##### Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the Quarterly Period Ended March 31, 2007

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. 0-24753



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ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|North Carolina                                                |  | 56-2090738                         
|(State or other jurisdiction 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 Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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

Large accelerated filer ̈Accelerated filer  x    Non-accelerated filer ̈

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

On May 7, 2007, there were 2,921,992 outstanding shares of Registrants common stock.

This Form 10-Q has 30 pages.



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##### Table of Contents

Table of Contents



|                                                                                                          |  |              
|--------------------------------------------------------------------------------------------------------- |  | -------------
|Index                                                                                                     |  | Beginson Page
|Part 1  Financial Information                                                                            |  |              
|Item 1. Financial Statements:                                                                             |  |              
|Consolidated Balance Sheets at March 31, 2007 and December 31, 2006                                       |  | 3            
|Consolidated Income Statements for Three Months Ended March 31, 2007 and 2006                             |  | 4            
|Consolidated Statements of Changes in Shareholders Equity for Three Months Ended March 31, 2007 and 2006 |  | 5            
|Consolidated Statements of Cash Flows for Three Months Ended March 31, 2007 and 2006                      |  | 6            
|Notes to Consolidated Financial Statements                                                                |  | 7            
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations             |  | 12           
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                                        |  | 24           
|Item 4. Controls and Procedures                                                                           |  | 24           
|Part II  Other Information                                                                               |  | 24           
|Item 1. Legal Proceedings                                                                                 |  | 24           
|Item 1A. Risk Factors                                                                                     |  | 25           
|Item 2. Unregistered Sales of Equity Securities and Use of Proceeds                                       |  | 25           
|Item 3. Defaults upon Senior Securities                                                                   |  | 25           
|Item 4. Submission of Matters to a Vote of Security Holders                                               |  | 25           
|Item 5. Other Information                                                                                 |  | 25           
|Item 6. Exhibits                                                                                          |  | 25           
|Signatures                                                                                                |  | 26           
|Exhibit Index                                                                                             |  | 27           
|EX- 31.1                                                                                                  |  | 28           
|EX- 31.2                                                                                                  |  | 29           
|EX- 32                                                                                                    |  | 30           



2



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

March 31, 2007 and December 31, 2006

(Dollars in thousands, except per share
data)



|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                                              |  | March 31,2007 |         |   | December 31,2006* |  
|                                                                                                                                                              |  | (unaudited)   |         |   |                   |  
|Assets                                                                                                                                                        |  |               |         |   |                   |   |         |  
|Non-interest bearing deposits and cash                                                                                                                        |  | $             | 17,047  |   |                   | $ | 15,591  |  
|Interest bearing deposits                                                                                                                                     |  |               | 883     |   |                   |   | 891     |  
|Overnight investments                                                                                                                                         |  |               | 9,825   |   |                   |   | 23,575  |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total cash and cash equivalents                                                                                                                               |  |               | 27,755  |   |                   |   | 40,057  |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Investment securities                                                                                                                                         |  |               |         |   |                   |   |         |  
|Available-for-sale, at market value (cost of $131,078 and $128,005 at March 31, 2007 and December 31, 2006,
respectively)                                     |  |               | 129,424 |   |                   |   | 125,860 |  
|                                                                                                                                                              |  |              
|Loans                                                                                                                                                         |  |               | 418,308 |   |                   |   | 417,943 |  
|Allowance for loan losses                                                                                                                                     |  |               | (5,103  | ) |                   |   | (4,725  | )
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Loans, net                                                                                                                                                    |  |               | 413,205 |   |                   |   | 413,218 |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Real estate and repossessions acquired in settlement of loans, net                                                                                            |  |               | 266     |   |                   |   | 240     |  
|Federal Home Loan Bank common stock, at cost                                                                                                                  |  |               | 1,257   |   |                   |   | 1,229   |  
|Bank premises and equipment, net                                                                                                                              |  |               | 24,249  |   |                   |   | 23,042  |  
|Accrued interest receivable                                                                                                                                   |  |               | 4,107   |   |                   |   | 4,619   |  
|Bank owned life insurance                                                                                                                                     |  |               | 7,813   |   |                   |   | 7,741   |  
|Other assets                                                                                                                                                  |  |               | 7,966   |   |                   |   | 8,064   |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total                                                                                                                                                         |  | $             | 616,042 |   |                   | $ | 624,070 |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Liabilities and Shareholders Equity                                                                                                                          |  |               |         |   |                   |   |         |  
|Deposits                                                                                                                                                      |  |               |         |   |                   |   |         |  
|Demand, noninterest bearing                                                                                                                                   |  | $             | 93,452  |   |                   | $ | 96,890  |  
|Demand, interest bearing                                                                                                                                      |  |               | 91,180  |   |                   |   | 94,569  |  
|Savings                                                                                                                                                       |  |               | 19,226  |   |                   |   | 19,809  |  
|Time                                                                                                                                                          |  |               | 299,122 |   |                   |   | 300,981 |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total deposits                                                                                                                                                |  |               | 502,980 |   |                   |   | 512,249 |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Accrued interest payable                                                                                                                                      |  |               | 2,694   |   |                   |   | 2,363   |  
|Short-term borrowings                                                                                                                                         |  |               | 41,588  |   |                   |   | 31,105  |  
|Long-term obligations                                                                                                                                         |  |               |        |   |                   |   | 10,310  |  
|Other liabilities                                                                                                                                             |  |               | 4,959   |   |                   |   | 5,250   |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total liabilities                                                                                                                                             |  |               | 552,221 |   |                   |   | 561,277 |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Shareholders equity                                                                                                                                          |  |               |         |   |                   |   |         |  
|Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,921,992 at March 31, 2007 and 2,902,242
at December 31, 2006. |  |               | 10,188  |   |                   |   | 10,119  |  
|Capital surplus                                                                                                                                               |  |               | 26,897  |   |                   |   | 26,680  |  
|Retained earnings                                                                                                                                             |  |               | 27,773  |   |                   |   | 27,333  |  
|Accumulated other comprehensive loss                                                                                                                          |  |               | (1,037  | ) |                   |   | (1,339  | )
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total shareholders equity                                                                                                                                    |  |               | 63,821  |   |                   |   | 62,793  |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  
|Total                                                                                                                                                         |  | $             | 616,042 |   |                   | $ | 624,070 |  
|                                                                                                                                                              |  |               |         |   |                   |   |         |  

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

See accompanying
Notes to Consolidated Financial Statements.



3



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For the three months ended March 31, 2007 and 2006

(Dollars in thousands, except per share data)



|                                                    |  |                              |           |             |   |          
|--------------------------------------------------- |  | ---------------------------- | --------- | ----------- | - | ---------
|                                                    |  | Three months ended March 31,
|                                                    |  | 2007                         |           | 2006       
|                                                    |  | (unaudited)                  |           | (unaudited)
|Interest income:                                    |  |                              |           |             |   |          
|Interest and fees on loans                          |  | $                            | 8,110     |             | $ | 7,060    
|Interest on investment securities:                  |  |                              |           |             |   |          
|Interest exempt from federal income taxes           |  |                              | 302       |             |   | 266      
|Taxable interest income                             |  |                              | 1,109     |             |   | 798      
|FHLB stock dividends                                |  |                              | 18        |             |   | 50       
|Other interest                                      |  |                              | 277       |             |   | 123      
|                                                    |  |                              |           |             |   |          
|Total interest income                               |  |                              | 9,816     |             |   | 8,297    
|                                                    |  |                              |           |             |   |          
|Interest expense:                                   |  |                              |           |             |   |          
|Deposits:                                           |  |                              |           |             |   |          
|Demand accounts                                     |  |                              | 401       |             |   | 243      
|Savings                                             |  |                              | 24        |             |   | 28       
|Time                                                |  |                              | 3,758     |             |   | 2,633    
|Short-term borrowings                               |  |                              | 680       |             |   | 112      
|Long-term obligations                               |  |                              |          |             |   | 414      
|                                                    |  |                              |           |             |   |          
|Total interest expense                              |  |                              | 4,863     |             |   | 3,430    
|                                                    |  |                              |           |             |   |          
|Net interest income                                 |  |                              | 4,953     |             |   | 4,867    
|Provision for loan losses                           |  |                              | 390       |             |   | 200      
|                                                    |  |                              |           |             |   |          
|Net interest income after provision for loan losses |  |                              | 4,563     |             |   | 4,667    
|                                                    |  |                              |           |             |   |          
|Noninterest income:                                 |  |                              |           |             |   |          
|Service charges on deposit accounts                 |  |                              | 770       |             |   | 793      
|Other service charges and fees                      |  |                              | 326       |             |   | 216      
|Mortgage origination brokerage fees                 |  |                              | 248       |             |   | 214      
|Income from bank owned life insurance               |  |                              | 72        |             |   | 65       
|Other operating income                              |  |                              | 265       |             |   | 27       
|                                                    |  |                              |           |             |   |          
|Total noninterest income                            |  |                              | 1,681     |             |   | 1,315    
|                                                    |  |                              |           |             |   |          
|Noninterest expenses:                               |  |                              |           |             |   |          
|Salaries                                            |  |                              | 1,980     |             |   | 1,771    
|Retirement and other employee benefits              |  |                              | 670       |             |   | 662      
|Occupancy                                           |  |                              | 432       |             |   | 395      
|Equipment                                           |  |                              | 499       |             |   | 418      
|Professional fees                                   |  |                              | 306       |             |   | 49       
|Supplies                                            |  |                              | 54        |             |   | 83       
|Telephone                                           |  |                              | 132       |             |   | 107      
|Other operating expenses                            |  |                              | 888       |             |   | 917      
|                                                    |  |                              |           |             |   |          
|Total noninterest expenses                          |  |                              | 4,961     |             |   | 4,402    
|                                                    |  |                              |           |             |   |          
|Income before income taxes                          |  |                              | 1,283     |             |   | 1,580    
|Income taxes                                        |  |                              | 331       |             |   | 482      
|                                                    |  |                              |           |             |   |          
|Net income                                          |  | $                            | 952       |             | $ | 1,098    
|                                                    |  |                              |           |             |   |          
|Net income per sharebasic                          |  | $                            | 0.33      |             | $ | 0.51     
|                                                    |  |                              |           |             |   |          
|Net income per sharediluted                        |  | $                            | 0.33      |             | $ | 0.51     
|                                                    |  |                              |           |             |   |          
|Weighted average shares outstandingbasic           |  |                              | 2,894,067 |             |   | 2,133,275
|                                                    |  |                              |           |             |   |          
|Weighted average shares outstandingdiluted         |  |                              | 2,911,899 |             |   | 2,150,583
|                                                    |  |                              |           |             |   |          

