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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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



For the Quarterly Period Ended June 30, 2004



or



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



For the transition period from  to



Commission File No. 2017-6



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ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)



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



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



(252) 925-9411

(Registrants telephone number, including area code)



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



APPLICABLE ONLY TO CORPORATE ISSUERS:



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



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



This Form 10-QSB has 25 pages.



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2004 and December 31, 2003



|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                             |  | June 30, 2004 |             |   | December 31,2003* |  
|                                                                                                                                                             |  | (unaudited)   |             |   |                   |  
|Assets                                                                                                                                                       |  |               |             |   |                   |   |             |  
|Non-interest bearing deposits and cash                                                                                                                       |  | $             | 27,548,148  |   |                   | $ | 27,384,112  |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Total cash and cash equivalents                                                                                                                              |  |               | 27,548,148  |   |                   |   | 27,384,112  |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Investment securities                                                                                                                                        |  |               |             |   |                   |   |             |  
|Available-for-sale, at market value (cost of $121,117,850 and $101,428,313 at June 30, 2004 and December 31,2003,
respectively)                              |  |               | 117,585,575 |   |                   |   | 101,820,909 |  
|                                                                                                                                                             |  |              
|Loans                                                                                                                                                        |  |               | 315,126,901 |   |                   |   | 281,581,346 |  
|Allowance for probable loan losses                                                                                                                           |  |               | (3,926,429  | ) |                   |   | (3,550,000  | )
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Loans, net                                                                                                                                                   |  |               | 311,200,472 |   |                   |   | 278,031,346 |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Real estate acquired in settlement of loans, net                                                                                                             |  |               | 58,500      |   |                   |   | 24,000      |  
|Federal Home Loan Bank common stock, at cost                                                                                                                 |  |               | 1,557,500   |   |                   |   | 1,100,000   |  
|Bank premises and equipment, net                                                                                                                             |  |               | 13,796,719  |   |                   |   | 11,880,400  |  
|Accrued interest receivable                                                                                                                                  |  |               | 2,433,432   |   |                   |   | 2,623,464   |  
|Other assets                                                                                                                                                 |  |               | 15,062,012  |   |                   |   | 12,099,778  |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Total                                                                                                                                                        |  | $             | 489,242,358 |   |                   | $ | 434,964,009 |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Liabilities and Shareholders Equity                                                                                                                         |  |               |             |   |                   |   |             |  
|Deposits                                                                                                                                                     |  |               |             |   |                   |   |             |  
|Demand, noninterest bearing                                                                                                                                  |  | $             | 88,340,557  |   |                   | $ | 79,660,488  |  
|Demand interest bearing                                                                                                                                      |  |               | 94,004,272  |   |                   |   | 81,421,156  |  
|Savings                                                                                                                                                      |  |               | 22,489,878  |   |                   |   | 21,295,920  |  
|Time                                                                                                                                                         |  |               | 199,262,689 |   |                   |   | 170,556,204 |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Total deposits                                                                                                                                               |  |               | 404,097,396 |   |                   |   | 352,933,768 |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Accrued interest payable                                                                                                                                     |  |               | 663,425     |   |                   |   | 694,004     |  
|Short-term borrowings                                                                                                                                        |  |               | 17,557,757  |   |                   |   | 18,299,409  |  
|Long-term obligations                                                                                                                                        |  |               | 34,310,000  |   |                   |   | 29,310,000  |  
|Other liabilities                                                                                                                                            |  |               | 2,973,714   |   |                   |   | 3,084,563   |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Total liabilities                                                                                                                                            |  |               | 459,602,292 |   |                   |   | 404,321,744 |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Shareholders equity                                                                                                                                         |  |               |             |   |                   |   |             |  
|Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,038,242 at June 30, 2004 and 2,037,929 at
December 31, 2003. |  |               | 7,133,848   |   |                   |   | 7,132,752   |  
|Capital surplus                                                                                                                                              |  |               | 5,360,003   |   |                   |   | 5,359,978   |  
|Retained earnings                                                                                                                                            |  |               | 19,672,819  |   |                   |   | 18,058,476  |  
|Deferred compensation - restricted stock                                                                                                                     |  |               | (354,255    | ) |                   |   | (150,388    | )
|Accumulated other comprehensive income (loss)                                                                                                                |  |               | (2,172,349  | ) |                   |   | 241,447     |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Total shareholders equity                                                                                                                                   |  |               | 29,640,066  |   |                   |   | 30,642,265  |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Commitments                                                                                                                                                  |  |               |             |   |                   |   |             |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  
|Total                                                                                                                                                        |  | $             | 489,242,358 |   |                   | $ | 434,964,009 |  
|                                                                                                                                                             |  |               |             |   |                   |   |             |  



See
accompanying notes to consolidated financial statements.

---

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



2



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For three and six months ended June 30, 2004 and 2003

(unaudited)



