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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



FORM 10-K



ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934



For the fiscal year ended December 31, 2007



Commission File No. 0-24753



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ECB BANCORP, INC.

(Name of Registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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, including Zip Code)



(252) 925-9411

Registrants telephone number, including area code



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|                                                      |  |                                        
|----------------------------------------------------- |  | ---------------------------------------
|Securities registered under Section 12(b) of the Act: |  | Common Stock, $3.50 par value per share
|Name of exchange on which registered:                 |  | The NASDAQ Global Market               
|Securities registered under Section 12(g) of the Act: |  | None                                   
|                                                      |  | (Title of class)                       



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Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x



Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.    Yes   ̈    No  x



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



Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    x



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



|                             |  |                               
|---------------------------- |  | ------------------------------
|Large accelerated filer     ̈ |  | Accelerated filer    x        
|Non-accelerated filer     ̈   |  | Smaller reporting company    x



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



State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrants most recently completed
second fiscal quarter.



$67,635,839



On March 6, 2008, there were 2,915,199 outstanding shares of
Registrants common stock.



Documents Incorporated by
Reference



Portions of Registrants definitive Proxy
Statement to be filed with the Securities and Exchange Commission in connection with its 2008 Annual Meeting are incorporated into Part III of this Report.



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PART I



When used in this Report, the terms we, us, our and similar terms refer to the registrant, ECB Bancorp, Inc. The
term Bank refers to our bank subsidiary, The East Carolina Bank.



Item 1.    Business.

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General



We are a North Carolina corporation organized during 1998 by the Bank and at the direction of its Board of Directors to serve as the Banks parent holding company. We operate as a bank holding company registered
with the Federal Reserve Board, and our primary business activity is owning the Bank and promoting its banking business. Through the Bank, we engage in a general, community-oriented commercial and consumer banking business.



The Bank is an insured, North Carolina-chartered bank that was founded in
1919. Its deposits are insured under the FDICs Deposit Insurance Fund to the maximum amount permitted by law, and it is subject to supervision and regulation by the FDIC and the North Carolina Commissioner of Banks.



Like other community banks, our net income depends primarily on our net
interest income, which is the difference between the interest income we earn on loans, investment assets and other interest-earning assets, and the interest we pay on deposits and other interest-bearing liabilities. To a lesser extent, our net
income also is affected by non-interest income we derive principally from fees and charges for our services, as well as the level of our non-interest expenses, such as expenses related to our banking facilities and salaries and employee benefits.



Our operations are significantly affected by prevailing
economic conditions, competition, and the monetary, fiscal and regulatory policies of governmental agencies. Lending activities are influenced by the general credit needs of small and medium-sized businesses and individuals in our banking markets,
competition among lenders, the level of interest rates, and the availability of funds. Deposit flows and costs of funds are influenced by prevailing market interest rates (primarily the rates paid on competing investments), account maturities and
the levels of personal income and savings in our banking markets.



Our and the Banks headquarters are located at 35050 U.S. Highway 264 East in Engelhard, North Carolina, and our telephone number at that address is (252) 925-9411.



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Business Offices and Banking Markets



The Bank has 23 full-service banking offices located in thirteen North Carolina counties. Our banking markets are located
east of the Interstate Highway 95 corridor in portions of the Coastal Plain region of North Carolina which extends from the Virginia border along the coast of North Carolina to the South Carolina border. Within that region, we subdivide our banking
markets into five banking regions. The following table lists our branch offices in each banking region.



|                   |  |                             |  |            
|------------------ |  | --------------------------- |  | -----------
|Region             |  | Branches                    |  | County     
|                   |  |                            
|Outer Banks Region |  | Currituck                   |  | Currituck  
|                   |  | Southern Shores/ Kitty Hawk |  | Dare       
|                   |  | Nags Head                   |  | Dare       
|                   |  | Manteo                      |  | Dare       
|                   |  | Avon                        |  | Dare       
|                   |  | Hatteras                    |  | Dare       
|                   |  | Ocracoke                    |  | Hyde       
|                   |  |                            
|Western Region     |  | Greenville (three offices)  |  | Pitt       
|                   |  | Winterville                 |  | Pitt       
|                   |  |                            
|Pamlico Region     |  | Engelhard                   |  | Hyde       
|                   |  | Swan Quarter                |  | Hyde       
|                   |  | Fairfield                   |  | Hyde       
|                   |  | Washington                  |  | Beaufort   
|                   |  | Williamston                 |  | Martin     
|                   |  | Morehead City               |  | Carteret   
|                   |  |                            
|Albemarle Region   |  | Columbia                    |  | Tyrrell    
|                   |  | Creswell                    |  | Washington 
|                   |  | Hertford                    |  | Perquimans 
|                   |  |                            
|Southern Region    |  | Wilmington                  |  | New Hanover
|                   |  | Ocean Isle Beach            |  | Brunswick  



Competition



Commercial banking in North Carolina is highly competitive, due in large
part to our states early adoption of statewide branching. Over the years, federal and state legislation (including the elimination of restrictions on interstate banking) has heightened the competitive environment in which all financial
institutions conduct their business, and competition among financial institutions of all types has increased significantly.



Banking also is highly competitive in our banking markets, and customers tend to aggressively shop the terms of both their loans and deposits.
North Carolina is home to two of the largest commercial banks in the United States, each of which has branches located in our banking markets, and we compete with other commercial banks, savings banks and credit unions, including three banks
headquartered or controlled by companies headquartered outside of North Carolina but that have offices in our banking markets. According to the most recent market share data published by the FDIC, on June 30, 2007 there were 287 offices of 31
different FDIC-insured depository institutions (including us) in the 13 counties in which we have banking offices. Three of those banks (Wachovia, BB&T and First-Citizens Bank) controlled an aggregate of approximately 52% of all deposits in the
13-county area held by those 31 institutions, while we held approximately 5% of total deposits.



We believe community banks can compete successfully by providing personalized service and making timely, local decisions, and that further consolidation
in the banking industry is likely to create additional opportunities for community banks to capture deposits from customers of other financial institutions who become dissatisfied as their financial institutions grow larger. Additionally, we believe
continued growth in our banking markets provides us with an opportunity to capture new deposits from new residents.



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Almost all our customers are small- and medium-sized businesses and individuals. We try to differentiate
ourselves from our larger competitors with our focus on relationship banking, personalized service, direct customer contact, and our ability to make credit and other business decisions locally. We also depend on our reputation as a community bank in
our banking markets, our involvement in the communities we serve, the experience of our senior management team, and the quality of our associates. We believe that our focus allows us to be more responsive to our customers needs and more
flexible in approving loans based on collateral quality and personal knowledge of our customers.



Services



Our banking
operations are primarily retail oriented and directed toward small- and medium-sized businesses and individuals located in our banking markets. We derive the majority of our deposits and loans from customers in our banking markets, but we also make
loans and have deposit relationships with commercial and consumer customers in areas surrounding our immediate banking markets. We also market certificates of deposit by advertising our deposit rates on an Internet certificate of deposit network,
and we accept brokered deposits. We provide most traditional commercial and consumer banking services, but our principal activities are taking demand and time deposits and making commercial and consumer loans. Our primary source of
revenue is interest income we derive from our lending activities.



Lending
Activities



General.    We make
a variety of commercial and consumer loans to small- and medium-sized businesses and individuals for various business and personal purposes, including term and installment loans, business and personal lines of credit, equity lines of credit and
overdraft checking credit. For financial reporting purposes, our loan portfolio generally is divided into real estate loans, consumer installment loans, commercial and industrial loans (including agricultural production loans), and credit cards and
related plans. We make credit card services available to our customers through a correspondent relationship. Statistical information about our loan portfolio is contained in Item 7 of this report under the caption Managements
Discussion and Analysis of Financial Condition and Results of Operations.



Real Estate Loans.    Our real estate loan classification includes all loans secured by real estate. Real estate loans include loans made to purchase, construct or improve residential or
commercial real estate, for real estate development purposes, and for various other commercial, agricultural and consumer purposes (which may or may not be related to our real estate collateral). On December 31, 2007, loans amounting to
approximately 74.7% of our loan portfolio were classified as real estate loans. We do not make long-term residential mortgage loans ourselves, but we originate loans of that type which are funded by and closed in the name of other lenders. Those
arrangements permit us to make long-term residential loans available to our customers and generate fee income but avoid risks associated with those loans in our loan portfolio.



Commercial real estate and construction loans typically involve larger loan balances concentrated with single borrowers or
groups of related borrowers. Repayment of commercial real estate loans may depend on the successful operation of income producing properties, a business, or a real estate project and, therefore, may, to a greater extent than in the case of other
loans, be subject to the risk of adverse conditions in the economy generally or in the real estate market in particular.



Construction loans involve special risks because loan funds are advanced on the security of houses or other improvements that are under construction and
are of uncertain value before construction is complete. For that reason, it is more difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. To reduce these risks, we generally limit
loan amounts to 85% of the projected as built appraised values of our collateral on completion of construction. For larger projects, we include amounts for contingencies in our construction cost estimates. We generally require a
qualified permanent financing commitment from an outside lender unless we have agreed to convert the construction loan to permanent financing ourselves.



On December 31, 2007, our construction and acquisition and development loans (consumer and commercial) amounted to approximately 23.0% of our loan
portfolio, and our other commercial real estate loans amounted to approximately 30.4% of our loan portfolio.



Our real estate loans also include home equity lines of credit that generally are used for consumer purposes and usually are secured by junior liens on
residential real property. Our commitment on each line is for a term of 15 years. During the terms of the lines of credit, borrowers may either pay accrued interest only (calculated at variable interest



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rates), with their outstanding principal balances becoming due in full at the maturity of the lines, or they may make monthly payments of principal and
interest equal to 1.5% of their outstanding balances. On December 31, 2007, our home equity lines of credit amounted to approximately 4.6% of our loan portfolio.



Many of our real estate loans, while secured by real estate, were made for purposes unrelated to the real estate collateral.
This generally reflects our efforts to reduce credit risk by taking real estate as additional collateral, whenever possible, without regard to loan purpose. Substantially all of our real estate loans are secured by real property located in or near
our banking markets. Our real estate loans may be made at fixed or variable interest rates, and they generally have maturities that do not exceed five years and provide for payments based on amortization schedules of less than twenty years. A real
estate loan with a maturity of more than five years or that is based on an amortization schedule of more than five years generally will include contractual provisions that allow us to call the loan in full, or provide for a balloon
payment in full, at the end of a period of no more than five years.



Consumer Installment Loans.    Our consumer installment loans consist primarily of loans for various consumer purposes, as well as the outstanding balances of non-real estate secured consumer revolving credit
accounts. A majority of these loans are secured by liens on various personal assets of the borrowers, but they also may be made on an unsecured basis. On December 31, 2007, our consumer installment loans made up approximately 1.3% of our loan
portfolio, and approximately 14.2% of the aggregate outstanding balances of those loans were unsecured. In addition to loans classified on our books as consumer installment loans, many of our loans included in the real estate loan classification are
made for consumer purposes but are classified as real estate loans on our books because they are secured by first or junior liens on real estate. Consumer loans generally are made at fixed interest rates and with maturities or amortization schedules
that generally do not exceed five years. However, consumer-purpose loans secured by real estate (and, thus, classified as real estate loans as described above) may be made for terms of up to 15 years but under terms that allow us to call the loan in
full, or provide for a balloon payment, at the end of a period of no more than five years.



Consumer installment loans involve greater risks than other loans, particularly in the case of loans that are unsecured or secured by depreciating assets.
When damage or depreciation reduces the value of our collateral below the unpaid balance of a defaulted loan, repossession may not result in repayment of the entire outstanding loan balance. The resulting deficiency may not warrant further
substantial collection efforts against the borrower. In connection with consumer lending in general, the success of our loan collection efforts is highly dependent on the continuing financial stability of our borrowers, and our collection of
consumer installment loans may be more likely to be adversely affected by a borrowers job loss, illness, personal bankruptcy or other change in personal circumstances than is the case with other types of loans.



Commercial and Industrial Loans.    Our commercial
and industrial loan classification includes loans to small- and medium-sized businesses and individuals for working capital, equipment purchases and various other business and agricultural purposes. This classification excludes any loan secured by
real estate. These loans generally are secured by business assets, such as inventory, accounts receivable, equipment or similar assets, but they also may be made on an unsecured basis. On December 31, 2007, our commercial and industrial loans
made up approximately 19.2% of our loan portfolio, and approximately 12.0% of the aggregate outstanding balances of those loans represented unsecured loans. Those loans included approximately $20.4 million, or approximately 4.5% of our total loans,
to borrowers engaged in agriculture, commercial fishing or seafood-related businesses. In addition to loans classified on our books as commercial and industrial loans, many of our loans included in the real estate loan classification are made for
commercial or agricultural purposes but are classified as real estate loans on our books because they are secured by first or junior liens on real estate. Commercial and industrial loans may be made at variable or fixed rates of interest. However,
any loan that has a maturity or amortization schedule of longer than five years normally will be made at an interest rate that varies with our prime lending rate and will include contractual provisions that allow us to call the loan in full, or
provide for a balloon payment in full, at the end of a period of no more than five years. Commercial and industrial loans typically are made on the basis of the borrowers ability to make repayment from business cash flow. As a
result, the ability of borrowers to repay commercial loans may be substantially dependent on the success of their businesses, and the collateral for commercial loans may depreciate over time and cannot be appraised with as much precision as real
estate.



Loan Pricing.    We price
our loans under policies established as a part of our asset/liability management function. For larger loans, we use a pricing model developed by an outside vendor to reduce our exposure to interest rate risk on fixed and variable rate loans that
have maturities of longer than three years. On December 31, 2007, approximately 47.0% of the total dollar amount of our loans accrued interest at variable rates.



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Loan Administration and Underwriting.    We make loans based, to a great
extent, on our assessment of borrowers income, cash flow, net worth, sources of repayment and character. The principal risk associated with each of the categories of our loans is the creditworthiness of our borrowers, and our loans may be
viewed as involving a higher degree of credit risk than is the case with some other types of loans, such as long-term residential mortgage loans, in which greater emphasis is placed on collateral values. To manage this risk, we have adopted written
loan policies and procedures, and our loan portfolio is administered under a defined process. That process includes guidelines and standards for loan underwriting and risk assessment, and procedures for loan approvals, loan grading, ongoing
identification and management of credit deterioration, and portfolio reviews to assess loss exposure and to test our compliance with our credit policies and procedures.



The loan underwriting standards we use include an evaluation of various factors, including a loan applicants income, cash flow,
payment history on other debts, and ability to meet existing obligations and payments on the proposed loan. Although an applicants creditworthiness is a primary consideration in the loan approval process, our underwriting process for secured
loans also includes analysis of the value of the proposed collateral in relation to the proposed loan amount. We consider the value of collateral, the degree of certainty of that value, the marketability of the collateral in the event of foreclosure
or repossession, and the likelihood of depreciation in the collateral value.



Our Board of Directors has approved levels of lending authority for lending and credit personnel based on our aggregate credit exposure to a borrower. A loan that satisfies the Banks loan policies and is within
a lending officers assigned authority may be approved by that officer alone. Loans involving aggregate credit exposures in excess of a lending officers authority may be approved by a Credit Policy Officer in our Loan Administration
Department up to the amount of that officers authority. Above those amounts, a secured or unsecured loan involving an aggregate exposure to a single relationship of up to $2 million may be approved either by our Chief Executive Officer, Chief
Operating Officer or Chief Credit Officer, and a loan involving an aggregate exposure to a single relationship of up to $3 million may be approved by our General Loan Committee which consists of our Chief Executive Officer, Chief Operating Officer
and Chief Credit Officer. A loan that exceeds the approval authority of that Committee, and, notwithstanding the above credit authorities, any single loan in excess of $2 million, must be approved by the Executive Committee of our Board of
Directors.



When a loan is made, our lending officer handling
that loan assigns it a grade based on various underwriting and other criteria under our risk grading procedures. Any proposed loan that grades below a threshold set by our Board of Directors must be reviewed by a Credit Policy Officer before it can
be made, even if the loan amount is within the loan officers approval authority. The grades assigned to loans we make indicate the level of ongoing review and attention we will give to those loans to protect our position and reduce loss
exposure.