See accompanying Notes to Consolidated Financial Statements.



4



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders Equity

Three months ended March 31, 2007 and 2006

(Dollars in thousands, except per share data)



|                                                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   |        |  
|----------------------------------------------------------------------------------------------- | ------ | ------------ | ------ | ------ | ------- | ------- | ------- | -------- | -------- | -------- | -------------------------------- | ----- | ------ | ----------------------------- | ---- | ---- | ------------- | ------ | ------ | ----- | ------ | ----- |  | - | ----- | - |  | - | ------ | -
|                                                                                                |        | Common Stock |        |        | Capital |         |         | Retained |          |          | Deferredcompensation- restricted |       |        | Accumulatedothercomprehensive |      |      | Comprehensive |        |        | Total |       
|                                                                                                | Number |              | Amount |        |         | surplus |         |          | earnings |          |                                  | stock |        |                               | loss |      |               | income |        |      
|Balance January 1, 2006                                                                         |        | 2,040,042    |        | $      | 7,140   |         |         | $        | 5,408    |          |                                  | $     | 23,724 |                               |      | $    | (255          | )      |        | $     | (1,452 | )     |  |   |       |   |  | $ | 34,565 |  
|Unrealized loss, net of income tax benefit of $ 176                                             |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       | (281   | )     |  | $ | (281  | ) |  |   | (281   | )
|Net income                                                                                      |        |              |        |        |         |         |         |          |          |          |                                  |       | 1,098  |                               |      |      |               |        |        |       |        |       |  |   | 1,098 |   |  |   | 1,098  |  
|                                                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                      |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  | $ | 817   |   |  |   |        |  
|                                                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   |        |  
|Issuance of common stock                                                                        |        | 862,500      |        |        | 3,019   |         |         |          | 23,503   |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   | 26,522 |  
|Expenses related to issuance of common stock                                                    |        |              |        |        |         |         |         |          | (2,169   | )        |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   | (2,169 | )
|Stock based compensation                                                                        |        |              |        |        | 15      |         |         |          | 29       |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   | 44     |  
|Reclass of deferred restricted stock compensation due to adoption of SFAS No. 123R (See note 4) |        |              |        |        | (58     | )       |         |          | (197     | )        |                                  |       |        |                               |      |      | 255           |        |        |       |        |       |  |   |       |   |  |   |       |  
|Cash dividends ($0.17 per share)                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       | (493   | )                             |      |      |               |        |        |       |        |       |  |   |       |   |  |   | (493   | )
|                                                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   |        |  
|Balance March 31, 2006                                                                          |        | 2,902,542    |        | $      | 10,116  |         |         | $        | 26,574   |          |                                  | $     | 24,329 |                               |      | $    |              |        |        | $     | (1,733 | )     |  |   |       |   |  | $ | 59,286 |  
|                                                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   |        |  
|                                                                                                |        |              |        |        |         |         |        
|                                                                                                |        | Common Stock |        |        | Capital |         |         | Retained |          |          | Deferredcompensation-restricted  |       |        | Accumulatedothercomprehensive |      |      | Comprehensive |        |        |       |       
|                                                                                                |        | Number       |        | Amount |         |         | surplus |          |          | earnings |                                  |       | stock  |                               |      | loss |               |        | income |       |        | Total | 
|Balance January 1, 2007                                                                         |        | 2,902,242    |        | $      | 10,119  |         |         | $        | 26,680   |          |                                  | $     | 27,333 |                               |      | $    |              |        |        | $     | (1,339 | )     |  |   |       |   |  | $ | 62,793 |  
|Unrealized gain, net of income tax expense of $ 189                                             |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       | 302    |       |  | $ | 302   |   |  |   | 302    |  
|Net income                                                                                      |        |              |        |        |         |         |         |          |          |          |                                  |       | 952    |                               |      |      |               |        |        |       |        |       |  |   | 952   |   |  |   | 952    |  
|                                                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   |        |  
|Total comprehensive income                                                                      |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  | $ | 1,254 |   |  |   |        |  
|                                                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   |        |  
|Stock options exercised                                                                         |        | 19,750       |        |        | 69      |         |         |          | 168      |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   | 237    |  
|Stock based compensation                                                                        |        |              |        |        |         |         |         |          | 49       |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   | 49     |  
|Cash dividends ($0.175 per share)                                                               |        |              |        |        |         |         |         |          |          |          |                                  |       | (512   | )                             |      |      |               |        |        |       |        |       |  |   |       |   |  |   | (512   | )
|                                                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   |        |  
|Balance March 31, 2007                                                                          |        | 2,921,992    |        | $      | 10,188  |         |         | $        | 26,897   |          |                                  | $     | 27,773 |                               |      | $    |              |        |        | $     | (1,037 | )     |  |   |       |   |  | $ | 63,821 |  
|                                                                                                |        |              |        |        |         |         |         |          |          |          |                                  |       |        |                               |      |      |               |        |        |       |        |       |  |   |       |   |  |   |        |  

See accompanying Notes to Consolidated Financial Statements.



5



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Three months ended March 31, 2007 and 2006

(Dollars in thousands)