|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|------------------------------------------------------------ |  | ------------------------------- | --------- | ---- | - | --------- | ----------------------------- |  | ---- | ---------- |  | - | ----------
|                                                             |  | Three months endedJune 30, 2004 |           | 2003 |   |           | Six months endedJune 30, 2004 |  | 2003
|Interest income:                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Interest and fees on loans                                   |  | $                               | 4,306,217 |      | $ | 3,979,341 |                               |  | $    | 8,405,666  |  | $ | 7,750,066 
|Interest on investment securities:                           |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Interest exempt from federal income taxes                    |  |                                 | 295,803   |      |   | 187,199   |                               |  |      | 545,786    |  |   | 381,257   
|Taxable interest income                                      |  |                                 | 867,281   |      |   | 923,315   |                               |  |      | 1,648,549  |  |   | 2,004,761 
|Dividend income                                              |  |                                 | 18,369    |      |   | 40,619    |                               |  |      | 52,956     |  |   | 89,669    
|FHLB stock dividends                                         |  |                                 | 10,601    |      |   | 15,839    |                               |  |      | 20,357     |  |   | 32,606    
|Interest on federal funds sold                               |  |                                 | 8,013     |      |   | 15,069    |                               |  |      | 30,953     |  |   | 30,503    
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Total interest income                                        |  |                                 | 5,506,284 |      |   | 5,161,382 |                               |  |      | 10,704,267 |  |   | 10,288,862
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Interest expense:                                            |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Deposits:                                                    |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Demand accounts                                              |  |                                 | 91,497    |      |   | 122,603   |                               |  |      | 173,418    |  |   | 244,520   
|Savings                                                      |  |                                 | 27,876    |      |   | 24,307    |                               |  |      | 54,767     |  |   | 48,065    
|Time                                                         |  |                                 | 867,769   |      |   | 776,439   |                               |  |      | 1,659,132  |  |   | 1,595,138 
|Short-term borrowings                                        |  |                                 | 56,689    |      |   | 73,956    |                               |  |      | 104,015    |  |   | 146,647   
|Long-term obligations                                        |  |                                 | 350,590   |      |   | 337,854   |                               |  |      | 690,486    |  |   | 697,255   
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Total interest expense                                       |  |                                 | 1,394,421 |      |   | 1,335,159 |                               |  |      | 2,681,818  |  |   | 2,731,625 
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Net interest income                                          |  |                                 | 4,111,863 |      |   | 3,826,223 |                               |  |      | 8,022,449  |  |   | 7,557,237 
|Provision for probable loan losses                           |  |                                 | 250,000   |      |   | 120,000   |                               |  |      | 400,000    |  |   | 240,000   
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Net interest income after provision for probable loan losses |  |                                 | 3,861,863 |      |   | 3,706,223 |                               |  |      | 7,622,449  |  |   | 7,317,237 
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Noninterest income:                                          |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Service charges on deposit accounts                          |  |                                 | 906,743   |      |   | 886,908   |                               |  |      | 1,699,220  |  |   | 1,759,795 
|Other service charges and fees                               |  |                                 | 453,320   |      |   | 456,832   |                               |  |      | 730,665    |  |   | 778,997   
|Net gain (loss) on sale of securities                        |  |                                 | 255,228   |      |   | (33,014   | )                             |  |      | 292,139    |  |   | 5,569     
|Income from bank owned life insurance                        |  |                                 | 88,524    |      |   | 61,575    |                               |  |      | 150,099    |  |   | 123,150   
|Other operating income                                       |  |                                 | 116,121   |      |   | 15,458    |                               |  |      | 453,163    |  |   | 56,776    
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Total noninterest income                                     |  |                                 | 1,819,936 |      |   | 1,387,759 |                               |  |      | 3,325,286  |  |   | 2,724,287 
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Noninterest expenses:                                        |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Salaries                                                     |  |                                 | 1,480,780 |      |   | 1,329,646 |                               |  |      | 2,876,585  |  |   | 2,590,522 
|Retirement and other employee benefits                       |  |                                 | 609,768   |      |   | 539,713   |                               |  |      | 1,199,346  |  |   | 1,095,005 
|Occupancy                                                    |  |                                 | 300,788   |      |   | 299,984   |                               |  |      | 660,281    |  |   | 591,799   
|Equipment                                                    |  |                                 | 442,315   |      |   | 336,723   |                               |  |      | 864,487    |  |   | 663,989   
|Professional fees                                            |  |                                 | 64,437    |      |   | 124,365   |                               |  |      | 151,116    |  |   | 191,909   
|Supplies                                                     |  |                                 | 64,635    |      |   | 96,924    |                               |  |      | 153,853    |  |   | 199,084   
|Telephone                                                    |  |                                 | 90,577    |      |   | 151,160   |                               |  |      | 209,259    |  |   | 264,450   
|Postage                                                      |  |                                 | 63,755    |      |   | 52,886    |                               |  |      | 118,989    |  |   | 98,639    
|Other operating expenses                                     |  |                                 | 818,064   |      |   | 707,546   |                               |  |      | 1,593,205  |  |   | 1,418,784 
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Total noninterest expenses                                   |  |                                 | 3,935,119 |      |   | 3,638,947 |                               |  |      | 7,827,121  |  |   | 7,114,181 
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Income before income taxes                                   |  |                                 | 1,746,680 |      |   | 1,455,035 |                               |  |      | 3,120,614  |  |   | 2,927,343 
|Income taxes                                                 |  |                                 | 525,000   |      |   | 445,000   |                               |  |      | 925,000    |  |   | 910,000   
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Net income                                                   |  | $                               | 1,221,680 |      | $ | 1,010,035 |                               |  | $    | 2,195,614  |  | $ | 2,017,343 
|                                                             |  |                                 |           |      |   |           |                               |  |      |            |  |   |           
|Net income per share - basic                                 |  | $                               | 0.61      |      | $ | 0.50      |                               |  | $    | 1.09       |  | $ | 1.00      
|Net income per share - diluted                               |  | $                               | 0.60      |      | $ | 0.49      |                               |  | $    | 1.07       |  | $ | 0.99      
|Weighted average shares outstanding - basic                  |  |                                 | 2,015,318 |      |   | 2,020,274 |                               |  |      | 2,018,506  |  |   | 2,024,288 
|Weighted average shares outstanding - diluted                |  |                                 | 2,041,208 |      |   | 2,041,986 |                               |  |      | 2,044,550  |  |   | 2,043,908 



See
accompanying notes to consolidated financial statements.



3



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ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Shareholders Equity

Six months ended June 30, 2004 and
2003

(unaudited)