After loans are made, they are reviewed by our Loan
Administration personnel for adequacy of contract documentation, compliance with regulatory requirements, and documentation of compliance with our loan underwriting criteria. Also, our Credit Policy Officers conduct detailed reviews of selected
loans based on various criteria, including loan type, amount, collateral, and borrower identity, and the particular lending officers or branchs lending history. These reviews include at least 10% of the loans made by each lending
officer. All loans involving an aggregate exposure of $2 million or more ultimately are reviewed after funding by the Executive Committee of our Board of Directors. Each loan involving an aggregate exposure of more than $350,000 is required to
be reviewed at least annually by the lending officer who originated the loan, and those reviews are monitored by a Credit Policy Officer. Loan Administration personnel also periodically review various loans based on various criteria, and we retain
the services of an independent credit risk management consultant to annually review our problem loans, a random sampling of performing loans related to our larger aggregate credit exposures, and selected other loans.



During the life of each loan, its grade is reviewed and validated or modified
to reflect changes in circumstances and risk. We generally place a loan on a nonaccrual status when it becomes 90 days past due or whenever we believe collection of that loan has become doubtful. We charge off loans when the collection of principal
and interest has become doubtful and the loans no longer can be considered sound collectible assets (or, in the case of unsecured loans, when they become 90 days past due).



Our Special Assets Coordinator, who reports directly to our Chief Credit Officer, monitors the overall performance of our
loan portfolio, monitors the collection activities of our lending officers, and directly supervises collection actions that involve legal action or bankruptcies.



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Allowance for Loan Losses.    Our Board of Directors reviews all impaired
loans at least quarterly, and our management reviews asset quality trends monthly. Based on these reviews and our current judgments about the credit quality of our loan portfolio and other relevant internal and external factors, we have established
an allowance for loan losses. The adequacy of the allowance is assessed by our management and reviewed by our Board of Directors each month. On December 31, 2007, our allowance was $4.1 million and amounted to 0.90% of our total loans and
approximately 877% of our nonperforming loans.



On
December 31, 2007, our nonperforming loans (consisting of non-accrual loans, loans past due greater than 90 days and still accruing interest, and restructured loans) amounted to approximately $466 thousand, and we had $66 thousand of
repossessed collateral acquired in settlement of loans on our books. (See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.)



Seasonality and Cycles



Because the local economies of communities in our Outer Banks, Albemarle, and Pamlico Regions depend, to a large extent, on
tourism and agribusiness (including seafood related businesses), historically there has been an element of seasonality in our business in those regions. However, more recently, the extent to which seasonality affects our business has diminished
somewhat, largely as a result of a shift away from the seasonal population growth that once characterized many of our coastal communities and toward a more year-round economy resulting from increasing numbers of permanent residents and retirees
relocating to these markets. The seasonal patterns that once characterized agribusiness also have been lessened with agricultural product diversification, the year round marketing and sales of agricultural commodities, and agribusiness tax and
financial planning.



The current real estate cycle has been
trending downward in most of the Banks markets. This downward trend has and will continue to have an impact on the real estate lending of the Bank. Continued emphasis will be placed on the customers ability to generate sufficient cash
flow to support their total credit exposure rather than reliance upon the underlying value of the real estate being held as collateral for those loans.



We do not believe we have any one customer from whom more than 10% of our revenues are derived. However, we have multiple customers, commercial and
retail, that are directly or indirectly affected by, or engaged in businesses related to, the tourism and agribusiness industries and that, in the aggregate, historically have provided greater than 10% of our revenues.



Deposit Activities



Our deposit services include business and individual checking accounts, NOW accounts, money market checking accounts,
savings accounts and certificates of deposit. We monitor our competition in order to keep the rates paid on our deposits at a competitive level. On December 31, 2007, our time deposits of $100,000 or more amounted to approximately $162.3
million, or approximately 30.8% of our total deposits. We derive the majority of our deposits from within our banking market. However, we also accept deposits through deposit brokers and market our certificates of deposit by advertising our deposit
rates on an Internet certificate of deposit network, and we generate a significant amount of out-of-market deposits in that manner. Although we accept these deposits primarily for liquidity purposes, we also use them to manage our interest rate
risk. On December 31, 2007, our out-of-market deposits amounted to approximately $42.6 million, or approximately 8.1% of our total deposits and approximately 13.8% of our total certificates of deposit.



Statistical information about our deposit accounts is contained in
Item 7 of this report under the caption Managements Discussion and Analysis of Financial Condition and Results of Operations.



Investment Portfolio



On December 31, 2007, our investment portfolio totaled approximately $125.9 million and included municipal securities, corporate notes,
mortgage-backed securities guaranteed by the Government National Mortgage Association or issued by the Federal National Mortgage Corporation and Federal Home Loan Mortgage Corporation (including collateralized mortgage obligations), securities
issued by U.S. government-sponsored enterprises and agencies and equity securities. We have classified all of our securities as available-for-sale, and we analyze their performance at least quarterly. Our securities have various interest
rate features, maturity dates and call options.



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Statistical information about our investment portfolio is contained in Item 7 of this report under
the caption Managements Discussion and Analysis of Financial Condition and Results of Operations.



Employees



On December 31, 2007, the Bank employed 218 full-time employees (including our executive officers), and 6 part-time employees. We have no separate
employees of our own. The Bank is not party to any collective bargaining agreement with its employees, and we consider the Banks relations with its employees to be good.



Legal Proceedings



From time to time we may become involved in legal proceedings in the ordinary course of our business. However, subject to the uncertainties inherent in
any litigation, we believe that no pending or threatened proceedings are likely to result in a material adverse change in our financial condition or operating results.



Supervision and Regulation



Our business and operations are subject to extensive federal and state governmental regulation and supervision. The following is a summary of some of
the basic statutes and regulations that apply to us. However, it is not a complete discussion of all the laws that affect our business, and it is qualified in its entirety by reference to the particular statutory or regulatory provision or proposal
being described.



General.    We
are a bank holding company registered with the Federal Reserve Board (the FRB) under the Bank Holding Company Act of 1956, as amended (the BHCA). We are subject to supervision and examination by, and the regulations and
reporting requirements of, the FRB. Under the BHCA, a bank holding companys activities are limited to banking, managing or controlling banks, or engaging in other activities the FRB determines are closely related and a proper incident to
banking or managing or controlling banks.



The BHCA prohibits a
bank holding company from acquiring direct or indirect control of more than 5.0% of the outstanding voting stock, or substantially all of the assets, of any financial institution, or merging or consolidating with another bank holding company or
savings bank holding company, without the FRBs prior approval. Additionally, the BHCA generally prohibits bank holding companies from engaging in a nonbanking activity, or acquiring ownership or control of more than 5.0% of the outstanding
voting stock of any company that engages in a nonbanking activity, unless that activity is determined by the FRB to be closely related and a proper incident to banking. In approving an application to engage in a nonbanking activity, the FRB must
consider whether that activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts of interest or unsound banking practices.



The law imposes a number of obligations and restrictions on a bank holding company and its insured bank subsidiaries designed to minimize potential losses
to depositors and the FDIC insurance funds. For example, if a bank holding companys insured bank subsidiary becomes undercapitalized, the bank holding company is required to guarantee the banks compliance (subject to certain
limits) with the terms of any capital restoration plan filed with its federal banking agency. A bank holding company is required to serve as a source of financial strength to its bank subsidiaries and to commit resources to support those banks in
circumstances in which, absent that policy, it might not do so. Under the BHCA, the FRB may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary if the FRB determines that the activity or control
constitutes a serious risk to the financial soundness and stability of a bank subsidiary of a bank holding company.



The Bank is an insured, North Carolina-chartered bank. Its deposits are insured under the FDICs Deposit Insurance Fund, and it is subject to
supervision and examination by, and the regulations and reporting requirements of, the FDIC and the North Carolina Commissioner of Banks (the Commissioner). The Bank is not a member of the Federal Reserve System.



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As an insured bank, the Bank is prohibited from engaging as a principal in an activity that is not
permitted for national banks unless (1) the FDIC determines that the activity would pose no significant risk to the deposit insurance fund and (2) the Bank is in compliance with applicable capital standards. Insured banks also are
prohibited generally from directly acquiring or retaining any equity investment of a type or in an amount not permitted for national banks.



The Commissioner and the FDIC regulate all areas of the Banks business, including its payment of dividends and other aspects of its operations. They
conduct regular examinations of the Bank, and the Bank must furnish periodic reports to the Commissioner and the FDIC containing detailed financial and other information about its affairs. The Commissioner and the FDIC have broad powers to enforce
laws and regulations that apply to the Bank and to require corrective action of conditions that affect its safety and soundness. These powers include, among others, issuing cease and desist orders, imposing civil penalties, removing officers and
directors, and otherwise intervening in the Banks operation and management if examinations of the Bank and the reports it files indicate the need to do so.



The Banks business also is influenced by prevailing economic conditions and governmental policies, both foreign and
domestic, and, though it is not a member bank of the Federal Reserve System, by the monetary and fiscal policies of the FRB. The FRBs actions and policy directives determine to a significant degree the cost and availability of funds the Bank
obtains from money market sources for lending and investing, and they also influence, directly and indirectly, the rates of interest the Bank pays on its time and savings deposits and the rates it charges on commercial bank loans.



Gramm-Leach-Bliley Act.    The federal
Gramm-Leach-Bliley Act enacted in 1999 (the GLB Act) dramatically changed various federal laws governing the banking, securities and insurance industries.



The GLB Act permits bank holding companies to become financial holding companies and, in general
(1) expands opportunities to affiliate with securities firms and insurance companies; (2) overrides certain state laws that would prohibit certain banking and insurance affiliations; (3) expands the activities in which banks and bank
holding companies may participate; (4) requires that banks and bank holding companies engage in some activities only through affiliates owned or managed in accordance with certain requirements; and (5) reorganizes responsibility among
various federal regulators for oversight of certain securities activities conducted by banks and bank holding companies.



The GLB Act has expanded opportunities for us and the Bank to provide other services and obtain other revenues in the future. However, this expanded
authority also may present us with new challenges as our larger competitors are able to expand their services and products into areas that are not feasible for smaller, community oriented financial institutions. To date we have not elected to become
a financial holding company.



Payment of
Dividends.    Under North Carolina law, we are authorized to pay dividends as declared by our Board of Directors, provided that no such distribution results in our insolvency on a going concern or balance sheet basis.
However, although we are a legal entity separate and distinct from the Bank, our principal source of funds with which we can pay dividends to our shareholders is dividends we receive from the Bank. For that reason, our ability to pay dividends
effectively is subject to the same limitations that apply to the Bank.



In general, the Bank may pay dividends only from its undivided profits. However, if its surplus is less than 50% of its paid-in capital stock, the Banks directors may not declare any cash dividend until it has transferred to surplus
25% of its undivided profits or any lesser percentage necessary to raise its surplus to an amount equal to 50% of its paid-in capital stock.



Federal law prohibits the Bank from making any capital distributions, including paying a cash dividend, if it is, or after making the distribution it
would become, undercapitalized as that term is defined in the Federal Deposit Insurance Act (the FDIA). Also, if in the FDICs opinion an insured bank under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice, the FDIC may require, after notice and hearing, that the bank cease and desist from that practice. The FDIC has indicated that paying dividends that deplete a banks capital base to an inadequate level would be an
unsafe and unsound banking practice. (See Prompt Corrective Action below.) The FDIC has issued policy statements which provide that insured banks generally should pay dividends only out of their current operating earnings. Also,
under the FDIA no dividend may be paid by an FDIC-insured bank while it is in default on any assessment due the FDIC. The Banks payment of dividends also may be affected or limited by other factors, such as events or circumstances that lead
the FDIC to require the Bank to maintain its capital above regulatory guidelines.



9



---

In the future, our ability to declare and pay cash dividends will be subject to our Board of
Directors evaluation of our operating results, capital levels, financial condition, future growth plans, general business and economic conditions, and other relevant considerations.



Capital Adequacy.    We and the Bank are required to comply with the FRBs and FDICs
capital adequacy standards for bank holding companies and insured banks. The FRB and FDIC have issued risk-based capital and leverage capital guidelines for measuring capital adequacy, and all applicable capital standards must be satisfied for us or
the Bank to be considered in compliance with regulatory capital requirements.



Under the risk-based capital guidelines, the minimum ratio (Total Capital Ratio) of an entitys total capital (Total Capital) to its risk-weighted assets (including certain
off-balance-sheet items, such as standby letters of credit) is 8.0%. At least half of Total Capital must be composed of Tier 1 Capital. Tier 1 Capital includes common equity, undivided profits, minority interests in the equity accounts
of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, and a limited amount of cumulative perpetual preferred stock, less goodwill and certain other intangible assets. The remaining Total Capital may consist of Tier
2 Capital which includes certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of loan loss reserves. A bank or bank holding company that does not satisfy minimum capital
requirements may be required to adopt and implement a plan acceptable to its federal banking regulator to achieve an adequate level of capital.



Under the leverage capital measure, the minimum ratio (the Leverage Capital Ratio) of Tier 1 Capital to average assets, less goodwill and
various other intangible assets, is 3.0% for entities that meet specified criteria, including having the highest regulatory rating. All other entities generally are required to maintain an additional cushion of 100 to 200 basis points above the
stated minimum. The guidelines also provide that banks experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum levels without significant reliance on intangible
assets. A banks Tangible Leverage Ratio (deducting all intangibles) and other indicators of capital strength also will be taken into consideration by banking regulators in evaluating proposals for expansion or new activities.



The FRB and the FDIC also consider interest rate risk (when
the interest rate sensitivity of an institutions assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in evaluating capital adequacy. Banks with excessive interest rate risk exposure must hold additional
amounts of capital against their exposure to losses resulting from that risk. The regulators also require banks to incorporate market risk components into their risk-based capital. Under these market risk requirements, capital is allocated to
support the amount of market risk related to a banks trading activities.



The following table lists our consolidated regulatory capital ratios, and the Banks separate regulatory capital ratios, at December 31, 2007. On that date, our capital ratios were at levels to qualify us as
well capitalized.



|                                                                                         |  |                        |   |  |                                  |   |  |                               |   |  |                          |  
|---------------------------------------------------------------------------------------- |  | ---------------------- | - |  | -------------------------------- | - |  | ----------------------------- | - |  | ------------------------ | -
|                                                                                         |  | MinimumRequired Ratios |   |  | Required to beWell Capitalized |   |  | OurConsolidatedCapital Ratios |   |  | The BanksCapital Ratios |  
|Leverage Capital Ratio (Tier 1 Capital to average assets)                                |  | 3.0                    | % |  | 5.0                              | % |  | 10.66                         | % |  | 8.98                     | %
|Risk-based capital ratios: Tier 1 Capital Ratio (Tier 1 Capital to risk-weighted assets) |  | 4.0                    | % |  | 6.0                              | % |  | 12.94                         | % |  | 10.90                    | %
|Total Capital Ratio (Total Capital to risk-weighted assets)                              |  | 8.0                    | % |  | 10.0                             | % |  | 13.72                         | % |  | 11.69                    | %



Our capital categories
are determined only for the purpose of applying the prompt corrective action rules described below which have been adopted by the various federal banking regulators, and they do not necessarily constitute an accurate representation of
overall financial condition or prospects for other purposes. A failure to meet capital guidelines could subject us to a variety of enforcement remedies under those rules, including issuance of a capital directive, termination of FDIC deposit
insurance, a prohibition on taking brokered deposits, and other restrictions on our business. As described below, substantial additional restrictions can be imposed on banks that fail to meet applicable capital requirements. (See Prompt
Corrective Action below.)



10



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Prompt Corrective Action.    Federal law establishes a system of prompt
corrective action to resolve the problems of undercapitalized banks. Under this system, the FDIC has established five capital categories (well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized) and it is required to take various mandatory supervisory actions, and is authorized to take other discretionary actions, with respect to banks in the three
undercapitalized categories. The severity of any actions taken will depend on the capital category in which a bank is placed. Generally, subject to a narrow exception, current federal law requires the FDIC to appoint a receiver or conservator for a
bank that is critically undercapitalized.



