##### 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 June 30, 2005



or



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



For the transition period from  to



Commission File No. 2017-6



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ECB Bancorp, Inc.

(Exact name of registrant as specified in its charter)



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



Post Office Box 337,
Engelhard, North Carolina 27824

(Address of principal executive offices) (Zip Code)



(252) 925-9411

(Registrants telephone number, including area code)



---



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



Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange Act)    Yes ̈No  x



APPLICABLE ONLY TO CORPORATE
ISSUERS:



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



As
of August 10, 2005 2,040,042 shares of the registrants common stock, $3.50 par value, were outstanding.



This Form 10-Q has 28 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 June 30, 2005 and December 31, 2004                                 |  | 3            
|Consolidated Income Statements for Three and Six Months Ended June 30, 2005 and 2004               |  | 4            
|Consolidated Statements of Changes in Shareholders Equity Six Months Ended June 30, 2005 and 2004 |  | 5            
|Consolidated Statements of Cash Flows Six Months Ended June 30, 2005 and 2004                      |  | 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                                 |  | 21           
|Item 4.
Controls and Procedures                                                                    |  | 21           
|                                                                                                   | 
|Part II  Other Information                                                                        |  |              
|Item 6.
Exhibits                                                                                   |  | 23           
|Signatures                                                                                         |  | 24           
|Exhibit Index                                                                                      |  | 25           
|EX- 31.1                                                                                           |  |              
|EX- 31.2                                                                                           |  |              
|EX- 32                                                                                             |  |              



2



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

June 30, 2005 and December 31, 2004



|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                                                            |  | June 30, 2005 |             |   | December 31,2004* |  
|                                                                                                                                                            |  | (unaudited)   |             |   |                   |  
|Assets                                                                                                                                                      |  |               |             |   |                   |   |             |  
|Non-interest bearing deposits and cash                                                                                                                      |  | $             | 30,534,275  |   |                   | $ | 28,263,268  |  
|Federal funds sold                                                                                                                                          |  |               | 10,575,000  |   |                   |   |            |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Total cash and cash equivalents                                                                                                                             |  |               | 41,109,275  |   |                   |   | 28,263,268  |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Investment securities                                                                                                                                       |  |               |             |   |                   |   |             |  
|Available-for-sale, at market value (cost of $105,007,590 and $112,787,121 at June 30, 2005 and December 31, 2004,
respectively)                            |  |               | 104,447,739 |   |                   |   | 112,321,137 |  
|                                                                                                                                                            |  |              
|Loans                                                                                                                                                       |  |               | 361,664,970 |   |                   |   | 329,530,355 |  
|Allowance for probable loan losses                                                                                                                          |  |               | (4,449,314  | ) |                   |   | (4,300,000  | )
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Loans, net                                                                                                                                                  |  |               | 357,215,656 |   |                   |   | 325,230,355 |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Real estate acquired in settlement of loans, net                                                                                                            |  |               | 39,000      |   |                   |   | 34,500      |  
|Federal Home Loan Bank common stock, at cost                                                                                                                |  |               | 2,082,700   |   |                   |   | 1,946,500   |  
|Bank premises and equipment, net                                                                                                                            |  |               | 17,538,957  |   |                   |   | 16,939,045  |  
|Accrued interest receivable                                                                                                                                 |  |               | 2,862,648   |   |                   |   | 2,758,558   |  
|Bank owned life insurance                                                                                                                                   |  |               | 7,305,916   |   |                   |   | 6,691,215   |  
|Other assets                                                                                                                                                |  |               | 8,533,821   |   |                   |   | 7,705,252   |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Total                                                                                                                                                       |  | $             | 541,135,712 |   |                   | $ | 501,889,830 |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Liabilities and Shareholders Equity                                                                                                                        |  |               |             |   |                   |   |             |  
|Deposits                                                                                                                                                    |  |               |             |   |                   |   |             |  
|Demand, noninterest bearing                                                                                                                                 |  | $             | 106,672,342 |   |                   | $ | 86,215,997  |  
|Demand interest bearing                                                                                                                                     |  |               | 96,833,033  |   |                   |   | 94,924,075  |  
|Savings                                                                                                                                                     |  |               | 22,942,822  |   |                   |   | 23,178,796  |  
|Time                                                                                                                                                        |  |               | 229,174,113 |   |                   |   | 206,814,091 |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Total deposits                                                                                                                                              |  |               | 455,622,310 |   |                   |   | 411,132,959 |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Accrued interest payable                                                                                                                                    |  |               | 1,272,551   |   |                   |   | 970,081     |  
|Short-term borrowings                                                                                                                                       |  |               | 15,398,911  |   |                   |   | 23,006,740  |  
|Long-term obligations                                                                                                                                       |  |               | 31,310,000  |   |                   |   | 31,310,000  |  
|Other liabilities                                                                                                                                           |  |               | 3,895,210   |   |                   |   | 3,392,837   |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Total liabilities                                                                                                                                           |  |               | 507,498,982 |   |                   |   | 469,812,617 |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Shareholders equity                                                                                                                                        |  |               |             |   |                   |   |             |  
|Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,040,042 at June 30, 2005 and 2,038,242 at
December 31, 2004 |  |               | 7,140,148   |   |                   |   | 7,133,848   |  
|Capital surplus                                                                                                                                             |  |               | 5,407,703   |   |                   |   | 5,360,003   |  
|Retained earnings                                                                                                                                           |  |               | 21,741,141  |   |                   |   | 20,176,100  |  
|Deferred compensation - restricted stock                                                                                                                    |  |               | (312,059    | ) |                   |   | (306,157    | )
|Accumulated other comprehensive loss                                                                                                                        |  |               | (340,203    | ) |                   |   | (286,581    | )
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Total shareholders equity                                                                                                                                  |  |               | 33,636,730  |   |                   |   | 32,077,213  |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Commitments                                                                                                                                                 |  |               |             |   |                   |   |             |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  
|Total                                                                                                                                                       |  | $             | 541,135,712 |   |                   | $ | 501,889,830 |  
|                                                                                                                                                            |  |               |             |   |                   |   |             |  



See accompanying notes to consolidated
financial statements.

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



3



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For three and six months ended June 30, 2005 and 2004

(unaudited)



