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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-QSB



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



For the Quarterly Period Ended September 30, 2003



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)



|North Carolina                                                |  | 56-2090738                         
|------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)



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



(252) 925-9411

(Registrants telephone number, including area code)



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



APPLICABLE ONLY TO CORPORATE ISSUERS:



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



As of November 12, 2003, 2,037,929 shares of the registrants common stock, $3.50 par value, were outstanding.



This Form 10-QSB has 25 pages.



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Part I. FINANCIAL INFORMATION



|Item 1. |  | Financial Statements
|------- |  | --------------------



ECB BANCORP, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2003 and December 31, 2002



|                                                                                                                                                      |  | September 30,2003 |             |   | December 31,2002* |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ----------- | - | ----------------- | -
|                                                                                                                                                      |  | (unaudited)       |             |   |                   |  
|                                                                                                                                                      |  |                  
|Assets                                                                                                                                                |  |                   |             |   |                   |  
|Non-interest bearing deposits and cash                                                                                                                |  | $                 | 21,095,735  |   |                   | $
|Federal funds sold                                                                                                                                    |  |                   |            |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Total cash and cash equivalents                                                                                                                       |  |                   | 21,095,735  |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|                                                                                                                                                      |  |                  
|Investment securities                                                                                                                                 |  |                   |             |   |                   |  
|Available-for-sale, at market value (cost of $106,865,504 and $117,115,368 at September 30, 2003 and December 31, 2002,
respectively)                 |  |                   | 107,631,211 |   |                   |  
|                                                                                                                                                      |  |                  
|Loans                                                                                                                                                 |  |                   | 268,855,282 |   |                   |  
|Allowance for probable loan losses                                                                                                                    |  |                   | (3,520,602  | ) |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Loans, net                                                                                                                                            |  |                   | 265,334,680 |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Real estate acquired in settlement of loans, net                                                                                                      |  |                   | 477,513     |   |                   |  
|Federal Home Loan Bank common stock, at cost                                                                                                          |  |                   | 1,250,000   |   |                   |  
|Bank premises and equipment, net                                                                                                                      |  |                   | 11,094,735  |   |                   |  
|Accrued interest receivable                                                                                                                           |  |                   | 2,843,249   |   |                   |  
|Other assets                                                                                                                                          |  |                   | 9,762,647   |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Total                                                                                                                                                 |  | $                 | 419,489,770 |   |                   | $
|                                                                                                                                                      |  |                   |             |   |                   |  
|                                                                                                                                                      |  |                  
|Liabilities and Shareholders Equity                                                                                                                  |  |                   |             |   |                   |  
|Deposits                                                                                                                                              |  |                   |             |   |                   |  
|Demand, noninterest bearing                                                                                                                           |  | $                 | 81,067,194  |   |                   | $
|Demand interest bearing                                                                                                                               |  |                   | 80,276,233  |   |                   |  
|Savings                                                                                                                                               |  |                   | 19,012,110  |   |                   |  
|Time                                                                                                                                                  |  |                   | 148,301,920 |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Total deposits                                                                                                                                        |  |                   | 328,657,457 |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Accrued interest payable                                                                                                                              |  |                   | 634,320     |   |                   |  
|Short-term borrowings                                                                                                                                 |  |                   | 26,001,045  |   |                   |  
|Long-term obligations                                                                                                                                 |  |                   | 32,000,000  |   |                   |  
|Other liabilities                                                                                                                                     |  |                   | 1,933,365   |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Total liabilities                                                                                                                                     |  |                   | 389,226,187 |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Shareholders equity                                                                                                                                  |  |                   |             |   |                   |  
|Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,037,929 and 2,040,016 in 2003 and
2002, respectively. |  |                   | 7,132,752   |   |                   |  
|Capital surplus                                                                                                                                       |  |                   | 5,359,978   |   |                   |  
|Retained earnings                                                                                                                                     |  |                   | 17,463,735  |   |                   |  
|Deferred compensation  restricted stock                                                                                                              |  |                   | (163,792    | ) |                   |  
|Accumulated other comprehensive income                                                                                                                |  |                   | 470,910     |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Total shareholders equity                                                                                                                            |  |                   | 30,263,583  |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|                                                                                                                                                      |  |                  
|Commitments                                                                                                                                           |  |                   |             |   |                   |  
|                                                                                                                                                      |  |                   |             |   |                   |  
|Total                                                                                                                                                 |  | $                 | 419,489,770 |   |                   | $
|                                                                                                                                                      |  |                   |             |   |                   |  



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



See accompanying notes to consolidated financial statements.



2



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ECB BANCORP, INC. AND SUBSIDIARIES

Consolidated Income Statements

For the three and nine months ended September 30, 2003
and 2002

(unaudited)