Under the
FDICs rules implementing the prompt corrective action provisions, an insured, state-chartered bank that (1) has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or
greater, and (2) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC, is considered well capitalized. A bank with a Total Capital Ratio of 8.0% or greater, a
Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater, is considered adequately capitalized. A bank that has a Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than 4.0%, or a
Leverage Ratio of less than 4.0%, is considered undercapitalized. A bank that has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio of less than 3.0%, is considered
significantly undercapitalized, and a bank that has a tangible equity capital to assets ratio equal to or less than 2.0% is considered critically undercapitalized. For purposes of these rules, the term tangible
equity includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards (see Capital Adequacy above), plus the amount of outstanding cumulative perpetual preferred stock
(including related surplus), minus all intangible assets (with various exceptions). A bank may be deemed to be in a lower capitalization category than indicated by its actual capital position if it receives an unsatisfactory examination rating.



A bank categorized as undercapitalized,
significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to the FDIC. An undercapitalized bank also is generally prohibited from increasing its
average total assets, making acquisitions, establishing new branches, or engaging in new lines of business, other than in accordance with an accepted capital restoration plan or with the FDICs approval. Also, the FDIC may treat an
undercapitalized bank as being significantly undercapitalized if it determines that is necessary to carry out the purpose of the law. On December 31, 2007, our capital ratios were at levels to qualify us as well
capitalized.



Reserve
Requirements.    Under the FRBs regulations, all FDIC-insured banks must maintain average daily reserves against their transaction accounts. No reserves are required on the first $9.3 million of transaction accounts,
but a bank must maintain reserves equal to 3.0% on aggregate balances between $9.3 million and $43.9 million, and reserves equal to 10.0% on aggregate balances in excess of $43.9 million. The FRB may adjust these percentages from time to time.
Because our reserves must be maintained in the form of vault cash or in a non-interest-bearing account at a Federal Reserve Bank, one effect of the reserve requirement is to reduce the amount of our interest-earning assets.



Federal Deposit Insurance Reform.    On
February 8, 2006, President Bush signed the Federal Deposit Insurance Reform Act of 2005 (FDIRA).



Among other things, FDIRA changes the Federal deposit insurance system by:



| | · |  | raising the coverage level for retirement accounts to $250,000;
| | - |  | ---------------------------------------------------------------



| | · |  | indexing deposit insurance coverage levels for inflation beginning in 2012;
| | - |  | ---------------------------------------------------------------------------



| | · |  | prohibiting undercapitalized financial institutions from accepting employee benefit plan deposits;
| | - |  | --------------------------------------------------------------------------------------------------



| | · |  | merging the Bank Insurance Fund and Savings Association Insurance Fund into a new Deposit Insurance Fund (the DIF); and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| | · |  | providing credits to financial institutions that capitalized the FDIC prior to 1996 to offset future assessment premiums.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



FDIRA also authorized the FDIC to revise the current risk-based assessment
system, subject to notice and comments, and caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue cash dividends, awarded on a historical basis, for the amount of the DIF over the 1.50% ratio. Additionally, if the DIF exceeds
1.35% of domestic deposits at year-end, the FDIC must issue cash dividends, awarded on a historical basis, for half of the amount of the excess.



11



---

FDIC Insurance Assessments.    Under FDIRA, the FDIC uses a revised risk-based
assessment system to determine the amount of the Banks deposit insurance assessment based on an evaluation of the probability that the DIF will incur a loss with respect to the Bank. That evaluation takes into consideration risks attributable
to different categories and concentrations of the Banks assets and liabilities and any other factors the FDIC considers to be relevant, including information obtained from the Commissioner. A higher assessment rate results in an increase in
the assessments paid by the Bank to the FDIC for deposit insurance



Under the Federal Deposit Insurance Act, the FDIC may terminate the Banks deposit insurance if it finds that the Bank engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has
violated applicable laws, regulations, rules or orders.



The
FDIC is responsible for maintaining the adequacy of the DIF, and the amount the Bank pays for deposit insurance is influenced not only by the assessment of the risk it poses to the DIF, but also by the adequacy of the insurance fund at any time to
cover the risk posed by all insured institutions. FDIC insurance assessments could be increased substantially in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the insurance fund.



Restrictions on Transactions with
Affiliates.    The Bank is subject to the provisions of Section 23A of the Federal Reserve Act which, among other things, places limits on the amount of:



| | · |  | a banks loans or extensions of credit to, or investment in, its affiliates;
| | - |  | ----------------------------------------------------------------------------



| | · |  | assets a bank may purchase from affiliates, except for real and personal property exempted by the FRB;
| | - |  | ------------------------------------------------------------------------------------------------------



| | · |  | the amount of a banks loans or extensions of credit to third parties collateralized by securities or obligations of the banks affiliates; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | a banks issuance of a guarantee, acceptance or letter of credit for its affiliates.
| | - |  | ------------------------------------------------------------------------------------



The total amount of these transactions is limited in amount, as to any one
affiliate, to 10% of a banks capital and surplus and, as to all affiliates, to 20% of a banks capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified
collateral requirements. We also must comply with other provisions under Section 23A that are designed to avoid the taking of low-quality assets from an affiliate.



The Bank also is subject to the provisions of Section 23B of the Federal Reserve Act which, among other things, prohibit a bank or its
subsidiaries generally from engaging in transactions with its affiliates unless those transactions are on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as would apply in comparable transactions with
nonaffiliated companies.



Federal law also restricts the
Banks ability to extend credit to its and our executive officers, directors, principal shareholders and their related interests. These credit extensions (1) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with unrelated third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.



Interstate Banking and Branching.    The Bank
Holding Company Act, as amended by the interstate banking provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the Interstate Banking Law), permits adequately capitalized and managed bank holding
companies to acquire control of the assets of banks in any state. Acquisitions are subject to provisions that cap at 10.0% the portion of the total deposits of insured depository institutions in the United States that a single bank holding company
may control, and generally cap at 30.0% the portion of the total deposits of insured depository institutions in a state that a single bank holding company may control. Under certain circumstances, states have the authority to increase or decrease
the 30.0% cap, and states may set minimum age requirements of up to five years on target banks within their borders.



Subject to certain conditions, the Interstate Banking Law also permits interstate branching by allowing a bank in one state to merge with a bank located
in a different state. Each state was allowed to accelerate the effective date for interstate mergers by adopting a law authorizing such transactions prior to June 1, 1997, or any state could opt out and thereby prohibit interstate
branching in that state by enacting legislation to that effect prior to that date. The Interstate Banking



12



---

Law also permits banks to establish branches in other states by opening new branches or acquiring existing branches of other banks, provided the laws of
those other states specifically permit that form of interstate branching. North Carolina has adopted statutes which, subject to conditions, authorize out-of-state bank holding companies and banks to acquire or merge with North Carolina banks and to
establish or acquire branches in North Carolina.



Community
Reinvestment.    Under the Community Reinvestment Act (the CRA), an insured bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for banks, nor does it limit a banks discretion to develop, consistent with the CRA, the types of products
and services it believes are best suited to its particular community. The CRA requires the federal banking regulators, in their examinations of insured banks, to assess the banks records of meeting the credit needs of their communities, using
the ratings of outstanding, satisfactory, needs to improve, or substantial noncompliance, and to take that record into account in its evaluation of various applications by those banks. All banks are
required to make public disclosure of their CRA performance ratings. We received a satisfactory rating in our last CRA examination during 2006.



USA Patriot Act of 2001.    The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in the
United States on September 11, 2001. The Act is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The Acts impact on all financial
institutions is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency requirements and imposes various other regulatory requirements, including standards for verifying customer identification at
account opening, and rules promoting cooperation among financial institutions, regulators and law enforcement agencies in identifying parties that may be involved in terrorism or money laundering.



Sarbanes-Oxley Act of 2002.    The Sarbanes-Oxley
Act of 2002, which became effective on July 30, 2002, is sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The Act imposes significant new requirements on all public companies. Some provisions of
the Act became effective immediately while others are still being implemented.



In general, the Sarbanes-Oxley Act mandated important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies reported financial
results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process, and it created a new regulatory body to oversee auditors of public companies. It
backed these requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. It
also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new corporate whistleblower protection.



The Act also required the various securities exchanges, including The Nasdaq Stock Market, to prohibit the listing of a
companys stock unless that company complies with various new corporate governance requirements imposed by the exchanges, including the requirement that various corporate matters (including executive compensation and board nominations) be
approved, or recommended for approval, by the issuers full board of directors, by directors of the issuer who are independent as defined by the exchanges rules, or by committees made up of independent directors.
Because our common stock is listed on The NASDAQ Global Market, we are subject to those provisions of the Act and to corporate governance requirements of The Nasdaq Stock Market.



The economic and operational effects of the Sarbanes-Oxley Act on public companies, including us, have been and will
continue to be significant in terms of the time, resources and costs associated with compliance. Because the Act, for the most part, applies equally to larger and smaller public companies, we will continue to be presented with additional challenges
as a smaller, community-oriented financial institution seeking to compete with larger financial institutions in our markets.



Available Information



Copies of reports we file electronically with the Securities and Exchange Commission, including copies of our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, and Current Reports on Form 8-K, and amendments to those reports, are available free of charge through our Internet website as soon as reasonably practicable after they are filed. Our website address is
www.ecbbancorp.com.



13



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Item 1A.    Risk Factors

---



Not applicable.



Item 1B.    Unresolved Staff Comments

---



Not applicable.



Item 2.    Properties

---



Our offices are located in the Banks corporate offices in Engelhard,
North Carolina, and we do not own or lease any separate properties. The Bank maintains 23 branch offices, 20 of which are owned by the Bank, and three of which are leased from unaffiliated third parties. The following table contains information
about our branch offices.



|                                       |  |                                       |  |              |     |  |                                           
|-------------------------------------- |  | ------------------------------------- |  | ------------ | --- |  | ------------------------------------------
|Office location                        |  | Opening date oforiginalbanking
office |  | Owned/Leased |     |  | Date current facilitybuilt orpurchased
(1)
|                                       |  |                                       | 
|35050 Hwy 264 Engelhard, NC            |  | January 1920                          |  | Owned        |     |  | 2004                                      
|                                       |  |                                       | 
|80 Main and Pearl St. Swan Quarter, NC |  | March 1935                            |  | Owned        | (2) |  | 1975                                      
|                                       |  |                                       | 
|204 Scuppernong Dr. Columbia, NC       |  | December 1936                         |  | Owned        | (2) |  | 1975                                      
|                                       |  |                                       | 
|7th St. & Hwy. 64 Creswell, NC         |  | January 1963                          |  | Owned        |     |  | 1963                                      
|                                       |  |                                       | 
|205 Virginia Dare Rd. Manteo, NC       |  | June 1969                             |  | Owned        |     |  | 1999                                      
|                                       |  |                                       | 
|2721 S Croatan Hwy. Nags Head, NC      |  | April 1971                            |  | Owned        | (2) |  | 1974                                      
|                                       |  |                                       | 
|State Hwy. 12 Hatteras, NC             |  | April 1973                            |  | Owned        | (2) |  | 1980                                      
|                                       |  |                                       | 
|6839 N.C. Hwy. 94 Fairfield, NC        |  | June 1973                             |  | Owned        | (2) |  | 1973                                      
|                                       |  |                                       | 
|Hwy. 12 Ocracoke, NC                   |  | May 1978                              |  | Owned        |     |  | 1978                                      
|                                       |  |                                       | 
|Hwy. 158 & Juniper Tr. Kitty Hawk, NC  |  | May 1984                              |  | Owned        | (3) |  | 2006                                      
|                                       |  |                                       | 
|1001 Red Banks Rd. Greenville, NC      |  | August 1989                           |  | Owned        |     |  | 1990                                      
|                                       |  |                                       | 
|2400 Stantonsburg Rd. Greenville, NC   |  | June 1995                             |  | Owned        |     |  | 1995                                      
|                                       |  |                                       | 
|NC Hwy. 12 Avon, NC                    |  | June 1997                             |  | Leased       | (4) |  |                                          
|                                       |  |                                       | 
|2878 Caratoke Hwy. Currituck, NC       |  | January 1998                          |  | Owned        |     |  | 2001                                      



14



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|                                               |  |                                       |  |              |     |  |                                           
|---------------------------------------------- |  | ------------------------------------- |  | ------------ | --- |  | ------------------------------------------
|Office location                                |  | Opening date oforiginalbanking
office |  | Owned/Leased |     |  | Date current facilitybuilt orpurchased
(1)
|                                               |  |                                       | 
|1418 Carolina Ave. Washington, NC              |  | May 1999                              |  | Leased       | (4) |  |                                          
|                                               |  |                                       | 
|1801 S Glenburnie Rd. New Bern, NC             |  | August 2000                           |  | Owned        |     |  | 1996                                      
|                                               |  |                                       | 
|1103 Harvey Point Road Hertford, NC            |  | October 2000                          |  | Owned        | (5) |  | 2006                                      
|                                               |  |                                       | 
|403 East Blvd. Williamston, NC                 |  | May 2003                              |  | Owned        |     |  | 2003                                      
|                                               |  |                                       | 
|168 Hwy. 24 Morehead City, NC                  |  | January 2004                          |  | Owned        |     |  | 2004                                      
|                                               |  |                                       | 
|1724 Eastwood Rd. Wilmington, NC               |  | June 2004                             |  | Owned        |     |  | 2004                                      
|                                               |  |                                       | 
|100 Causeway Drive Unit 4 Ocean Isle Beach, NC |  | May 2007                              |  | Leased       | (4) |  |                                          
|                                               |  |                                       | 
|1221 Portertown Rd. Greenville, NC             |  | July 2007                             |  | Owned        |     |  | 2007                                      
|                                               |  |                                       | 
|3810 S. Memorial Dr. Winterville, NC           |  | July 2007                             |  | Owned        |     |  | 2007                                      

---

|(1) |  | Includes only facilities owned by the Bank.
|--- |  | -------------------------------------------

|(2) |  | Leased from the Banks subsidiary, ECB Realty, Inc. until February 2, 2007. ECB Realty, Inc. was merged into the Bank on that date and the Bank acquired title to the
property.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Constructed by the Bank and first occupied during February 2006 to replace a facility previously leased from ECB Realty, Inc.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------

|(4) |  | Leased from a third party.
|--- |  | --------------------------

|(5) |  | Constructed by the Bank and first occupied during January 2006 to replace a facility previously leased from a third party.
|--- |  | --------------------------------------------------------------------------------------------------------------------------



The Bank owns a vacant property in each of Jacksonville, Wilmington, New Bern
and Grandy, North Carolina, as sites for future branch offices. We are currently constructing a new office in Leland, North Carolina, which will be opened in 2008.



All the Banks existing branch offices are in good condition and fully equipped for the Banks purposes. At
December 31, 2007, our consolidated investment in premises and banking equipment (cost less accumulated depreciation) was approximately $24.4 million.



Item 3.    Legal Proceedings

---



We are not a party to any legal proceeding that is expected to have a
material effect on our financial condition or results of operations.



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

---



Not applicable.



15



---

PART II



Item 5.    Market for Registrants Common Equity; Related Stockholder Matters and Issuer Purchases of Equity Securities

---



Our
common stock was listed on The NASDAQ Global Market on July 3, 2006, under the trading symbol ECBE. Prior to that date, it was listed on The NASDAQ Capital Market. The following table lists the high and low sales prices for our
common stock as reported by The Nasdaq Stock Market for the periods indicated. Prices in the table reflect inter-dealer prices, without retail mark-up, mark-down, or commission, and may not represent actual transactions.



|            |  |                   |       |                                 |   |       |  |   |      
|----------- |  | ----------------- | ----- | ------------------------------- | - | ----- |  | - | -----
|            |  | Sales Price Range |       | Cash DividendDeclared Per Share
|Quarter     |  | High              |       | Low                             |  
|2007 Fourth |  | $                 | 27.60 |                                 | $ | 21.00 |  | $ | 0.175
|Third       |  |                   | 30.99 |                                 |   | 23.52 |  |   | 0.175
|Second      |  |                   | 34.26 |                                 |   | 29.25 |  |   | 0.175
|First       |  |                   | 33.67 |                                 |   | 31.70 |  |   | 0.175
|2006 Fourth |  |                   | 34.05 |                                 |   | 31.80 |  |   | 0.170
|Third       |  |                   | 35.10 |                                 |   | 32.30 |  |   | 0.170
|Second      |  |                   | 35.24 |                                 |   | 32.75 |  |   | 0.170
|First       |  |                   | 35.13 |                                 |   | 26.75 |  |   | 0.170



On March 6, 2008,
there were approximately 669 record holders of our common stock. We believe the number of beneficial owners of our common stock is greater than the number of record holders because a large amount of our common stock is held of record through
brokerage firms in street name.