|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|------------------------------------------------------------ |  | --------------------------- | --------- | ------------------------- | - | --------- |  | ---- | ---------- |  | - | ----------
|                                                             |  | Three months ended June 30, |           | Six months ended June 30,
|                                                             |  | 2005                        |           | 2004                      |   | 2005      |  | 2004
|Interest income:                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Interest and fees on loans                                   |  | $                           | 5,719,499 |                           | $ | 4,306,217 |  | $    | 10,865,169 |  | $ | 8,405,666 
|Interest on investment securities:                           |  |                             |           |                           |   |           |  |      |            |  |   |           
|Interest exempt from federal income taxes                    |  |                             | 283,665   |                           |   | 295,803   |  |      | 572,860    |  |   | 545,786   
|Taxable interest income                                      |  |                             | 743,887   |                           |   | 867,281   |  |      | 1,496,579  |  |   | 1,648,549 
|Dividend income                                              |  |                             | 18,199    |                           |   | 18,369    |  |      | 36,551     |  |   | 52,956    
|FHLB stock dividends                                         |  |                             | 20,519    |                           |   | 10,601    |  |      | 32,978     |  |   | 20,357    
|Interest on federal funds sold                               |  |                             | 54,824    |                           |   | 8,013     |  |      | 77,741     |  |   | 30,953    
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Total interest income                                        |  |                             | 6,840,593 |                           |   | 5,506,284 |  |      | 13,081,878 |  |   | 10,704,267
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Interest expense:                                            |  |                             |           |                           |   |           |  |      |            |  |   |           
|Deposits:                                                    |  |                             |           |                           |   |           |  |      |            |  |   |           
|Demand accounts                                              |  |                             | 126,391   |                           |   | 91,497    |  |      | 237,999    |  |   | 173,418   
|Savings                                                      |  |                             | 28,870    |                           |   | 27,876    |  |      | 57,828     |  |   | 54,767    
|Time                                                         |  |                             | 1,540,479 |                           |   | 867,769   |  |      | 2,800,712  |  |   | 1,659,132 
|Short-term borrowings                                        |  |                             | 132,413   |                           |   | 56,689    |  |      | 234,299    |  |   | 104,015   
|Long-term obligations                                        |  |                             | 387,554   |                           |   | 350,590   |  |      | 752,035    |  |   | 690,486   
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Total interest expense                                       |  |                             | 2,215,707 |                           |   | 1,394,421 |  |      | 4,082,873  |  |   | 2,681,818 
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Net interest income                                          |  |                             | 4,624,886 |                           |   | 4,111,863 |  |      | 8,999,005  |  |   | 8,022,449 
|Provision for probable loan losses                           |  |                             | 90,000    |                           |   | 250,000   |  |      | 190,000    |  |   | 400,000   
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Net interest income after provision for probable loan losses |  |                             | 4,534,886 |                           |   | 3,861,863 |  |      | 8,809,005  |  |   | 7,622,449 
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Noninterest income:                                          |  |                             |           |                           |   |           |  |      |            |  |   |           
|Service charges on deposit accounts                          |  |                             | 838,508   |                           |   | 906,743   |  |      | 1,633,921  |  |   | 1,699,220 
|Other service charges and fees                               |  |                             | 599,459   |                           |   | 453,320   |  |      | 922,915    |  |   | 730,665   
|Net gain on sale of securities                               |  |                             | 90,075    |                           |   | 255,228   |  |      | 90,075     |  |   | 292,139   
|Income from bank owned life insurance                        |  |                             | 56,091    |                           |   | 88,524    |  |      | 125,190    |  |   | 150,099   
|Other operating income                                       |  |                             | 34,164    |                           |   | 116,121   |  |      | 53,589     |  |   | 453,163   
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Total noninterest income                                     |  |                             | 1,618,297 |                           |   | 1,819,936 |  |      | 2,825,690  |  |   | 3,325,286 
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Noninterest expenses:                                        |  |                             |           |                           |   |           |  |      |            |  |   |           
|Salaries                                                     |  |                             | 1,679,242 |                           |   | 1,480,780 |  |      | 3,249,060  |  |   | 2,876,585 
|Retirement and other employee benefits                       |  |                             | 672,697   |                           |   | 609,768   |  |      | 1,313,521  |  |   | 1,199,346 
|Occupancy                                                    |  |                             | 348,832   |                           |   | 300,788   |  |      | 679,835    |  |   | 660,281   
|Equipment                                                    |  |                             | 413,365   |                           |   | 442,315   |  |      | 868,779    |  |   | 864,487   
|Professional fees                                            |  |                             | 84,205    |                           |   | 64,437    |  |      | 271,344    |  |   | 151,116   
|Supplies                                                     |  |                             | 79,569    |                           |   | 64,635    |  |      | 162,273    |  |   | 153,853   
|Telephone                                                    |  |                             | 131,908   |                           |   | 90,577    |  |      | 265,001    |  |   | 209,259   
|Postage                                                      |  |                             | 58,643    |                           |   | 63,755    |  |      | 105,731    |  |   | 118,989   
|Other operating expenses                                     |  |                             | 900,491   |                           |   | 818,064   |  |      | 1,618,956  |  |   | 1,593,205 
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Total noninterest expenses                                   |  |                             | 4,368,952 |                           |   | 3,935,119 |  |      | 8,534,500  |  |   | 7,827,121 
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Income before income taxes                                   |  |                             | 1,784,231 |                           |   | 1,746,680 |  |      | 3,100,195  |  |   | 3,120,614 
|Income taxes                                                 |  |                             | 518,871   |                           |   | 525,000   |  |      | 882,629    |  |   | 925,000   
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Net income                                                   |  | $                           | 1,265,360 |                           | $ | 1,221,680 |  | $    | 2,217,566  |  | $ | 2,195,614 
|                                                             |  |                             |           |                           |   |           |  |      |            |  |   |           
|Net income per share - basic                                 |  | $                           | 0.63      |                           | $ | 0.61      |  | $    | 1.10       |  | $ | 1.09      
|Net income per share - diluted                               |  | $                           | 0.62      |                           | $ | 0.60      |  | $    | 1.08       |  | $ | 1.07      
|Weighted average shares outstanding - basic                  |  |                             | 2,014,872 |                           |   | 2,015,318 |  |      | 2,014,861  |  |   | 2,018,506 
|Weighted average shares outstanding - diluted                |  |                             | 2,044,091 |                           |   | 2,041,208 |  |      | 2,045,074  |  |   | 2,044,550 



See accompanying notes to consolidated
financial statements.



4



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Shareholders Equity

Six months ended June 30, 2005 and 2004

(unaudited)



|                                                           |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|---------------------------------------------------------- |  | ----------- | --------- | - | -------------- | - | --------- | ---------------- |  | - | --------------------------------------- | - |  | ----------------------------------- | -------- | - | ------------------- | - | ---------- | ----- |  | - | ---------- | - |  | - | ---------- | -
|                                                           |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferred compensation- restricted stock |   |  | Accumulated othercomprehensive loss |          |   | Comprehensive loss  |   |            | Total | 
|Balance January 1, 2004                                    |  | $           | 7,132,752 |   |                | $ | 5,359,978 |                  |  | $ | 18,058,476                              |   |  | $                                   | (150,388 | ) |                     | $ | 241,447    |       |  |   |            |   |  | $ | 30,642,265 |  
|Unrealized losses, net of income tax benefit of $1,511,076 |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   | (2,413,796 | )     |  | $ | (2,413,796 | ) |  |   | (2,413,796 | )
|Net income                                                 |  |             |           |   |                |   |           |                  |  |   | 2,195,614                               |   |  |                                     |          |   |                     |   |            |       |  |   | 2,195,614  |   |  |   | 2,195,614  |  
|                                                           |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Total comprehensive income                                 |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  | $ | (218,182   | ) |  |   |            |  
|                                                           |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Deferred compensation - restricted stock issuance          |  |             | 31,196    |   |                |   | 222,825   |                  |  |   |                                         |   |  |                                     | (254,021 | ) |                     |   |            |       |  |   |            |   |  |   |           |  
|Recognition of deferred compensation - restricted stock    |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     | 50,154   |   |                     |   |            |       |  |   |            |   |  |   | 50,154     |  
|Repurchase of common stock                                 |  |             | (30,100   | ) |                |   | (222,800  | )                |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   | (252,900   | )
|Cash dividends ($.285 per share)                           |  |             |           |   |                |   |           |                  |  |   | (581,271                                | ) |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   | (581,271   | )
|                                                           |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Balance June 30, 2004                                      |  | $           | 7,133,848 |   |                | $ | 5,360,003 |                  |  | $ | 19,672,819                              |   |  | $                                   | (354,255 | ) |                     | $ | (2,172,349 | )     |  |   |            |   |  | $ | 29,640,066 |  
|                                                           |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|                                                           |  |             |           |   |                |   |          
|                                                           |  | Commonstock |           |   | Capitalsurplus |   |           | Retainedearnings |  |   | Deferredcompensation- restrictedstock   |   |  | Accumulatedothercomprehensiveloss   |          |   | Comprehensiveincome |   |            | Total | 
|Balance January 1, 2005                                    |  | $           | 7,133,848 |   |                | $ | 5,360,003 |                  |  | $ | 20,176,100                              |   |  | $                                   | (306,157 | ) |                     | $ | (286,581   | )     |  |   |            |   |  | $ | 32,077,213 |  
|Unrealized losses, net of income tax benefit of $33,569    |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   | (53,622    | )     |  | $ | (53,622    | ) |  |   | (53,622    | )
|Net income                                                 |  |             |           |   |                |   |           |                  |  |   | 2,217,566                               |   |  |                                     |          |   |                     |   |            |       |  |   | 2,217,566  |   |  |   | 2,217,566  |  
|                                                           |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Total comprehensive income                                 |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  | $ | 2,163,944  |   |  |   |            |  
|                                                           |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Deferred compensation - restricted stock issuance          |  |             | 6,300     |   |                |   | 47,700    |                  |  |   |                                         |   |  |                                     | (54,000  | ) |                     |   |            |       |  |   |            |   |  |   |           |  
|Recognition of deferred compensation - restricted stock    |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     | 48,098   |   |                     |   |            |       |  |   |            |   |  |   | 48,098     |  
|Cash dividends ($.32 per share)                            |  |             |           |   |                |   |           |                  |  |   | (652,526                                | ) |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   | (652,526   | )
|                                                           |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  
|Balance June 30, 2005                                      |  | $           | 7,140,148 |   |                | $ | 5,407,703 |                  |  | $ | 21,741,140                              |   |  | $                                   | (312,059 | ) |                     | $ | (340,203   | )     |  |   |            |   |  | $ | 33,636,729 |  
|                                                           |  |             |           |   |                |   |           |                  |  |   |                                         |   |  |                                     |          |   |                     |   |            |       |  |   |            |   |  |   |            |  