|                                                                                    |  |                             |         |   |             |   |        |  
|----------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ----------- | - | ------ | -
|                                                                                    |  | Three months endedMarch 31, |        
|                                                                                    |  | 2007                        |         |   | 2006        |  
|                                                                                    |  | (unaudited)                 |         |   | (unaudited) |  
|Cash flows from operating activities:                                               |  |                             |         |   |             |   |        |  
|Net income                                                                          |  | $                           | 952     |   |             | $ | 1,098  |  
|Adjustments to reconcile net income to net cash provided by operating activities:   |  |                             |         |   |             |   |        |  
|Depreciation                                                                        |  |                             | 399     |   |             |   | 294    |  
|Amortization of premium on investment securities, net                               |  |                             | 15      |   |             |   | 31     |  
|Provision for loan losses                                                           |  |                             | 390     |   |             |   | 200    |  
|Net (charge-offs)/recoveries on loans                                               |  |                             | (12     | ) |             |   | 2      |  
|Stock based compensation                                                            |  |                             | 49      |   |             |   | 44     |  
|Decrease in accrued interest receivable                                             |  |                             | 512     |   |             |   | 31     |  
|Income from Bank owned life insurance                                               |  |                             | (72     | ) |             |   | (65    | )
|(Increase) decrease in other assets                                                 |  |                             | (902    | ) |             |   | 901    |  
|Increase in accrued interest payable                                                |  |                             | 331     |   |             |   | 296    |  
|Decrease in other liabilities, net                                                  |  |                             | (499    | ) |             |   | (842   | )
|                                                                                    |  |                             |         |   |             |   |        |  
|Net cash provided by operating activities                                           |  |                             | 1,163   |   |             |   | 1,990  |  
|                                                                                    |  |                             |         |   |             |   |        |  
|Cash flows from investing activities:                                               |  |                             |         |   |             |   |        |  
|Proceeds from maturities of investment securities classified as available-for-sale  |  |                             | 1,835   |   |             |   | 1,994  |  
|Purchases of investment securities classified as available-for-sale                 |  |                             | (3,923  | ) |             |   | (2,000 | )
|Purchase (redemption) of Federal Home Loan Bank common stock                        |  |                             | (28     | ) |             |   | 134    |  
|Purchases of premises and equipment                                                 |  |                             | (1,606  | ) |             |   | (944   | )
|Net loan originations                                                               |  |                             | (391    | ) |             |   | (8,200 | )
|                                                                                    |  |                             |         |   |             |   |        |  
|Net cash used by investing activities                                               |  |                             | (4,113  | ) |             |   | (9,016 | )
|                                                                                    |  |                             |         |   |             |   |        |  
|Cash flows from financing activities:                                               |  |                             |         |   |             |   |        |  
|Net increase (decrease) in deposits                                                 |  |                             | (9,269  | ) |             |   | 17,279 |  
|Net increase (decrease) in borrowings                                               |  |                             | 173     |   |             |   | (7,360 | )
|Dividends paid                                                                      |  |                             | (493    | ) |             |   | (326   | )
|Net proceeds from issuance of common stock                                          |  |                             | 237     |   |             |   | 24,353 |  
|                                                                                    |  |                             |         |   |             |   |        |  
|Net cash provided (used) by financing activities                                    |  |                             | (9,352  | ) |             |   | 33,946 |  
|                                                                                    |  |                             |         |   |             |   |        |  
|Increase (decrease) in cash and cash equivalents                                    |  |                             | (12,302 | ) |             |   | 26,920 |  
|Cash and cash equivalents at beginning of period                                    |  |                             | 40,057  |   |             |   | 18,839 |  
|                                                                                    |  |                             |         |   |             |   |        |  
|Cash and cash equivalents at end of period                                          |  | $                           | 27,755  |   |             | $ | 45,759 |  
|                                                                                    |  |                             |         |   |             |   |        |  
|Cash paid during the period:                                                        |  |                             |         |   |             |   |        |  
|Interest                                                                            |  | $                           | 4,532   |   |             | $ | 3,134  |  
|Income taxes                                                                        |  |                             | 333     |   |             |   |       |  
|Supplemental disclosures of noncash financing and investing activities:             |  |                             |         |   |             |   |        |  
|Cash dividends declared but not paid                                                |  | $                           | 512     |   |             | $ | 493    |  
|Unrealized losses on available-for-sale securities, net of deferred taxes           |  |                             | 302     |   |             |   | (281   | )
|Investment in SBIC transferred from other assets to available-for-sale securities   |  |                             | 1,000   |   |             |   |       |  
|Transfer from loans to real estate and reposessions acquired in settlement of loans |  |                             | 26      |   |             |   |       |  
|Reclass of junior subordinated debt from long-term to short-term borrowings         |  |                             | 10,310  |   |             |   |       |  

See accompanying Notes to Consolidated Financial Statements.



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(1) Basis of Presentation

The consolidated financial
statements include the accounts of ECB Bancorp, Inc. (Bancorp) and its wholly-owned subsidiary, The East Carolina Bank (the Bank) (Bancorp and the Bank collectively referred to hereafter as the Company). The Bank
has one wholly-owned subsidiary, ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All intercompany transactions and balances are eliminated in consolidation. The preparation of the
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ from those estimates.

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

All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The notes to consolidated
financial statements in Bancorps annual report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the period ended March 31, 2007, are not necessarily indicative of the
results that may be expected for the year ending December 31, 2007.

Reclassification

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

(2) Net Income Per Share

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

Diluted net income per share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the
reporting period. Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized is considered proceeds using the treasury
stock method. For the three months ended March 31, 2007 and 2006, diluted weighted average shares outstanding increased by 9,267 and 16,657, respectively, due to the dilutive impact of restricted stock.

In computing diluted net income per share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective
exercise prices, with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and
the number of shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. For the three months ended
March 31, 2007 and 2006, diluted weighted average shares outstanding increased by 8,565 and 651, respectively, due to the dilutive impact of options.



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##### Table of Contents

The following is a reconciliation of the numerators and denominators used in computing basic and diluted
net income per share.



|                              |  |                                                                                          |       |                     |           |                 |   |     
|----------------------------- |  | ---------------------------------------------------------------------------------------- | ----- | ------------------- | --------- | --------------- | - | ----
|                              |  | Three months ended March 31,
2007(Dollars in thousands, except share and per share data)
|                              |  | Income(Numerator)                                                                        |       | Shares(Denominator) |           | Per ShareAmount
|Basic net income per share    |  | $                                                                                        | 952   |                     | 2,894,067 |                 | $ | 0.33
|                              |  |                                                                                          |       |                     |           |                 |   |     
|Effect of dilutive securities |  |                                                                                          |      |                     | 17,832    |                 |   |     
|                              |  |                                                                                          |       |                     |           |                 |   |     
|Diluted net income per share  |  | $                                                                                        | 952   |                     | 2,911,899 |                 | $ | 0.33
|                              |  |                                                                                          |       |                     |           |                 |   |     
|                              | 
|                              |  | Three months ended March 31, 2006(Dollars in thousands, except per share data)          
|                              |  | Income(Numerator)                                                                        |       | Shares(Denominator) |           | Per ShareAmount
|Basic net income per share    |  | $                                                                                        | 1,098 |                     | 2,133,275 |                 | $ | 0.51
|                              |  |                                                                                          |       |                     |           |                 |   |     
|Effect of dilutive securities |  |                                                                                          |      |                     | 17,308    |                 |   |     
|                              |  |                                                                                          |       |                     |           |                 |   |     
|Diluted net income per share  |  | $                                                                                        | 1,098 |                     | 2,150,583 |                 | $ | 0.51
|                              |  |                                                                                          |       |                     |           |                 |   |     

(3) Stock Option Plan

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

The Company adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R. Under this
application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the date of adoption.

Compensation cost charged to income was approximately $27 thousand and $19 thousand for the three months ended March 31, 2007 and 2006,
respectively, as a result of the implementation of SFAS No. 123R. No income tax benefit was recognized for share-based compensation, as the Company does not have any outstanding nonqualified stock options.



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##### Table of Contents

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

The weighted-average fair value of each stock option grant
is estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average estimated fair values of stock option grants and the assumptions that were used in calculating such fair values were based on estimates at the date
of grant as follows:



|                                                               |  |                              |       |   |      |   |       |  
|-------------------------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ----- | -
|                                                               |  | Three months ended March 31, |      
|                                                               |  | 2007                         |       |   | 2006 |  
|Weighted-average fair value of options granted during the year |  | $                            | 8.73  |   |      | $ | 8.75  |  
|                                                               |  |                             
|Assumptions:                                                   |  |                              |       |   |      |   |       |  
|Average risk free interest rate                                |  |                              | 4.66  | % |      |   | 4.52  | %
|Average expected volatility                                    |  |                              | 24.82 | % |      |   | 30.37 | %
|Expected dividend rate                                         |  |                              | 2.40  | % |      |   | 2.40  | %
|Expected life in years                                         |  |                              | 7.00  |   |      |   | 7.01  |  

A summary of option activity under the Plan as of March 31, 2007, and changes during the
three-month period ended March 31, 2007 is presented below:



|                                 |  |                                               |   |  |                              |       |                                 |            |                         |   |    
|-------------------------------- |  | --------------------------------------------- | - |  | ---------------------------- | ----- | ------------------------------- | ---------- | ----------------------- | - | ---
|                                 |  | OptionsOutstanding                            |   |  | WeightedAverageExercisePrice |       | AverageRemainingContractualTerm |            | AggregateIntrinsicValue
|                                 |  | (Dollars in thousands, except per share data)
|Outstanding at December 31, 2006 |  | 61,476                                        |   |  | $                            | 21.83 |                                 |            |                         |   |    
|Granted                          |  | 16,525                                        |   |  | $                            | 32.60 |                                 |            |                         |   |    
|Forfeited                        |  | 1                                             |   |  | $                            | 13.25 |                                 |            |                         |   |    
|Exercised                        |  | (19,750                                       | ) |  | $                            | 11.98 |                                 |            |                         |   |    
|                                 |  |                                               |   |  |                              |       |                                 |            |                         |   |    
|Outstanding at March 31, 2007    |  | 58,252                                        |   |  | $                            | 28.22 |                                 | 7.79 years |                         | $ | 290
|                                 |  |                                               |   |  |                              |       |                                 |            |                         |   |    
|Exercisable at March 31, 2007    |  | 16,645                                        |   |  | $                            | 23.06 |                                 | 4.98 years |                         | $ | 169
|                                 |  |                                               |   |  |                              |       |                                 |            |                         |   |    

There were 15,802 shares of non-vested restricted stock as of December 31, 2006. 6,589 shares
vested on January 1, 2007 resulting in a balance of non-vested restricted stock of 9,213 shares as of March 31, 2007.