Under North
Carolina law, we are authorized to pay dividends as declared by our Board of Directors, provided that no such distribution results in our insolvency on a going concern or balance sheet basis. We have paid cash dividends since we were incorporated
during 1998, and we intend to continue to pay dividends on a quarterly basis. However, although we are a legal entity separate and distinct from the Bank, our principal source of funds with which we can pay dividends to our shareholders is dividends
we receive from the Bank. For that reason, our ability to pay dividends effectively is subject to the limitations that apply to the Bank.



In general, the Bank may pay dividends only from its undivided profits. However, if its surplus is less than 50% of its paid-in capital stock, the
Banks directors may not declare any cash dividend until it has transferred to surplus 25% of its undivided profits or any lesser percentage necessary to raise its surplus to an amount equal to 50% of its paid-in capital stock. The Banks
ability to pay dividends to us is subject to other regulatory restrictions. (See Supervision and RegulationDividends under Item 1. Business.)



In the future, our ability to declare and pay cash dividends will be subject to evaluation by our Board of Directors of our
and the Banks operating results, capital levels, financial condition, future growth plans, general business and economic conditions, and other relevant considerations, and we cannot assure you that we will continue to pay cash dividends on any
particular schedule or that we will not reduce the amount of dividends we pay in the future.



The following table contains information regarding repurchases of shares of our outstanding common stock during the fourth quarter of 2007.



Issuer Repurchases of Equity Securities



|                                   |  |                                   |  |                                  |       |                                                                                    |       |                                                                                   |        
|---------------------------------- |  | --------------------------------- |  | -------------------------------- | ----- | ---------------------------------------------------------------------------------- | ----- | --------------------------------------------------------------------------------- | -------
|Period                             |  | (a)Total Numberof SharesPurchased |  | (b)AveragePrice PaidPer Share(1) |       | (c)Total Number ofShares Purchasedas Part of
PubliclyAnnouncedPlans or Programs(2) |       | (d)Maximum Number ofShares That May Yet BePurchased Under thePlans or Programs(3)
|Month #1 10/01/07 through 10/31/07 |  |                                  |  | $                                |      |                                                                                    |      |                                                                                   | 146,000
|Month #2 11/01/07 through 11/30/07 |  | 223                               |  |                                  | 25.43 |                                                                                    | 223   |                                                                                   | 145,777
|Month #3 12/01/07 through 12/31/07 |  | 1,000                             |  |                                  | 25.17 |                                                                                    | 1,000 |                                                                                   | 144,777
|Total                              |  | 1,223                             |  | $                                | 25.22 |                                                                                    | 1,223 |                                                                                   | 144,777



16



---

---

|(1) |  | Reflects weighted average price paid per share.
|--- |  | -----------------------------------------------

|(2) |  | On September 19, 2007, we announced that our Board of Directors had authorized our repurchase of up to 146,000 shares of our outstanding common stock and our adoption of a stock
trading plan under Rule 10b5-1 of the Securities and Exchange Act of 1934. The shares may be purchased from time to time in open market transactions or solicited or unsolicited privately negotiated transactions, subject to factors such as stock
price, our operating results and financial condition, general economic and market conditions, and our available cash. The Boards action approving share repurchases and the stock trading plan does not obligate us to acquire any particular
amount of shares, and purchases may be suspended or discontinued at any time at our discretion. The boards authorization expires on September 18, 2008.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | As of December 31, 2007.
|--- |  | ------------------------



The following information is being furnished for purposes of Rule 14a-3. It is not deemed to be filed with

the Securities and Exchange Commission or to be incorporated by reference into any filing under

the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent

that we specifically incorporate it by reference into such a filing.



LOGO



|                      |  |          |  |               |  |          |  |          |  |          |  |         
|--------------------- |  | -------- |  | ------------- |  | -------- |  | -------- |  | -------- |  | --------
|                      |  |          |  | Period Ending |  |         
|Index                 |  | 12/31/02 |  | 12/31/03      |  | 12/31/04 |  | 12/31/05 |  | 12/31/06 |  | 12/31/07
|ECB Bancorp, Inc.     |  | 100.00   |  | 161.77        |  | 169.32   |  | 159.12   |  | 196.81   |  | 158.28  
|NASDAQ Composite      |  | 100.00   |  | 150.01        |  | 162.89   |  | 165.13   |  | 180.85   |  | 198.60  
|SNL Bank NASDAQ Index |  | 100.00   |  | 129.08        |  | 147.94   |  | 143.43   |  | 161.02   |  | 126.42  



17



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Item 6.    Selected Financial Data

---



The following table contains summary
historical consolidated financial information from our consolidated financial statements. You should read it in conjunction with our audited year end consolidated financial statements, including the related notes, and Managements
Discussion and Analysis of Financial Condition and Results of Operations which are included elsewhere in this report.



|                                                      |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|----------------------------------------------------- |  | --------------------------------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                      |  | At or for the Year Ended December 31,         |          
|                                                      |  | 2007                                          |           |   | 2006 |   |           | 2005 |  |   | 2004      |   |  | 2003 |          
|                                                      |  | (Dollars in thousands, except per share data) |          
|Income Statement Data:                                |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Net interest income                                   |  | $                                             | 20,548    |   |      | $ | 20,697    |      |  | $ | 18,952    |   |  | $    | 16,822    |   |  | $ | 15,230    |  
|Provision for loan losses                             |  |                                               | (99       | ) |      |   | 351       |      |  |   | 757       |   |  |      | 804       |   |  |   | 638       |  
|Non-interest income                                   |  |                                               | 6,186     |   |      |   | 6,183     |      |  |   | 6,225     |   |  |      | 4,802     |   |  |   | 5,464     |  
|Non-interest expense                                  |  |                                               | 20,344    |   |      |   | 18,537    |      |  |   | 17,465    |   |  |      | 15,515    |   |  |   | 14,451    |  
|Provision for income taxes                            |  |                                               | 1,677     |   |      |   | 2,410     |      |  |   | 2,102     |   |  |      | 2,025     |   |  |   | 1,700     |  
|Net income                                            |  |                                               | 4,812     |   |      |   | 5,582     |      |  |   | 4,853     |   |  |      | 3,280     |   |  |   | 3,906     |  
|                                                      |  |                                               |           |   |     
|Per Share Data and Shares Outstanding:                |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic net income(1)                                   |  | $                                             | 1.65      |   |      | $ | 2.07      |      |  | $ | 2.41      |   |  | $    | 1.63      |   |  | $ | 1.93      |  
|Diluted net income(1)                                 |  |                                               | 1.65      |   |      |   | 2.05      |      |  |   | 2.37      |   |  |      | 1.60      |   |  |   | 1.91      |  
|Cash dividends declared                               |  |                                               | 0.70      |   |      |   | 0.68      |      |  |   | 0.64      |   |  |      | 0.57      |   |  |   | 0.50      |  
|Book value at period end                              |  |                                               | 22.88     |   |      |   | 21.64     |      |  |   | 16.94     |   |  |      | 15.74     |   |  |   | 15.04     |  
|Weighted-average number of common shares outstanding: |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Basic                                                 |  |                                               | 2,908,371 |   |      |   | 2,700,663 |      |  |   | 2,014,879 |   |  |      | 2,016,680 |   |  |   | 2,022,264 |  
|Diluted                                               |  |                                               | 2,914,352 |   |      |   | 2,724,717 |      |  |   | 2,046,129 |   |  |      | 2,044,201 |   |  |   | 2,045,263 |  
|Shares outstanding at period end                      |  |                                               | 2,920,769 |   |      |   | 2,902,242 |      |  |   | 2,040,042 |   |  |      | 2,038,242 |   |  |   | 2,037,929 |  
|                                                      |  |                                               |           |   |     
|Balance Sheet Data:                                   |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Total assets                                          |  | $                                             | 643,889   |   |      | $ | 624,070   |      |  | $ | 547,686   |   |  | $    | 501,890   |   |  | $ | 434,964   |  
|Loans receivable                                      |  |                                               | 454,198   |   |      |   | 417,943   |      |  |   | 386,786   |   |  |      | 329,530   |   |  |   | 281,581   |  
|Allowance for loan losses                             |  |                                               | 4,083     |   |      |   | 4,725     |      |  |   | 4,650     |   |  |      | 4,300     |   |  |   | 3,550     |  
|Other interest-earning assets                         |  |                                               | 133,970   |   |      |   | 151,555   |      |  |   | 107,583   |   |  |      | 115,178   |   |  |   | 102,921   |  
|Total deposits                                        |  |                                               | 526,361   |   |      |   | 512,249   |      |  |   | 465,208   |   |  |      | 411,133   |   |  |   | 352,934   |  
|Borrowings                                            |  |                                               | 43,174    |   |      |   | 41,415    |      |  |   | 41,908    |   |  |      | 54,317    |   |  |   | 47,609    |  
|Shareholders equity                                  |  |                                               | 66,841    |   |      |   | 62,793    |      |  |   | 34,565    |   |  |      | 32,077    |   |  |   | 30,642    |  
|                                                      |  |                                               |           |   |     
|Selected Performance Ratios:                          |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Return on average assets                              |  |                                               | 0.77      | % |      |   | 0.96      | %    |  |   | 0.93      | % |  |      | 0.68      | % |  |   | 0.95      | %
|Return on average shareholders equity                |  |                                               | 7.48      |   |      |   | 10.13     |      |  |   | 14.56     |   |  |      | 10.51     |   |  |   | 12.97     |  
|Net interest margin(2)                                |  |                                               | 3.76      |   |      |   | 4.04      |      |  |   | 4.16      |   |  |      | 4.04      |   |  |   | 4.26      |  
|Efficiency ratio(3)                                   |  |                                               | 73.44     |   |      |   | 67.06     |      |  |   | 67.30     |   |  |      | 69.38     |   |  |   | 67.86     |  
|                                                      |  |                                               |           |   |     
|Asset Quality Ratios:                                 |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Nonperforming loans to period-end loans               |  |                                               | 0.10      | % |      |   | 0.04      | %    |  |   | 0.02      | % |  |      | 0.03      | % |  |   | 0.07      | %
|Allowance for loan losses to period-end loans         |  |                                               | 0.90      |   |      |   | 1.13      |      |  |   | 1.20      |   |  |      | 1.30      |   |  |   | 1.26      |  
|Allowance for loan losses to nonperforming loans      |  |                                               | 876.92    |   |      |   | 2,567.93  |      |  |   | 7,153.85  |   |  |      | 4,174.76  |   |  |   | 1,868.42  |  
|Nonperforming assets to total assets(4)               |  |                                               | 0.08      |   |      |   | 0.07      |      |  |   | 0.01      |   |  |      | 0.03      |   |  |   | 0.10      |  
|Net loan charge-offs to average loans outstanding     |  |                                               | 0.13      |   |      |   | 0.01      |      |  |   | 0.08      |   |  |      | 0.02      |   |  |   | 0.09      |  
|                                                      |  |                                               |           |   |     
|Capital Ratios:                                       |  |                                               |           |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|Equity-to-assets ratio(5)                             |  |                                               | 10.38     | % |      |   | 10.06     | %    |  |   | 6.31      | % |  |      | 6.39      | % |  |   | 7.04      | %
|Leverage capital ratio(6)                             |  |                                               | 10.66     |   |      |   | 12.05     |      |  |   | 8.43      |   |  |      | 8.43      |   |  |   | 9.31      |  
|Tier 1 capital ratio(6)                               |  |                                               | 12.94     |   |      |   | 15.08     |      |  |   | 10.32     |   |  |      | 10.86     |   |  |   | 11.41     |  
|Total capital ratio(6)                                |  |                                               | 13.72     |   |      |   | 16.04     |      |  |   | 11.36     |   |  |      | 11.96     |   |  |   | 12.52     |  

---

|(1) |  | Per share amounts are computed based on the weighted-average number of shares outstanding during each period.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(2) |  | Net interest margin is net interest income divided by average interest earning assets, net of allowance for loan losses.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

|(3) |  | Efficiency ratio is non-interest expense divided by the sum of net interest income and non-interest income, both as calculated on a fully taxable-equivalent basis.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Nonperforming assets consist of the aggregate amount of any non-accruing loans, loans past due greater than 90 days and still accruing interest, restructured loans, repossessions
and foreclosed assets on each date.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Equity-to-assets ratios are computed based on total shareholders equity and total assets at each period end.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(6) |  | These ratios are described in Item 1 under the captions Supervision and RegulationCapital Adequacy and Prompt Corrective Action.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------



18



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Item 7.    Managements Discussion and Analysis of Financial Condition
and Results of Operations.

---



This section presents managements discussion and analysis of our financial condition and results of operations. You should read the discussion in conjunction with our financial statements and related notes
included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those described in these forward-looking statements as a result of
various factors. This discussion is intended to assist in understanding our financial condition and results of operations.



Executive Summary



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



Our consolidated
assets increased 3.2% to $643.9 million on December 31, 2007, from $624.1 million at year-end 2006. Our loan portfolio increased 8.7% to $454.2 million at December 31, 2007, from loans of $417.9 million at year-end 2006 while deposits
increased 2.8% to $526.4 million at year-end 2007 from $512.2 million at year-end 2006. Total shareholders equity was approximately $66.8 million at year-end 2007.



In 2007, our net income was $4.8 million or $1.65 basic and $1.65 diluted earnings per share, compared to net income of $5.6 million or
$2.07 basic and $2.05 diluted earnings per share for the year ended December 31, 2006. The 2007 net income represents a decrease of $0.8 million over reported 2006 net income.



Critical Accounting Policies



Our significant accounting policies are set forth in Note 1 to our audited consolidated financial statements included in Item 8 of this report. Of
these significant accounting policies, we consider our policy regarding the allowance for loan losses to be our most critical accounting policy, because it requires managements most subjective and complex judgments. In addition, changes in
economic conditions can have a significant impact on the allowance for loan losses and, therefore, the provision for loan losses and results of operations. We have developed policies and procedures for assessing the adequacy of the allowance for
loan losses, recognizing that this process requires a number of assumptions and estimates with respect to our loan portfolio. Our 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 currently known to management. For additional discussion concerning our allowance for loan losses and related matters, see Allowance for Loan
Losses and Nonperforming Assets and Past Due Loans.



We also consider our determination of retirement plans and other postretirement benefit plans to be a critical accounting estimate as it requires the use of estimates and judgments related to the amount and timing of
expected future cash out-flows for benefit payments and cash in-flows for maturities and return on plan assets. Our retirement plans and other postretirement benefit plans are actuarially determined based on assumptions on the discount rate,
estimated future return on plan assets and the health care cost trend rate. Changes in estimates and assumptions related to mortality rates and future health care costs could have a material impact to our financial condition or results of
operations. The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate used to value the future benefit obligation as of each year-end is the rate used to determine the
periodic benefit cost in the following year. For additional discussion concerning our retirement plans and other postretirement benefits refer to Note 8 of our consolidated financial statements.



Results of Operations for the Years Ended December 31, 2007, 2006 and 2005



In 2007, our net income was $4.8 million or $1.65 basic
and $1.65 diluted earnings per share, compared to net income of $5.6 million or $2.07 basic and $2.05 diluted earnings per share for the year ended December 31, 2006. The decrease in earnings is primarily due to an increase in operating expense
and interest margin compression.



19



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The following table shows return on assets (net income divided by average assets), return on equity (net
income divided by average shareholders equity), dividend payout ratio (dividends declared per share divided by net income per share) and shareholders equity to assets ratio (average shareholders equity divided by average total
assets) for each of the years presented.



|                               |  |                        |   |  |       |   |  |       |  
|------------------------------ |  | ---------------------- | - |  | ----- | - |  | ----- | -
|                               |  | Year EndedDecember 31, |  
|                               |  | 2007                   |   |  | 2006  |   |  | 2005  |  
|Return on assets               |  | 0.77                   | % |  | 0.96  | % |  | 0.93  | %
|Return on equity               |  | 7.48                   |   |  | 10.13 |   |  | 14.56 |  
|Dividend payout                |  | 42.42                  |   |  | 32.85 |   |  | 26.56 |  
|Shareholders equity to assets |  | 10.38                  |   |  | 9.47  |   |  | 6.35  |  



Our performance in
2007 reflects the continued execution of our core strategies: (1) grow the loan portfolio while maintaining high asset quality; (2) grow core deposits; (3) increase non-interest income; (4) control expenses; and (5) make
strategic investments in new and existing communities that will result in increased shareholder value. We continued to make strategic investments in our future as we completed construction on two branches that opened in 2007 and converted our Ocean
Isle, NC Loan Production Office (LPO) to a full service branch during 2007.