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

Six months ended June 30, 2005 and 2004

(Unaudited)



|                                                                                         |  |                           |             |   |      |   |             |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | ----------- | - | ---- | - | ----------- | -
|                                                                                         |  | Six Months Ended June 30, |            
|                                                                                         |  | 2005                      |             |   | 2004 |  
|Cash flows from operating activities:                                                    |  |                           |             |   |      |   |             |  
|Net income                                                                               |  | $                         | 2,217,566   |   |      | $ | 2,195,614   |  
|Adjustments to reconcile net income to net cash provided <used> by operating activities: |  |                           |             |   |      |   |             |  
|Depreciation                                                                             |  |                           | 530,517     |   |      |   | 527,489     |  
|Amortization of premium on investment securities, net                                    |  |                           | 137,684     |   |      |   | 190,440     |  
|Provision for probable loan losses                                                       |  |                           | 190,000     |   |      |   | 400,000     |  
|Gain on sale of securities                                                               |  |                           | (90,075     | ) |      |   | (292,139    | )
|Deferred compensation - restricted stock                                                 |  |                           | 48,098      |   |      |   | 50,154      |  
|(Gain) loss on disposal of premises and equipment                                        |  |                           | (2,950      | ) |      |   | 4,263       |  
|Gain on sale of real estate acquired in settlement of loans                              |  |                           | (4,500      | ) |      |   |            |  
|Income from bank owned life insurance                                                    |  |                           | (125,190    | ) |      |   | (150,099    | )
|Decrease (increase) in accrued interest receivable                                       |  |                           | (104,090    | ) |      |   | 190,032     |  
|Increase in other assets                                                                 |  |                           | (828,569    | ) |      |   | (2,407,135  | )
|Increase (decrease) in accrued interest payable                                          |  |                           | 302,470     |   |      |   | (30,579     | )
|Increase in other liabilities, net                                                       |  |                           | 500,356     |   |      |   | 1,364,520   |  
|                                                                                         |  |                           |             |   |      |   |             |  
|Net cash provided <used> by operating activities                                         |  |                           | 2,771,317   |   |      |   | 2,042,560   |  
|                                                                                         |  |                           |             |   |      |   |             |  
|Cash flows from investing activities:                                                    |  |                           |             |   |      |   |             |  
|Proceeds from sales of investment securities classified as available-for-sale            |  |                           | 4,366,800   |   |      |   | 18,655,347  |  
|Proceeds from maturities of investment securities classified as available-for-sale       |  |                           | 6,152,696   |   |      |   | 13,081,526  |  
|Purchases of investment securities classified as available-for-sale                      |  |                           | (2,780,898  | ) |      |   | (51,324,712 | )
|Purchase of Federal Home Loan Bank common stock                                          |  |                           | (136,200    | ) |      |   | (457,500    | )
|Purchases of premises and equipment                                                      |  |                           | (1,127,479  | ) |      |   | (2,448,071  | )
|Purchase of bank owned life insurance                                                    |  |                           | (489,511    | ) |      |   | (405,000    | )
|Net loan originations                                                                    |  |                           | (32,175,301 | ) |      |   | (33,603,626 | )
|                                                                                         |  |                           |             |   |      |   |             |  
|Net cash used by investing activities                                                    |  |                           | (26,189,893 | ) |      |   | (56,502,036 | )
|                                                                                         |  |                           |             |   |      |   |             |  
|Cash flows from financing activities:                                                    |  |                           |             |   |      |   |             |  
|Net increase in deposits                                                                 |  |                           | 44,489,351  |   |      |   | 51,163,628  |  
|Net decrease in short-term borrowings                                                    |  |                           | (7,607,829  | ) |      |   | (741,652    | )
|Origination of long-term obligations                                                     |  |                           |            |   |      |   | 5,000,000   |  
|Dividends paid                                                                           |  |                           | (616,940    | ) |      |   | (545,564    | )
|Repurchase of common stock                                                               |  |                           |            |   |      |   | (252,900    | )
|                                                                                         |  |                           |             |   |      |   |             |  
|Net cash provided by financing activities                                                |  |                           | 36,264,582  |   |      |   | 54,623,512  |  
|                                                                                         |  |                           |             |   |      |   |             |  
|Increase in cash and cash equivalents                                                    |  |                           | 12,846,007  |   |      |   | 164,036     |  
|Cash and cash equivalents at beginning of period                                         |  |                           | 28,263,268  |   |      |   | 27,384,112  |  
|                                                                                         |  |                           |             |   |      |   |             |  
|Cash and cash equivalents at end of period                                               |  | $                         | 41,109,275  |   |      | $ | 27,548,148  |  
|                                                                                         |  |                           |             |   |      |   |             |  
|Cash paid during the period:                                                             |  |                           |             |   |      |   |             |  
|Interest                                                                                 |  | $                         | 3,780,403   |   |      | $ | 2,712,397   |  
|Taxes                                                                                    |  |                           | 1,405,781   |   |      |   | 910,340     |  
|                                                                                         |  |                          
|Supplemental disclosures of noncash financing and investing activities:                  |  |                           |             |   |      |   |             |  
|Cash dividends declared but not paid                                                     |  | $                         | 326,407     |   |      | $ | 290,450     |  
|Unrealized losses on available-for-sale securities, net of deferred taxes                |  |                           | (53,622     | ) |      |   | (2,413,796  | )
|Restricted stock issuance                                                                |  |                           | 54,000      |   |      |   | 254,021     |  
|Transfer of assets into OREO (non-cash change)                                           |  |                           |            |   |      |   | (34,500     | )



See accompanying notes to consolidated
financial statements.