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##### Table of Contents

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



|                            |  |                        |     |                       |   |       |  |   |    
|--------------------------- |  | ---------------------- | --- | --------------------- | - | ----- |  | - | ---
|                            |  | StockOptions           |     | RestrictedStockGrants |   | Total
|                            |  | (Dollars in thousands)
|April 1  December 31, 2007 |  | $                      | 95  |                       | $ | 65    |  | $ | 160
|2008                        |  |                        | 110 |                       |   | 51    |  |   | 161
|2009                        |  |                        | 42  |                       |   |      |  |   | 42 
|2010                        |  |                        | 29  |                       |   |      |  |   | 29 
|2011                        |  |                        | 14  |                       |   |      |  |   | 14 
|2012                        |  |                        | 1   |                       |   |      |  |   | 1  
|                            |  |                        |     |                       |   |       |  |   |    
|Total                       |  | $                      | 291 |                       | $ | 116   |  | $ | 407
|                            |  |                        |     |                       |   |       |  |   |    

The intrinsic value of options exercised during the three months ended March 31, 2007 was $422 thousand. $237
thousand was received for options exercised.

(4) Postretirement Benefits

The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met
minimum age and service requirements. Net periodic postretirement benefit cost for the three months ended March 31, 2007 and 2006 includes the following components.



|                                         |  |                              |    |   |      |   |   
|---------------------------------------- |  | ---------------------------- | -- | - | ---- | - | --
|Components of Net Periodic Benefit Cost  |  | Three months ended March 31,
|                                         |  | 2007                         |    |   | 2006
|                                         |  | (Dollars in thousands)      
|Service cost                             |  | $                            | 1  |   |      | $ | 2 
|Interest cost                            |  |                              | 11 |   |      |   | 11
|Prior service cost                       |  |                              | (2 | ) |      |   |  
|                                         |  |                              |    |   |      |   |   
|Net periodic postretirement benefit cost |  | $                            | 10 |   |      | $ | 13
|                                         |  |                              |    |   |      |   |   

The Company expects to contribute $40 thousand to its postretirement benefit plan in 2007. No
contributions were made in the first quarter of 2007. For additional information related to the plan, refer to the Companys Form 10-K for the year ended December 31, 2006.



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##### Table of Contents

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

The following table sets forth the amount of unrealized losses (that is, the amount by which cost or amortized cost exceeds fair value), and the related
fair value of investments with unrealized losses, none of which are considered to be other than temporarily impaired. The table is segregated into investments that have been in continuous unrealized-loss position for less than 12 months from those
that have been in a continuous unrealized-loss position for more than 12 months, as of March 31, 2007:



|                                                        |  |                        |       |                     |   |            |  |                   |        |            |   |                   |  |   |        |  |   |      
|------------------------------------------------------- |  | ---------------------- | ----- | ------------------- | - | ---------- |  | ----------------- | ------ | ---------- | - | ----------------- |  | - | ------ |  | - | -----
|                                                        |  | Less than 12 months    |       | 12 months or longer |   | Total     
|                                                        |  | (Dollars in thousands)
|Description of Securities                               |  | Fair Value             |       | Unrealized Losses   |   | Fair Value |  | Unrealized Losses |        | Fair Value |   | Unrealized Losses
|                                                        |  |                        |       |                     |  
|Government-sponsored enterprises and Farm Credit bonds. |  | $                      | 2,487 |                     | $ | 7          |  | $                 | 21,501 |            | $ | 211               |  | $ | 23,988 |  | $ | 218  
|Obligations of states and political subdivisions        |  |                        | 3,528 |                     |   | 49         |  |                   | 15,189 |            |   | 398               |  |   | 18,717 |  |   | 447  
|Mortgage-backed securities                              |  |                        |      |                     |   |           |  |                   | 44,876 |            |   | 1,155             |  |   | 44,876 |  |   | 1,155
|Equity securities                                       |  |                        | 910   |                     |   | 90         |  |                   |       |            |   |                  |  |   | 910    |  |   | 90   
|                                                        |  |                        |       |                     |   |            |  |                   |        |            |   |                   |  |   |        |  |   |      
|Total                                                   |  | $                      | 6,925 |                     | $ | 146        |  | $                 | 81,566 |            | $ | 1,764             |  | $ | 88,491 |  | $ | 1,910
|                                                        |  |                        |       |                     |   |            |  |                   |        |            |   |                   |  |   |        |  |   |      

As of March 31, 2007, management has concluded that the unrealized losses above (which
consisted of 130 securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost. The
losses above with the exception of the equity securities are on securities that have contractual maturity dates and are primarily related to market interest rates. Securities that have been in an unrealized loss position for longer than 1 year
include fifty-four (54) municipal obligations, forty-one (41) mortgage-backed securities and twenty-one (21) securities of U.S. government sponsored enterprises. The unrealized losses associated with these securities are not
considered to be other-than-temporary because they are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or the issuer.

During the first quarter 2007, Triangle Mezzanine converted from a privately held SBIC to a publicly traded entity called Triangle Capital Corporation
(TCAP). As a result, the Bank reclassified the asset as an equity security in its investment portfolio with no gain or loss on the transaction since the proceeds to the Bank equaled its initial cost of the investment.

(6) Comprehensive Income

A summary of comprehensive
income is as follows:



|                                                                                                  |                        |                             |       |  |   |       |  
|------------------------------------------------------------------------------------------------- | ---------------------- | --------------------------- | ----- |  | - | ----- | -
|                                                                                                  |                        | Three months endedMarch 31, |      
|                                                                                                  | 2007                   |                             | 2006  | 
|                                                                                                  | (Dollars in thousands) |                            
|Net Income                                                                                        |                        | $                           | 952   |  | $ | 1,098 |  
|Other comprehensive income (loss):                                                                |                        |                             |       |  |   |       |  
|Net increase (decrease) in the fair value of investment securities available for sale, net of tax |                        |                             | 302   |  |   | (281  | )
|                                                                                                  |                        |                             |       |  |   |       |  
|Total comprehensive income                                                                        |                        | $                           | 1,254 |  | $ | 817   |  
|                                                                                                  |                        |                             |       |  |   |       |  

(7) Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information
by the Company.

In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in
Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48 prescribes a
recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007 with no material impact to its financial position,
results of operations or cash flows.



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##### Table of Contents

In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS)
No. 157, Fair Value Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This
standard does not require any new fair value measurements, but rather eliminates inconsistencies found in various prior pronouncements. SFAS No. 157 is effective for the Company on January 1, 2008 and is not expected to have a significant
impact on the Companys financial statements.

In September 2006, the FASB ratified the consensuses reached by the FASBs
Emerging Issues Task Force (EITF) relating to EITF 06-4 Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 states that an employer
accounting for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106,
Employers Accounting for Postretirement Benefits Other Than Pensions, or Accounting Principles Board (APB) Opinion No. 12, Omnibus Opinion1967. EITF 06-4 is effective for fiscal years beginning
after December 15, 2007. The Company has not determined the effect of this statement on its consolidated financial statements.

In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. SFAS No. 159 allows entities to measure financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected must be reported in earnings at each subsequent reporting date. The fair value option can be applied instrument by
instrument, however the election is irrevocable. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect the statement to have an effect on its financial position, results of operations or
cash flows.

In March 2007, the FASB ratified the consensuses reached by the EITF relating to EITF 06-10, Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements. EITF 06-10 established that an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance
with either SFAS No. 106 or APB No. 12 if the employer has agreed to maintain a life insurance policy during the employees retirement or provide the employee with a death benefit based on the substantive arrangement with the
employee. EITF 06-10 is effective for fiscal years beginning after December 15, 2007 and the Company has not determined the effect of this statement on its consolidated financial statements.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on
the Companys financial position, results of operations and cash flows.



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

Forward-Looking Statements

Statements in this Report and exhibits relating to plans, strategies,
economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to
risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, risk factors discussed in the Companys Annual Report on Form 10-K and in
other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as may, will, should, could,
expects, plans, intends, anticipates, believes, estimates, predicts, forecasts, potential or continue, or similar terms or the
negative of these terms, or other statements concerning opinions or judgments of the Companys management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the
financial success or changing strategies of the Companys customers, actions of government regulators, the level of



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##### Table of Contents

market interest rates, weather and similar conditions, particularly the effect of hurricanes on the Companys banking and operations facilities and on
the Companys customers and the communities in which it does business, changes in general economic conditions and the real estate values in our banking market (particularly changes that affect our loan portfolio), the abilities of our borrowers
to repay their loans, and the values of loan collateral. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or
achievements. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company has no obligations, and does not intend, to update these forward-looking
statements.

Executive Summary

ECB
Bancorp, Inc. is a bank holding company headquartered in Engelhard, North Carolina. Our wholly owned subsidiary, The East Carolina Bank (the Bank) is a state-chartered community bank that was founded in 1919. For the purpose of this
discussion, we, us and our refers to the Bank and the bank holding company as a single, consolidated entity unless the context otherwise indicates.

As of March 31, 2007, we had consolidated assets of approximately $616.0 million, total loans of approximately $418.3 million, total deposits of
approximately $503.0 million and shareholders equity of approximately $63.8 million. For the three months ended March 31, 2007, we had net income of $1.0 million or $0.33 basic and diluted earnings per share, compared to net income of
$1.1 million, or $0.51 basic and diluted earnings per share for the three months ended March 31, 2006. The decrease in earnings per share is primarily due to the sale of 862,500 additional shares of common equity during the first quarter of
2006 for $26.5 million and a decrease in earnings for the first quarter of 2007. The proceeds were used to support the Banks various strategic initiatives for expansion and growth over the next several years.