|                                                             |  | Three months endedSeptember 30, |           | Nine months endedSeptember 30,
|------------------------------------------------------------ |  | ------------------------------- | --------- | ------------------------------
|                                                             |  | 2003                            |           | 2002                          
|Interest income:                                             |  |                                 |           |                               
|Interest and fees on loans                                   |  | $                               | 4,011,232 |                               
|Interest on investment securities:                           |  |                                 |           |                               
|Interest exempt from federal income taxes                    |  |                                 | 197,671   |                               
|Taxable interest income                                      |  |                                 | 808,378   |                               
|Dividend income                                              |  |                                 | 34,519    |                               
|FHLB stock dividends                                         |  |                                 | 13,614    |                               
|Interest on federal funds sold                               |  |                                 | 18,766    |                               
|                                                             |  |                                 |           |                               
|Total interest income                                        |  |                                 | 5,084,180 |                               
|                                                             |  |                                 |           |                               
|                                                             |  |                                 |           |                               
|Interest expense:                                            |  |                                 |           |                               
|Deposits:                                                    |  |                                 |           |                               
|Demand accounts                                              |  |                                 | 87,245    |                               
|Savings                                                      |  |                                 | 26,153    |                               
|Time                                                         |  |                                 | 739,795   |                               
|Short-term borrowings                                        |  |                                 | 26,405    |                               
|Long-term obligations                                        |  |                                 | 373,534   |                               
|                                                             |  |                                 |           |                               
|Total interest expense                                       |  |                                 | 1,253,132 |                               
|                                                             |  |                                 |           |                               
|                                                             |  |                                 |           |                               
|Net interest income                                          |  |                                 | 3,831,048 |                               
|Provision for probable loan losses                           |  |                                 | 225,000   |                               
|                                                             |  |                                 |           |                               
|Net interest income after provision for probable loan losses |  |                                 | 3,606,048 |                               
|                                                             |  |                                 |           |                               
|                                                             |  |                                 |           |                               
|Noninterest income:                                          |  |                                 |           |                               
|Service charges on deposit accounts                          |  |                                 | 795,735   |                               
|Other service charges and fees                               |  |                                 | 563,840   |                               
|Net gain on sale of securities                               |  |                                 | 42,112    |                               
|Income from bank owned life insurance                        |  |                                 | 61,575    |                               
|Other operating income                                       |  |                                 | 30,370    |                               
|                                                             |  |                                 |           |                               
|Total noninterest income                                     |  |                                 | 1,493,632 |                               
|                                                             |  |                                 |           |                               
|                                                             |  |                                 |           |                               
|Noninterest expenses:                                        |  |                                 |           |                               
|Salaries                                                     |  |                                 | 1,342,867 |                               
|Retirement and other employee benefits                       |  |                                 | 574,653   |                               
|Occupancy                                                    |  |                                 | 325,148   |                               
|Equipment                                                    |  |                                 | 329,908   |                               
|Professional fees                                            |  |                                 | 62,767    |                               
|Supplies                                                     |  |                                 | 66,199    |                               
|Telephone                                                    |  |                                 | 110,012   |                               
|Postage                                                      |  |                                 | 51,453    |                               
|Other operating expenses                                     |  |                                 | 762,872   |                               
|                                                             |  |                                 |           |                               
|Total noninterest expenses                                   |  |                                 | 3,625,879 |                               
|                                                             |  |                                 |           |                               
|                                                             |  |                                 |           |                               
|Income before income taxes                                   |  |                                 | 1,473,801 |                               
|Income taxes                                                 |  |                                 | 435,000   |                               
|                                                             |  |                                 |           |                               
|Net income                                                   |  | $                               | 1,038,801 |                               
|                                                             |  |                                 |           |                               
|                                                             |  |                                 |           |                               
|Net income per share  basic                                 |  | $                               | 0.51      |                               
|Net income per share  diluted                               |  | $                               | 0.51      |                               
|Weighted average shares outstanding  basic                  |  |                                 | 2,020,274 |                               
|Weighted average shares outstanding  diluted                |  |                                 | 2,042,834 |                               



See accompanying notes
to consolidated financial statements.



3



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ECB BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Shareholders Equity

Nine months ended September 30,
2003 and 2002

(unaudited)



|                                                          |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferredcompensation-restrictedstock |   |  | Accumulatedothercomprehensiveincome |          |   | Comprehensiveincome |   |            | Total | 
|--------------------------------------------------------- |  | ----------- | --------- | - | -------------- | - | --------- | ---------------- |  | - | ------------------------------------ | - |  | ----------------------------------- | -------- | - | ------------------- | - | ---------- | ----- | 
|Balance January 1, 2002                                   |  | $           | 7,230,619 |   |                | $ | 5,762,477 |                  |  | $ | 12,507,403                           |   |  | $                                   | (75,896  | ) |                     | $ | 101,322    |       | 
|Unrealized gains, net of income tax expense of $1,115,480 |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   | 1,781,552  |       | 
|Net income                                                |  |             |           |   |                |   |           |                  |  |   | 2,443,315                            |   |  |                                     |          |   |                     |   |            |       | 
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|Total comprehensive income                                |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|Recognition of deferred compensation - restricted stock   |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     | 17,495   |   |                     |   |            |       | 
|Repurchase of common stock                                |  |             | (13,213   | ) |                |   | (47,601   | )                |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|Cash dividends ($.30 per share)                           |  |             |           |   |                |   |           |                  |  |   | (619,740                             | ) |  |                                     |          |   |                     |   |            |       | 
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|Balance September 30, 2002                                |  | $           | 7,217,406 |   |                | $ | 5,714,876 |                  |  | $ | 14,330,978                           |   |  | $                                   | (58,401  | ) |                     | $ | 1,882,874  |       | 
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|                                                          |  |             |           |   |                |   |          
|                                                          |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferredcompensation-restrictedstock |   |  | Accumulatedothercomprehensiveincome |          |   | Comprehensiveincome |   |            | Total | 
|Balance January 1, 2003                                   |  | $           | 7,140,057 |   |                | $ | 5,410,102 |                  |  | $ | 15,171,819                           |   |  | $                                   | (52,568  | ) |                     | $ | 1,968,835  |       | 
|Unrealized losses, net of income tax benefit of $937,723  |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   | (1,497,925 | )     | 
|Net income                                                |  |             |           |   |                |   |           |                  |  |   | 3,056,144                            |   |  |                                     |          |   |                     |   |            |       | 
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|Total comprehensive income                                |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|Deferred compensation  restricted stock issuance         |  |             | 29,445    |   |                |   | 121,989   |                  |  |   |                                      |   |  |                                     | (151,434 | ) |                     |   |            |       | 
|Recognition of deferred compensation  restricted stock   |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     | 40,210   |   |                     |   |            |       | 
|Repurchase of common stock                                |  |             | (36,750   | ) |                |   | (172,113  | )                |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|Cash dividends ($.375 per share)                          |  |             |           |   |                |   |           |                  |  |   | (764,228                             | ) |  |                                     |          |   |                     |   |            |       | 
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 
|Balance September 30, 2003                                |  | $           | 7,132,752 |   |                | $ | 5,359,978 |                  |  | $ | 17,463,735                           |   |  | $                                   | (163,792 | ) |                     | $ | 470,910    |       | 
|                                                          |  |             |           |   |                |   |           |                  |  |   |                                      |   |  |                                     |          |   |                     |   |            |       | 