6



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##### Table of Contents

ECB BANCORP, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



(1) Basis of
Presentation



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



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



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



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



(2) Allowance for Probable Loan Losses



The following table summarizes the activity in the allowance for probable loan losses for the six-month periods ended June 30, 2005 and 2004, respectively.



|                                       |  |                           |           |   |      |   |           |  
|-------------------------------------- |  | ------------------------- | --------- | - | ---- | - | --------- | -
|                                       |  | Six-months ended June 30, |          
|                                       |  | 2005                      |           |   | 2004 |  
|Balance at the beginning of the period |  | $                         | 4,300,000 |   |      | $ | 3,550,000 |  
|Provision for probable loan losses     |  |                           | 190,000   |   |      |   | 400,000   |  
|Charge-offs                            |  |                           | (67,174   | ) |      |   | (114,725  | )
|Recoveries                             |  |                           | 26,488    |   |      |   | 91,154    |  
|Net Charge-offs                        |  |                           | (40,686   | ) |      |   | (23,571   | )
|                                       |  |                           |           |   |      |   |           |  
|Balance at end of the period           |  | $                         | 4,449,314 |   |      | $ | 3,926,429 |  
|                                       |  |                           |           |   |      |   |           |  



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##### Table of Contents

(3) Net Income Per Share



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



Diluted net income per share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding
during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized is considered proceeds using the
treasury stock method. For the six months ended June 30, 2005 and 2004, diluted weighted average shares outstanding increased by 14,654 and 11,144, respectively, due to the dilutive impact of restricted stock. For the three months ended June 30,
2005 and 2004, diluted weighted average shares outstanding increased by 14,359 and 11,061, respectively, due to the dilutive impact of restricted stock.



In computing diluted net income per share, it is assumed that all dilutive stock options are exercised during the reporting period at their respective exercise prices,
with the proceeds from the exercises used by the Company to buy back stock in the open market at the average market price in effect during the reporting period. The difference between the number of shares assumed to be exercised and the number of
shares bought back is added to the number of weighted average common shares outstanding during the period. The sum is used as the denominator to calculate diluted net income per share for the Company. For the six months ended June 30, 2005 and 2004,
diluted weighted average shares outstanding increased by 15,560 and 14,900, respectively, due to the dilutive impact of options. For the three months ended June 30, 2005 and 2004, diluted weighted average shares outstanding increased by 14,860 and
14,829, respectively, due to the dilutive impact of options. There were 18,087 anti-dilutive (not in the money) options outstanding for the three months ended June 30, 2005 and there were no anti-dilutive options outstanding for the three months
ended June 30, 2005 and 2004.



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



|                              |  |                                |           |                     |           |                |   |     
|----------------------------- |  | ------------------------------ | --------- | ------------------- | --------- | -------------- | - | ----
|                              |  | Six months ended June 30, 2005
|                              |  | Income(Numerator)              |           | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                              | 2,217,566 |                     | 2,014,861 |                | $ | 1.10
|                              |  |                                |           |                     |           |                |   |     
|Effect of dilutive securities |  |                                |          |                     | 30,213    |                |   |     
|                              |  |                                |           |                     |           |                |   |     
|Diluted net income per share  |  | $                              | 2,217,566 |                     | 2,045,074 |                | $ | 1.08
|                              |  |                                |           |                     |           |                |   |     
|                              | 
|                              |  | Six months ended June 30, 2004
|                              |  | Income(Numerator)              |           | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                              | 2,195,614 |                     | 2,018,506 |                | $ | 1.09
|                              |  |                                |           |                     |           |                |   |     
|Effect of dilutive securities |  |                                |          |                     | 26,044    |                |   |     
|                              |  |                                |           |                     |           |                |   |     
|Diluted net income per share  |  | $                              | 2,195,614 |                     | 2,044,550 |                | $ | 1.07
|                              |  |                                |           |                     |           |                |   |     



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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 June 30, 2005
|                              |  | Income(Numerator)                |           | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                                | 1,265,360 |                     | 2,014,872 |                | $ | 0.63
|                              |  |                                  |           |                     |           |                |   |     
|Effect of dilutive securities |  |                                  |          |                     | 29,219    |                |   |     
|                              |  |                                  |           |                     |           |                |   |     
|Diluted net income per share  |  | $                                | 1,265,360 |                     | 2,044,091 |                | $ | 0.62
|                              |  |                                  |           |                     |           |                |   |     
|                              | 
|                              |  | Three months ended June 30, 2004
|                              |  | Income(Numerator)                |           | Shares(Denominator) |           | PerShareAmount
|Basic net income per share    |  | $                                | 1,221,680 |                     | 2,015,318 |                | $ | 0.61
|                              |  |                                  |           |                     |           |                |   |     
|Effect of dilutive securities |  |                                  |          |                     | 25,890    |                |   |     
|                              |  |                                  |           |                     |           |                |   |     
|Diluted net income per share  |  | $                                | 1,221,680 |                     | 2,041,208 |                | $ | 0.60
|                              |  |                                  |           |                     |           |                |   |     



(4) Stock Option Plan



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



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



9



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##### Table of Contents

Stock options of 18,087 shares were granted during the six months ended June 30, 2005. There were no options granted in
the first six months of 2004.



The Company awarded 1,800 and 8,913 shares of
restricted stock during the six months ended June 30, 2005 and 2004, respectively, resulting in an increase to deferred compensation-restricted stock of $54,000 and $254,021, respectively.



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



|                                                                                                                                            |  |                             |           |   |      |           |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | - | ---- | --------- | -
|                                                                                                                                            |  | Six months ended June 30,   |          
|                                                                                                                                            |  | 2005                        |           |   | 2004 |          
|Net income, as reported                                                                                                                     |  | $                           | 2,217,566 |   |      | 2,195,614 |  
|Deduct: Total stock-based employee Compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (4,546    | ) |      | (3,293    | )
|                                                                                                                                            |  |                             |           |   |      |           |  
|Proforma net income                                                                                                                         |  | $                           | 2,213,020 |   |      | 2,192,321 |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Earnings per share:                                                                                                                         |  |                             |           |   |      |           |  
|Basic  as reported                                                                                                                         |  | $                           | 1.10      |   |      | 1.09      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Basic  proforma                                                                                                                            |  |                             | 1.10      |   |      | 1.09      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Diluted  as reported                                                                                                                       |  |                             | 1.08      |   |      | 1.07      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Diluted  proforma                                                                                                                          |  |                             | 1.07      |   |      | 1.07      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|                                                                                                                                            | 
|                                                                                                                                            |  | Three months ended June 30, |          
|                                                                                                                                            |  | 2005                        |           |   | 2004 |          
|Net income, as reported                                                                                                                     |  | $                           | 1,265,360 |   |      | 1,221,680 |  
|Deduct: Total stock-based employee Compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                             | (2,273    | ) |      | (1,646    | )
|                                                                                                                                            |  |                             |           |   |      |           |  
|Proforma net income                                                                                                                         |  | $                           | 1,263,087 |   |      | 1,220,034 |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Earnings per share:                                                                                                                         |  |                             |           |   |      |           |  
|Basic  as reported                                                                                                                         |  | $                           | 0.63      |   |      | 0.61      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Basic  proforma                                                                                                                            |  |                             | 0.63      |   |      | 0.61      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Diluted  as reported                                                                                                                       |  |                             | 0.61      |   |      | 0.60      |  
|                                                                                                                                            |  |                             |           |   |      |           |  
|Diluted  proforma                                                                                                                          |  |                             | 0.61      |   |      | 0.60      |  
|                                                                                                                                            |  |                             |           |   |      |           |  



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(5) Postretirement Benefits



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



|                                         |  |                             |        |      |   |       
|---------------------------------------- |  | --------------------------- | ------ | ---- | - | ------
|                                         |  | Six months ended June 30,  
|                                         |  | 2005                        |        | 2004
|Service cost                             |  | $                           | 3,424  |      | $ | 3,179 
|Interest cost                            |  |                             | 21,236 |      |   | 21,304
|Amortization of loss                     |  |                             | 142    |      |   | 2,143 
|                                         |  |                             |        |      |   |       
|Net periodic postretirement benefit cost |  | $                           | 24,802 |      | $ | 26,626
|                                         |  |                             |        |      |   |       
|                                         | 
|                                         |  | Three months ended June 30,
|                                         |  | 2005                        |        | 2004
|Service cost                             |  | $                           | 1,712  |      | $ | 1,589 
|Interest cost                            |  |                             | 10,618 |      |   | 10,652
|Amortization of loss                     |  |                             | 71     |      |   | 1,072 
|                                         |  |                             |        |      |   |       
|Net periodic postretirement benefit cost |  | $                           | 12,401 |      | $ | 13,313
|                                         |  |                             |        |      |   |       