|                                                            |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|----------------------------------------------------------- |  | ----------- | --------- | - | -------------- | - | --------- | ---------------- |  | - | --------------------------------------- | - |  | ----------------------------------- | -------- | - | ------------------- | - | ---------- | ----- |  | - | ---------- | - |  | - | ---------- | -
|                                                            |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferred compensation- restrictedstock  |   |  | Accumulatedothercomprehensiveincome |          |   | Comprehensiveincome |   |            | Total | 
|Balance January 1, 2003                                     |  | $           | 7,140,057 |   |                | $ | 5,410,102 |                  |  | $ | 15,171,819                              |   |  | $                                   | (52,568  | ) |                     | $ | 1,968,835  |       |  |   |            |   |  | $ | 29,638,245 |  
|                                                            |  |             |           |   |                |   |          
|Unrealized losses, net of income tax benefit of $ 231,411   |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   | (369,657   | )     |  | $ | (369,657   | ) |  |   | (369,657   | )
|                                                            |  |             |           |   |                |   |          
|Net income                                                  |  |             |           |   |                |   |           |                  |  |   | 2,017,343                               |   |  |                                     |          |   |                     |   |            |       |  |   | 2,017,343  |   |  |   | 2,017,343  |  
|                                                            |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Total comprehensive income                                  |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  | $ | 1,647,686  |   |  |   |            |  
|                                                            |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Deferred compensation - restricted stock issuance           |  |             | 29,445    |   |                |   | 121,989   |                  |  |   |                                         |   |  |                                     | (151,434 | ) |                     |   |            |       |  |   |            |   |  |   |           |  
|                                                            |  |             |           |   |                |   |          
|Recognition of deferred compensation - restricted stock     |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     | 26,807   |   |                     |   |            |       |  |   |            |   |  |   | 26,807     |  
|                                                            |  |             |           |   |                |   |          
|Repurchase of common stock                                  |  |             | (36,750   | ) |                |   | (172,113  | )                |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   | (208,863   | )
|                                                            |  |             |           |   |                |   |          
|Cash dividends ($.25 per share)                             |  |             |           |   |                |   |           |                  |  |   | (509,485                                | ) |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   | (509,485   | )
|                                                            |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Balance June 30, 2003                                       |  | $           | 7,132,752 |   |                | $ | 5,359,978 |                  |  | $ | 16,679,677                              |   |  | $                                   | (177,195 | ) |                     | $ | 1,599,178  |       |  |   |            |   |  | $ | 30,594,390 |  
|                                                            |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|                                                            |  |             |           |   |                |   |          
|                                                            |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferred compensation - restrictedstock |   |  | Accumulatedothercomprehensiveloss   |          |   | Comprehensiveloss   |   |            | Total | 
|Balance January 1, 2004                                     |  | $           | 7,132,752 |   |                | $ | 5,359,978 |                  |  | $ | 18,058,476                              |   |  | $                                   | (150,388 | ) |                     | $ | 241,447    |       |  |   |            |   |  | $ | 30,642,265 |  
|                                                            |  |             |           |   |                |   |          
|Unrealized losses, net of income tax benefit of $ 1,511,076 |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   | (2,413,796 | )     |  | $ | (2,413,796 | ) |  |   | (2,413,796 | )
|                                                            |  |             |           |   |                |   |          
|Net income                                                  |  |             |           |   |                |   |           |                  |  |   | 2,195,614                               |   |  |                                     |          |   |                     |   |            |       |  |   | 2,195,614  |   |  |   | 2,195,614  |  
|                                                            |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Total comprehensive loss                                    |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  | $ | (218,182   | ) |  |   |            |  
|                                                            |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Deferred compensation - restricted stock issuance           |  |             | 31,196    |   |                |   | 222,825   |                  |  |   |                                         |   |  |                                     | (254,021 | ) |                     |   |            |       |  |   |            |   |  |   |           |  
|                                                            |  |             |           |   |                |   |          
|Recognition of deferred compensation - restricted stock     |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     | 50,154   |   |                     |   |            |       |  |   |            |   |  |   | 50,154     |  
|                                                            |  |             |           |   |                |   |          
|Repurchase of common stock                                  |  |             | (30,100   | ) |                |   | (222,800  | )                |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   | (252,900   | )
|                                                            |  |             |           |   |                |   |          
|Cash dividends ($.285 per share)                            |  |             |           |   |                |   |           |                  |  |   | (581,271                                | ) |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   | (581,271   | )
|                                                            |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Balance June 30, 2004                                       |  | $           | 7,133,848 |   |                | $ | 5,360,003 |                  |  | $ | 19,672,819                              |   |  | $                                   | (354,255 | ) |                     | $ | (2,172,349 | )     |  |   |            |   |  | $ | 29,640,066 |  
|                                                            |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  



See
accompanying notes to consolidated financial statements.



4



---

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Six months ended June 30, 2004 and 2003

(Unaudited)



|                                                                                   |  |                           |             |   |      |   |             |  
|---------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                   |  | Six Months Ended June 30, |            
|                                                                                   |  | 2004                      |             |   | 2003 |  
|Cash flows from operating activities:                                              |  |                           |             |   |      |   |             |  
|Net income                                                                         |  | $                         | 2,195,614   |   |      | $ | 2,017,343   |  
|Adjustments to reconcile net income to net cash provided by operating activities:  |  |                           |             |   |      |   |             |  
|Depreciation                                                                       |  |                           | 527,489     |   |      |   | 400,053     |  
|Amortization of premium on investment securities, net                              |  |                           | 190,440     |   |      |   | 244,426     |  
|Provision for probable loan losses                                                 |  |                           | 400,000     |   |      |   | 240,000     |  
|Gain on sale of securities                                                         |  |                           | (292,139    | ) |      |   | (5,569      | )
|Deferred compensation - restricted stock                                           |  |                           | 50,154      |   |      |   | 26,807      |  
|Decrease (increase) in accrued interest receivable                                 |  |                           | 190,032     |   |      |   | (122,674    | )
|(Gain) loss on disposal of premises and equipment                                  |  |                           | 4,263       |   |      |   | (991        | )
|Loss on sale of real estate acquired in settlement of loans                        |  |                           |            |   |      |   | 4,820       |  
|Increase in other assets                                                           |  |                           | (2,962,234  | ) |      |   | (622,123    | )
|Decrease in accrued interest payable                                               |  |                           | (30,579     | ) |      |   | (73,193     | )
|Increase (decrease) in other liabilities, net                                      |  |                           | 1,364,520   |   |      |   | (499,516    | )
|                                                                                   |  |                           |             |   |      |   |             |  
|Net cash provided by operating activities                                          |  |                           | 1,637,560   |   |      |   | 1,609,383   |  
|                                                                                   |  |                           |             |   |      |   |             |  
|Cash flows from investing activities:                                              |  |                           |             |   |      |   |             |  
|Proceeds from sales of investment securities classified as available-for-sale      |  |                           | 18,655,347  |   |      |   | 5,139,365   |  
|Proceeds from maturities of investment securities classified as available-for-sale |  |                           | 13,081,526  |   |      |   | 23,005,838  |  
|Purchases of investment securities classified as available-for-sale                |  |                           | (51,324,712 | ) |      |   | (19,191,305 | )
|(Purchase) Redemption of Federal Home Loan Bank common stock                       |  |                           | (457,500    | ) |      |   | 177,500     |  
|Proceeds from disposal of premises and equipment                                   |  |                           |            |   |      |   | 3,300       |  
|Purchases of premises and equipment                                                |  |                           | (2,448,071  | ) |      |   | (2,170,551  | )
|Net loan originations                                                              |  |                           | (33,603,626 | ) |      |   | (28,803,429 | )
|                                                                                   |  |                           |             |   |      |   |             |  
|Net cash used by investing activities                                              |  |                           | (56,097,036 | ) |      |   | (21,839,282 | )
|                                                                                   |  |                           |             |   |      |   |             |  
|Cash flows from financing activities:                                              |  |                           |             |   |      |   |             |  
|Net increase in deposits                                                           |  |                           | 51,163,628  |   |      |   | 26,124,942  |  
|Net (decrease) increase in short-term borrowings                                   |  |                           | (741,652    | ) |      |   | 1,759,375   |  
|Origination of long-term obligations                                               |  |                           | 5,000,000   |   |      |   |            |  
|Dividends paid                                                                     |  |                           | (545,564    | ) |      |   | (458,745    | )
|Repurchase of common stock                                                         |  |                           | (252,900    | ) |      |   | (208,860    | )
|                                                                                   |  |                           |             |   |      |   |             |  
|Net cash provided by financing activities                                          |  |                           | 54,623,512  |   |      |   | 27,216,712  |  
|                                                                                   |  |                           |             |   |      |   |             |  
|Increase in cash and cash equivalents                                              |  |                           | 164,036     |   |      |   | 6,986,813   |  
|Cash and cash equivalents at beginning of period                                   |  |                           | 27,384,112  |   |      |   | 20,345,006  |  
|                                                                                   |  |                           |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                         |  | $                         | 27,548,148  |   |      | $ | 27,331,819  |  
|                                                                                   |  |                           |             |   |      |   |             |  
|Cash paid during the period:                                                       |  |                           |             |   |      |   |             |  
|Interest                                                                           |  | $                         | 2,712,397   |   |      | $ | 2,804,818   |  
|Taxes                                                                              |  |                           | 910,340     |   |      |   | 1,436,740   |  
|                                                                                   |  |                          
|Supplemental disclosures of noncash financing and investing activities:            |  |                           |             |   |      |   |             |  
|Cash dividends declared but not paid                                               |  | $                         | 290,450     |   |      | $ | 254,743     |  
|Unrealized (losses) gains on available-for-sale securities, net of deferred taxes  |  |                           | (2,413,796  | ) |      |   | (369,657    | )
|Restricted stock issuance                                                          |  |                           | 254,021     |   |      |   | 151,434     |  
|Transfer of assets to OREO                                                         |  |                           | (34,500     | ) |      |   |            |  



See
accompanying notes to consolidated financial statements.