See accompanying notes
to consolidated financial statements.



4



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ECB BANCORP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Nine months ended September 30, 2003 and 2002

(Unaudited)



|                                                                                                    |  | Nine Months EndedSeptember 30, |            
|--------------------------------------------------------------------------------------------------- |  | ------------------------------ | -----------
|                                                                                                    |  | 2003                           |            
|Cash flows from operating activities:                                                               |  |                                |            
|Net income                                                                                          |  | $                              | 3,056,144  
|Adjustments to reconcile net income to net cash provided by operating activities:                   |  |                                |            
|Depreciation                                                                                        |  |                                | 718,481    
|Amortization of premium on investment securities, net                                               |  |                                | 389,543    
|Provision for probable loan losses                                                                  |  |                                | 465,000    
|Gain on sale of securities                                                                          |  |                                | (47,681    
|Deferred compensation - restricted stock                                                            |  |                                | 40,210     
|Decrease (increase) in accrued interest receivable                                                  |  |                                | (522,285   
|(Gain) loss on disposal of premises and equipment                                                   |  |                                | (991       
|Loss on sale of real estate acquired in settlement of loans                                         |  |                                | 4,820      
|Increase in other assets                                                                            |  |                                | (1,242,700 
|Decrease in accrued interest payable                                                                |  |                                | (94,828    
|Increase (decrease) in other liabilities, net                                                       |  |                                | 365,500    
|                                                                                                    |  |                                |            
|Net cash provided by operating activities                                                           |  |                                | 3,131,210  
|                                                                                                    |  |                                |            
|Cash flows from investing activities:                                                               |  |                                |            
|Proceeds from sales of investment securities classified as available-for-sale                       |  |                                | 10,864,349 
|Proceeds from maturities of investment securities classified as available-for-sale                  |  |                                | 39,300,350 
|Purchases of investment securities classified as available-for-sale                                 |  |                                | (40,256,695
|Redemption (purchase) of Federal Home Loan Bank common stock                                        |  |                                | 177,500    
|Proceeds from disposal of premises and equipment                                                    |  |                                | 3,300      
|Purchases of premises and equipment                                                                 |  |                                | (3,199,697 
|Proceeds from disposal of real estate acquired in settlement of loans and real estate held for sale |  |                                |           
|Net loan originations                                                                               |  |                                | (41,523,338
|                                                                                                    |  |                                |            
|Net cash used by investing activities                                                               |  |                                | (34,634,231
|                                                                                                    |  |                                |            
|Cash flows from financing activities:                                                               |  |                                |            
|Net increase in deposits                                                                            |  |                                | 27,396,180 
|Net increase in short-term borrowings                                                               |  |                                | 5,779,918  
|Increase in long-term obligations                                                                   |  |                                |           
|Dividends paid                                                                                      |  |                                | (713,488   
|Repurchase of common stock                                                                          |  |                                | (208,863   
|                                                                                                    |  |                                |            
|Net cash provided by financing activities                                                           |  |                                | 32,253,750 
|                                                                                                    |  |                                |            
|Increase in cash and cash equivalents                                                               |  |                                | 750,729    
|Cash and cash equivalents at beginning of period                                                    |  |                                | 20,345,006 
|                                                                                                    |  |                                |            
|Cash and cash equivalents at end of period                                                          |  | $                              | 21,095,735 
|                                                                                                    |  |                                |            
|Cash paid during the period:                                                                        |  |                                |            
|Interest                                                                                            |  | $                              | 4,079,585  
|Taxes                                                                                               |  |                                | 1,436,740  
|                                                                                                    |  |                               
|Supplemental disclosures of noncash financing and investing activities:                             |  |                                |            
|Cash dividends declared but not paid                                                                |  | $                              | 254,743    
|Unrealized (losses) gains on available-for-sale securities, net of deferred taxes                   |  |                                | (1,497,925 
|Restricted stock issuance                                                                           |  |                                | 151,434    



See accompanying notes
to consolidated financial statements.



5



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ECB BANCORP, INC. AND SUBSIDIARIES



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



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



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



All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such
adjustments are normal and recurring in nature). The footnotes in Bancorps annual report on Form 10-KSB should be referenced when reading these unaudited interim financial statements. Operating results for the period ended September 30, 2003,
are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.