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



The following table
sets forth the amount of unrealized losses (that is, the amount by which cost or amortized cost exceeds fair value), and the related fair value of investments with unrealized losses, none of which are considered to be other than temporarily
impaired. The table is segregated into investments that have been in continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for more than 12 months, as of June 30, 2005:



|                                                              |  |                     |           |                     |        |            |            |                  |         |            |            |                  |          
|------------------------------------------------------------- |  | ------------------- | --------- | ------------------- | ------ | ---------- | ---------- | ---------------- | ------- | ---------- | ---------- | ---------------- | ---------
|                                                              |  | Less than 12 months |           | 12 months or longer |        | Total     
|Description of Securities                                     |  | Fair Value          |           | UnrealizedLosses    |        | Fair Value |            | UnrealizedLosses |         | Fair Value |            | UnrealizedLosses
|Securities of other U.S. government agencies and corporations |  | $                   | 997,800   |                     | 2,200  |            | 7,428,350  |                  | 64,353  |            | 8,426,150  |                  | 66,553   
|Obligations of states and political subdivisions              |  |                     | 4,070,884 |                     | 66,713 |            | 8,393,672  |                  | 240,882 |            | 12,464,556 |                  | 307,595  
|Mortgage-backed securities                                    |  |                     | 495,750   |                     | 6,173  |            | 47,877,502 |                  | 652,546 |            | 48,373,252 |                  | 658,719  
|                                                              |  |                     |           |                     |        |            |            |                  |         |            |            |                  |          
|Total                                                         |  | $                   | 5,564,434 |                     | 75,086 |            | 63,699,524 |                  | 957,781 |            | 69,263,958 |                  | 1,032,867
|                                                              |  |                     |           |                     |        |            |            |                  |         |            |            |                  |          



As of June 30, 2005, management has
concluded that the unrealized losses above (which consisted of 80 securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments
for a time necessary to recover its cost. The losses above are on securities that have contractual maturity dates and are primarily related to market interest rates. Securities that have been in an unrealized loss position for longer than 1 year
include twenty-six (26) municipal obligations, twenty-eight (28) mortgage-backed securities and seven (7) securities of U.S. government agencies. The unrealized losses associated with these securities are not considered to be other-than-temporary,
because they are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or the issuer.



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##### Table of Contents

(7) Comprehensive Income (Loss)



A summary of comprehensive income (loss) is as follows:



|                                                                                                  |  |                             |           |      |                           |   |      |           |   |      |            |  
|------------------------------------------------------------------------------------------------- |  | --------------------------- | --------- | ---- | ------------------------- | - | ---- | --------- | - | ---- | ---------- | -
|                                                                                                  |  | Three Months Ended June 30, |           |      | Six Months Ended June 30, |  
|                                                                                                  |  | 2005                        |           | 2004 |                           |   | 2005 |           |   | 2004 |           
|Net Income                                                                                        |  | $                           | 1,265,360 |      | 1,221,680                 |   |      | 2,217,566 |   |      | 2,195,614  |  
|Other comprehensive income (loss):                                                                |  |                             |           |      |                           |   |      |           |   |      |            |  
|Net increase (decrease) in the fair value of Investment securities available for sale, net of tax |  |                             | 754,814   |      | (2,9912,348               | ) |      | (53,622   | ) |      | (2,413,796 | )
|                                                                                                  |  |                             |           |      |                           |   |      |           |   |      |            |  
|Total comprehensive income (loss)                                                                 |  | $                           | 2,020,174 |      | (1,690,668                | ) |      | 2,163,944 |   |      | (218,182   | )
|                                                                                                  |  |                             |           |      |                           |   |      |           |   |      |            |  



(8) New Accounting Pronouncements



On December 12, 2003, the American Institute of Certified Public
Accountants (AICPA) released Statement of Position (SOP) 03-03, Accounting for Certain Loans or Debt Securities Acquired in a Transfer. This statement of position addresses accounting for differences between contractual cash flows and cash flows
expected to be collected from investors initial investment in loans or debt securities (loans) acquired in a transfer if those differences are attributable, at least in part, to credit quality. The adoption of SOP 03-3 on January 1, 2005 did
not have a material impact on the consolidated financial statements.



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



In December 2004, the FASB issued Statement of Financial Accounting SAFS No.123(R), which revises SFAS No. 123 and supersedes APB 25. SFAS
No.123(R) eliminates an entitys ability to account for share-based payments using APB 25 and requires all such transactions to be accounted for using fair value based method. In addition, although it does not require use of a binomial lattice
model, SFAS No. 123(R) indicates that a binomial lattice model may be more effective in valuing employee stock options than the Black-Scholes model, which was primarily developed to value publicly traded options. In April 2005, the Securities
Exchange Commission deferred the effective date of SFAS No.123(R) from the interim or annual period beginning after June 15, 2005 to the next fiscal year beginning after June 15, 2005. SFAS No.123(R) is not expected to have a material impact on the
Companys consolidated statements of income or balance sheets. If the Company had included the cost of employee stock option compensation in its consolidated financial statements, its net income in the first six months of 2005 and 2004 would
have been lower by $4,546 and $3,293, respectively, using a Black-Scholes model.



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



General



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



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##### Table of Contents

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



Critical Accounting Policies



The Companys significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-KSB Annual Report for the
fiscal year ended December 31, 2004. Of these significant accounting policies, the Company considers its policy regarding the allowance for probable loan losses to be its most critical accounting policy, because it requires managements most
subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for probable loan losses and therefore the provision for loan losses and results of operations. The Company has developed
appropriate policies and procedures for assessing the adequacy of the allowance for probable loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Companys assessments
may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated
financial statements. For additional discussion concerning the Companys allowance for probable loan losses and related matters, see Asset Quality.



Comparison of the Results of Operations for the Six Month Periods Ended June 30, 2005 and 2004



Summary



For the six months ended June 30, 2005, we had net income of $2,217,566 or $1.10 basic and $1.08 diluted earnings per share, compared to
$2,195,614 or $1.09 basic and $1.07 diluted earnings per share for the six months ended June 30, 2004. Net interest income increased $976,556 or 12.17% to $8,999,005 in the first six months of 2005 from $8,022,449 in the first half of 2004, and
noninterest income decreased $499,596 or 15.02% when compared to the same period last year. The first six months of 2004 included a $316,924 gain on insurance proceeds for property damage sustained during Hurricane Isabel in September 2003.
Noninterest expense increased $707,379 or 9.04% for the six month period ended June 30, 2005 as compared to the same period in 2004, as salary and benefits expense increased $486,650 or 11.94% to $4,562,581 compared to $4,075,931 during the first
half of 2004.



Net interest income



Net interest income for the six months ended June 30, 2005 was $8,999,005, an increase of
$976,556 or 12.17% when compared to net interest income of $8,022,449 for the prior year period. Our net interest margin, on a tax-equivalent basis, for the six months ended June 30, 2005 was 4.09% compared to 3.93% in the first half of 2004.
Management attributes the increase in our net interest margin to the increase in short term rates. Since March of 2004, the Federal Open Market Committee (FOMC) has increased short-term rates 200 basis points from 1.00% to 3.50% through a succession
of 25 basis point increases. Approximately $221 million or 61% of our loan portfolio are variable rate loans that adjust with the movement of the national prime rate. As a result, yields on our loans increased approximately 72 basis points compared
to first half of 2004. The yield on average earning assets, on a tax-equivalent basis, increased 68 basis points to 5.89% compared to 5.21% for first six months of 2004. Total interest income increased $2,377,611 or 22.21% for the six months ended
June 30, 2005 compared to the same six months of 2004 as average earning assets increased $34.0 million and the rate on variable rate loans increased 250 basis points since the first quarter of 2004.