Critical Accounting Policies

The Companys
significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2006. Of these significant accounting policies, the Company
considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires managements most subjective and complex judgments. In addition, changes in economic conditions can have a significant
impact on the allowance for loan losses and therefore the provision for loan losses and results of operations. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing
that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Companys assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the
discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Companys allowance for loan losses and related
matters, see Asset Quality.



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##### Table of Contents

Comparison of the Results of Operations for the Three Month Periods Ended March 31, 2007 and 2006

Results of Operations

The
following table summarizes components of income and expense and the changes in those components for the three-month period ended March 31, 2007 as compared to the same period in 2006.



|                           |                            |                                             |                            |  |                            |       |  |   |       |   |  |       |  
|-------------------------- | -------------------------- | ------------------------------------------- | -------------------------- |  | -------------------------- | ----- |  | - | ----- | - |  | ----- | -
|                           |                            | Condensed Consolidated Statements of Income |                           
|                           | For the Three months ended |                                             | For the Three months ended |  | Changes from thePrior Year |      
|                           | March 31, 2007             |                                             | March 31, 2006             |  | Amount                     |       |  | % |      
|                           | (Dollars in thousands)     |                                            
|Gross interest income      |                            | $                                           | 9,816                      |  | $                          | 8,297 |  | $ | 1,519 |   |  | 18.3  |  
|Gross interest expense     |                            |                                             | 4,863                      |  |                            | 3,430 |  |   | 1,433 |   |  | 41.8  |  
|                           |                            |                                             |                            |  |                            |       |  |   |       |   |  |       |  
|                           |                            |                                             |                            | 
|Net interest income        |                            |                                             | 4,953                      |  |                            | 4,867 |  |   | 86    |   |  | 1.8   |  
|Provision for loan losses  |                            |                                             | 390                        |  |                            | 200   |  |   | 190   |   |  | 95.0  |  
|                           |                            |                                             |                            |  |                            |       |  |   |       |   |  |       |  
|Net interest income after  |                            |                                             |                            |  |                            |       |  |   |       |   |  |       |  
|Provision for loan losses  |                            |                                             | 4,563                      |  |                            | 4,667 |  |   | (104  | ) |  | (2.2  | )
|                           |                            |                                             |                            | 
|Noninterest income         |                            |                                             | 1,681                      |  |                            | 1,315 |  |   | 366   |   |  | 27.8  |  
|Noninterest expense        |                            |                                             | 4,961                      |  |                            | 4,402 |  |   | 559   |   |  | 12.7  |  
|                           |                            |                                             |                            |  |                            |       |  |   |       |   |  |       |  
|                           |                            |                                             |                            | 
|Income before income taxes |                            |                                             | 1,283                      |  |                            | 1,580 |  |   | (297  | ) |  | (18.8 | )
|Income tax provision       |                            |                                             | 331                        |  |                            | 482   |  |   | (151  | ) |  | (31.3 | )
|                           |                            |                                             |                            |  |                            |       |  |   |       |   |  |       |  
|Net income                 |                            | $                                           | 952                        |  | $                          | 1,098 |  | $ | (146  | ) |  | (13.3 | )
|                           |                            |                                             |                            |  |                            |       |  |   |       |   |  |       |  

Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities, and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of
operating income. Net interest income for the three months ended March 31, 2007 was $5.0 million, an increase of $86 thousand or 1.8% when compared to net interest income of $4.9 million for the three months ended March 31, 2006.

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

Interest income increased $1.5 million or 18.3% for the three months ended
March 31, 2007 compared to the same three months of 2006. The increase for the three months ended March 31, 2007 is due to increases in average interest rates earned on our average earning assets and increases in volume of average earning
assets of $57.4 million as compared to the same period in 2006. We funded the increases in interest-earning assets primarily with in-market certificates of deposit (CDs). Supplementing the additional earnings from increased volumes
of earning assets was the increase in yield on earning assets. The tax equivalent yield on average earning assets increased 42 basis points for the quarter ended March 31, 2007 to 7.24% from 6.82% for the same period in 2006. Management
attributes the increase in the yield on our earning assets to the increase in short-term market interest rates. Approximately $224.9 million or 53.8% of our loan portfolio consists of variable rate loans that adjust with the movement of the national
prime rate. As a result, composite yield on our loans increased approximately 62 basis points for the first quarter of 2007 compared to the first quarter of 2006.



14



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Conversely, our average cost of funds during the first quarter of 2007 was 4.32%, an increase of 108
basis points when compared to 3.24% for the first quarter of 2006. Average rates paid on bank certificates of deposit increased 104 basis points from 3.96% for the quarter ended March 31, 2006 to 5.00% for the quarter ended March 31, 2007,
while our average cost of borrowed funds increased 173 basis points during the first quarter of 2007 compared to the same period in 2006. Total interest expense increased $1.4 million or 41.8% during the first quarter of 2007 compared to the same
period in 2006, primarily the result of increased market rates paid on borrowed funds and certificates of deposit.

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

Our annualized net interest margin, on a tax-equivalent basis and net of the allowance for loan losses, for the three months ended March 31, 2007 was 3.71% compared to 4.05% in the first quarter of 2006 while our
net interest spread decreased 66 basis points during the same period. The decrease in our net interest margin and spread is the result of increased competitive pricing for money market accounts and certificates of deposit. Average interest-bearing
liabilities, as a percentage of interest-earning assets for the quarters ended March 31, 2007 and 2006 was 81.8% and 85.6%, respectively.

Margin pressure continued during the first quarter of 2007 and we expect margins to decline further over the next several months. The Federal Reserve stopped raising rates in June 2006 after seventeen consecutive rate increases. The
increase in loan yields this generated was greater than the cost of funds in the early stages of the monetary policy tightening phase. We are now experiencing the effect of repricing our interest-bearing liabilities at much higher rates causing our
cost of funds to rise faster than the yields on interest-earning assets over the past three months. A second factor causing our margin to decline is the change in deposit mix. Our funding growth year-over-year has been, primarily, in the form of
CDs and we have experienced a decline in transaction accounts. Balances in low cost, non-maturity deposit accounts are declining as customers who parked money in these accounts when rates were low are now moving to higher yielding CDs.
Management plans to improve net interest income by growing our balance sheet while maintaining a constant interest margin. However, this expectation may not be realized and our net interest margin could decline.

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



15



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

For the three months ended March 31, 2007 and 2006



|                                                                       |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|---------------------------------------------------------------------- | ---------------------- | -------------- | ------- | --------------- | ---- | - | -------------- | - | -------------- |  | --------------- | ------- |  | -------------- | - |  | - | -----
|                                                                       |                        | AverageBalance |         | 2007 Yield/Rate |      |   | Income/Expense |   | AverageBalance |  | 2006 Yield/Rate |         |  | Income/Expense
|                                                                       | (Dollars in thousands)
|Assets                                                                 |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|Loans  net (1)                                                        |                        | $              | 409,796 |                 | 8.03 | % |                | $ | 8,110          |  | $               | 386,301 |  | 7.41           | % |  | $ | 7,060
|Taxable securities                                                     |                        |                | 96,373  |                 | 4.74 |   |                |   | 1,127          |  |                 | 77,043  |  | 4.46           |   |  |   | 848  
|Non-taxable securities (2)                                             |                        |                | 32,778  |                 | 5.66 |   |                |   | 458            |  |                 | 29,018  |  | 5.63           |   |  |   | 403  
|Other investments                                                      |                        |                | 19,731  |                 | 5.69 |   |                |   | 277            |  |                 | 8,914   |  | 5.60           |   |  |   | 123  
|                                                                       |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|Total interest- earning assets                                         |                        |                | 558,678 |                 | 7.24 |   |                | $ | 9,972          |  |                 | 501,276 |  | 6.82           |   |  | $ | 8,434
|Cash and due from banks                                                |                        |                | 15,259  |                 |      |   |                |   |                |  |                 | 21,158  |  |                |   |  |   |      
|Bank premises and equipment, net                                       |                        |                | 23,748  |                 |      |   |                |   |                |  |                 | 19,251  |  |                |   |  |   |      
|Other assets                                                           |                        |                | 18,185  |                 |      |   |                |   |                |  |                 | 17,859  |  |                |   |  |   |      
|                                                                       |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|Total assets                                                           |                        | $              | 615,870 |                 |      |   |                |   |                |  | $               | 559,544 |  |                |   |  |   |      
|                                                                       |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|                                                                       |                        |                |         |                 |      |  
|Liabilities and Shareholders Equity                                   |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|Interest-bearing deposits                                              |                        | $              | 415,463 |                 | 4.08 |   |                | $ | 4,183          |  | $               | 385,796 |  | 3.05           |   |  | $ | 2,904
|Short-term borrowings                                                  |                        |                | 41,567  |                 | 6.63 |   |                |   | 680            |  |                 | 10,230  |  | 4.44           |   |  |   | 112  
|Long-term obligations                                                  |                        |                |        |                 |     |   |                |   |               |  |                 | 33,194  |  | 5.06           |   |  |   | 414  
|                                                                       |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|Total interest- bearing liabilities                                    |                        |                | 457,030 |                 | 4.32 |   |                |   | 4,863          |  |                 | 429,220 |  | 3.24           |   |  |   | 3,430
|Non-interest-bearing deposits                                          |                        |                | 89,820  |                 |      |   |                |   |                |  |                 | 88,767  |  |                |   |  |   |      
|Other liabilities                                                      |                        |                | 5,534   |                 |      |   |                |   |                |  |                 | 3,396   |  |                |   |  |   |      
|Shareholders equity                                                   |                        |                | 63,486  |                 |      |   |                |   |                |  |                 | 38,161  |  |                |   |  |   |      
|                                                                       |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|Total liabilities and Shareholders equity                             |                        | $              | 615,870 |                 |      |   |                |   |                |  | $               | 559,544 |  |                |   |  |   |      
|                                                                       |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|Net interest income and net yield on Interest-earning Assets (FTE) (3) |                        |                |         |                 | 3.71 |   |                | $ | 5,109          |  |                 |         |  | 4.05           |   |  | $ | 5,004
|                                                                       |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      
|Interest rate spread (FTE) (4)                                         |                        |                |         |                 | 2.92 | % |                |   |                |  |                 |         |  | 3.58           | % |  |   |      
|                                                                       |                        |                |         |                 |      |   |                |   |                |  |                 |         |  |                |   |  |   |      