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



|(2) | Allowance for Probable Loan Losses
|--- | ----------------------------------



The following table summarizes the activity in the allowance for probable loan losses for the nine-month periods ended September 30, 2003 and 2002, respectively.



|                                       |  | Nine-months endedSeptember 30, |          
|-------------------------------------- |  | ------------------------------ | ---------
|                                       |  | 2003                           |          
|Balance at the beginning of the period |  | $                              | 3,150,000
|Provision for probable loan losses     |  |                                | 465,000  
|Charge-offs                            |  |                                | (156,238 
|Recoveries                             |  |                                | 61,840   
|Net Charge-offs                        |  |                                | (94,398  
|Balance at end of the period           |  | $                              | 3,520,602



6



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|(3) | Net Income Per Share
|--- | --------------------



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



Diluted net income per share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period.
Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized is considered proceeds using the treasury stock method. For the
nine months ended September 30, 2003 and 2002, diluted weighted average shares outstanding increased by 9,987 and 5,462, respectively, due to the dilutive impact of restricted stock. For the three months ended September 30, 2003 and 2002, diluted
weighted average shares outstanding increased by 10,474 and 5,655, respectively, due to the dilutive impact of restricted stock.



In computing diluted net income per share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices,
with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of
shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. For the nine months ended September 30, 2003 and
2002, diluted weighted average shares outstanding increased by 11,189 and 3,780, respectively, due to the dilutive impact of options. For the three months ended September 30, 2003 and 2002, diluted weighted average shares outstanding increased by
12,086 and 3,587, respectively, due to the dilutive impact of options.



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



|                              |  | Nine months ended September 30, 2003
|----------------------------- |  | ------------------------------------
|                              |  | Income(Numerator)                   
|Basic net income per share    |  | $                                   
|                              |  |                                     
|Effect of dilutive securities |  |                                     
|                              |  |                                     
|Diluted net income per share  |  | $                                   
|                              |  |                                     
|                              | 
|                              |  | Nine months ended September 30, 2002
|                              |  | Income(Numerator)                   
|Basic net income per share    |  | $                                   
|                              |  |                                     
|Effect of dilutive securities |  |                                     
|                              |  |                                     
|Diluted net income per share  |  | $                                   
|                              |  |                                     



7



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



|                              |  | Three months ended September 30, 2003
|----------------------------- |  | -------------------------------------
|                              |  | Income(Numerator)                    
|Basic net income per share    |  | $                                    
|                              |  |                                      
|Effect of dilutive securities |  |                                      
|                              |  |                                      
|Diluted net income per share  |  | $                                    
|                              |  |                                      
|                              | 
|                              |  | Three months ended September 30, 2002
|                              |  | Income(Numerator)                    
|Basic net income per share    |  | $                                    
|                              |  |                                      
|Effect of dilutive securities |  |                                      
|                              |  |                                      
|Diluted net income per share  |  | $                                    
|                              |  |                                      



|(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 4 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.



8



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Stock options of 8,100 shares were granted during the nine months ended September 30, 2002. There were no options granted
in the first nine months of 2003. The per share weighted-average fair value of options granted during 2002 was $2.63 on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:



|                         |  | 2002 |  
|------------------------ |  | ---- | -
|Expected dividend yield  |  | 3.0  | %
|Risk-free interest rate  |  | 4.8  | %
|Expected life (in years) |  | 6    |  
|Expected volatility      |  | 20   | %



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



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



|                                                                                                                                            |  | Nine months endedSeptember 30,  |          
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------- | ---------
|                                                                                                                                            |  | 2003                            |          
|Net income, as reported                                                                                                                     |  | $                               | 3,056,144
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects |  |                                 | (6,538   
|                                                                                                                                            |  |                                 |          
|Proforma net income                                                                                                                         |  | $                               | 3,049,606
|                                                                                                                                            |  |                                 |          
|                                                                                                                                            |  |                                
|Earnings per share:                                                                                                                         |  |                                 |          
|Basic  as reported                                                                                                                         |  | $                               | 1.51     
|                                                                                                                                            |  |                                 |          
|Basic  proforma                                                                                                                            |  |                                 | 1.51     
|                                                                                                                                            |  |                                 |          
|Diluted  as reported                                                                                                                       |  |                                 | 1.50     
|                                                                                                                                            |  |                                 |          
|Diluted  proforma                                                                                                                          |  |                                 | 1.49     
|                                                                                                                                            |  |                                 |          
|                                                                                                                                            | 
|                                                                                                                                            |  | Three months endedSeptember 30, |          
|                                                                                                                                            |  | 2003                            |          
|Net income, as reported                                                                                                                     |  | $                               | 1,038,801
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related
tax effects |  |                                 | (2,179   
|                                                                                                                                            |  |                                 |          
|Proforma net income                                                                                                                         |  | $                               | 1,036,622
|                                                                                                                                            |  |                                 |          
|                                                                                                                                            |  |                                
|Earnings per share:                                                                                                                         |  |                                 |          
|Basic  as reported                                                                                                                         |  | $                               | 0.51     
|                                                                                                                                            |  |                                 |          
|Basic  proforma                                                                                                                            |  |                                 | 0.51     
|                                                                                                                                            |  |                                 |          
|Diluted  as reported                                                                                                                       |  |                                 | 0.51     
|                                                                                                                                            |  |                                 |          
|Diluted  proforma                                                                                                                          |  |                                 | 0.51     
|                                                                                                                                            |  |                                 |          



9



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|(5) | Long-term Obligations
|--- | ---------------------



On June 26, 2002 the Company completed a private issuance of $10 million in trust preferred securities as part of a pooled re-securitization transaction with several
other financial institutions. The trust preferred securities bear a floating rate of interest of 3.45% over the three-month LIBOR rate, and the initial coupon, set at 5.34%, is payable quarterly. ECB Bancorp intends to use the net proceeds for the
opportunistic acquisition of fee income producing entities, market expansion, the repurchase of Bancorp stock and for other corporate and strategic purposes.