Conversely, our cost of funds during the first half 2005 was 2.15%, an increase of 65 basis
points when compared to 1.50% for the first six months of 2004. Rates paid on bank certificate of deposits increased 84 basis points from 1.74% to 2.58% for the first six months of 2005 while our cost of borrowed funds increased 109 basis points



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compared to the prior year period. Rates paid on accounts such as NOW and Money Market accounts, increased only 11 basis
points when compared to first half of last year as rates paid on Money Markets accounts were adjusted upward approximately 25 basis points. Total interest expense increased $1,401,055 or 52.24% during first half of 2005 compared to the same period
in 2004, the result of increased interest-bearing liabilities and increased market rates paid on wholesale certificates of deposits. The volume of average interest-bearing liabilities increased approximately $24.6 million when comparing the first
six months of 2005 with that of 2004.



Provision for probable loan
losses



The provision for probable loan losses charged to operations
during the six months ended June 30, 2005 and 2004 was $190,000 and $400,000, respectively. Net charge-offs for the six month period ended June 30, 2005 totaled $40,686 compared to net charge-offs of $23,571 during the first half of 2004. The
decrease in amount of provision for probable loan losses charged during the period is due to our loan quality. The amount charged for provision for probable loan losses is the result of managements review and evaluation of the portfolio, which
considers current conditions, past due loans, and prior loan loss experience.



Noninterest income



Noninterest income decreased
$499,596 or 15.02% to $2,825,690 for the six months ended June 30, 2005 compared to $3,325,286 for the same period in 2004. The decrease is due to a $316,924 gain on insurance proceeds for property damage sustained during Hurricane Isabel in
September 2003 that was recorded as other income in the first quarter of 2004. Other service charges and fees increased $192,250 or 26.31% compared to the prior year period principally due to increased mortgage origination brokerage fees of
$174,940. The increase in mortgage origination brokerage fees is the result of additional locations and staff from the previous year. During the first half of 2004, we recorded a net gain on the sale of securities of $292,139 compared to $90,075 in
the first half of 2005.



Noninterest expense



Noninterest expense increased $707,379 or 9.04% to $8,534,500 for the six months ended June
30, 2005 from $7,827,121 incurred in the same period in 2004. This increase is principally due to general increases in salary and benefits expense of $486,650 or 11.94%. Salary expense increased $372,475 over the prior year period as a result of
additional staffing expense within our mortgage origination department and home office of $131,852 and $112,664, respectively. Additional salary expenses of $55,962 are associated with our recently opened full service office in Wilmington. Benefits
during first six months of 2005 compared to 2004 increased $114,175 or 9.52% principally due to Supplemental Executive Retirement Plan (SERP) expense totaling $27,692 and increase in employee group insurance premiums and employee FICA tax $28,623
and $27,760, respectively. Professional fees increased $120,228 or 79.56% to $271,344 for the six months ended June 30, 2005 from $151,116 in the prior year period. Consulting fees increased $72,813 for services pertaining to strategy planning and
independent credit review performed during the first quarter of 2005. Audit and accounting fees increased by $38,428 over the prior year period due to additional yearend control testing in our data processing area and requirements of Sarbanes-Oxley
Act of 2002.



Income taxes



Income tax expense for the six months ended June 30, 2005 and 2004 was $882,629 and
$925,000, respectively, resulting in effective tax rates of 28.47% and 29.64%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



The valuation allowance for deferred tax assets was $499,836 and $534,486 at June 30, 2005
and December 31, 2004, respectively. The valuation allowance required at both periods was for certain unrealized capital losses related to perpetual preferred stock issued by Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation. These losses are capital in character and the corporation may not have current capital gain capacity to offset these losses.



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Comparison of the Results of Operations for the Three Month Periods Ended June 30, 2005 and 2004



Summary



For the three months ended June 30, 2005, we had net income of $1,265,360 or $0.63 basic and $0.62 diluted earnings per share, compared to
$1,221,680, or $0.61 basic and $0.60 diluted earnings per share for the three months ended June 30, 2004. Net interest income increased $513,023 or 12.48% to $4,624,886 in the second quarter of 2005 from $4,111,863 in the second quarter of 2004, and
noninterest income decreased $201,639 or 11.08% when compared to the same period last year. The second quarter of 2004 included net gain on sale of securities of $255,228. Noninterest expense increased $433,833 or 11.02% for the three month period
ended June 30, 2005 as compared to the same period in 2004, as salary and benefits expense increased $261,391 or 12.50% to $2,351,939 compared to $2,090,548 during the second quarter of 2004.



Net interest income



Net interest income for the three months ended June 30, 2005 was $4,624,886, an increase of
$513,023 or 12.48% when compared to net interest income of $4,111,863 for the prior year period. Our net interest margin, on a tax-equivalent basis, for the three months ended June 30, 2005 was 4.10% compared to 3.92% in the second quarter of 2004.
Management attributes the increase in our net interest margin to the increase in short term rates. Since March of 2004, the Federal Open Market Committee (FOMC) has increased short-term rates 250 basis points from 1.00% to 3.50% through a succession
of 25 basis point increases. Approximately $221 million or 61% of our loan portfolio are variable rate loans that adjust with the movement of the national prime rate. As a result, yields on our loans increased approximately 87 basis points compared
to second quarter of 2004. The yield on average earning assets, on a tax-equivalent basis, increased 80 basis points to 6.00% compared to 5.20% for the second quarter of 2004. Total interest income increased $1,334,309 or 24.23% for the three months
ended June 30, 2005 compared to the same three months of 2004 as average earning assets increased $28.9 million and the rate on variable rate loans increased 250 basis points since the first quarter of 2004.



Conversely, our cost of funds during the second quarter of 2005 was 2.29%, an increase of 76
basis points when compared to 1.53% for the second quarter of 2004. Rates paid on bank certificate of deposits increased 101 basis points form 1.76% to 2.77% as of June 30, 2005 while our cost of borrowed funds increased 105 basis points compared to
the prior year period. Rates paid on accounts such as NOW and Money Market accounts, increased only 12 basis points when compared to second quarter of last year. Total interest expense increased $821,286 or 58.90% during second quarter of 2005
compared to the same period in 2004, the result of increased interest-bearing liabilities and increased market rates paid on wholesale certificates of deposits. The volume of average interest-bearing liabilities increased approximately $25.4 million
when comparing second quarter of 2005 with that of 2004.



Provision for
probable loan losses



The provision for probable loan losses charged
to operations during the three months ended June 30, 2005 and 2004 was $90,000 and $250,000, respectively. Net charge-offs for the second quarter of 2005 totaled $21,182 compared to net recoveries of $25,994 during the second quarter of 2004. The
amount charged for provision for probable loan losses is the result of managements review and evaluation of the portfolio, which considers current conditions, past due loans, and prior loan loss experience.



Noninterest income



Noninterest income decreased $201,639 or 11.08% to $1,618,297 for the three months ended
June 30, 2005 compared to $1,819,936 for the same period in 2004. This decrease is principally due to a decrease of $165,153 in net gain on the sale of securities. Other operating income for the second quarter of 2005 decreased $81,957 or 70.58%
compared to the prior year period. During the second quarter of 2004, as we recorded an insurance recovery of $79,440 on a wire transfer fraud that was charged off in late 2003. Other charges and fees increased $146,139 or 32.24% compared to the
prior year period principally due to increased mortgage origination brokerage fees of $156,331.