---

|(1) | Average loans include non-accruing loans, net of allowance for loan losses. Amortization of deferred loan fees of $235 thousand and $136 thousand for periods ended March 31,
2007 and 2006, respectively, are included in interest income.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $156
thousand and $137 thousand for periods ended March 31, 2007 and 2006, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



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Change in Interest Income and Expense on Tax Equivalent Basis

For the three months ended March 31, 2007 and 2006

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



|                           |                        |                       |      |          |  |   |       |   |  |   |       |  
|-------------------------- | ---------------------- | --------------------- | ---- | -------- |  | - | ----- | - |  | - | ----- | -
|                           |                        | 2007 compared to 2006 |     
|                           | Volume (1)             |                       |      | Rate (1) |  |   | Net   |  
|                           | (Dollars in thousands) |                      
|Loans                      |                        | $                     | 447  |          |  | $ | 603   |   |  | $ | 1,050 |  
|Taxable securities         |                        |                       | 219  |          |  |   | 60    |   |  |   | 279   |  
|Non-taxable securities (2) |                        |                       | 52   |          |  |   | 3     |   |  |   | 55    |  
|Other investments          |                        |                       | 151  |          |  |   | 3     |   |  |   | 154   |  
|                           |                        |                       |      |          |  |   |       |   |  |   |       |  
|Interest income            |                        |                       | 869  |          |  |   | 669   |   |  |   | 1,538 |  
|                           |                        |                       |     
|Interest-bearing deposits  |                        |                       | 261  |          |  |   | 1,018 |   |  |   | 1,279 |  
|Short-term borrowings      |                        |                       | 428  |          |  |   | 140   |   |  |   | 568   |  
|Long-term obligations      |                        |                       | (210 | )        |  |   | (204  | ) |  |   | (414  | )
|                           |                        |                       |      |          |  |   |       |   |  |   |       |  
|Interest expense           |                        |                       | 479  |          |  |   | 954   |   |  |   | 1,433 |  
|                           |                        |                       |      |          |  |   |       |   |  |   |       |  
|Net interest income        |                        | $                     | 390  |          |  | $ | (285  | ) |  | $ | 105   |  
|                           |                        |                       |      |          |  |   |       |   |  |   |       |  

---

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

|(2) | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $156
thousand and $137 thousand for periods ended March 31, 2007 and 2006, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Provision for loan losses

The provision for loan losses charged to operations during the three months ended March 31, 2007 and 2006 was $390 thousand and $200 thousand,
respectively. The Bank had net charge-offs of $12 thousand for the quarter ended March 31, 2007 compared to net recoveries of $2 thousand during the first quarter of 2006. The increase in amount of provision for loan losses charged during the
period is due principally to increases of specific reserves on individual loans identified within our loan portfolio. We use the results of our allowance for loan loss model to estimate the dollar amount of provision expense needed to maintain the
adequacy of our allowance for loan losses. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as necessary.

Noninterest income

Noninterest income, principally charges and fees assessed for the use of our
services, is a significant contributor to net income. The following table presents the components of noninterest income for the three months ended March 31, 2007 and 2006.



|                                      |                        |                             |       |  |               |       |  |       |   
|------------------------------------- | ---------------------- | --------------------------- | ----- |  | ------------- | ----- |  | ----- | --
|                                      |                        | Three months endedMarch 31, |      
|                                      | 2007                   |                             | 2006  |  | PercentChange |      
|                                      | (Dollars in thousands) |                            
|Service charges on deposit accounts   |                        | $                           | 770   |  | $             | 793   |  | (2.9  | )%
|Other service charges and fees        |                        |                             | 326   |  |               | 216   |  | 50.9  |   
|Mortgage origination brokerage fees   |                        |                             | 248   |  |               | 214   |  | 15.9  |   
|Income from bank owned life insurance |                        |                             | 72    |  |               | 65    |  | 10.8  |   
|Other operating income                |                        |                             | 265   |  |               | 27    |  | 881.5 |   
|                                      |                        |                             |       |  |               |       |  |       |   
|Total noninterest income              |                        | $                           | 1,681 |  | $             | 1,315 |  | 27.8  | % 
|                                      |                        |                             |       |  |               |       |  |       |   



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Noninterest income increased $366 thousand or 27.8% to $1.7 million for the three months ended
March 31, 2007 compared to $1.3 million for the same period in 2006. This increase in noninterest income is primarily the result of the recapture of $240 thousand relating to the allowance for losses on unfunded loan commitments. During the
first quarter of 2007, management reviewed its allowance for unfunded loan commitments and determined such reserves were no longer needed. Management reviewed its unfunded loan commitments and found no outstanding loan commitments that were doubtful
of collection if the commitment were funded. Service charges on deposit accounts decreased slightly in the first quarter of 2007 relative to the same period in 2006 while other service charges and fees increased $110 thousand or 50.9% during the
first quarter of 2007 compared to the prior year period. The increase in other service charges and fees is principally due to increased merchant discount income of $58 thousand and increased brokerage fees of $35 thousand generated by our financial
services sales group.

Noninterest expense

Noninterest expense increased $559 thousand or 12.7% to $5.0 million for the three months ended March 31, 2007 from $4.4 million incurred in the same period in 2006. This increase is principally due to increases in professional fees of
$257 thousand and general increases in salary and benefits expense of $217 thousand. The following table presents the components of noninterest expense for the three months ended March 31, 2007 and 2006.



|                                       |      |                              |       |  |               |       |  |       |  
|-------------------------------------- | ---- | ---------------------------- | ----- |  | ------------- | ----- |  | ----- | -
|                                       |      | Three months ended March 31, |      
|                                       | 2007 |                              | 2006  |  | PercentChange |      
|Salaries                               |      | $                            | 1,980 |  | $             | 1,771 |  | 11.8  | %
|Retirement and other employee benefits |      |                              | 670   |  |               | 662   |  | 1.2   |  
|Occupancy                              |      |                              | 432   |  |               | 395   |  | 9.4   |  
|Equipment                              |      |                              | 499   |  |               | 418   |  | 19.4  |  
|Professional fees                      |      |                              | 306   |  |               | 49    |  | 524.5 |  
|Supplies                               |      |                              | 54    |  |               | 83    |  | (34.9 | )
|Telephone                              |      |                              | 132   |  |               | 107   |  | 23.4  |  
|Other operating expenses               |      |                              | 888   |  |               | 917   |  | (3.2  | )
|                                       |      |                              |       |  |               |       |  |       |  
|Total noninterest expenses             |      | $                            | 4,961 |  | $             | 4,402 |  | 12.7  | %
|                                       |      |                              |       |  |               |       |  |       |  

Salary expense increased $209 thousand over the prior year period as we continued to add business
development officers in some of our newer markets and additional originators to our expanding mortgage loan brokerage service. As of March 31, 2007, we had 210 full time equivalent employees and operated 20 full service banking offices and
three mortgage loan origination offices.

Occupancy expense increased $37 thousand or 9.4% to $432 thousand in the first three months of
2007 compared to $395 thousand in the prior year period. The largest component of the increase was building property insurance expense, which increased $22 thousand in the first quarter of 2007 relative to the same period of 2006.

Equipment expense increased during the first three months of 2007 by $81 thousand or 19.4% compared to the first quarter of 2006. Early in 2007
management elected to outsource the Banks check processing function. We accelerated the remaining depreciation on our check processing equipment and software to coincide with our back-office change-over scheduled to occur in June of 2007 which
resulted in depreciation expense increasing $97 thousand during the first quarter of 2007. The decision to outsource is expected to produce cost savings in future periods. The increase in depreciation expense was partially offset by decreased
miscellaneous equipment expense in the first period of 2007 compared to the same period of 2006.