The trust preferred securities were issued by a wholly-owned finance subsidiary of ECB Bancorp, Inc., and ECB Bancorp has fully and unconditionally guaranteed the
repayment of those securities. The proceeds from the issuance of trust preferred securities were invested in debentures issued by ECB Bancorp, Inc. and that investment became the sole asset of the trust. ECB Bancorp may redeem the trust preferred
securities in whole or in part on or after June 26, 2007. The trust preferred securities mature on June 26, 2032.



|(6) | New Accounting Pronouncements
|--- | -----------------------------



In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) SFAS No. 143,
Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of
tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial
measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company adopted SFAS No. 143 on
January 1, 2003. The adoption of SFAS No. 143 did not have a material effect on the Companys consolidated financial statements.



In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of
this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 did not have a material effect on the Companys consolidated financial
statements.



In November 2002, the FASB issued Interpretation No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34.This
Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at
inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and did not have
a material effect on the Companys consolidated financial statements. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002.



In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the
fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of
the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.



In January 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.
This Interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in



10



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variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. For
public enterprises, such as the Company, with a variable interest in a variable interest entity created before February 1, 2003, the Interpretation is applied to the enterprise no later than the end of the first interim reporting period beginning
after June 15, 2003. The application of this Interpretation did not have and is not expected to material effect on the Companys consolidated financial statements.



The application of Interpretation 46 may result in the de-consolidation of the trust that has issued the trust preferred capital securities
currently reported in our consolidated financial statements; at this time final interpretation regarding such application is pending. The trust preferred capital securities are currently disclosed as long-term borrowings within the consolidated
financial statements. The potential de-consolidation of the trust would instead require disclosure of subordinated debentures between Bancorp and the issuing trust. Currently, the subordinated debentures are eliminated in consolidation, resulting in
the disclosure of long-term borrowings. The impact of this change would not have a material effect on our consolidated financial statements.



Statement No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities, amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities.This Statement is effective for contracts entered into or modified after June 30, 2003, except certain hedging relationships designated after June 30, 2003, as defined in the Statement. In addition, except as defined in the
Statement, all provisions of this Statement should be applied prospectively. The adoption of SFAS No.149 did not have a material impact on the consolidated financial statements.



Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, was issued in May 2003. This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. It is to be implemented by reporting the cumulative
effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Restatement is not permitted. The adoption of SFAS
No.150 did not have a material impact on the consolidated financial statements.



11



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|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 two wholly-owned subsidiaries are The East
Carolina Bank (the Bank or ECB) and ECB Statutory Trust I. Bancorp and its subsidiaries are collectively referred to hereafter as the Company. The Bank is a state-chartered community bank which was founded in
1919. The Bank offers a full range of banking services through 18 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, Hertford, New Bern, Greenville (two branches), Williamston and newly opened loan production offices located in Morehead City and Wilmington.



ECB Statutory Trust I is a business trust subsidiary of Bancorp formed during 2002 which 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 Bancorp, were used to purchase
an aggregate of $10.3 million in junior subordinated debentures issued by Bancorp. 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. Subject to certain limitations, Bancorp has fully and unconditionally guaranteed its Trust subsidiarys obligations under the preferred trust securities. Substantially all the proceeds from the transaction are being counted as Tier
1 capital on Bancorps books and have been or will be used by Bancorp to supplement Bancorps and the Banks capital and support their continued operations and growth.



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.



Comparison of the Results of Operations for the Nine Month Periods Ended September 30, 2003 and 2002



Summary



For the nine months ended September 30, 2003, the Company had net income of $3,056,144 or $1.51 basic and $1.50 diluted earnings per share,
compared to $2,443,345, or $1.19 basic and $1.18 diluted earnings per share for the nine months ended September 30, 2002. Net interest income increased $1,133,913 or 11.06% to $11,388,285 in the first nine months of 2003 from $10,254,372 in the
first nine months of 2002, and noninterest income increased $898,802 or 27.08% when compared to the same period last year. Noninterest expense increased $1,012,235 or 10.41% for the nine month period ended September 30, 2003 as compared to the same
period in 2002, as salary and employee benefits expense increased $576,858 to $5,603,047 compared to $5,026,189 during the same nine month period in 2002.



Net interest income



Net interest income for the nine months ended September 30, 2003 was $11,388,285, an increase of $1,133,913 or 11.06% when compared to net interest income of $10,254,372
for the prior year period. The Companys net interest margin, on a tax-equivalent basis, for the nine months ended September 30, 2003 was 4.27% compared to 4.83% for the same period in 2002. Management attributes a portion of the decrease in
the Banks net interest margin to the decrease in yield on earning assets. The yield on average



12



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earning assets, on a tax-equivalent basis, for the nine months ended September 30, 2003 was 5.72% compared to 6.61% in 2002, a decrease of 89 basis points.