5



---

ECB BANCORP, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



(1) Basis of Presentation



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



The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date
of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ from those estimates.



Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for probable loan
losses. In connection with the determination of the allowance for probable loan losses, management obtains independent appraisals for significant properties held as collateral for loans.



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



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



(2) Allowance for Probable Loan Losses



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



|                                       |  |                           |           |   |      |   |           |  
|-------------------------------------- |  | ------------------------- | --------- | - | ---- | - | --------- | -
|                                       |  | Six-months ended June 30, |          
|                                       |  | 2004                      |           |   | 2003 |  
|Balance at the beginning of the period |  | $                         | 3,550,000 |   |      | $ | 3,150,000 |  
|                                       |  |                          
|Provision for probable loan losses     |  |                           | 400,000   |   |      |   | 240,000   |  
|                                       |  |                          
|Charge-offs                            |  |                           | (114,725  | ) |      |   | (82,299   | )
|                                       |  |                          
|Recoveries                             |  |                           | 91,154    |   |      |   | 31,542    |  
|                                       |  |                          
|Net Charge-offs                        |  |                           | (23,571   | ) |      |   | (50,757   | )
|                                       |  |                          
|Balance at end of the period           |  | $                         | 3,926,429 |   |      | $ | 3,339,243 |  



6



---

(3) Net Income Per Share



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



Diluted net income per share is computed by assuming the issuance of common shares for all dilutive potential common shares
outstanding during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized is considered proceeds
using the treasury stock method. For the six months ended June 30, 2004 and 2003, diluted weighted average shares outstanding increased by 11,144 and 9,016, respectively, due to the dilutive impact of restricted stock. For the three months ended
June 30, 2004 and 2003, diluted weighted average shares outstanding increased by 11,061 and 9,790, respectively, due to the dilutive impact of restricted stock.



In computing diluted net income per share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective
exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and
the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. For the six months ended June 30,
2004 and 2003, diluted weighted average shares outstanding increased by 14,900 and 10,604, respectively, due to the dilutive impact of options. For the three months ended June 30, 2004 and 2003, diluted weighted average shares outstanding increased
by 14,829 and 11,922, respectively, due to the dilutive impact of options



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



|                              |  |                                |           |                     |           |                |   |     
|----------------------------- |  | ------------------------------ | --------- | ------------------- | --------- | -------------- | - | ----
|                              |  | Six months ended June 30, 2004
|                              |  | Income(Numerator)              |           | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                              | 2,195,614 |                     | 2,018,506 |                | $ | 1.09
|                              |  |                                |           |                     |           |                |   |     
|Effect of dilutive securities |  |                                |          |                     | 26,044    |                |   |     
|                              |  |                                |           |                     |           |                |   |     
|Diluted net income per share  |  | $                              | 2,195,614 |                     | 2,044,550 |                | $ | 1.07
|                              |  |                                |           |                     |           |                |   |     



|                              |  |                                |           |                     |           |                |   |     
|----------------------------- |  | ------------------------------ | --------- | ------------------- | --------- | -------------- | - | ----
|                              |  | Six months ended June 30, 2003
|                              |  | Income(Numerator)              |           | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                              | 2,017,343 |                     | 2,024,288 |                | $ | 1.00
|                              |  |                                |           |                     |           |                |   |     
|Effect of dilutive securities |  |                                |          |                     | 19,620    |                |   |     
|                              |  |                                |           |                     |           |                |   |     
|Diluted net income per share  |  | $                              | 2,017,343 |                     | 2,043,908 |                | $ | 0.99
|                              |  |                                |           |                     |           |                |   |     



7



---

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



|                              |  |                                  |           |                     |           |                |   |     
|----------------------------- |  | -------------------------------- | --------- | ------------------- | --------- | -------------- | - | ----
|                              |  | Three months ended June 30, 2004
|                              |  | Income(Numerator)                |           | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                                | 1,221,680 |                     | 2,015,318 |                | $ | 0.61
|                              |  |                                  |           |                     |           |                |   |     
|Effect of dilutive securities |  |                                  |          |                     | 25,890    |                |   |     
|                              |  |                                  |           |                     |           |                |   |     
|Diluted net income per share  |  | $                                | 1,221,680 |                     | 2,041,208 |                | $ | 0.60
|                              |  |                                  |           |                     |           |                |   |     



|                              |  |                                  |           |                     |           |                |   |     
|----------------------------- |  | -------------------------------- | --------- | ------------------- | --------- | -------------- | - | ----
|                              |  | Three months ended June 30, 2003
|                              |  | Income(Numerator)                |           | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                                | 1,010,035 |                     | 2,020,274 |                | $ | 0.50
|                              |  |                                  |           |                     |           |                |   |     
|Effect of dilutive securities |  |                                  |          |                     | 21,712    |                |   |     
|                              |  |                                  |           |                     |           |                |   |     
|Diluted net income per share  |  | $                                | 1,010,035 |                     | 2,041,986 |                | $ | 0.49
|                              |  |                                  |           |                     |           |                |   |     



(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 six months of 2004 or 2003.