Net Interest Income



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



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



Our net
interest income for the year ended December 31, 2007 was $20.5 million, a decrease of $.2 million or 1.0% when compared to net interest income of $20.7 million for the year ended December 31, 2006. Our net interest margin, on a
tax-equivalent basis, for 2007 was 3.76% compared to 4.04% for 2006. The decrease in our net interest margin is the result of increased competitive pricing for money market accounts and certificates of deposits. Our net interest rate spread, on a
tax-equivalent basis, for 2007 was 2.95% compared to 3.36% for 2006. As a result of competitive pricing pressure the rates paid on our interest-bearing liabilities increased more than the rates paid on our interest-earning assets. The spread
decreased by forty-one basis points as the change in the rates paid on interest-bearing liabilities was forty-one basis points greater than the change in yields earned on interest-earning assets for the year.



Total interest income increased $3.4 million or 9.3% to $40.0 million in 2007
compared to $36.6 million in interest income in 2006. Increases in our average earning assets of $38.6 million in 2007 when compared to 2006 resulted in $2.5 million of the increase in interest income from 2006 to 2007. We funded the increases
in interest-earning assets primarily with in-market certificates of deposit. Supplementing the additional earnings from increased volumes of earning assets was the increase in yield on earning assets. The tax equivalent yield on average earning
assets increased 13 basis points during 2007 and resulted in $.9 million of the increase in interest income.



The effect of variances in volume and rate on interest income and interest expense is illustrated in the table titled Change in Interest Income and
Expense on Tax Equivalent Basis. We attribute the increase in the yield on our earning



20



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assets to the increase in short-term market interest rates. Between January 1, 2006 and June 30, 2006, the Federal Open Market Committee
(FOMC) increased short-term rates 100 basis points from 4.25% to 5.25% through a succession of 25 basis point increases. This increase affected most of 2007 until the FOMC began to lower rates in September 2007. Approximately $213.7
million or 47.0% of our loan portfolio consists of variable rate loans that adjust with the movement of the national prime rate. As a result, composite yield on our loans increased approximately 16 basis points for the year ended December 31,
2007 compared to December 31, 2006.



Similarly, our
average cost of funds for 2007 was 4.25%, an increase of 54 basis points when compared to 3.71% for 2006. The average cost on Bank certificates of deposit increased 60 basis points from 4.42% paid in 2006 to 5.02% paid in 2007, while our average
cost of borrowed funds decreased 20 basis points during 2007 compared to 2006. Borrowing cost decreased because on June 26, 2007, we redeemed all of our higher cost trust preferred securities ($10.3 million), originally issued June 26,
2002 which bore an interest rate of 3.45% over the three month LIBOR rate, with lower cost funding sources.



Total interest expense increased $3.5 million or 22.0% to $19.4 million in 2007 from $15.9 million in 2006, primarily the result of increased market rates
paid on Bank certificates of deposit. The volume of average interest-bearing liabilities increased approximately $29.2 million when comparing 2007 with that of 2006. The increase to interest expense resulting from increased rates on all
interest-bearing liabilities was $1.9 million and the increase attributable to higher volumes of interest-bearing liabilities was $1.6 million.



Throughout 2008, we believe our net interest margin will decline due to anticipated target federal funds rate decreases by the Board of Governors of the
Federal Reserve System (the Federal Reserve Board). However, this expectation may not be realized and our net interest margin could improve if inflationary pressures or other factors cause the Federal Reserve Board to raise the federal
funds target rate.



Our net interest income for the year ended
December 31, 2006 was $20.7 million, an increase of $1.7 million or 8.9% when compared to net interest income of $19.0 million for the year ended December 31, 2005. Our net interest margin, on a tax-equivalent basis, for 2006 was 4.04%
compared to 4.16% for 2005. The decreased net interest margin resulted from deposits continuing to reprice higher throughout all of 2006, while loan rates remained flat during the second half of the year as the Federal Reserve Board did not raise
short term rates in the second half of 2006. Our net interest rate spread, on a tax-equivalent basis, for 2006 was 3.36% compared to 3.77% for 2005. As a result of interest-bearing liabilities repricing faster than interest-earning assets, the
spread decreased by forty-one basis points as the change in the rates paid on interest-bearing liabilities was forty-one basis points greater than the change in yields earned on interest-earning assets for the period.



Total interest income increased $8.0 million or 28.0% to $36.6 million in
2006 compared to $28.6 million in interest income in 2005. Increases in our average earning assets of $56.1 million in 2006 when compared to 2005 resulted in $4.0 million of the increase in interest income from 2005 to 2006. We funded the
increases in interest-earning assets primarily with in-market certificates of deposit and additional wholesale certificates of deposit obtained through an Internet bulletin board service. Supplementing the additional earnings from increased volumes
of earning assets was the increase in yield on earning assets. The tax equivalent yield on average earning assets increased 85 basis points during 2006 and resulted in $4.0 million of the increase in interest income.



Similarly, our average cost of funds for 2006 was 3.71%, an increase of 126
basis points when compared to 2.45% for 2005. The average cost on Bank certificates of deposit increased 139 basis points from 3.03% paid in 2006 to 4.42% paid in 2006, while our average cost of borrowed funds increased 182 basis points during 2006
compared to 2005. Total interest expense increased $6.2 million or 63.9% to $15.9 million in 2006 from $9.7 million in 2005; primarily the result of increased market rates paid on Bank certificates of deposit and borrowed funds. The volume of
average interest-bearing liabilities increased approximately $34.5 million when comparing 2006 with that of 2005. The increase to interest expense resulting from increased rates on all interest-bearing liabilities was $5.4 million and the increase
attributable to higher volumes of interest-bearing liabilities was $790 thousand.



21



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The following table presents an analysis of average interest-earning assets and interest-bearing
liabilities, the interest income or expense applicable to each asset or liability category and the resulting yield or rate paid.



Average Consolidated Balances and Net Interest Income Analysis



|                                                     |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|---------------------------------------------------- |  | ----------------------- | ------- | ---------- | ---- | ---- | -------------- | - | -------------- |  | ---------- | ------- |  | -------------- | - | --------------- | - | ---------- |  | - | -------------- |  | ---- | - |  | - | ------
|                                                     |  | Year Ended December 31,
|                                                     |  | 2007                    |         | 2006       |      | 2005
|                                                     |  | AverageBalance          |         | Yield/Rate |      |      | Income/Expense |   | AverageBalance |  | Yield/Rate |         |  | Income/Expense |   | AverageBalances |   | Yield/Rate |  |   | Income/Expense
|                                                     |  | (Dollars in thousands) 
|Assets:                                              |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|Loansnet(1)                                         |  | $                       | 426,965 |            | 7.89 | %    |                | $ | 33,688         |  | $          | 404,676 |  | 7.73           | % |                 | $ | 31,277     |  | $ | 351,279        |  | 6.84 | % |  | $ | 24,012
|Taxable securities                                   |  |                         | 95,325  |            | 4.74 |      |                |   | 4,521          |  |            | 82,929  |  | 4.49           |   |                 |   | 3,724      |  |   | 78,853         |  | 4.04 |   |  |   | 3,189 
|Nontaxable securities(2)                             |  |                         | 33,101  |            | 5.61 |      |                |   | 1,856          |  |            | 29,548  |  | 5.58           |   |                 |   | 1,648      |  |   | 32,223         |  | 5.46 |   |  |   | 1,759 
|Other investments(3)                                 |  |                         | 8,859   |            | 6.20 |      |                |   | 549            |  |            | 8,479   |  | 5.86           |   |                 |   | 497        |  |   | 7,188          |  | 3.35 |   |  |   | 241   
|                                                     |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|Total interest-earning assets                        |  |                         | 564,250 |            | 7.20 |      |                |   | 40,614         |  |            | 525,632 |  | 7.07           |   |                 |   | 37,146     |  |   | 469,543        |  | 6.22 |   |  |   | 29,201
|Cash and due from banks                              |  |                         | 14,877  |            |      |      |                |   |                |  |            | 17,514  |  |                |   |                 |   |            |  |   | 21,005         |  |      |   |  |   |       
|Bank premises and equipment, net                     |  |                         | 24,391  |            |      |      |                |   |                |  |            | 20,606  |  |                |   |                 |   |            |  |   | 17,831         |  |      |   |  |   |       
|Other assets                                         |  |                         | 18,396  |            |      |      |                |   |                |  |            | 17,831  |  |                |   |                 |   |            |  |   | 16,252         |  |      |   |  |   |       
|                                                     |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|Total assets                                         |  | $                       | 621,914 |            |      |      |                |   |                |  | $          | 581,583 |  |                |   |                 |   |            |  | $ | 524,631        |  |      |   |  |   |       
|                                                     |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|                                                     |  |                         |         |            |      |      |                |   |               
|Liabilities and Shareholders Equity:                |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|Interest-bearing deposits                            |  | $                       | 417,675 |            | 4.10 | %    |                | $ | 17,129         |  | $          | 386,209 |  | 3.46           | % |                 | $ | 13,370     |  | $ | 345,690        |  | 2.21 | % |  | $ | 7,644 
|Short-term borrowings                                |  |                         | 39,818  |            | 5.79 |      |                |   | 2,306          |  |            | 15,826  |  | 4.83           |   |                 |   | 765        |  |   | 14,598         |  | 3.21 |   |  |   | 468   
|Long-term obligations                                |  |                         |        |            |     |      |                |   |               |  |            | 26,223  |  | 6.69           |   |                 |   | 1,754      |  |   | 33,460         |  | 4.60 |   |  |   | 1,539 
|                                                     |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|Total interest-bearing liabilities                   |  |                         | 457,493 |            | 4.25 |      |                |   | 19,435         |  |            | 428,258 |  | 3.71           |   |                 |   | 15,889     |  |   | 393,748        |  | 2.45 |   |  |   | 9,651 
|Non-interest-bearing deposits                        |  |                         | 94,397  |            |      |      |                |   |                |  |            | 92,988  |  |                |   |                 |   |            |  |   | 93,996         |  |      |   |  |   |       
|Other liabilities                                    |  |                         | 5,712   |            |      |      |                |   |                |  |            | 5,234   |  |                |   |                 |   |            |  |   | 3,561          |  |      |   |  |   |       
|Shareholders equity                                 |  |                         | 64,312  |            |      |      |                |   |                |  |            | 55,103  |  |                |   |                 |   |            |  |   | 33,326         |  |      |   |  |   |       
|                                                     |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|Total liabilities and shareholders equity           |  | $                       | 621,914 |            |      |      |                |   |                |  | $          | 581,583 |  |                |   |                 |   |            |  | $ | 524,631        |  |      |   |  |   |       
|                                                     |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|Net interest income and net interest margin (FTE)(4) |  |                         |         |            | 3.75 | %    |                | $ | 21,179         |  |            |         |  | 4.04           | % |                 | $ | 21,257     |  |   |                |  | 4.16 | % |  | $ | 19,550
|                                                     |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       
|Net interest rate spread (FTE)(5)                    |  |                         |         |            | 2.95 | %    |                |   |                |  |            |         |  | 3.36           | % |                 |   |            |  |   |                |  | 3.77 | % |  |   |       
|                                                     |  |                         |         |            |      |      |                |   |                |  |            |         |  |                |   |                 |   |            |  |   |                |  |      |   |  |   |       

---

|(1) |  | Average loans include non accruing loans, net of allowance for loan losses. Amortization of deferred loan fees of $813 thousand, $619 thousand, and $615 thousand for 2007, 2006, and
2005, respectively, are included in interest income.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $631
thousand, $560 thousand, and $598 thousand for the years 2007, 2006, and 2005, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Other investments include federal funds sold and interest-bearing deposits with banks and other institutions.
|--- |  | -------------------------------------------------------------------------------------------------------------

|(4) |  | Net interest margin is computed by dividing net interest income by total average earning assets, net of the allowance for loan losses.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | Net interest rate spread equals the earning asset yield minus the interest-bearing liability rate.
|--- |  | --------------------------------------------------------------------------------------------------



22



---

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



Change in Interest Income and Expense on Tax
Equivalent Basis



|                          |  |                        |       |   |                       |   |        |     |  |   |           |   |  |         |       |   |     |   |        |   |  |   |       |  
|------------------------- |  | ---------------------- | ----- | - | --------------------- | - | ------ | --- |  | - | --------- | - |  | ------- | ----- | - | --- | - | ------ | - |  | - | ----- | -
|                          |  | 2007 Compared to 2006  |       |   | 2006 Compared to 2005 |  
|                          |  | Volume(1)              |       |   | Rate(1)               |   |        | Net |  |   | Volume(1) |   |  | Rate(1) |       |   | Net |  
|                          |  | (Dollars in thousands) |      
|Loans                     |  | $                      | 1,741 |   |                       | $ | 670    |     |  | $ | 2,411     |   |  | $       | 3,889 |   |     | $ | 3,376  |   |  | $ | 7,265 |  
|Taxable securities        |  |                        | 572   |   |                       |   | 225    |     |  |   | 797       |   |  |         | 174   |   |     |   | 361    |   |  |   | 535   |  
|Nontaxable securities(2)  |  |                        | 199   |   |                       |   | 9      |     |  |   | 208       |   |  |         | (148  | ) |     |   | 37     |   |  |   | (111  | )
|Other investments         |  |                        | 23    |   |                       |   | 29     |     |  |   | 52        |   |  |         | 59    |   |     |   | 197    |   |  |   | 256   |  
|                          |  |                        |       |   |                       |   |        |     |  |   |           |   |  |         |       |   |     |   |        |   |  |   |       |  
|Interest income           |  |                        | 2,535 |   |                       |   | 933    |     |  |   | 3,468     |   |  |         | 3,974 |   |     |   | 3,971  |   |  |   | 7,945 |  
|                          |  |                        |       |   |                       |   |        |     |  |   |           |   |  |         |       |   |     |   |        |   |  |   |       |  
|Interest-bearing deposits |  |                        | 1,190 |   |                       |   | 2,569  |     |  |   | 3,759     |   |  |         | 1,149 |   |     |   | 4,577  |   |  |   | 5,726 |  
|Short-term borrowings     |  |                        | 1,275 |   |                       |   | 266    |     |  |   | 1,541     |   |  |         | 49    |   |     |   | 248    |   |  |   | 297   |  
|Long-term obligations     |  |                        | (877  | ) |                       |   | (877   | )   |  |   | (1,754    | ) |  |         | (408  | ) |     |   | 623    |   |  |   | 215   |  
|                          |  |                        |       |   |                       |   |        |     |  |   |           |   |  |         |       |   |     |   |        |   |  |   |       |  
|Interest expense          |  |                        | 1,588 |   |                       |   | 1,958  |     |  |   | 3,546     |   |  |         | 790   |   |     |   | 5,448  |   |  |   | 6,238 |  
|                          |  |                        |       |   |                       |   |        |     |  |   |           |   |  |         |       |   |     |   |        |   |  |   |       |  
|Net interest income       |  | $                      | 947   |   |                       | $ | (1,025 | )   |  | $ | (78       | ) |  | $       | 3,184 |   |     | $ | (1,477 | ) |  | $ | 1,707 |  
|                          |  |                        |       |   |                       |   |        |     |  |   |           |   |  |         |       |   |     |   |        |   |  |   |       |  

---

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

|(2) |  | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $631
thousand, $560 thousand, and $598 thousand for the years 2007, 2006, and 2005, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Rate Sensitivity Management



Rate sensitivity management, an important aspect of achieving satisfactory levels of net interest income, is the management of the composition and maturities of rate-sensitive assets and liabilities. The following table sets forth our
interest sensitivity analysis at December 31, 2007 and describes, at various cumulative maturity intervals, the gap-ratios (ratios of rate-sensitive assets to rate-sensitive liabilities) for assets and liabilities that we consider to be rate
sensitive. The interest-sensitivity position has meaning only as of the date for which it was prepared. Variable rate loans are considered to be highly sensitive to rate changes and are assumed to reprice within 12 months.