Total interest income increased $1,228,778 for the nine months ended September
30, 2003 compared to the nine months ended September 30, 2002, due to an increase of $74.6 million in average earning assets. Average loans outstanding increased $47.3 million as real estate loans increased $20.5 million. During the third quarter of
2002, management implemented a cost recovery strategy to leverage its newly acquired capital through borrowings from the Federal Home Loan Bank and the concomitant purchase of wholesale assets at a spread. As a result, the Banks average
investment portfolio increased by $27.9 million.



Total interest expense
increased $94,865 for the nine months ended September 30, 2003 compared to the nine months ended September 30, 2002, as interest-bearing liabilities increased on average $70.4 million. The cost of funds for the Company during the nine months ended
September 30, 2003 was 1.76%; a decrease of 48 basis points when compared to 2.24% for the nine months ended September 30, 2002.



Provision for probable loan losses



The provision for probable loan losses charged to operations during the nine months ended September 30, 2003 was $465,000, compared to $435,000 during the nine months
ended September 30, 2002. Net charge-offs for the period ended September 30, 2003 totaled $94,398, compared to net charge-offs of $201,503 during the first nine months of 2002. The slightly higher provision expense for probable loan loss for the
nine month period ending September 30, 2003 is primarily the result of loan growth, while provision expense for probable loan loss in the same period in 2002 reflects the charge-off activity that occurred in the first quarter of 2002 when the Bank
charged-off $150,000 on a single commercial credit. 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 $898,802 or 27.08% to $4,217,919 for the nine months ended
September 30, 2003 compared to $3,319,117 for the same period in 2002. This is principally due to an increase of $551,062 in Overdraft Banking Privilege fees generated from a new banking product, designed to automatically advance funds to assist in
the event of checking account overdrafts, introduced by the Bank in December of 2001. Other service charges and fees increased $338,384 over the prior year period due to increases of mortgage loan origination fees of $228,836 and increased brokerage
fees of $88,019. During the nine months of 2003, the Bank had a net gain on the sale of securities of $47,681 compared to $69,488 during the same period last year.



Noninterest expense



Noninterest expense increased $1,012,235 or 10.41% to $10,740,060 for the nine months ended September 30, 2003 from the same period in 2002. This increase is principally
due to general increases in salary and employee benefits expense of $576,858 or 11.48%. Salary expense increased $394,118 over the prior year period as a result of general staffing increases of $216,013 and additional salary expense of $178,105
associated with the Banks recently opened office in Williamston and loan production offices in Morehead City and Wilmington. Employee benefit expense increased $182,740 over the prior year period as the Company increased its incentive pay
accrual by $72,731 and employee group insurance premiums increased $55,449 over the prior year period. Occupancy expense increased $187,945 or 25.78% principally as the result of accelerated depreciation expense of $97,413 on the Banks home
office branch facility as the Bank plans to replace the existing branch structure with a new corporate and branch office in 2004. An additional $50,170 of occupancy expense is directly attributable to the opening of the new Williamston office and
two loan production offices. Bank supplies increased $34,785 from the prior year period primarily as the result of increased forms and PC related supplies. Telephone and data communications expense increased $139,716 over the prior year period, as
the Bank has implemented a new voice and data system, upgraded to provide bank-wide voicemail and additional bandwidth to promote the Banks network capabilities. Other operating expenses increased $114,708 from $2,066,948 for the nine



13



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months ended September 30, 2002 to $2,181,656 for the nine months ended September 30, 2003. Increased dues and membership fees of $66,078, one-time expenses
due to flooding during Hurricane Isabel of $42,138 in late September 2003, increased advertising expense of $34,634, increased outside services of $27,770 and increases in ATM expense of $25,857 were offset by a decrease in Loss on Sale of
Other Assets and Repossessions. During the second quarter of 2002, the Company had a write-down on repossessed loan collateral of $144,894.



Income taxes



Income tax expense for the nine months ended September 30, 2003 and 2002 was $1,345,000 and $967,319, respectively, resulting in effective tax rates of 30.56% and 28.36%, respectively. The increase in the Banks
effective tax rate for 2003 is the result of an increased state tax liability. Changes in the mix of investments within the Banks investment portfolio during 2002 away from state tax exempt securities resulted in a higher state tax liability.
The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



Comparison of the Results of Operations for the Three Month Periods Ended September 30, 2003 and 2002



Summary



For the three months ended September 30, 2003, the Company had net income of $1,038,801 or $0.51 basic and diluted earnings per share,
compared to $1,025,791, or $0.50 basic and diluted earnings per share for the three months ended September 30, 2002. Net interest income increased $232,948 or 6.47% to $3,831,048 in the third quarter of 2003 from $3,598,100 in the third quarter of
2002, and noninterest income increased $291,139 or 24.21% when compared to the same period last year. Noninterest expense increased $410,396 or 12.76% for the three month period ended September 30, 2003 as compared to the same period in 2002, as
salary and benefits expense increased $260,389 to $1,917,520 compared to $1,657,131 during the third quarter of 2002.



Net interest income



Net interest income for the three months ended September 30, 2003 was $3,831,048, an increase of $232,948 or 6.47% when compared to net interest income of $3,598,100 for
the prior year period. The Companys net interest margin, on a tax-equivalent basis, for the three months ended September 30, 2003 was 4.13% compared to 4.77% in the third quarter of 2002. Management attributes a portion of the decrease in the
Banks net interest margin to the decrease in yield on earning assets resulting from continued decreases in interest rates.