Professional fees, which include audit,
legal and consulting fees, increased $257 thousand or 524.5% to $306 thousand for the three months ended March 31, 2007 from $49 thousand in the prior year period. Approximately half of the increase is the result of increased consulting fees
totaling $139 thousand for the first three months of 2007 compared to $16 thousand in the first quarter of 2006. Loan related consulting fees increased by $74 thousand during the first quarter of 2007 when compared to the same period of 2006 while
the Banks Human Resources department incurred $45 thousand in consultant fees during the first three months of 2007



18



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##### Table of Contents

compared to none in 2006. Audit and accounting fees for the first quarter of 2007 accounted for the other half of increased professional fees. We experienced
an increase of $133 thousand over the prior year period, of which $37 thousand can be contributed to Sarbanes-Oxley 404 compliance.

Other
operating expenses decreased $29 thousand or 3.2% from $917 thousand for the three months ended March 31, 2006 to $888 thousand for the three months ended March 31, 2007. During the first quarter of 2006 we incurred expense of $31 thousand
related to redemption of reward points on credit cards that were sold in the fourth quarter of 2005. The Bank had no similar expense in 2007.

Income
taxes

Income tax expense for the three months ended March 31, 2007 and 2006 was $331 thousand and $482 thousand, respectively,
resulting in effective tax rates of 25.8% and 30.5%, respectively. The decreased effective tax rate in 2007 is due to a higher ratio of tax-exempt to taxable income compared to 2006. The effective tax rates in both years differ from the federal
statutory rate of 34.0% primarily due to tax-exempt interest income.

Balance Sheet

Our total assets were $616.0 million at March 31, 2007, $624.1 million at December 31, 2006 and $581.8 million at March 31, 2006. Our
year-over-year asset growth was primarily funded by deposit growth and short-term borrowings. For the twelve months ended March 31, 2007, we grew our loans $23.3 million while our deposits grew by approximately $20.5 million. Year-over-year,
our earning assets grew primarily through loan originations. For the three months ended March 31, 2007, we experienced flat loan demand and a slight decline in deposits.

Loans

As of March 31, 2007, total loans had increased to $418.3 million, up 0.1% from total
loans of $417.9 million at December 31, 2006 and up 5.9% from total loans of $395.0 million at March 31, 2006. The year-over-year increase in loan demand is due, in part, to new businesses that are opening in our markets. Loan growth can
also be attributed to our branching efforts and the efforts of our lending team. For the three-months ended March 31, 2007, loan demand in all markets was a little flatter than we usually see at this time of year reflecting the caution with
which the economy is currently moving. We believe that general loan growth will regain momentum in the near term.

Asset Quality

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

Net charge-offs for the first quarter of 2007 totaled $12 thousand compared to net recoveries of $2 thousand during the
first quarter of 2006. The provision for loan losses charged to operations for the three months ended March 31, 2007 and 2006 was $390 thousand and $200 thousand, respectively. The following table presents an analysis of the changes in the
allowance for loan losses for the three months ended March 31, 2007 and 2006.



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##### Table of Contents

Analysis of Changes in Allowance for Loan Losses



|                                                               |                        |                                     |         |      |  |   |         |  
|-------------------------------------------------------------- | ---------------------- | ----------------------------------- | ------- | ---- |  | - | ------- | -
|                                                               |                        | For the three monthsEnded March 31, |        
|                                                               | 2007                   |                                     |         | 2006 | 
|                                                               | (Dollars in thousands) |                                    
|Total loans outstanding at end of period-gross                 |                        | $                                   | 418,308 |      |  | $ | 394,986 |  
|                                                               |                        |                                     |         |      |  |   |         |  
|Average loans outstanding-gross                                |                        | $                                   | 414,571 |      |  | $ | 391,030 |  
|                                                               |                        |                                     |         |      |  |   |         |  
|Allowance for loan losses at beginning of period               |                        | $                                   | 4,725   |      |  | $ | 4,650   |  
|Loans charged off:                                             |                        |                                     |         |      |  |   |         |  
|Real estate                                                    |                        |                                     |        |      |  |   |        |  
|Installment loans                                              |                        |                                     | 20      |      |  |   | 2       |  
|Credit cards and related plans                                 |                        |                                     |        |      |  |   |        |  
|Commercial and all other loans                                 |                        |                                     |        |      |  |   |        |  
|                                                               |                        |                                     |         |      |  |   |         |  
|Total charge-offs                                              |                        |                                     | (20     | )    |  |   | (2      | )
|                                                               |                        |                                     |         |      |  |   |         |  
|Recoveries of loans previously charged off:                    |                        |                                     |         |      |  |   |         |  
|Real estate                                                    |                        |                                     |        |      |  |   |        |  
|Installment loans                                              |                        |                                     | 8       |      |  |   | 2       |  
|Credit cards and related plans                                 |                        |                                     |        |      |  |   | 2       |  
|Commercial and all other loans                                 |                        |                                     |        |      |  |   |        |  
|                                                               |                        |                                     |         |      |  |   |         |  
|Total recoveries                                               |                        |                                     | 8       |      |  |   | 4       |  
|                                                               |                        |                                     |         |      |  |   |         |  
|Net recoveries/(charge offs)                                   |                        |                                     | (12     | )    |  |   | 2       |  
|                                                               |                        |                                     |         |      |  |   |         |  
|Provision for loan loses                                       |                        |                                     | 390     |      |  |   | 200     |  
|                                                               |                        |                                     |         |      |  |   |         |  
|Allowance for loan losses at end of period                     |                        | $                                   | 5,103   |      |  | $ | 4,852   |  
|                                                               |                        |                                     |         |      |  |   |         |  
|Ratios                                                         |                        |                                     |         |      |  |   |         |  
|Annualized net charge offs to average loans during the period  |                        |                                     | 0.01    | %    |  |   | 0.00    | %
|Allowance for loan losses to loans at period end               |                        |                                     | 1.22    | %    |  |   | 1.23    | %
|Allowance for loan losses to nonperforming loans at period end |                        |                                     | 3,074   | %    |  |   | 7,954   | %

Nonperforming Assets

Nonperforming assets consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our policy to place loans on nonaccrual status
when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest becomes doubtful. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the
current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become
current as to both principal and interest and when the collectibility of principal or interest is no longer doubtful. Nonperforming assets were $432 thousand and $424 thousand, or 0.10% and 0.11% of loans outstanding at March 31, 2007 and
December 31, 2006, respectively. We had no loans considered to be impaired under SFAS No. 114 at March 31, 2007 or December 31, 2006. On March 31, 2007, our nonperforming loans (consisting of nonaccruing and restructured
loans) amounted to approximately $166 thousand, and we had no foreclosed properties.

Investment Securities and Other Assets

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



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Our investment securities totaled $129.4 million at March 31, 2007, $125.9 million at
December 31, 2006 and $104.2 million at March 31, 2006. The increase in investment securities of $25.2 million or 24.2% when compared to March 31, 2006 is principally due to a $25.0 million prefund strategy implemented
early in the fourth quarter of 2006. We preinvested future cash flows with short-term borrowing in order to capture currently available high yields versus waiting for cash roll off later that may have to be reinvested at lower rates. Additions to
the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as
interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.

At March 31, 2007, the securities portfolio had unrealized net losses of approximately $1.7 million, which are reported in accumulated other comprehensive loss on the consolidated statement of shareholders equity, net of tax. Our
securities portfolio at March 31, 2007 consisted of U.S. government sponsored agencies, collateralized mortgage obligations (CMOs), mortgage-backed securities (MBS), equity securities and tax-exempt municipal securities.

We currently have the ability to hold our available-for-sale investment securities to maturity except for equity securities. However, should conditions
change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. All securities held are traded in liquid markets. As of March 31, 2007, we owned securities from issuers in which the aggregate
amortized cost from such issuers exceeded 10% of our shareholders equity. As of March 31, 2007 the amortized cost and market value of the securities from such issuers were as follows:



|                                       |  |                        |        |              |   |       
|-------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------
|                                       |  | Amortized Cost         |        | Market Value
|                                       |  | (Dollars in thousands)
|Federal National Mortgage Corporation  |  | $                      | 29,228 |              | $ | 28,452
|Federal Home Loan Mortgage Corporation |  |                        | 20,841 |              |   | 20,529
|Federal Home Loan Banks                |  |                        | 34,154 |              |   | 34,034

At March 31, 2007, we held $7.8 million in bank owned life insurance, compared to $7.7
million and $7.5 million at December 31, 2006 and March 31, 2006, respectively.