The difference between interest-sensitive asset and interest-sensitive
liability repricing within time periods is referred to as the interest-rate-sensitivity gap. Gaps are identified as either positive (interest-sensitive assets in excess of interest-sensitive liabilities) or negative (interest-sensitive liabilities
in excess of interest-sensitive assets).



As of
December 31, 2007, we had a negative one-year cumulative gap of 24.5%. We have interest-earning assets of $303.6 million maturing or repricing within one year and interest-bearing liabilities of $447.5 million repricing or maturing within one
year. This is primarily the result of short-term interest sensitive liabilities being used to fund longer term interest-earning assets, such as loans and investment securities. A negative gap position implies that interest-bearing liabilities
(deposits and other borrowings) will reprice at a faster rate than interest-earning assets (loans and investments). In a falling rate environment, a negative gap position will generally have a positive effect on earnings, while in a rising rate
environment this will generally have a negative effect on earnings.



On December 31, 2007, our savings and core time deposits of $268.5 million included savings, NOW and Money Market accounts of $121.8 million. In our rate sensitivity analysis, these deposits are considered as repricing in the earliest
period (3 months or less) because the rate we pay on these interest-bearing deposits can be changed weekly. However, our historical experience has shown that changes in market interest rates have little, if any, effect on those deposits within a
given time period and, for that reason, those liabilities could be considered non-rate sensitive. If those deposits were excluded from rate sensitive liabilities, our rate sensitive assets and liabilities would be more closely matched at the end of
the one-year period.



23



---

Rate Sensitivity Analysis as of December 31, 2007



|                                                                                          |  |                        |         |    |            |   |          |                      |  |   |               |    |  |       |         |   |  |   |         |  
|----------------------------------------------------------------------------------------- |  | ---------------------- | ------- | -- | ---------- | - | -------- | -------------------- |  | - | ------------- | -- |  | ----- | ------- | - |  | - | ------- | -
|                                                                                          |  | 3 MonthsOr Less        |         |    | 4-12Months |   |          | TotalWithin 12Months |  |   | Over 12Months |    |  | Total |        
|                                                                                          |  | (Dollars in thousands) |        
|Earning assets:                                                                           |  |                        |         |    |            |   |          |                      |  |   |               |    |  |       |         |   |  |   |         |  
|Loansgross                                                                               |  | $                      | 225,078 |    |            | $ | 38,907   |                      |  | $ | 263,985       |    |  | $     | 190,213 |   |  | $ | 454,198 |  
|Investment securities                                                                     |  |                        | 6,795   |    |            |   | 14,433   |                      |  |   | 21,228        |    |  |       | 104,660 |   |  |   | 125,888 |  
|Federal funds sold                                                                        |  |                        | 4,775   |    |            |   |         |                      |  |   | 4,775         |    |  |       |        |   |  |   | 4,775   |  
|Interest bearing deposits                                                                 |  |                        | 925     |    |            |   |         |                      |  |   | 925           |    |  |       |        |   |  |   | 925     |  
|FHLB stock                                                                                |  |                        | 2,382   |    |            |   |         |                      |  |   | 2,382         |    |  |       |        |   |  |   | 2,382   |  
|                                                                                          |  |                        |         |    |            |   |          |                      |  |   |               |    |  |       |         |   |  |   |         |  
|Total earning assets                                                                      |  |                        | 239,189 |    |            |   | 64,395   |                      |  |   | 303,584       |    |  |       | 284,584 |   |  |   | 588,168 |  
|                                                                                          |  |                        |         |    |            |   |          |                      |  |   |               |    |  |       |         |   |  |   |         |  
|Percent of total earnings assets                                                          |  |                        | 40.7    | %  |            |   | 10.9     | %                    |  |   | 51.6          | %  |  |       | 48.4    | % |  |   | 100.0   | %
|Cumulative percentage of total earning assets                                             |  |                        | 40.7    |    |            |   | 51.6     |                      |  |   | 51.6          |    |  |       | 100.0   |   |  |   |         |  
|                                                                                          |  |                        |         |    |           
|Interest-bearing liabilities:                                                             |  |                        |         |    |            |   |          |                      |  |   |               |    |  |       |         |   |  |   |         |  
|Savings, NOW and Money Market deposits                                                    |  |                        | 121,839 |    |            |   |         |                      |  |   | 121,839       |    |  |       |        |   |  |   | 121,839 |  
|Time deposits of $100,000 or more                                                         |  |                        | 53,661  |    |            |   | 92,124   |                      |  |   | 145,785       |    |  |       | 16,491  |   |  |   | 162,276 |  
|Other time deposits                                                                       |  |                        | 39,053  |    |            |   | 97,693   |                      |  |   | 136,746       |    |  |       | 9,904   |   |  |   | 146,650 |  
|Short-term borrowings                                                                     |  |                        | 43,174  |    |            |   |          |                      |  |   | 43,174        |    |  |       |        |   |  |   | 43,174  |  
|Long-term obligations                                                                     |  |                        |        |    |            |   |         |                      |  |   |              |    |  |       |        |   |  |   |        |  
|                                                                                          |  |                        |         |    |            |   |          |                      |  |   |               |    |  |       |         |   |  |   |         |  
|Total interest-bearing liabilities                                                        |  | $                      | 257,727 |    |            | $ | 189,817  |                      |  | $ | 447,544       |    |  | $     | 26,395  |   |  | $ | 473,939 |  
|                                                                                          |  |                        |         |    |            |   |          |                      |  |   |               |    |  |       |         |   |  |   |         |  
|Percent of total interest-bearing liabilities                                             |  |                        | 54.4    | %  |            |   | 40.0     | %                    |  |   | 94.4          | %  |  |       | 5.6     | % |  |   | 100.0   | %
|Cumulative percent of total interest-bearing liabilities                                  |  |                        | 54.4    |    |            |   | 94.4     |                      |  |   | 94.4          |    |  |       | 100.0   |   |  |   |         |  
|                                                                                          |  |                        |         |    |           
|Ratios:                                                                                   |  |                        |         |    |            |   |          |                      |  |   |               |    |  |       |         |   |  |   |         |  
|Ratio of earning assets to interest-bearing liabilities                                   |  |                        |         |    |            |   |          |                      |  |   |               |    |  |       |         |   |  |   |         |  
|(gap ratio)                                                                               |  |                        | 92.8    | %  |            |   | 33.9     | %                    |  |   | 67.8          | %  |  |       | 1,078.1 | % |  |   | 124.1   | %
|Cumulative ratio of earning assets to interest-bearing liabilities (cumulative gap ratio) |  |                        | 92.8    | %  |            |   | 67.8     | %                    |  |   | 67.8          | %  |  |       | 124.1   | % |  |   |         |  
|Interest sensitivity gap                                                                  |  | $                      | (18,538 | )  |            | $ | (125,422 | )                    |  | $ | (143,960      | )  |  | $     | 258,189 |   |  | $ | 114,229 |  
|Cumulative interest sensitivity gap                                                       |  |                        | (18,538 | )  |            |   | (143,960 | )                    |  |   | (143,960      | )  |  |       | 114,229 |   |  |   | 114,229 |  
|As a percent of total earnings assets                                                     |  |                        | (3.2    | %) |            |   | (24.5    | %)                   |  |   | (24.5         | %) |  |       | 19.4    | % |  |   | 19.4    | %



As of
December 31, 2007, approximately 51.6% of our interest-earning assets could be repriced within one year and approximately 88.0% of interest-earning assets could be repriced within five years. Approximately 94.4% of interest-bearing liabilities
could be repriced within one year and approximately 100.0% could be repriced within five years.



24



---

Market Risk



Our primary market risk is interest rate risk. Interest rate risk results from differing maturities or repricing intervals of interest-earning assets and
interest-bearing liabilities and the fact that rates on these financial instruments do not change uniformly. These conditions may impact the earnings generated by our interest-earning assets or the cost of our interest-bearing liabilities, thus
directly impacting our overall earnings.



We actively monitor
and manage interest rate risk. One way this is accomplished is through the development of and adherence to our asset/liability policy. This policy sets forth our strategy for matching the risk characteristics of interest-earning assets and
interest-bearing liabilities so as to mitigate the effect of changes in the rate environment.



Market Risk Analysis



|                                       |  |                                                |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   |         |   |  |   |        
|-------------------------------------- |  | ---------------------------------------------- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------ | - | ---------- | - | ------ | ----- |  | - | --------- | - |  | - | ------- | - |  | - | -------
|                                       |  | Principal Maturing in Years Ended December 31,
|                                       |  | 2008                                           |         |   | 2009 |   |        | 2010 |  |   | 2011   |   |  | 2012 |        |   | Thereafter |   |        | Total |  |   | FairValue
|                                       |  | (Dollars in thousands)                        
|Assets:                                |  |                                                |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   |         |   |  |   |        
|Loans, gross:                          |  |                                                |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   |         |   |  |   |        
|Fixed rate                             |  | $                                              | 50,293  |   |      | $ | 34,769 |      |  | $ | 39,996 |   |  | $    | 27,313 |   |            | $ | 52,907 |       |  | $ | 35,228    |   |  | $ | 240,506 |   |  | $ | 234,800
|Average rate (%)                       |  |                                                | 7.11    | % |      |   | 6.92   | %    |  |   | 7.18   | % |  |      | 7.36   | % |            |   | 7.37   | %     |  |   | 6.09      | % |  |   | 6.82    | % |  |   |        
|Variable rate                          |  |                                                | 102,239 |   |      |   | 29,088 |      |  |   | 21,876 |   |  |      | 10,618 |   |            |   | 12,181 |       |  |   | 37,690    |   |  |   | 213,692 |   |  |   | 213,692
|Average rate (%)                       |  |                                                | 7.44    |   |      |   | 7.16   |      |  |   | 7.31   |   |  |      | 7.51   |   |            |   | 7.20   |       |  |   | 7.18      |   |  |   | 8.19    |   |  |   |        
|                                       |  |                                                |         |   |      |   |        |     
|Investment securities:                 |  |                                                |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   |         |   |  |   |        
|Fixed rate                             |  |                                                | 18,434  |   |      |   | 5,052  |      |  |   | 4,671  |   |  |      | 4,218  |   |            |   | 9,036  |       |  |   | 79,502    |   |  |   | 120,913 |   |  |   | 120,157
|Average rate (%)                       |  |                                                | 4.46    |   |      |   | 5.40   |      |  |   | 5.22   |   |  |      | 5.58   |   |            |   | 5.36   |       |  |   | 5.09      |   |  |   | 5.05    |   |  |   |        
|Variable rate                          |  |                                                |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   | 5,703     |   |  |   | 5,703   |   |  |   | 5,731  
|Average rate (%)                       |  |                                                |        |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   | 5.41      |   |  |   | 5.41    |   |  |   |        
|                                       |  |                                                |         |   |      |   |        |     
|Interest-bearing deposits:             |  |                                                |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   |         |   |  |   |        
|Variable rate                          |  |                                                | 925     |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |          |   |  |   | 925     |   |  |   | 925    
|Average rate (%)                       |  |                                                | 4.22    |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |          |   |  |   | 4.22    |   |  |   |        
|                                       |  |                                                |         |   |      |   |        |     
|Liabilities:                           |  |                                                |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   |         |   |  |   |        
|Savings and interest-bearing checking: |  |                                                |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   |         |   |  |   |        
|Variable rate                          |  |                                                | 121,839 |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |          |   |  |   | 121,839 |   |  |   | 121,839
|Average rate (%)                       |  |                                                | 1.48    |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   | 1.48    |   |  |   |        
|                                       |  |                                                |         |   |      |   |        |     
|Certificate of deposit:                |  |                                                |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   |         |   |  |   |        
|Fixed rate                             |  |                                                | 281,686 |   |      | $ | 21,413 |      |  | $ | 2,938  |   |  | $    | 510    |   |            | $ | 1,534  |       |  |   |          |   |  |   | 308,081 |   |  |   | 309,702
|Average rate (%)                       |  |                                                | 4.91    |   |      |   | 4.60   | %    |  |   | 4.60   | % |  |      | 5.57   | % |            |   | 6.08   | %     |  |   |          |   |  |   | 4.89    |   |  |   |        
|Variable rate                          |  |                                                | 845     |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |          |   |  |   | 845     |   |  |   | 845    
|Average rate (%)                       |  |                                                | 2.71    |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   | 2.71    |   |  |   |        
|                                       |  |                                                |         |   |      |   |        |     
|Short-term borrowings:                 |  |                                                |         |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   |         |   |  |   |        
|Fixed rate                             |  |                                                | 28,000  |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |          |   |  |   | 28,000  |   |  |   | 28,000 
|Average rate (%)                       |  |                                                | 4.67    |   |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   | 4.67    |   |  |   |        
|Variable rate                          |  | $                                              | 15,174  |   |      |   |       |      |  |   |       |   |  |      |       |   |            |   |       |       |  |   |          |   |  |   | 15,174  |   |  |   | 15,174 
|Average rate (%)                       |  |                                                | 4.33    | % |      |   |        |      |  |   |        |   |  |      |        |   |            |   |        |       |  |   |           |   |  |   | 4.33    |   |  |   |        



25



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Non-interest Income



Non-interest income, principally charges and fees assessed for the use of our services, is a significant contributor to net income. The following table
presents the components of non-interest income for 2007, 2006 and 2005.



Non-interest Income



|                                        |  |                         |       |   |      |   |       |  |   |      
|--------------------------------------- |  | ----------------------- | ----- | - | ---- | - | ----- |  | - | -----
|                                        |  | Year Ended December 31,
|                                        |  | 2007                    |       |   | 2006 |   | 2005 
|                                        |  | (Dollars in thousands) 
|Service charges on deposit accounts     |  | $                       | 3,028 |   |      | $ | 3,027 |  | $ | 3,323
|Other service charges and fees          |  |                         | 1,508 |   |      |   | 1,364 |  |   | 1,301
|Mortgage origination brokerage fees     |  |                         | 1,091 |   |      |   | 1,013 |  |   | 756  
|Net gain (loss) on sale of securities   |  |                         | (161  | ) |      |   |      |  |   | 107  
|Income from investments in SBICs       |  |                         | 72    |   |      |   | 375   |  |   |     
|Income from bank owned life insurance   |  |                         | 289   |   |      |   | 305   |  |   | 255  
|Recapture of reserve for unfunded loans |  |                         | 240   |   |      |   |      |  |   |     
|Gain on sale of credit card portfolio   |  |                         |      |   |      |   |      |  |   | 375  
|Other operating income                  |  |                         | 119   |   |      |   | 99    |  |   | 108  
|                                        |  |                         |       |   |      |   |       |  |   |      
|Total non-interest income               |  | $                       | 6,186 |   |      | $ | 6,183 |  | $ | 6,225
|                                        |  |                         |       |   |      |   |       |  |   |      



Non-interest income
was $6.2 million for both 2007 and 2006. During the first quarter of 2007, management reviewed its unfunded loan commitments and determined such reserves were no longer needed. Offsetting the aforementioned recapture of allowance for losses on
unfunded loans is a decrease in income distributions from investments in Small Business Investment Companies (SBICs). Income from SBICs decreased $303 thousand in 2007 compared to 2006. Distributions from SBICs are generated
whenever a company in which the SBIC has invested in is sold or otherwise successfully exits the financing provided by the SBIC. Future distributions are expected but their dollar level and frequency can not be determined by management. There was a
net loss on the sale of securities of $161 thousand for 2007. Other service charges and fees increased $144 thousand or 10.6% compared to the prior year mainly due to increased merchant discount income of $63 thousand generated by our merchant
services unit and increased investment brokerage fees of $49 thousand. Service charges on deposit accounts were relatively flat for 2007 compared to 2006 only increasing $1 thousand while mortgage origination brokerage fees increased $78 thousand or
7.7% over 2006.