Total interest income increased $160,746 for the three months ended September 30, 2003 compared to the three months ended September 30, 2002, due to an increase of
$70.1million in average earning assets. Average loans outstanding increased $51.0 million as real estate loans increased $20.0 million. Late during the third quarter of 2002, management implemented a cost recovery strategy to leverage its newly
acquired capital through borrowings from the Federal Home Loan Bank and the concomitant purchase of wholesale assets at a spread. As a result, the Banks average investment portfolio increased by $19.2 million when compared to the third quarter
of 2002. The yield on average earning assets, on a tax-equivalent basis, for the three months ended September 30, 2003 was 5.44% compared to 6.47% in 2002.



Total interest expense decreased $72,202 for the three months ended September 30, 2003 compared to the three months ended September 30, 2002, even as interest-bearing
liabilities increased on average $66.1 million. The cost of funds for the Company during the three months ended September 30, 2003 was 1.62%; a decrease of 57 basis points when compared to 2.19% for the three months ended September 30, 2002.



Provision for probable loan losses



The provision for probable loan losses charged to operations during the three months ended
September 30, 2003 was $225,000 compared to $115,000 in the same period in 2002. Net charge-offs for the quarter



14



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ended September 30, 2003 totaled $43,641, compared to net recoveries of $2,365 during the third quarter of 2002. The increase in provision for probable loan
losses is due to increased net charge-offs and loan growth that occurred in the third quarter of 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, and prior loan loss experience.



Noninterest income



Noninterest income increased
$291,139 or 24.21% to $1,493,632 for the three months ended September 30, 2003 compared to $1,202,493 for the same period in 2002. This is principally due to an increase of $124,028 in Overdraft Banking Privilege fees generated from a new banking
product, designed to automatically advance funds to assist in the event of checking account overdrafts, introduced by the Bank in December of 2001. Other service charges and fees increased $135,233 over the prior year period due to increases of
mortgage loan origination fees of $91,208 and increased brokerage fees of $54,664. During the third quarter of 2003, the Bank had a net gain on the sale of securities of $42,112 compared to net gain of $8,304 during the same period last year.



Noninterest expense



Noninterest expense increased $410,396 or 12.76% to $3,625,879 for the three months ended
September 30, 2003 from the same period in 2002. This increase is principally due to general increases in salary and benefits expense of $260,389 or 15.71%. Salary expense increased $147,008 over the prior year period as a result of general salary
increases of $35,120 and additional staffing expense within home office and mortgage departments of $43,379. Additional salary expenses of $68,509 are associated with the Banks recently opened office in Williamston and loan production offices
in Morehead City and Wilmington. Benefits during third quarter 2003 compared to 2002 increased $113,381 or 25.58% principally due to an increase in employee group insurance premiums of $61,805. Occupancy expense increased $82,044 or 33.75%
principally as the result of accelerated depreciation expense of $32,471 on the Banks home office branch facility, as the Bank plans to replace the existing branch structure with a new corporate and branch office in 2004. Telephone and data
communications expense increased $33,496 over the prior year period, as the Bank implemented a new voice and data system, upgraded to provide bank-wide voicemail and additional bandwidth to promote the Banks network capabilities. Other
operating expenses increased $84,983 from $677,889 for the three months ended September 30, 2002 to $762,872 for the three months ended September 30, 2003. The increase is primarily due to one-time expenses due to flooding during Hurricane Isabel of
$42,138 in late September 2003 and increased membership fees of $20,849 associated the Banks merchant services department.



Income taxes



Income tax expense for the three months ended September 30, 2003 and 2002 was $435,000 and $444,319, respectively, resulting in effective tax rates of 29.51% and 30.22%, respectively. The effective tax rates in both
years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



Comparison of Financial Condition at September 30, 2003 and December 31, 2002



Total assets increased $33.2 million to $419.5 million, an increase of 8.59% when compared to $386.3 million at December 31, 2002. Asset growth was driven by an increase
in non-interest-bearing demand deposits of $14.2 million, an increase in interest-bearing demand deposits of $9.0 million and increased savings and time deposits of $4.2 million. A large portion of the growth in transaction accounts is reflective of
the Banks seasonal tourist business on the Outer Banks of North Carolina where the Bank has six branches.



Loans receivable have increased $41.0 million or 17.98% from $227.9 million at December 31, 2002 to $268.9 million at September 30, 2003. The Bank has experienced steady
loan demand from all of its markets and its loan production offices have contributed throughout the quarter.



15



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Shareholders equity increased by $625,338 from December 31, 2002 to September 30, 2003, as the Company generated
net income of $3,056,144 and experienced a decrease of net unrealized gains on available-for-sale securities of $1,497,925 and recognition of deferred compensation  restricted stock of $40,210. During 2003, the Company repurchased 10,500
shares or $208,860 of its stock. The Company declared cash dividends of $764,228 or 37.5 cents per share, during 2003 compared to 30.0 cents per share in the prior year period.



Asset Quality



Allowance for probable loan losses



The allowance for probable loan losses (AFLL) is established through a provision for probable loan losses charged against earnings. The level of the allowance for
probable loan losses reflects managements best estimate of probable losses inherent in the portfolio as of the balance sheet date and is based on managements evaluation of the risks in the loan portfolio and changes in the nature and
volume of loan activity. Managements evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers the loans risk grades, the estimated fair value of the underlying
collateral, current economic conditions, historical loan loss experience and other current factors that warrant consideration in determining an adequate allowance. The Banks 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 1.31% and 1.38% at September 30, 2003 and December 31, 2002, respectively. Management has allowed the AFLL to represent a slightly smaller percentage of total loans outstanding due to improved asset quality and the effect of
seasonal lines of credit.