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



8



---

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



|                                                                                                                                            |  |                           |           |   |      |           |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | --------- | - | ---- | --------- | -
|                                                                                                                                            |  | Six months ended June 30, |          
|                                                                                                                                            |  | 2004                      |           |   | 2003 |          
|Net income, as reported                                                                                                                     |  | $                         | 2,195,614 |   |      | 2,017,343 |  
|Deduct: Total stock-based employee Compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                           | (3,293    | ) |      | (4,359    | )
|                                                                                                                                            |  |                           |           |   |      |           |  
|Proforma net income                                                                                                                         |  | $                         | 2,192,321 |   |      | 2,012,984 |  
|                                                                                                                                            |  |                           |           |   |      |           |  
|                                                                                                                                            |  |                          
|Earnings per share:                                                                                                                         |  |                           |           |   |      |           |  
|Basic  as reported                                                                                                                         |  | $                         | 1.09      |   |      | 1.00      |  
|                                                                                                                                            |  |                           |           |   |      |           |  
|Basic  proforma                                                                                                                            |  |                           | 1.09      |   |      | 1.00      |  
|                                                                                                                                            |  |                           |           |   |      |           |  
|Diluted  as reported                                                                                                                       |  |                           | 1.07      |   |      | 0.99      |  
|                                                                                                                                            |  |                           |           |   |      |           |  
|Diluted  proforma                                                                                                                          |  |                           | 1.07      |   |      | 0.99      |  
|                                                                                                                                            |  |                           |           |   |      |           |  



|                                                                                                                                            |  |                             |           |   |      |           |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- | --------- | -
|                                                                                                                                            |  | Three months ended June 30, |          
|                                                                                                                                            |  | 2004                        |           |   | 2003 |          
|Net income, as reported                                                                                                                     |  | $                           | 1,221,680 |   |      | 1,010,035 |  
|Deduct: Total stock-based employee Compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (1,646    | ) |      | (2,179    | )
|                                                                                                                                            |  |                             |           |   |      |           |  
|Proforma net income                                                                                                                         |  | $                           | 1,220,034 |   |      | 1,007,856 |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|                                                                                                                                            |  |                            
|Earnings per share:                                                                                                                         |  |                             |           |   |      |           |  
|Basic  as reported                                                                                                                         |  | $                           | 0.61      |   |      | 0.50      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Basic  proforma                                                                                                                            |  |                             | 0.61      |   |      | 0.50      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Diluted  as reported                                                                                                                       |  |                             | 0.60      |   |      | 0.49      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Diluted  proforma                                                                                                                          |  |                             | 0.60      |   |      | 0.49      |  
|                                                                                                                                            |  |                             |           |   |      |           |  



(5) Long-term Obligations



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



9



---

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



(6) Postretirement Benefits



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



|                                         |  |                           |        |      |   |        |  
|---------------------------------------- |  | ------------------------- | ------ | ---- | - | ------ | -
|                                         |  | Six months ended June 30, |       
|                                         |  | 2004                      |        | 2003 |  
|Service cost                             |  | $                         | 3,179  |      | $ | 4,476  |  
|Interest cost                            |  |                           | 21,304 |      |   | 21,271 |  
|Amortization of (gain) loss              |  |                           | 2,143  |      |   | (107   | )
|Net periodic postretirement benefit cost |  | $                         | 26,626 |      | $ | 25,640 |  



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



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



The
following table sets forth the amount of unrealized losses (that is, the amount by which cost or amortized cost exceeds fair value), and the related fair value of investments with unrealized losses, none of which are considered to be other than
temporarily impaired. The table is segregated into investments that have been in continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for more than 12 months, as of June 30,
2004:



|                                                              |  |                     |             |                     |           |            |           |                  |         |            |             |                  |          
|------------------------------------------------------------- |  | ------------------- | ----------- | ------------------- | --------- | ---------- | --------- | ---------------- | ------- | ---------- | ----------- | ---------------- | ---------
|                                                              |  | Less than 12 months |             | 12 months or longer |           | Total      |           |                 
|Description of Securities                                     |  | Fair Value          |             | UnrealizedLosses    |           | Fair Value |           | UnrealizedLosses |         | Fair Value |             | UnrealizedLosses
|Securities of other U.S. government agencies and corporations |  | $                   | 13,797,690  |                     | 172,260   |            |          |                  |        |            | 13,797,690  |                  | 172,260  
|Obligations of states and political subdivisions              |  |                     | 16,104,144  |                     | 790,163   |            |          |                  |        |            | 16,104,144  |                  | 790,163  
|Mortgage-backed securities                                    |  |                     | 71,287,842  |                     | 2,077,699 |            |          |                  |        |            | 71,287,842  |                  | 2,077,699
|                                                              |  |                     |             |                     |           |            |           |                  |         |            |             |                  |          
|Subtotal, debt securities                                     |  |                     | 101,189,676 |                     | 3,040,122 |            |          |                  |        |            | 101,189,676 |                  | 3,040,122
|Preferred stock                                               |  |                     |            |                     |          |            | 4,103,749 |                  | 811,252 |            | 4,103,749   |                  | 811,252  
|                                                              |  |                     |             |                     |           |            |           |                  |         |            |             |                  |          
|Total                                                         |  | $                   | 101,189,676 |                     | 3,040,122 |            | 4,103,749 |                  | 811,252 |            | 105,293,425 |                  | 3,851,374
|                                                              |  |                     |             |                     |           |            |           |                  |         |            |             |                  |          



As the above table
represents, the overall total dollar amount of unrealized losses within the Banks investment portfolio during the first six months of 2004, increased $2,589,363 or 205% when compared to unrealized losses of $1,262,011 at December 31, 2003. The
increase in unrealized losses is the result of a continued rise in interest rates. The duration of the investment portfolio has averaged about 3.25 years and comparable bond rates rose almost 1% during the period. As a result, 3 year bond price and
the portfolio value declined accordingly. The amount of unrealized losses 12 months or longer increased as agency preferred stock losses increased $199,310 or 32.57% to $811,252 from $611,942 at December 31, 2003.



10



---

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



(8) New Accounting Pronouncements



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



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



In March 2004, the SEC released Staff Accounting Bulletin: No. 105  Application of Accounting Principles to Loan Commitments. This bulletin requires
all registrants to begin accounting for their issued loan commitments (including interest rate lock commitments) subject to Statement 133 as written options for new commitments entered into after April 1, 2004. Treatment as a written option would
require those loan commitments to be reported as liabilities until either they are exercised (and a loan is made) or they expire unexercised. The adoption of Staff Accounting Bulletin No. 105 did not have a material impact on the consolidated
financial statements.



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



General



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



Sale of Preferred Trust Securities. On June 26, 2002, a business trust subsidiary that we formed (ECB Statutory Trust I) privately sold $10.0
million in preferred trust securities as part of a pooled re-securitization transaction with several other financial institutions. The proceeds from that sale, together with the proceeds from the Trusts sale of all its common securities to us,
were used to purchase an aggregate of $10.3 million in junior subordinated debentures that we issued. The debentures call for interest payable quarterly at a variable annual rate



11



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equal to the three-month LIBOR plus 3.45%, with principal payable in full on June 26, 2032. We own all of our Trust
subsidiarys common securities and, subject to certain limitations, we have fully and unconditionally guaranteed the Trust subsidiarys obligations under its preferred trust securities. Substantially all the proceeds from the Trusts
sale of preferred securities are currently being counted as Tier 1 capital on our books and have been or will be used by us to supplement the Banks and our capital and support our continued operations and growth. Since its
organization, we have treated the Trust as our consolidated subsidiary for financial statement purposes, and the Trusts assets and liabilities have been included in our consolidated financial statements. However, as a result of the application
of Financial Accounting Standards Board Interpretation No. 46 (FIN 46), as subsequently amended, as of December 31, 2003, we have deconsolidated the Trust. Under de-consolidation accounting, only the amount owed by the Company to the
trusts is reported in the consolidated financial statements. The receivables recorded by the trusts as being due from the Company and the amounts payable by the trusts to the third-party purchasers of the trust preferred securities remain on the
trusts books and are not included in the Companys consolidated financial statements. The net effect is that the Company now describes its borrowings as being due to the trusts instead of the third-party purchasers of the trust preferred
securities. There is no change to the terms of the borrowings or the amounts owed.