Non-interest income decreased $42 thousand or
0.7% to $6.2 million in 2006 primarily the result of decreased service charges on deposit accounts of $296 thousand in 2006 compared to 2005. We experienced a decrease in Overdraft Banking Privilege (ODP) fees of $264 thousand. Management believes
that an enhancement to the Banks account statement information to provide customers with ODP fees paid year-to-date altered the usage of our ODP service. Other service charges and fees increased $320 thousand or 15.6% principally due to
increased mortgage origination brokerage fees of $257 thousand as the Bank continued to expand this service within our market areas. Income distributions totaling $375 thousand from investments in SBICs received during the third and fourth
quarter of 2006 contributed to non-interest income in 2006. The income from the SBICs during 2006 compares equally to the gain on sale of credit card loans of $375 thousand in 2005. In 2006 there were no gains on the sale of securities while
there were $107 thousand in net gains during 2005. Income from bank owned life insurance (BOLI) increased $50 thousand from $255 thousand in 2005 to $305 thousand in 2006.



26



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Non-interest Expense



Non-interest expense increased $1.8 million or 9.7% to $20.3 million in 2007 compared to $18.5 million in 2006 and non-interest expense increased $1.0
million or 5.7% in 2006 compared to $17.5 million in 2005. The increase in all periods is principally due to increases in salary expense. The following table presents the components of non-interest expense for 2007, 2006 and 2005.



Non-interest Expense



|                                       |  |                         |        |      |   |        |  |   |       
|-------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------
|                                       |  | Year Ended December 31,
|                                       |  | 2007                    |        | 2006 |   | 2005  
|                                       |  | (Dollars in thousands) 
|Salaries                               |  | $                       | 8,431  |      | $ | 7,509  |  | $ | 6,651 
|Retirement and other employee benefits |  |                         | 2,503  |      |   | 2,753  |  |   | 2,624 
|Occupancy                              |  |                         | 1,788  |      |   | 1,621  |  |   | 1,559 
|Equipment                              |  |                         | 1,885  |      |   | 1,727  |  |   | 1,701 
|Professional fees                      |  |                         | 673    |      |   | 356    |  |   | 469   
|Supplies                               |  |                         | 432    |      |   | 341    |  |   | 330   
|Telephone                              |  |                         | 563    |      |   | 506    |  |   | 498   
|Other                                  |  |                         | 4,069  |      |   | 3,724  |  |   | 3,633 
|                                       |  |                         |        |      |   |        |  |   |       
|Total                                  |  | $                       | 20,344 |      | $ | 18,537 |  | $ | 17,465
|                                       |  |                         |        |      |   |        |  |   |       



Expenses for salaries
and benefits increased 6.5%, 10.6% and 15.9% for the years ended December 31, 2007, 2006 and 2005, respectively. The increase in salary and benefit expenses is related to staff additions to accommodate our growth, additional branches and the
expansion of our mortgage origination department. As of December 31, 2007, we had 224 employees and operated 23 full service banking offices, a loan production office and a mortgage loan origination office.



Salary expense increased $922 thousand or 12.3% in 2007 compared to 2006 as
we opened three new branches and a loan production office. Employee benefits decreased $250 thousand or 9.1% in 2007 over the prior year principally due to a decrease of $459 thousand of incentive pay. Incentive pay declined during 2007 because
certain goals set by the board under the Companys incentive plan were not met. This decrease was partially offset by increases in FICA tax of $78 thousand and increase in employee related insurance of $153 thousand.



Occupancy expense increased $167 thousand or 10.3% in 2007. The addition of
three new branches and a loan production office was the primary reason for the increase.



Professional fees, which include audit, legal and consulting fees, increased $317 thousand or 89.0% to $673 thousand for 2007 compared to $356 thousand in 2006. Loan related consulting fees increased by $143 thousand
while our Human Resources department incurred $76 thousand in consultant fees. Audit and accounting fees increased $77 thousand over the prior year, a portion of which can be contributed to Sarbanes-Oxley Section 404 compliance as we became an
accelerated filer for 2007. Legal fees increased $55 thousand during 2007 compared to 2006 mainly due to increased general corporate reporting and disclosure matters.



Other operating expenses increased $345 thousand or 9.3% for 2007 compared to 2006. Item processing fees paid in 2007 to our
third party vendor increased by $171 thousand over the prior year period as we switched our entire item processing to an outside vendor. We recorded an other-than-temporary impairment charge of $90 thousand against our original equity position of
$300 thousand in a company formed to provide trust services for community banks. In addition to the aforementioned items, we experienced increases in other outside service of $93 thousand, increased corporate franchise taxes of $39 thousand and
increased recruiting expense of $45 thousand. These increases over the prior year were partially offset by decreases in courier related expense of $56 thousand as a result of outsourcing our item processing, a decrease of automated teller machine
expense of $42 thousand and a decrease of $31 thousand of credit card scorecard expense (redemption of reward points on credit cards that were sold in the fourth quarter of 2005).



27



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Salary expense increased $858 thousand or 12.9% in 2006 compared to 2005 as we added business development
officers in some of our newer markets. Also, as a result of the adoption of SFAS No. 123R, compensation cost of $109 thousand was recognized in 2006 that previously was not required to be expensed. Employee benefits increased $129 thousand or
4.9% in 2006 over the prior year principally due to an expense of $90 thousand relating to plans that are tied to BOLI, increased group insurance of $40 thousand and increased FICA tax of $39 thousand.



Occupancy expense increased $62 thousand or 4.0% in 2006. Increased property
taxes, building repair and maintenance, building rentals for our mortgage brokerage services and janitorial services accounted for the increase in occupancy expense during 2006.



Professional fees, which include audit, legal and consulting fees, decreased $113 thousand or 24.1% to $356 thousand for
2006 relative to the same period in 2005. The decrease in professional fees during 2006 compared to 2005 was principally due to decreased consulting fees of $96 thousand and decreased audit and accounting fees of $57 thousand. During 2005, fees were
incurred for services pertaining to strategic planning, disaster recovery/business resumption planning and independent credit review that were not incurred during 2006.



Other operating expenses increased $91 thousand or 2.5% for 2006 compared to 2005 primarily the result of increased write downs of
repossessed assets in the amount $58 thousand, increased advertising costs of $43 thousand and increased recruiting expenses of $41 thousand.



Income Taxes



For the year-ended December 31, 2007, we recorded income tax expense of $1.7 million, compared to $2.4 million and $2.1 million for the year-ended
December 31, 2006 and 2005, respectively. Our effective tax rate for the years ended December 31, 2007, 2006 and 2005 was 25.8%, 30.2% and 30.2%, respectively.



Our effective tax rate for 2007 was lower due to the recognition of a tax benefit associated with the reduction of the valuation allowance
on a deferred tax asset and a higher ratio of tax-exempt to taxable income compared to 2006. The valuation allowance for deferred tax assets was $335 thousand for December 31, 2007 and $499 for both December 31, 2006 and 2005. The
valuation allowance was for certain capital losses related to perpetual preferred stock issued by FNMA and FHLMC. These losses are capital in character and we may not have current capital gain capacity to offset these losses. The effective tax rate
in 2007, 2006 and 2005 also differs from the federal statutory rate of 34.0% primarily due to tax-exempt interest income we earned on tax-exempt securities in our investment portfolio.



Financial Condition at December 31, 2007, 2006 and 2005



Our total assets were $643.9 million at December 31, 2007, $624.1 million at December 31, 2006 and $547.7 million
at December 31, 2005. Asset growth during 2007 was funded primarily by an increase in interest bearing demand deposits of $8.8 million and an increase in time deposits of $7.9 million. For the years ended December 31, 2007 and 2006, we
grew our loans $36.3 million and $31.1 million, respectively, due to favorable loan demand in our market areas and our addition of 3 new branches and a loan production office. For the years ended December 31, 2007 and 2006, we grew our deposits
$14.1 million and $47.0 million, respectively, through marketing of core deposits and wholesale certificates of deposit, the proceeds of which were invested in interest-earning assets.



We believe our financial condition is sound. The following discussion focuses on the factors considered by us to be
important in assessing our financial condition.



28



---

The following table sets forth the relative composition of our balance sheets at December 31, 2007,
2006 and 2005.



Distribution of Assets and Liabilities



|                                            |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  
|------------------------------------------- |  | ---------------------- | ------- | - | ---- | ----- | - | ---- | - | ------- | - |  | ----- | - |  | - | ------- | - |  | ----- | -
|                                            |  | December 31,           |        
|                                            |  | 2007                   |         |   | 2006 |       |   | 2005 |  
|                                            |  | (Dollars in thousands) |        
|Assets:                                     |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  
|Loan, gross                                 |  | $                      | 454,198 |   |      | 70.5  | % |      | $ | 417,943 |   |  | 67.0  | % |  | $ | 386,786 |   |  | 70.6  | %
|Investment securities                       |  |                        | 125,888 |   |      | 19.6  |   |      |   | 125,860 |   |  | 20.2  |   |  |   | 104,723 |   |  | 19.1  |  
|Interest-bearing deposits                   |  |                        | 925     |   |      | 0.1   |   |      |   | 891     |   |  | 0.1   |   |  |   | 912     |   |  | 0.2   |  
|FHLB stock                                  |  |                        | 2,382   |   |      | 0.4   |   |      |   | 1,229   |   |  | 0.2   |   |  |   | 1,948   |   |  | 0.4   |  
|Federal funds sold                          |  |                        | 4,775   |   |      | 0.7   |   |      |   | 23,575  |   |  | 3.8   |   |  |   |        |   |  |      |  
|                                            |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  
|Total earning assets                        |  |                        | 588,168 |   |      | 91.3  |   |      |   | 569,498 |   |  | 91.3  |   |  |   | 494,369 |   |  | 90.3  |  
|Allowance for loan losses                   |  |                        | (4,083  | ) |      | (0.6  | ) |      |   | (4,725  | ) |  | (0.8  | ) |  |   | (4,650  | ) |  | (0.8  | )
|Non-interest-bearing deposits and cash      |  |                        | 16,303  |   |      | 2.5   |   |      |   | 15,591  |   |  | 2.5   |   |  |   | 17,927  |   |  | 3.3   |  
|Bank premises and equipment, net            |  |                        | 24,450  |   |      | 3.8   |   |      |   | 23,042  |   |  | 3.7   |   |  |   | 18,859  |   |  | 3.4   |  
|Other assets                                |  |                        | 19,051  |   |      | 3.0   |   |      |   | 20,664  |   |  | 3.3   |   |  |   | 21,181  |   |  | 3.8   |  
|                                            |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  
|Total assets                                |  | $                      | 643,889 |   |      | 100.0 | % |      | $ | 624,070 |   |  | 100.0 | % |  | $ | 547,686 |   |  | 100.0 | %
|                                            |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  
|                                            |  |                        |         |   |      |      
|Liabilities and Shareholders Equity:       |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  
|Demand deposits                             |  | $                      | 95,596  |   |      | 14.9  | % |      | $ | 96,890  |   |  | 15.5  | % |  | $ | 98,890  |   |  | 18.1  | %
|Savings, NOW and Money Market deposits      |  |                        | 121,839 |   |      | 18.9  |   |      |   | 114,378 |   |  | 18.3  |   |  |   | 117,241 |   |  | 21.4  |  
|Time deposits of $100,000 or more           |  |                        | 162,276 |   |      | 25.2  |   |      |   | 156,265 |   |  | 25.0  |   |  |   | 122,329 |   |  | 22.3  |  
|Other time deposits                         |  |                        | 146,650 |   |      | 22.8  |   |      |   | 144,716 |   |  | 23.2  |   |  |   | 126,748 |   |  | 23.1  |  
|                                            |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  
|Total deposits                              |  |                        | 526,361 |   |      | 81.8  |   |      |   | 512,249 |   |  | 82.0  |   |  |   | 465,208 |   |  | 84.9  |  
|Short-term borrowings                       |  |                        | 43,174  |   |      | 6.7   |   |      |   | 31,105  |   |  | 5.0   |   |  |   | 23,598  |   |  | 4.3   |  
|Long-term obligations                       |  |                        |        |   |      | 0.0   |   |      |   | 10,310  |   |  | 1.7   |   |  |   | 18,310  |   |  | 3.4   |  
|Accrued interest and other liabilities      |  |                        | 7,513   |   |      | 1.1   |   |      |   | 7,613   |   |  | 1.2   |   |  |   | 6,005   |   |  | 1.1   |  
|                                            |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  
|Total liabilities                           |  |                        | 577,048 |   |      | 89.6  |   |      |   | 561,277 |   |  | 89.9  |   |  |   | 513,121 |   |  | 93.7  |  
|Shareholders equity                        |  |                        | 66,841  |   |      | 10.4  |   |      |   | 62,793  |   |  | 10.1  |   |  |   | 34,565  |   |  | 6.3   |  
|                                            |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  
|Total liabilities and share-holders equity |  | $                      | 643,889 |   |      | 100.0 | % |      | $ | 624,070 |   |  | 100.0 | % |  | $ | 547,686 |   |  | 100.0 | %
|                                            |  |                        |         |   |      |       |   |      |   |         |   |  |       |   |  |   |         |   |  |       |  



Loans



As of December 31, 2007, total loans increased to $454.2 million, up
8.7% from total loans of $417.9 million at December 31, 2006. Construction and land development loans decreased from $116.3 million in 2006 to $104.3 million in 2007. The majority of this loan decline can be attributed to commercial
construction loans, which decreased by approximately $32.8 million in 2007 compared to 2006. Offsetting part of this decline was an increase in consumer unimproved land loans of $10.9 million.



As of December 31, 2006, total loans increased to $417.9 million, up
8.0% from total loans of $386.8 million at December 31, 2005. Construction and land development loans increased from $91.3 million in 2005 to $116.3 million in 2006. The majority of this loan growth can be attributed to demand for commercial
construction loans, which increased by approximately $23.4 million from 2005 to 2006



At December 31, 2007, our loan portfolio contained no foreign loans, and we believe the portfolio is adequately diversified. Real estate loans represent approximately 74.7% of our loan portfolio. Real estate
loans are primarily loans secured by real estate, including mortgage and construction loans. Residential mortgage loans accounted for approximately $70.9 million or 20.9% of our real estate loans at December 31, 2007. Commercial loans are
spread throughout a variety of industries, with no particular industry or group of related industries accounting for a significant portion of the commercial loan portfolio. At December 31, 2007, our ten largest loans accounted for approximately
7.82%



29



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of our loans outstanding. As of December 31, 2007, we had outstanding loan commitments of approximately $91.6 million. The amounts of loans outstanding
at the indicated dates are shown in the following table according to loan type.



Loan Portfolio Composition



|                                                 |  |                        |         |      |   |         |  |      |         |      |   |         |  |   |        
|------------------------------------------------ |  | ---------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                                 |  | 2007                   |         | 2006 |   | 2005    |  | 2004 |         | 2003
|                                                 |  | (Dollars in thousands)
|Real estateconstruction and land development    |  | $                      | 104,339 |      | $ | 116,279 |  | $    | 91,334  |      | $ | 59,484  |  | $ | 36,564 
|Real estatecommercial, residential and other(1) |  |                        | 234,812 |      |   | 211,440 |  |      | 198,931 |      |   | 180,815 |  |   | 146,740
|Installment loans                                |  |                        | 5,808   |      |   | 6,109   |  |      | 8,518   |      |   | 9,996   |  |   | 11,569 
|Credit cards and overdraft plans(2)              |  |                        | 2,002   |      |   | 2,167   |  |      | 2,630   |      |   | 4,989   |  |   | 4,535  
|Commercial and all other loans                   |  |                        | 107,237 |      |   | 81,948  |  |      | 85,373  |      |   | 74,246  |  |   | 82,173 
|                                                 |  |                        |         |      |   |         |  |      |         |      |   |         |  |   |        
|Total                                            |  | $                      | 454,198 |      | $ | 417,943 |  | $    | 386,786 |      | $ | 329,530 |  | $ | 281,581
|                                                 |  |                        |         |      |   |         |  |      |         |      |   |         |  |   |        

---

|(1) |  | The majority of the commercial real estate is owner-occupied and operated.
|--- |  | --------------------------------------------------------------------------

|(2) |  | The Bank sold its credit card portfolio consisting of $2.7 million in outstanding balances in 2005.
|--- |  | ---------------------------------------------------------------------------------------------------



Maturities and Sensitivities of Loans to Changes in Interest Rates



The following table sets forth the maturity distribution of our loans as of
December 31, 2007. A significant majority of our loans maturing after one year reprice at two and three year intervals. In addition, approximately 47.0% of our loan portfolio is comprised of variable rate loans.