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 managements 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 reserve percentages for three of the eight risk grades (Special Mention, Substandard and Doubtful) are based on rates used by banking regulators
in conjunction with their examination of the Bank.



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 periodically reviewed by internal credit examiners to determine if any changes in the circumstances of the
loan require a different risk grade. An independent vendor engaged by the Bank 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 managements evaluation of the Banks 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,



16



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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 the Bank 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 the Banks policy to treat all commercial loans that are on nonaccrual status as impaired loans. Substantially all other loans made by the Bank are excluded from the scope
of SFAS No. 114 as they are comprised of large groups of smaller balance homogeneous loans (e.g., residential mortgage and consumer installment) that are evaluated collectively for impairment in the general reserves estimation process discussed
above.



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



While management uses 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



Nonperforming assets consist of loans not accruing interest, restructured debt and real
estate acquired in settlement of loans and other repossessed collateral. It is the Banks 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 $732,311 and $472,157 at September 30, 2003 and December 31, 2002, respectively. At September 30, 2003, the Company had $29,282 invested in loans considered to be impaired under SFAS No. 114 compared to none at
December 31, 2002, 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 allowance for probable loan losses
as a percentage of loans outstanding was 1.31% and 1.38% at September 30, 2003 and December 31, 2002, respectively. Management has allowed the AFLL to represent a slightly smaller percentage of total loans outstanding due to improved asset quality
and the effect of seasonal lines of credit.



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,



17



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internet deposit bulletin boards and Fed Fund lines with correspondent banks. Short-term borrowings increased $5.8 million during the first nine months of
2003.



Capital Resources



Bancorp and the Bank are subject to the capital requirements of the Federal Reserve, the
FDIC and the North Carolina State Banking Commission. The FDIC requires the Bank to maintain minimum ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 4% and 8%, respectively. To be well
capitalized, the FDIC requires ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 6% and 10%, respectively. Tier I capital consists of total stockholders equity calculated in accordance
with generally accepted accounting principles excluding unrealized gains or losses (net of deferred income taxes) on securities available-for-sale, and total capital is comprised of Tier I capital plus certain adjustments, the only one of which
applicable to the Bank is the allowance for probable loan losses. Risk-weighted assets reflect the Banks on- and off-balance sheet exposures after such exposures have been adjusted for their relative risk levels using formulas set forth in
FDIC regulations. As of September 30, 2003, 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 September 30, 2003, Bancorp was also in compliance with the similar capital requirements set forth by the Federal Reserve and was classified as well-capitalized.



As of September 30, 2003, $9.9 million of the trust preferred securities issued on June 26, 2002 qualifies 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. As of September 30, 2003, the Banks Leverage Ratio (Tier 1 capital divided by
average total assets) was 9.36%, compared to 9.98% at December 31, 2002, and Bancorps Leverage Ratio was 9.41% on September 30, 2003, compared to 9.51% at December 31, 2002. As of September 30, 2003, the Banks Tier 1 Risk-based Capital
Ratio was 11.56%, compared to 12.94% at December 31, 2002. Bancorps Tier 1 Risk-based Capital Ratio was 11.62% on September 30, 2003 compared to 12.67% at December 31, 2002.



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 6 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.



|ITEM 3. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



An evaluation of the effectiveness of the Companys disclosure controls and procedures as of the end of the period covered by this Report has been performed under
the supervision and with the participation of the



18



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Companys management, including its Chief Executive Officer and Chief Financial Officer. Based on that evaluation,
the Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of that period.



There has been no change in the Companys internal control over financial reporting that occurred during the Companys most recent
fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Companys internal control over financial reporting.



19



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PART II. OTHER INFORMATION



|Item 1. |  | Legal Proceedings
|------- |  | -----------------



None.



|Item 2. |  | Changes in Securities and Use of Proceeds
|------- |  | -----------------------------------------



Not applicable.



|Item 3. |  | Defaults upon Senior Securities
|------- |  | -------------------------------



Not applicable.



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



None.



|Item 5. |  | Other Information
|------- |  | -----------------



Not applicable.



|Item 6. |  | Exhibits 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
|--- | -------------------



Registrant furnished a Current Report on Form 8-K which was dated July 16, 2003 and reported that it had distributed a press release announcing its
results of operations for the three and six months periods ended June 30, 2003.



Registrant furnished a Current Report on Form 8-K which was dated September 16, 2003 and reported that its Board of Directors had declared a cash dividend of $0.125 per share of its common stock, payable on October
13, 2003, to its shareholders of record on September 29, 2003.



20



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SIGNATURES



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



|                  |  |  |  | ECB BANCORP, INC.(Registrant)              
|----------------- |  |  |  | -------------------------------------------
|                  |  |  |  |                                            
|                  |  | 
|November 12, 2003 |  |  |  | /s/    ARTHUR H. KEENEY, III               
|                  |  |  | 
|                  |  |  |  | Arthur H. Keeney, III (President & CEO)    
|                  |  |  |  |                                            
|                  |  | 
|November 12, 2003 |  |  |  | /s/    GARY M. ADAMS                       
|                  |  |  | 
|                  |  |  |  | Gary M. Adams (Senior Vice President & CFO)



21



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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)                   



22