Deposits and Other Borrowings

Deposits

Deposits totaled $503.0 million as of
March 31, 2007 compared to deposits of $512.2 million at December 31, 2006 and up 4.2% compared to deposits of $482.5 million at March 31, 2006. We attribute our deposit growth during the twelve months ended March 31, 2007 to our
management team attracting new customers from other financial institutions and our branching efforts. We believe that we can continue to improve our core deposit funding by improving our branching network and providing more convenient opportunities
for customers to bank with us. We anticipate that our deposits will increase during 2007.

Other Borrowings

Short-term borrowings include sweep accounts, advances from the Federal Home Loan Bank of Atlanta (the FHLB) having maturities of one
year or less, Federal Funds purchased, repurchase agreements and other borrowings to be repaid this year. Our short-term borrowings totaled $41.6 million at March 31, 2007, compared to $31.1 million on December 31, 2006, an increase of
$10.5 million primarily due to the reclassification of $10.3 million of junior subordinated debt from long-term obligations to short-term borrowings. During the first quarter of 2007, management notified the Federal Reserve Bank of Richmond of its
intent to redeem all of its trust preferred securities ($10.3 million) originally issued June 26, 2002. After a successful issuance of additional shares of common stock in March of 2006, management views the Company as being well capitalized
without trust preferred securities. Management has evaluated the interest cost associated with trust preferred securities and concluded that redemption of the securities would improve the Companys net interest margin and profitability. The
Company expects to redeem the securities in the second quarter of 2007. The Company does not expect to incur any loss as a result of this redemption.



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##### Table of Contents

Long-Term Obligations

Long-term obligations consist of advances from FHLB with maturities greater than one year and junior subordinated debt. As a result of managements decision to call its trust preferred securities in June
2007, our long-term obligation of $10.3 million was reclassified from long-term obligations to short-term borrowings during the first quarter of 2007.

Liquidity

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

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

We are a member of the FHLB. Membership, along with a blanket
collateral commitment of our one-to-four family residential mortgage loan portfolio, as well as our commercial real estate loan portfolio, provided us the ability to draw up to $123.3 million and $124.8 million of advances from the FHLB at
March 31, 2007 and December 31, 2006, respectively. At both March 31, 2007 and December 31, 2006, we had outstanding FHLB advances totaling $3.0 million compared to $16.0 million at March 31, 2006.

As a requirement for membership, we invest in stock of the FHLB in the amount of 1% of our outstanding residential loans or 5% of our outstanding
advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At March 31, 2007, we owned 12,572 shares of the FHLBs $100 par value capital stock, compared to 12,293 and 18,143 shares
at December 31, 2006 and March 31, 2006, respectively. No ready market exists for such stock, which is carried at cost.

We also
had unsecured federal funds lines in the aggregate amount of $22.0 million available to us at March 31, 2007 under which we can borrow funds to meet short-term liquidity needs. At March 31, 2007, we had no borrowings outstanding under
these federal funds lines. Another source of funding is loan participations sold to other commercial banks (in which we retain the servicing rights). We believe that our liquidity sources are adequate to meet our operating needs.

Net cash provided by operations during the three months ended March 31, 2007 totaled $1.2 million, compared to net cash provided by operations of
$2.0 million for the same period in 2006. Net cash used in investing activities decreased to $4.1 million for the three months ended March 31, 2007, as compared to $9.0 million for the same period in 2006 primarily due to the decrease in net
loan originations. Net cash used by financing activities was $9.4 million for the first three months of 2007, compared to net cash provided of $33.9 million for the same period in 2006 due primarily to net proceeds from issuance of common stock in
2006. Cash and cash equivalents at March 31, 2007 was $27.8 million compared to $45.8 million at March 31, 2006.



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##### Table of Contents

Capital Resources

Shareholders Equity

Shareholders equity increased by approximately $1.0 million to $63.8 million at
March 31, 2007 from $62.8 million at December 31, 2006. We generated net income of $1.0 million, experienced an increase in net unrealized gains on available-for-sale securities of $302 thousand, issued 19,750 shares of common stock or
$237 thousand related to exercise of stock awards and recognized stock based compensation of $49 thousand on incentive stock awards. We declared cash dividends of $512 thousand or $0.175 per share during the first quarter of 2007.

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

Quantitative measures established by the FDIC to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to
average assets (each as defined in the regulations). As a bank holding company, we also are subject, on a consolidated basis, to the capital adequacy guidelines of the Federal Reserve Board. The capital requirements of the Federal Reserve Board are
similar to those of the FDIC governing the Bank. As of March 31, 2007, we and the Bank met all capital adequacy requirements to which we are subject.

During the first quarter of 2007, we experienced a decline in our Tier 1 capital ratios when compared to the periods ending December 31, and March 31, 2006. This decline is primarily due to our decision to
call $10.3 million of trust preferred securities in June 2007.

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

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



|                                         |  |                                                                     |       |   |                                                   |   |      |          |  |       |             |  |       |  
|---------------------------------------- |  | ------------------------------------------------------------------- | ----- | - | ------------------------------------------------- | - | ---- | -------- |  | ----- | ----------- |  | ----- | -
|                                         |  | To be well capitalizedunder promptcorrective actionprovisions Ratio |       |   | Minimum requiredfor capitaladequacy purposesRatio |   |      | OurRatio |  |       | BanksRatio | 
|As of March 31, 2007:                    |  |                                                                     |       |   |                                                   |   |      |          |  |       |             |  |       |  
|                                         |  |                                                                     |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                                   | 5.00  | % |                                                   | 3 | 3.00 | %        |  | 10.52 | %           |  | 8.84  | %
|                                         |  |                                                                     |       |  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                                   | 6.00  | % |                                                   | 3 | 4.00 | %        |  | 13.03 |             |  | 10.94 |  
|                                         |  |                                                                     |       |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                                   | 10.00 | % |                                                   | 3 | 8.00 | %        |  | 14.05 |             |  | 11.97 |  
|                                         |  |                                                                     |       |  
|As of December 31, 2006:                 |  |                                                                     |       |   |                                                   |   |      |          |  |       |             |  |       |  
|                                         |  |                                                                     |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                                   | 5.00  | % |                                                   | 3 | 3.00 | %        |  | 12.05 | %           |  | 8.81  | %
|                                         |  |                                                                     |       |  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                                   | 6.00  | % |                                                   | 3 | 4.00 | %        |  | 15.08 |             |  | 11.04 |  
|                                         |  |                                                                     |       |  
|Total Capital (to Risk Weighted Assets)3 |  | 3                                                                   | 10.00 | % |                                                   | 3 | 8.00 | %        |  | 16.04 |             |  | 12.00 |  
|                                         |  |                                                                     |       |  
|As of March 31, 2006:                    |  |                                                                     |       |   |                                                   |   |      |          |  |       |             |  |       |  
|                                         |  |                                                                     |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                                   | 5.00  | % |                                                   | 3 | 3.00 | %        |  | 12.69 | %           |  | 9.19  | %
|                                         |  |                                                                     |       |  
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                                   | 6.00  | % |                                                   | 3 | 4.00 | %        |  | 15.46 |             |  | 11.20 |  
|                                         |  |                                                                     |       |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                                   | 10.00 | % |                                                   | 3 | 8.00 | %        |  | 16.51 |             |  | 12.26 |  



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

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

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

Management does not believe there has been any significant change in the overall analysis of financial instruments considered market risk sensitive, as measured by the factors of contractual maturities, average
interest rates and estimated fair values, since the analysis prepared and presented in conjunction with the Form 10-K Annual Report for the fiscal year ended December 31, 2006.



|Item 4. | Controls and Procedures
|------- | -----------------------

Our management, with the
participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15 of the Securities Exchange Act of 1934
(the Exchange Act). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective in enabling
us to record, process, summarize and report in a timely manner the information required to be disclosed in reports we file under the Exchange Act. We review our disclosure controls and procedures, which may include our internal control over
financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. In connection with the above evaluation of our disclosure controls and procedures, no change in our internal control over
financial reporting was identified that occurred during the quarterly period ended March 31, 2007, and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



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



| |  |      
| |  | -----
| |  | None.



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##### Table of Contents

|Item 1A. | Risk Factors
|-------- | ------------

In addition to the other information
set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business,
financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may
materially adversely affect our business, financial condition and/or operating results.



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



| |  |      
| |  | -----
| |  | None.



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



| |  |      
| |  | -----
| |  | None.



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



| |  |      
| |  | -----
| |  | None.



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



| |  |      
| |  | -----
| |  | None.



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



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



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##### Table of Contents

SIGNATURES

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



|                   |  |                   |  |                            
|------------------ |  | ----------------- |  | ---------------------------
|                   |  | ECB BANCORP, INC.
|                   |  | (Registrant)     
|                   |  |                  
|Date: May 10, 2007 |  | By:               |  | /s/ Arthur H. Keeney III   
|                   |  |                   |  | Arthur H. Keeney III       
|                   |  |                   |  | President & CEO            
|                   |  |                  
|Date: May 10, 2007 |  | By:               |  | /s/ Gary M. Adams          
|                   |  |                   |  | Gary M. Adams              
|                   |  |                   |  | Senior Vice President & CFO



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##### Table of Contents

EXHIBIT INDEX



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



27