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



Critical
Accounting Policies



The Corporations
significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-KSB Annual Report for the fiscal year ended December 31, 2003. Of these significant accounting policies, the Corporation
considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires managements most subjective and complex judgments. In addition, changes in economic conditions can have a significant
impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing
that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Corporations assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and
the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Corporations allowance for loan losses and
related matters, see Asset Quality.



Comparison of the Results
of Operations for the Six Month Periods Ended June 30, 2004 and 2003



Summary



For the six months ended June
30, 2004, we had net income of $2,195,614 or $1.09 basic and $1.07 diluted earnings per share, compared to $2,017,343 or $1.00 basic and $0.99 diluted earnings per share for the six months ended June 30, 2003. Net interest income increased $465,212
or 6.16% to $8,022,449 in the first half of 2004 from $7,557,237 in the first half of 2003, and noninterest income increased $600,999 or 22.06% when compared to the same period last year. Noninterest expense increased $712,940 or 10.02% for the six
month period ended June 30, 2004 as compared to the same period in 2003 as salary and employee benefits expense increased $390,404 or 10.59% to $4,075,931 compared to $3,685,527 during the first half of 2003.



Net interest income



Net interest income for the six months ended June 30, 2004 was $8,022,449,
an increase of $465,212 or 6.16% when compared to net interest income of $7,557,237 for the prior year period. Our net interest margin, on a tax-equivalent basis, for the six months ended June 30, 2004 was 3.94% compared to 4.35% for the first half
of 2003. Management attributes the decrease in our net interest margin to the sustained low interest rate environment throughout all of 2004. Many of our rate sensitive liabilities, especially interest-bearing transaction accounts such as NOW and
Money Market accounts, reached minimum rates such that additional rate reductions were not practical, thus reducing our ability to lower our cost of funds. While our rate sensitive assets such as loans and investment securities continued to mature
and pay out, subsequently, these earning assets were reinvested at lower rates. The yield on average earning assets, on a tax-equivalent basis, for the six months ended June 30, 2004 was 5.21% compared to 5.88% in 2003, a decrease of 67 basis
points.



Total interest income increased $415,405 for the six
months ended June 30, 2004 compared to the six months ended June 30, 2003, as average earning assets increased by $63.8 million. Average loans outstanding increased $55.1 million as real estate loans increased $29.5 million.



Although interest-bearing liabilities increased on average $58.7 million,
total interest expense decreased $49,807 for the six months ended June 30, 2004 when compared to the six months ended June 30, 2003. Our cost of funds during the six months ended June 30, 2004 was 1.50%; a decrease of 34 basis points when compared
to 1.84% for the six months ended June 30, 2003.



12



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Provision for probable loan losses



The provision for probable loan losses charged to operations during the six months ended June 30, 2004 was $400,000 compared
to $240,000 during the six months ended June 30, 2003. Net charge-offs for the period ended June 30, 2004 totaled $23,571 compared to net charge-offs of $50,757 during the first six months of 2003. The higher provision expense for probable loan loss
in the first half of 2004 is primarily the result of loan growth that occurred during the first half of 2004 as our loan portfolio grew $33.6 million since December 31, 2003. The amount charged for provision for probable loan losses is the result of
managements review and evaluation of the portfolio, which considers current conditions, past due loans, prior loan loss experience and dollar amount of loan growth.



Noninterest income



Noninterest income increased $600,999 or 22.06% to $3,325,286 for the six months ended June 30, 2004 compared to $2,724,287 for the same period in 2003.
This is principally due to a gain on insurance proceeds of $316,924 for property damage sustained during Hurricane Isabel, net gain on the sale of securities of $292,139 and an insurance recovery of $79,440 on a wire transfer fraud that was charged
off in late 2003. Although the volume in Overdraft Banking Privilege (ODP) actually increased during the second quarter of 2004, on a year to date comparison, service charges on deposit accounts decreased $60,575 or 3.44% as ODP volume decreased as
compared to the first six month of 2003. Other service charges and fees decreased $48,332 or 13.94% over the prior year period due to decreases of mortgage loan origination fees of $63,266. During the first half of 2004, the Bank had a net gain on
the sale of securities of $292,139 compared to net gain of $5,569 during the same period last year.



Noninterest expense



Noninterest expense increased $712,940 or 10.02% to $7,827,121 for the six months ended June 30, 2004 from the same period in 2003. This increase is principally due to general increases in salary and benefits expense of $390,404 or 10.59%.
Salary expense increased $286,063 over the prior year period as a result of general salary increases of $78,064, additional staffing expense within our mortgage department and home office of $51,402 and $42,506, respectively. Additional salary
expenses of $114,101 are associated with our recently opened full service offices in Williamston, Morehead City and Wilmington. Benefits during first half 2004 compared to 2003 increased $104,341 or 9.53% principally due to an increase in premiums
for bank owned life insurance (BOLI) of $38,359 and employee group insurance of $37,339. Restricted stock incentive expense increased $23,346 over the prior year. Occupancy expense increased $68,482 or 11.57% principally as the result of accelerated
depreciation expense of approximately $66,000 on the Banks flood damaged accounting and operations facility, as the Bank is constructing a new corporate and branch office in 2004. As the result of furniture and equipment purchased for our new
operation center in Engelhard, equipment expense increased $200,498 or 30.20% over the first half of 2003 due to maintenance and depreciation expense increases of $92,863 and $25,610, respectively. Telephone and data communications rental expense
increased $64,414 over the prior year period, as we implemented a new voice and data system, upgraded to provide bank-wide voicemail and additional bandwidth to promote our network capabilities. Other operating expenses increased $174,421 from
$1,418,784 for the six months ended June 30, 2003 to $1,593,205 for the six months ended June 30, 2004. The increase is primarily due to losses on sale of repossessed assets during the first quarter of 2004 that amounted to $52,600.