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Noninterest expense



Noninterest expense increased $433,833 or 11.02% to $4,368,952 for the three months ended June 30, 2005 from $3,935,119 incurred in the same
period in 2004. This increase is principally due to general increases in salary and benefits expense of $261,391 or 12.50%. Salary expense increased $198,462 over the prior year period as a result of additional staffing expense within our mortgage
origination department and home office of $84,151 and $50,469, respectively. Additional salary expenses of $17,233 are associated with our recently opened full service office in Wilmington. Benefits during first quarter 2005 compared to 2004
increased $62,929 or 10.32% principally due to Supplemental Executive Retirement Plan (SERP) expense totaling $19,619 and increase in employee group insurance premiums and employee FICA tax $13,934 and $13,621, respectively. Occupancy expense
increased $48,044 or 15.97% as building depreciation and insurance increased $22,952 and $15,633, respectively. Equipment expense decreased $28,950 or 6.357% during the second quarter of 2005 when compared to the same period of 2004 as miscellaneous
equipment expense decreased $25,470. Professional fees increased $19,768 or 30.68% to $84,205 for the three months ended June 30, 2005 from $64,437 in the prior year period due principally to receiving final billing during the quarter for work
related to our year-end 2004 audit. Telephone expense increased $41,331 or 45.63% over the second quarter of 2004, the result of adding high speed (T-1) communication lines to our network. Other operating expenses increased $82,427 from $818,064 for
the three months ended June 30, 2004 to $900,491 for the three months ended June 30, 2005. The increase is attributed to increase credit card related expenses of approximately $51,000 during the second quarter of 2005.



Income taxes



Income tax expense for the three months ended June 30, 2005 and 2004 was $518,871 and $525,000, respectively, resulting in effective tax
rates of 29.08% and 30.06%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.



Comparison of Financial Condition at June 30, 2005 and December 31, 2004



Total assets increased $39.2 million to $541.1 million, an increase of 7.82% when compared
to $501.9 million at December 31, 2004. Asset growth was funded by increases in certificates of deposit (CDs) of $22.4 million and demand deposits of $20.5 million. Approximately half of the growth in certificates of deposit was retail
in-market certificates generated during our successful second quarter CD campaign. The remaining portion of CD growth is attributed to Internet wholesale certificates. Demand deposit growth of $15.6 million during the second quarter is a seasonal
increase associated with tourism on the Outer Banks of North Carolina.



Gross
loans increased $32.1 million or 9.75% from $329.5 million at December 31, 2004 to $361.7 million at June 30, 2005. The increase in loans is the result of increased lines of credit of $9.0 million to businesses located on the Outer Banks in
preparation for the upcoming season and farm production loans of $6.4 million to local farmers. Our new branches located in Morehead and Wilmington increased their loans by $7.1 million. Loan demand has been strong in all of the Banks markets.



Additions to the investment securities portfolio depend to a large extent on
the availability of investable funds that are not otherwise needed to satisfy loan demand. In general, because of loan funding needs, proceeds from investment maturities and calls were diverted to this purpose, leading to a reduction in the level of
investment securities at June 30, 2005 of $7.9 million or 7.01% compared to $112,321,137 at December 31, 2004. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the
level of which is affected by such considerations as near-term loan demand and liquidity needs.



Shareholders equity increased by $1,559,517 from December 31, 2004 to June 30, 2005, due to net income of $2,217,566 and the recognition of deferred compensation of $48,098 on restricted stock awards, which was
offset slightly by an increase of net unrealized losses on available-for-sale securities of $53,622. We declared cash dividends of $652,526, or 32.0 cents per share, during 2005 compared to 28.50 cents per share in the prior year period.



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Asset Quality



Allowance for probable loan losses



The allowance for probable loan losses (AFLL) is established through a provision for probable loan losses charged against earnings. The level of the allowance for
probable loan losses reflects managements best estimate of probable losses inherent in the portfolio as of the balance sheet date and is based on managements evaluation of the risks in the loan portfolio and changes in the nature and
volume of loan activity. Managements evaluation, which includes a review of loans for which full collectibility may not be reasonably assured, considers the loans risk grades, the estimated fair value of the underlying
collateral, current economic conditions, historical loan loss experience and other current factors that warrant consideration in determining an adequate allowance. Our objective is to maintain a loan portfolio that is diverse in terms of loan type,
industry concentration, and borrower concentration in order to manage overall credit risk by minimizing the adverse impact of any single event or combination of related events. The allowance for probable loan losses as a percentage of loans
outstanding was 1.23% at June 30, 2005 and 1.31% at December 31, 2004.



Reserve Policy and Methodology



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



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



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



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



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



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



Nonperforming assets consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans and other
repossessed collateral. It is our policy to place loans on nonaccrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest become doubtful. When loans are placed on
nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction of the remaining principal balance so long as doubt exists as to the ultimate
collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collectibility of principal or interest is no longer doubtful. Nonperforming assets were $1,066,384 and
$137,585 which represented .29% and .04% of loans outstanding at June 30, 2005 and December 31, 2004, respectively. We had $993,628 in loans considered to be impaired under SFAS No. 114 at June 30, 2005, all of which are on a non-accrual basis and
compared to none at December 31, 2004. Three (3) commercial real estate loans totaling $949,974 were moved to non-accrual status during the second quarter of 2005. Within our allowance for possible loan loss model, these loans were classified as
substandard prior to being placed on non-accrual status and they continue to have specific reserves consistent with our model. Consequently, additional reserves were not required for these loans. Trends and dollar amounts of
nonperforming loans are used by management in evaluating the overall adequacy of the allowance for probable loan losses.



The provision for probable loan losses charged to operations during the six months ended June 30, 2005 was $190,000, compared to $400,000 for the same period in 2004. Net
charge-offs during the first half of 2005 totaled $40,687, compared to net recoveries of $23,571 during the same period in 2004. The amount charged for provision for probable loan losses is the result of our review and evaluation of the portfolio,
which considers current economic conditions, past due loans, and prior loan loss experience.



Liquidity



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



Consistent with
the general approach to liquidity, loans and other assets of the Bank are based primarily on a core of local deposits, retail repurchase agreements and the Banks capital position. To date, these core funds, supplemented by Federal Home Loan
Bank advances and a modest amount of brokered deposits, have been adequate to fund loan demand in the Banks market area, while maintaining the desired level of immediate liquidity and an investment securities portfolio available for both
immediate and secondary liquidity purposes. It is anticipated that funding



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sources in the future will include an increased use of brokered deposits and, additionally, institutional deposits
obtained from secured websites on the internet. Short-term borrowings decreased $12.6 million during the second quarter of 2005.



Commitments, Contingencies and Off-Balance Sheet Risk



In the normal course of business, various commitments are outstanding that are not reflected in the consolidated financial statements. Significant commitments at June 30,
2005 are discussed below.



Commitments of the Bank to extend credit and
undisbursed advances on customer lines of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. At June 30, 2005, total commitments to extend credit and undisbursed advances on
customer lines of credit amounted to $62,168,166. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary, upon extension of credit is based on the credit evaluation of
the borrower.



The Bank issues standby letters of credit whereby the Bank
guarantees the performance of a customer to a third party if a specified triggering event or condition occurs. The guarantees generally expire within one year and may be automatically renewed depending on the terms of the guarantee. All standby
letters of credit provide for recourse against the customer on whose behalf the letter of credit was issued, and this recourse may be further secured by a pledge of assets. The maximum potential amount of undiscounted future payments related to
standby letters of credit was $962,268 at June 30, 2005 and $1,272,633 at June 30, 2004. Due to insignificance, the Company has recorded no liability at June 30, 2005 for the current carrying amount of the obligation to perform as a guarantor.



