    | %
|Total capital to risk-weighted assets  |  | 8.0                   | % |  | 10.0                             | % |  | 11.89                   | % |  | 11.82                    | %
|Leverage capital ratio                 |  | 3.0                   | % |  | 5.0                              | % |  | 8.58                    | % |  | 8.32                     | %



As of March 31, 2005 all of the trust
preferred securities issued on June 26, 2002 qualify as Tier 1 capital for regulatory capital adequacy requirements for Bancorp. The entire original $10 million was infused into the Bank, increasing the Banks Tier 1 capital by $10 million.



Regulatory Matters



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



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



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Current Accounting Issues



The Financial Accounting Standards Board (FASB) issues exposure drafts for proposed statements of financial accounting
standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the
consolidated financial statements of the Company and monitors the status of changes to issued exposure drafts and to proposed effective dates. See footnote 7 of the Notes to Consolidated Financial Statements for discussion on new accounting
pronouncements.



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-KSB and in other documents filed by us with the
Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as may, will, should, could, expects, plans,
intends, anticipates, believes, estimates, predicts, forecasts, potential or continue, or similar terms or the negative of these terms, or other
statements concerning opinions or judgments of the Companys management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing
strategies of our customers, actions of government regulators, the level of market interest rates, weather and similar conditions, particularly the effect of hurricanes on our banking and operations facilities and on our customers and the
communities in which we do business, and general economic conditions. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or
achievements. We have no obligation to update these forward-looking statements.



Item 3. Quantitative and Qualitative Disclosures about Market Risk



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



The Companys market risk arises
primarily from interest rate risk inherent in its lending and deposit-taking activities. The structure of the Companys loan and deposit portfolios is such that a significant decline in interest rates may adversely impact net market values and
net interest income. The Company does not maintain a trading account nor is the Company subject to currency exchange risk or commodity price risk. Interest rate risk is monitored as part of the Companys asset/liability management function,
which is discussed above in Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations under the heading Asset/Liability Management and Interest Rate Sensitivity.



Management does not believe there has been any significant change in the overall analysis of
financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-KSB Annual
Report for the fiscal year ended December 31, 2004.



Item 4. Controls and Procedures



As of March 31,
2005, the end of the period covered by this report, Bancorp carried out an evaluation under the supervision and with the participation of the companys management, including Bancorps Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of Bancorps disclosure controls and



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procedures. In designing and evaluating the companys disclosure controls and procedures, Bancorp and its management
recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and Bancorps management necessarily was required to apply its judgment in
evaluating and implementing possible controls and procedures. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the companys disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by Bancorp in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms. No significant changes in the Companys internal control over financial reporting occurred during the period ended March 31, 2005 that has materially affected, or is reasonably likely to materially affect,
Bancorps internal control over financial reporting. Bancorp reviews its disclosure controls and procedures, which may include its internal controls over financial reporting, on an ongoing basis and may from time to time make changes aimed at
enhancing their effectiveness.



PART II. OTHER INFORMATION



Item 1. Legal
Proceedings



None



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



Not applicable.



Item 3. Defaults upon Senior Securities



Not applicable.



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



None.



Item 5. Other Information



Not applicable.



Item 6. Exhibits



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



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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: May 13, 2005 |  | By:               |  | /s/ Arthur H. Keeney III     
|                   |  |                   |  | Arthur H. Keeney, III        
|                   |  |                   |  | (President & CEO)            
|                   |  |                  
|Date: May 13, 2005 |  | 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)                   



21