Income taxes



Income tax expense for the six months ended June 30, 2004 and 2003 was $925,000 and $910,000, respectively, resulting in
effective tax rates of 29.64% and 31.09%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



13



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



Summary



For the three months ended June 30, 2004, we had net income of $1,221,680 or $0.61 basic and $0.60 diluted earnings per
share, compared to $1,010,035, or $0.50 basic and $0.49 diluted earnings per share for the three months ended June 30, 2003. Net interest income increased $285,640 or 7.47% to $4,111,863 in the second quarter of 2004 from $3,826,223 in the second
quarter of 2003, and noninterest income increased $432,177 or 31.14% when compared to the same period last year. Noninterest expense increased $296,172 or 8.14% for the three month period ended June 30, 2004 as compared to the same period in 2003,
as salary and benefits expense increased $221,189 or 11.83% to $2,090,548 compared to $1,869,359 during the second quarter of 2003.



Net interest income



Net interest income for the three months ended June 30, 2004 was $4,111,863, an increase of $285,640 or 7.47% when compared to net interest income of
$3,826,223 for the prior year period. Our net interest margin, on a tax-equivalent basis, for the three months ended June 30, 2004 was 3.92% compared to 4.33% in the second quarter of 2003. Management attributes the decrease in our net interest
margin to the sustained low interest rate environment throughout all of 2004. Many of our rate sensitive liabilities, especially interest-bearing transaction accounts such as NOW and Money Market accounts, reached minimum rates such that additional
rate reductions were not practical, thus reducing our ability to lower our cost of funds. While our rate sensitive assets such as loans and investment securities continued to mature and pay out, subsequently, these earning assets were reinvested at
lower rates. The yield on average earning assets, on a tax-equivalent basis, fell 60 basis points to 5.20% compared to 5.80% at the end of the second quarter of 2003.



Total interest income increased $344,902 or 6.68% for the three months ended June 30, 2004 compared to the same three months
of 2003. The effect of lower rates has essentially offset an increase of $73.6 million in average earning assets.



Total interest expense increased $59,262 or 4.44% during second quarter of 2004 compared to the same period in 2003, the result of increased
interest-bearing liabilities. The volume of average interest-bearing liabilities increased approximately $63.2 million when comparing second quarter 2004 with 2003. Our cost of funds during the second quarter of 2004 was 1.53%, a decrease of 24
basis points when compared to 1.77% at the end of second quarter of 2003.



Provision for probable loan losses



The
provision for probable loan losses charged to operations during the three months ended June 30, 2004 and 2003 was $250,000 and $120,000, respectively. Net recoveries for the quarter ended June 30, 2004 totaled $25,994, compared to net charge-offs of
$39,514 during the second quarter of 2003. The increase in provision for probable loan losses is due primarily to loan growth of $25.4 million that occurred in the second 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.



Noninterest income



Noninterest income increased $432,177 or 31.14% to $1,819,936 for the three months ended June 30, 2004 compared to $1,387,759 for the same period in 2003.
This increase is principally due to a net gain on the sale of securities and an insurance recovery of $79,440 on a wire transfer fraud charged off in late 2003. Service charges on deposit accounts increased $19,835 or 2.24% as the volume in
Overdraft Banking Privilege fees increased compared



14



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to the second quarter of 2003. Other service charges and fees decreased slightly compared to the prior year period due to
decreases in merchant discount income of $17,143. The decrease in merchant discount income was offset by increased brokerage fees of $17,108 over second quarter 2003. Other operating income increased $100,663, primarily the result of a insurance
claim paid by our insurance provider of $79,440 that partially reimbursed us for a loss taken in fourth quarter 2003 that involved a fraudulent international wire transfer. During the second quarter of 2004, we had a net gain on the sale of
securities of $288,242 compared to net loss of $33,014 during the same period last year.



Noninterest expense



Noninterest expense increased $296,172 or 8.14% to $3,935,119 for the three months ended June 30, 2004 from the same period in 2003. This increase is principally due to general increases in salary and benefits expense of $221,189 or 11.83%.
Salary expense increased $151,134 over the prior year period as a result of general salary increases of $51,320, additional staffing expense within our home office of $22,381 and within the mortgage department of $30,282. Additional salary expenses
of $47,151 are associated with our recently opened full service offices in Morehead City and Wilmington. Benefits during second quarter 2004 compared to 2003 increased $70,055 or 12.98% principally due to an increase in bank owned life insurance and
employee group insurance premiums of $28,567 and $18,517, respectively. Restricted stock incentive expense increased $10,645 during the second quarter compared to second quarter of 2003. Equipment expense increased $105,592 or 31.36% over the second
quarter of 2003. Equipment maintenance increased $59,603, the result of upgraded core and item processing equipment purchased in May 2003. Equipment rental expense increased as we implemented a new voice and data system, upgraded to provide
bank-wide voicemail and additional bandwidth to promote our network capabilities. Other operating expenses increased $110,518 from $707,546 for the three months ended June 30, 2003 to $818,064 for the three months ended June 30, 2004. The increase
is primarily due to a second quarter write-off of non-reconciled differences in the settlement of debit card transactions totaling approximately $35,000.



Income taxes



Income tax expense for the three months ended June 30, 2004 and 2003 was $525,000 and $445,000, respectively, resulting in effective tax rates of 30.06%
and 30.58%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



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



Total assets increased $54.3 million to $489.2 million, an increase of 12.48% when compared to $435.0 million at December 31, 2003. Asset growth was
funded by increases in certificates of deposit of $28.7 million and interest-bearing demand deposits of $12.6 million. Approximately $20.4 million or 71.0% of the growth in certificates of deposit was wholesale funds.



Gross loans increased $33.5 million or 11.91% from $281.6 million at December
31, 2003 to $315.1 million at June 30, 2004. We experienced steady loan demand from all of our markets during the first half of 2004.



Shareholders equity decreased by $1,002,199 from December 31, 2003 to June 30, 2004, as we experienced an increase of net unrealized losses on
available-for-sale securities of $2,413,796, which was partially offset by net income of $2,195,614. Recognition of deferred compensation  restricted stock was $50,154. During the first half of 2004, we repurchased 8,600 shares or $252,900 of
our stock. We declared cash dividends of $581,271, or 28.50 cents per share, during 2004 compared to 25.00 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



15



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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 1.24% at June 30, 2004 and 1.26% at December 31, 2003.



Reserve Policy and Methodology



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



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



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



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



16



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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 $98,758 and $444,098 which represented .03% and .16% of loans outstanding at June 30, 2004 and December 31, 2003, respectively. At June 30, 2004, we had no loans considered to be impaired under SFAS No. 114
compared to $61,285 at December 31, 2003, all of which were on a non-accrual basis. Trends and dollar amounts of nonperforming loans are used by management in evaluating the overall adequacy of the allowance for probable loan losses.



The provision for probable loan losses charged to operations during the six
months ended June 30, 2004 was $400,000, compared to $240,000 for the same period in 2003. Net charge-offs during the first half of 2004 totaled $23,571, compared to net charge-offs of $50,578 during the first half of 2003. The amount charged for
provision for probable loan losses is the result of our review and evaluation of the portfolio, which considers current economic conditions, past due loans, and prior loan loss experience.