The Bank has commitments for land acquisitions and branch construction that
total approximately $1.7 million dollars.



Asset/Liability Management and
Interest Rate Sensitivity



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



The Companys balance sheet was asset-sensitive at June 30, 2005. An asset-sensitive position means that, for cumulative gap measurement periods of one year or less,
there are more assets than liabilities subject to immediate repricing as market rates change. Because immediately rate sensitive assets exceed rate sensitive interest-bearing liabilities, the earnings position could improve in a rising rate
environment and could deteriorate in a declining rate environment, depending on the correlation of rate changes in these two categories. Included in interest-bearing liabilities subject to rate changes within 90 days is a portion of the
interest-bearing demand, savings and money market deposits. These types of deposits historically have not repriced coincidentally with or in the same proportion as general market indicators.



Capital Resources



Bancorp and the Bank are subject to the capital requirements of the Federal Reserve, the
FDIC and the North Carolina State Banking Commission. The FDIC requires the Bank to maintain minimum ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 4% and 8%, respectively. To be well
capitalized, the FDIC requires ratios of Tier I capital to total risk-weighted assets and total capital to risk-weighted assets of 6% and 10%, respectively. Tier I capital consists of total stockholders equity calculated in accordance



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with generally accepted accounting principles excluding unrealized gains or losses (net of deferred income taxes) on
securities available-for-sale, and total capital is comprised of Tier I capital plus certain adjustments, the only one of which applicable to the Bank is the allowance for probable loan losses. Risk-weighted assets reflect the Banks on- and
off-balance sheet exposures after such exposures have been adjusted for their relative risk levels using formulas set forth in FDIC regulations. As of June 30, 2005, the Bank was in compliance with all of the aforementioned capital requirements and
meets the well-capitalized definition that is used by the FDIC in its evaluation of insured banks. Additionally, at June 30, 2005, Bancorp was also in compliance with the similar capital requirements set forth by the Federal Reserve and
was classified as well-capitalized.



The following table lists Bancorps
regulatory capital ratios at June 30, 2005 and December 31, 2004.



|                                                                                                       |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|------------------------------------------------------------------------------------------------------ |  | --------------------- | - |  | -------------------------------- | - |  | ------------------------- | - |  | -------------------------- | -
|                                                                                                       |  | Minimum Requiredratio |   |  | Required to be wellcapitalized |   |  | Bancorpsratio at 6-30-05 |   |  | Bancorpsratio at 12-31-04 |  
|Risk-based capital ratios:                                                                             |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|Tier 1 capital to risk-weighted assets                                                                 |  | 4.0                   | % |  | 6.0                              | % |  | 10.38                     | % |  | 10.86                      | %
|Total capital to risk-weighted assets                                                                  |  | 8.0                   | % |  | 10.0                             | % |  | 11.43                     | % |  | 11.96                      | %
|Leverage capital ratio                                                                                 |  | 3.0                   | % |  | 5.0                              | % |  | 8.50                      | % |  | 8.43                       | %
|                                                                                                       |  |                      
|The following table lists the Banks regulatory capital ratios at June 30, 2005 and December 31, 2004. |  |                       |   |  |                                  |   | 
|                                                                                                       |  |                       |   | 
|                                                                                                       |  | Minimum Requiredratio |   |  | Required to be wellcapitalized |   |  | Banks ratio at 6-30-05   |   |  | Banks ratio at 12-31-04   |  
|Risk-based capital ratios:                                                                             |  |                       |   |  |                                  |   |  |                           |   |  |                            |  
|Tier 1 capital to risk-weighted assets                                                                 |  | 4.0                   | % |  | 6.0                              | % |  | 10.33                     | % |  | 10.73                      | %
|Total capital to risk-weighted assets                                                                  |  | 8.0                   | % |  | 10.0                             | % |  | 11.38                     | % |  | 11.82                      | %
|Leverage capital ratio                                                                                 |  | 3.0                   | % |  | 5.0                              | % |  | 8.44                      | % |  | 8.32                       | %



As of June 30, 2005 all of the trust
preferred securities issued on June 26, 2002 qualify as Tier 1 capital for regulatory capital adequacy requirements for Bancorp. The entire original $10 million was infused into the Bank, increasing the Banks Tier 1 capital by $10 million.



Regulatory Matters



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



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



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Current Accounting Issues



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



Forward-Looking Statements



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



Item 3. Quantitative and Qualitative Disclosures about Market Risk



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



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



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



Item 4. Controls and Procedures



As of June 30,
2005, the end of the period covered by this report, Bancorp carried out an evaluation under the supervision and with the participation of the companys management, including Bancorps Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of Bancorps disclosure controls and



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procedures. In designing and evaluating the companys disclosure controls and procedures, Bancorp and its management
recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and Bancorps management necessarily was required to apply its judgment in
evaluating and implementing possible controls and procedures. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the companys disclosure controls and procedures are effective to provide reasonable
assurance that information required to be disclosed by Bancorp in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms. In connection with the above evaluation, no change in the Companys internal control over financial reporting was identified that occurred during the period ended June 30, 2005 and that had materially
affected, or is reasonably likely to materially affect, Bancorps internal control over financial reporting. Bancorp reviews its disclosure controls and procedures, which may include its internal control over financial reporting, on an ongoing
basis and may from time to time make changes aimed at enhancing their effectiveness.



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PART II. OTHER INFORMATION



Item 1. Legal
Proceedings



None



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



Not applicable.



Item 3. Defaults upon Senior Securities



Not applicable.



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



|(a) | Our Annual Meeting of Shareholders was held on April 19, 2005.
|--- | --------------------------------------------------------------



|(b) | At our Annual Meeting, the four Directors listed in the following table were elected for terms of three years or until their respective successors are duly elected and qualified.
Our incumbent Directors whose terms of office continued after the meeting are: George T. Davis, Jr., Gregory C. Gibbs, John F. Hughes, Jr., Arthur H. Keeney III and Joseph T. Lamb, Jr.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Voting for Directors was as follows:



|                     |  |           |  |          |  |                
|-------------------- |  | --------- |  | -------- |  | ---------------
|                     |  | For       |  | Withheld |  | Broker Non-vote
|Bryant Kittrell III  |  | 1,592,450 |  | 31,400   |  | none           
|B. Martelle Marshall |  | 1,592,450 |  | 31,400   |  | none           
|R. S. Spencer, Jr.   |  | 1,592,450 |  | 31,400   |  | none           
|Michael D. Weeks     |  | 1,592,450 |  | 31,400   |  | none           



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



1. Proposal to ratify the selection of Dixon Hughes PLLC as our independent auditors as described under the caption Ratification of Selection of
Independent Auditor in the our Proxy Statement dated March 25, 2005 (approved by an affirmative vote of 1,622,424 shares or 99.91% of the shares that voted, 454 negative votes, 972 shares abstaining and no broker non-votes ).



Item 5. Other Information



Not applicable.



Item 6. Exhibits



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



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SIGNATURES



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



|                      |  |                   |  |                              
|--------------------- |  | ----------------- |  | -----------------------------
|                      |  | ECB BANCORP, INC.
|                      |  | (Registrant)     
|                      |  |                  
|Date: August 12, 2005 |  | By:               |  | /s/ Arthur H. Keeney, III    
|                      |  |                   |  | Arthur H. Keeney, III        
|                      |  |                   |  | (President & CEO)            
|                      |  |                  
|Date: August 12, 2005 |  | By:               |  | /s/ Gary M. Adams            
|                      |  |                   |  | Gary M. Adams                
|                      |  |                   |  | (Senior Vice President & CFO)



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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)                                               



25