Regulatory Matters



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



Liquidity



The Company relies on the investment portfolio as a source of liquidity, with maturities designed to provide needed cash flows. Further, retail deposits
generated throughout the branch network have enabled management to fund asset growth and maintain liquidity. External sources of funds include the ability to access advances from the Federal Home Loan Bank of Atlanta, wholesale CD (brokered
deposits) market, internet deposit bulletin boards and Fed Fund lines with correspondent banks. Short-term borrowings decreased $3.7 million during the first half of 2004.



Capital Resources



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



17



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



|                                                                                                       |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|------------------------------------------------------------------------------------------------------ |  | --------------------- | - |  | -------------------------------- | - |  | ------------------------- | - |  | -------------------------- | -
|                                                                                                       |  | Minimum Requiredratio |   |  | Required to be wellcapitalized |   |  | Bancorpsratio at 6-30-04 |   |  | Bancorpsratio at 12-31-03 |  
|Risk-based capital ratios:                                                                             |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|Tier 1 capital to risk-weighted assets                                                                 |  | 4.0                   | % |  | 6.0                              | % |  | 11.45                     | % |  | 11.41                      | %
|Total capital to risk-weighted assets                                                                  |  | 8.0                   | % |  | 10.0                             | % |  | 12.49                     | % |  | 12.52                      | %
|Leverage capital ratio                                                                                 |  | 3.0                   | % |  | 5.0                              | % |  | 8.93                      | % |  | 9.31                       | %
|                                                                                                      
|The following table lists the Banks regulatory capital ratios at June 30, 2004 and December 31, 2003. | 
|                                                                                                       |  |                       |   | 
|                                                                                                       |  | Minimum Requiredratio |   |  | Required to be wellcapitalized |   |  | Banks ratio at 6-30-04   |   |  | Banks ratio at 12-31-03   |  
|Risk-based capital ratios:                                                                             |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|Tier 1 capital to risk-weighted assets                                                                 |  | 4.0                   | % |  | 6.0                              | % |  | 10.82                     | % |  | 11.32                      | %
|Total capital to risk-weighted assets                                                                  |  | 8.0                   | % |  | 10.0                             | % |  | 11.86                     | % |  | 12.34                      | %
|Leverage capital ratio                                                                                 |  | 3.0                   | % |  | 5.0                              | % |  | 8.42                      | % |  | 9.25                       | %



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



Current Accounting Issues



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



Forward-Looking Statements



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



18



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Item 3. Controls and Procedures



Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures in accordance with Rule 13a-14 of the Securities Exchange Act of 1934 (the Exchange Act). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end
of the period covered by this report, our disclosure controls and procedures were effective in enabling us to record, process, summarize and report in a timely manner the information required to be disclosed in reports we file under the Exchange
Act.



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



PART II. OTHER INFORMATION



Item 1. Legal Proceedings



None.



Item 2. Changes in Securities and Use of Proceeds



Issuer Purchases of Equity Securities. The following table contains information regarding repurchases by us of shares of our outstanding common stock during the quarter ended June 30, 2004.



|                                   |  |                                   |     |  |                                |       |                                                                                    |     |                                                                                 |    
|---------------------------------- |  | --------------------------------- | --- |  | ------------------------------ | ----- | ---------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------------------- | ---
|Period                             |  | (a) Totalnumberof sharespurchased |     |  | (b) Averageprice paidper share |       | ( c) Total number ofshares purchased as partof publicly announcedplans or programs |     | (d) Maximum number ofshares that may yet bepurchased under theplans or programs
|Month #1 04/01/04 through 04/30/04 |  | 1,600                             | (1) |  | $                              | 30.00 |                                                                                    | N/A |                                                                                 | N/A
|Month #2 05/01/04 through 05/31/04 |  | 1,000                             | (1) |  | $                              | 30.00 |                                                                                    | N/A |                                                                                 | N/A
|Month #3 06/01/04 through 06/30/04 |  | -0-                               |     |  |                                | -0-   |                                                                                    | N/A |                                                                                 | N/A
|                                   |  |                                   |     |  |                                |       |                                                                                    |     |                                                                                 |    
|Total                              |  | 2,600                             |     |  | $                              | 30.00 |                                                                                    | N/A |                                                                                 | N/A
|                                   |  |                                   |     |  |                                |       |                                                                                    |     |                                                                                 |    

---

|(1) | Reflects one purchase during each month. Each purchase was made in an unsolicited transaction pursuant to general authority given each year by our Board of Directors and not
pursuant to any formal repurchase plan or program. Under that authority, management can repurchase shares of our common stock from time to time in private and/or open market transactions. Aggregate total of shares purchased on open market for the
six month period ended June 30, 2004 is 8,600 with an average price of $29.58 compared to 10,500 shares purchased in the prior year period with an average price of $20.02.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item 3. Defaults upon Senior Securities



Not applicable.



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



|(a) | Our Annual Meeting of Shareholders was held on April 20, 2004.
|--- | --------------------------------------------------------------



|(b) | At our Annual Meeting, the three Directors listed in the following table were elected for terms of three years or until their respective successors are duly elected and qualified.
Our incumbent Directors whose terms of office continued after the meeting are; George T. Davis, Jr., Gregory C. Gibbs, John F. Hughes, Jr., Bryant Kittrell III, B. Martelle Marshall and R. S. Spencer, Jr.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Voting for Directors was as follows:



|                     |  |           |  |          |  |                
|-------------------- |  | --------- |  | -------- |  | ---------------
|                     |  | For       |  | Withheld |  | Broker Non-vote
|Arthur H. Keeney III |  | 1,592,104 |  | 6,181    |  | none           
|Joseph T. Lamb, Jr.  |  | 1,592,104 |  | 6,181    |  | none           
|Ray M. Spencer       |  | 1,592,104 |  | 6,181    |  | none           



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



1. Proposal to ratify the selection of KPMG LLP as our independent auditors as described under the caption Ratification of Selection of Independent Auditor in the our Proxy Statement dated March 22, 2004
(approved by an affirmative vote of 1,594,079 shares or 99.74% of the shares that voted, 1,000 negative votes, 3,206 shares withheld and no broker non-votes ).



Item 5. Other Information



Not applicable.



Item 6. Exhibits and Reports on Form 8-K



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



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



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



During the quarter covered by this Report, the Bank filed reports on Form 8-K as follows:



|               |  |                                                                                                                                                                                                  
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date of Report |  | Description                                                                                                                                                                                      
|April 20, 2004 |  | To report information under Items 9 and 12 regarding the Registrants financial results for the quarter ended March 31, 2004, that was contained in a press release distributed by the
Registrant
|               | 
|June 15, 2004  |  | To report under Item 9 that the Registrants Board of Directors had declared a cash dividend on the Registrants common stock                                                                    



20



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EXHIBIT INDEX



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



21