Loan Maturities at December 31, 2007



|                                              |  |                        |         |                                 |   |                   |  |       |         |       |   |        |  |   |        |  |   |        
|--------------------------------------------- |  | ---------------------- | ------- | ------------------------------- | - | ----------------- |  | ----- | ------- | ----- | - | ------ |  | - | ------ |  | - | -------
|                                              |  | 1 yearor less          |         | Due after 1 yearthrough 5 years |   | Due after 5 years |  |      
|                                              |  | Floating               |         | Fixed                           |   | Floating          |  | Fixed |         | Total
|                                              |  | (Dollars in thousands)
|Real estateconstruction and land development |  | $                      | 51,040  |                                 | $ | 15,943            |  | $     | 34,502  |       | $ | 1,335  |  | $ | 1,519  |  | $ | 104,339
|Real estatecommercial, residential and other |  |                        | 51,373  |                                 |   | 50,014            |  |       | 97,512  |       |   | 22,220 |  |   | 13,693 |  |   | 234,812
|Installment loans                             |  |                        | 1,283   |                                 |   | 168               |  |       | 3,982   |       |   |       |  |   | 375    |  |   | 5,808  
|Overdraft protection plans                    |  |                        | 892     |                                 |   | 254               |  |       | 22      |       |   | 164    |  |   | 670    |  |   | 2,002  
|Commercial and all other loans                |  |                        | 47,945  |                                 |   | 20,769            |  |       | 25,875  |       |   | 586    |  |   | 12,062 |  |   | 107,237
|                                              |  |                        |         |                                 |   |                   |  |       |         |       |   |        |  |   |        |  |   |        
|Total                                         |  | $                      | 152,533 |                                 | $ | 87,148            |  | $     | 161,893 |       | $ | 24,305 |  | $ | 28,319 |  | $ | 454,198
|                                              |  |                        |         |                                 |   |                   |  |       |         |       |   |        |  |   |        |  |   |        



Allowance for Loan Losses



We consider the allowance for loan losses adequate to
cover estimated probable loan losses relating to the loans outstanding as of each reporting period. The procedures and methods used in the determination of the allowance necessarily rely upon various judgments and assumptions about economic
conditions and other factors affecting our loans. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses. Those agencies may require us to recognize adjustments
to the allowance for loan losses based on their judgments about the information available to them at the time of their examinations. No assurance can be given that we will not in any particular period sustain loan losses that are sizable in relation
to the amount reserved or that subsequent evaluations of the loan portfolio, in light of conditions and factors then prevailing, will not require significant changes in the allowance for loan losses or future charges to earnings.



30



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The following table summarizes the balances of loans outstanding, average loans outstanding, changes in
the allowance arising from charge-offs and recoveries by category and additions to the allowance that have been charged to expense.



Analysis of the Allowance for Loan Losses



|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|-------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                                         |  | Year ended December 31, |        
|                                                         |  | 2007                    |         |   | 2006 |   |         | 2005 |  |   | 2004    |   |  | 2003 |        
|                                                         |  | (Dollars in thousands)  |        
|Total loans outstanding at end of yeargross             |  | $                       | 454,198 |   |      | $ | 417,943 |      |  | $ | 386,786 |   |  | $    | 329,530 |   |  | $ | 281,581 |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Average loans outstandinggross                          |  | $                       | 431,579 |   |      | $ | 409,565 |      |  | $ | 355,755 |   |  | $    | 312,082 |   |  | $ | 254,830 |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses at beginning of year           |  | $                       | 4,725   |   |      | $ | 4,650   |      |  | $ | 4,300   |   |  | $    | 3,550   |   |  | $ | 3,150   |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Loan charged off:                                        |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate                                              |  |                         | 433     |   |      |   |        |      |  |   | 12      |   |  |      | 6       |   |  |   |        |  
|Installment loans                                        |  |                         | 43      |   |      |   | 68      |      |  |   | 45      |   |  |      | 103     |   |  |   | 200     |  
|Credit cards and related plans                           |  |                         |        |   |      |   |        |      |  |   | 31      |   |  |      | 38      |   |  |   | 39      |  
|Commercial and all other loans                           |  |                         | 161     |   |      |   | 59      |      |  |   | 218     |   |  |      | 34      |   |  |   | 111     |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total charge-offs                                        |  |                         | 637     |   |      |   | 127     |      |  |   | 306     |   |  |      | 181     |   |  |   | 350     |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Recoveries of loans previously charged off:              |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Real estate                                              |  |                         |        |   |      |   | 7       |      |  |   |        |   |  |      |        |   |  |   | 14      |  
|Installment loans                                        |  |                         | 18      |   |      |   | 16      |      |  |   | 16      |   |  |      | 50      |   |  |   | 43      |  
|Credit cards and related plans                           |  |                         |        |   |      |   | 3       |      |  |   | 18      |   |  |      | 15      |   |  |   | 18      |  
|Commercial and all other loans                           |  |                         | 76      |   |      |   | 65      |      |  |   | 1       |   |  |      | 62      |   |  |   | 37      |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total recoveries                                         |  |                         | 94      |   |      |   | 91      |      |  |   | 35      |   |  |      | 127     |   |  |   | 112     |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs                                          |  |                         | 543     |   |      |   | 36      |      |  |   | 271     |   |  |      | 54      |   |  |   | 238     |  
|Provision for loan losses                                |  |                         | (99     | ) |      |   | 351     |      |  |   | 757     |   |  |      | 804     |   |  |   | 638     |  
|Adjustment for loans sold(1)                             |  |                         |        |   |      |   |        |      |  |   | (136    | ) |  |      |        |   |  |   |        |  
|Adjustment for unfunded loans(2)                         |  |                         |         |   |      |   | (240    | )    |  |   |        |   |  |      |        |   |  |   |        |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Allowance for loan losses at end of year                 |  | $                       | 4,083   |   |      | $ | 4,725   |      |  | $ | 4,650   |   |  | $    | 4,300   |   |  | $ | 3,550   |  
|                                                         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Ratios:                                                  |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Net charge-offs during year to average loans outstanding |  |                         | 0.13    | % |      |   | 0.01    | %    |  |   | 0.08    | % |  |      | 0.02    | % |  |   | 0.09    | %
|Allowance for loan losses to loans at year end           |  |                         | 0.90    |   |      |   | 1.13    |      |  |   | 1.20    |   |  |      | 1.30    |   |  |   | 1.26    |  
|Allowance for loan losses to nonperforming loans         |  |                         | 877     |   |      |   | 2,568   |      |  |   | 7,154   |   |  |      | 4,175   |   |  |   | 1,868   |  

---

|(1) |  | During 2005 the Bank sold its credit card portfolio with outstanding balances of approximately $2.7 million. Prior to the sale, the Bank had reserved 5% of the outstanding balances
in the allowance for loan losses. The allowance was reduced by $136 thousand when the credit card portfolio was sold.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | $240 thousand allocated to approximately $80 million of committed but unfunded loan obligations was reclassed to other liabilities from the Banks allowance for loan losses.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of the Interagency Policy Statement
of the Allowance for Loan and Lease Losses jointly issued in December 2006 by the federal banking regulatory agencies, management re-evaluated and adjusted the methodology it uses to estimate the allowance for loan losses during the second quarter
of 2007. At December 31, 2007, our allowance for loan losses as a percentage of loans was .90%, down from 1.13% at December 31, 2006. In evaluating the allowance for loan losses, we prepare an analysis of our current loan portfolio through
the use of historical loss rates, homogeneous risk analysis grouping to include probabilities for loss in each group by risk grade, estimation of period to impairment in each homogeneous grouping, analysis of internal credit processes, past due loan
portfolio performance and overall economic conditions, both regionally and nationally.



Homogeneous loan groups are assigned risk factors based on their perceived loss potential and on their respective risk ratings. The Bank utilizes a system of nine possible risk ratings. The risk ratings are
established based on perceived probability of loss. All loans risk rated doubtful and loss are removed from their homogeneous group and individually analyzed for impairment as detailed in FAS 114. Other groups of loans based
on certain asset quality indicators and loan



31



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size may be selected for impairment review. Loans are considered impaired if, based on current information and events, it is probable that the Bank will be
unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on either the fair value of the underlying collateral, the present value
of the future cash flows discounted at the historical effective interest rate stipulated in the loan agreement, or the estimated market value of the loan. In measuring the fair value of the collateral, management uses a comparison to the recent
selling price of similar assets, which is consistent with those that would be utilized by unrelated third parties.



A portion of the Banks allowance for loan losses is not allocated to any specific category of loans. This unallocated portion of the allowance
reflects the elements of imprecision and estimation risk inherent in the calculation of the overall allowance. Due to the subjectivity involved in determining the overall allowance, including the unallocated portion, the portion of the allowance
considered unallocated may fluctuate from period to period based on managements evaluation of the factors affecting the assumptions used in calculating the allowance, including historical loss experience, current and expected economic
conditions and geographic conditions.



While we believe that
our management uses the best information available to determine the allowance for loan losses, unforeseen market conditions could result in adjustments to the allowance for loan losses, and net income could be significantly affected if circumstances
differ substantially from the assumptions used in making the final determination. Because these factors and managements assumptions are subject to change, the allocation is not necessarily indicative of future loan portfolio performance.



Net charge-offs of $543 thousand in 2007 increased $507
thousand from 2006 and $272 thousand when compared to 2005. Net charge-offs from real estate secured loans were $433 thousand, ($7) thousand and $12 thousand for 2007, 2006 and 2005, respectively. Real estate loans charged off in 2007 consisted of
five loans; three secured by commercial properties and two secured by residential properties. These loans were previously identified as impaired loans under the SFAS No. 114 guidance and therefore individually analyzed for impairment and
individually reserved for in the allowance for loan losses. Once charged-off, these loans had the effect of reducing the overall allowance for loan losses. Asset quality remains a top priority and our loan portfolio continues to be in excellent
shape. For the year, net loan charge-offs were 0.13% of average loans and nonperforming loans represent only 0.10% of total loans at December 31, 2007. We believe these loan portfolio quality statistics will keep us above our peer averages.



Allocation of the Allowance for Loan Losses



During the second quarter 2007 management implemented changes to the
methodology used to estimate the allowance for loan loss. Because management re-evaluated and adjusted the methodology it uses to estimate the allowance for loan losses there were shifts in the allocated and unallocated portion of the allowance. The
following table sets forth the allocation of allowance for loan losses and percent of our total loans represented by the loans in each loan category for each of the years presented.



Allocation of the Allowance for Loan Losses



|                               |  |                        |       |         |       |   |        |      |         |  |       |        |  |         |       |  |        |   |         |   |       |        |       |         |  |   |       |  |       |  
|------------------------------ |  | ---------------------- | ----- | ------- | ----- | - | ------ | ---- | ------- |  | ----- | ------ |  | ------- | ----- |  | ------ | - | ------- | - | ----- | ------ | ----- | ------- |  | - | ----- |  | ----- | -
|                               |  | December 31,           |      
|                               |  | 2007                   |       |         | 2006  |   |        | 2005 |         |  | 2004  |        |  | 2003    |      
|                               |  | Amount                 |       | Percent |       |   | Amount |      | Percent |  |       | Amount |  | Percent |       |  | Amount |   | Percent |   |       | Amount |       | Percent | 
|                               |  | (Dollars in thousands) |      
|Real estate                    |  | $                      | 2,642 |         | 74.7  | % |        | $    | 3,630   |  | 78.4  | %      |  | $       | 3,292 |  | 75.0   | % |         | $ | 2,734 |        | 72.9  | %       |  | $ | 2,487 |  | 65.1  | %
|Installment loans              |  |                        | 73    |         | 1.3   |   |        |      | 233     |  | 1.5   |        |  |         | 122   |  | 2.2    |   |         |   | 134   |        | 3.0   |         |  |   | 82    |  | 4.1   |  
|Credit cards and related plans |  |                        | 38    |         | 0.4   |   |        |      | 8       |  | 0.5   |        |  |         | 21    |  | 0.7    |   |         |   | 165   |        | 1.5   |         |  |   | 162   |  | 1.6   |  
|Commercial and all other loans |  |                        | 773   |         | 23.6  |   |        |      | 817     |  | 19.6  |        |  |         | 1,073 |  | 22.1   |   |         |   | 1,196 |        | 22.6  |         |  |   | 777   |  | 29.2  |  
|                               |  |                        |       |         |       |   |        |      |         |  |       |        |  |         |       |  |        |   |         |   |       |        |       |         |  |   |       |  |       |  
|Total allocated                |  |                        | 3,526 |         | 100.0 | % |        |      | 4,688   |  | 100.0 | %      |  |         | 4,508 |  | 100.0  | % |         |   | 4,229 |        | 100.0 | %       |  |   | 3,508 |  | 100.0 | %
|Unallocated                    |  |                        | 557   |         |       |   |        |      | 37      |  |       |        |  |         | 142   |  |        |   |         |   | 71    |        |       |         |  |   | 42    |  |       |  
|                               |  |                        |       |         |       |   |        |      |         |  |       |        |  |         |       |  |        |   |         |   |       |        |       |         |  |   |       |  |       |  
|Total                          |  | $                      | 4,083 |         |       |   |        | $    | 4,725   |  |       |        |  | $       | 4,650 |  |        |   |         | $ | 4,300 |        |       |         |  | $ | 3,550 |  |       |  
|                               |  |                        |       |         |       |   |        |      |         |  |       |        |  |         |       |  |        |   |         |   |       |        |       |         |  |   |       |  |       |  



32



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Nonperforming Assets and Past Due Loans



The following table summarizes our nonperforming assets and past due loans at the dates indicated.



Nonperforming Assets and Past Due Loans



|                                                   |  |                        |     |      |   |      |  |      |    |      |   |     |  |   |    
|-------------------------------------------------- |  | ---------------------- | --- | ---- | - | ---- |  | ---- | -- | ---- | - | --- |  | - | ---
|                                                   |  | December 31,          
|                                                   |  | 2007                   |     | 2006 |   | 2005 |  | 2004 |    | 2003
|                                                   |  | (Dollars in thousands)
|Non-accrual loans                                  |  | $                      | 393 |      | $ | 130  |  | $    |   |      | $ | 66  |  | $ | 147
|Loans past due 90 days or more days still accruing |  |                        |    |      |   |     |  |      |   |      |   |    |  |   |   
|Restructured loans                                 |  |                        | 73  |      |   | 54   |  |      | 65 |      |   | 37  |  |   | 43 
|Repossessions                                      |  |                        | 66  |      |   | 240  |  |      |   |      |   |    |  |   | 230
|Foreclosed properties                              |  |                        |    |      |   |     |  |      |   |      |   | 35  |  |   | 24 
|                                                   |  |                        |     |      |   |      |  |      |    |      |   |     |  |   |    
|Total                                              |  | $                      | 532 |      | $ | 424  |  | $    | 65 |      | $ | 138 |  | $ | 444
|                                                   |  |                        |     |      |   |      |  |      |    |      |   |     |  |   |    



A loan is placed on
non-accrual status when, in our judgment, the collection of interest income appears doubtful or the loan is past due 90 days or more. Interest receivable that has been accrued and is subsequently determined to have doubtful collectibility is charged
to the appropriate interest income account. Interest on loans that are classified as non-accrual is recognized when received. In some cases, where borrowers are experiencing financial difficulties, loans may be restructured to provide terms
significantly different from the original terms. Foreclosed properties are initially recorded at the lower of cost or fair value less estimated costs to sell. Thereafter the properties are maintained at the lower of cost or fair value.



At December 31, 2007 and 2006, nonperforming assets were
approximately 0.1%, of the loans outstanding at such dates. The impact of our non-accrual loans at December 31, 2007, on our interest income for the year then ended was not material.



Any loans that are classified for regulatory purposes as loss, doubtful, substandard or special mention, and that are not
included as non-performing loans, do not (i) represent or result from trends or uncertainties that management reasonably expects will materially impact future operating results; or (ii) represent material credits about which management has
any information which causes management to have serious doubts as to the ability of such borrower to comply with the loan repayment terms.



Off-Balance Sheet Arrangements and Contractual Obligations



We have various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to meet the
financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. We also have contractual cash obligations and commitments, including certificates of deposit, other borrowings,
operating leases and loan commitments. The following tables set forth our commercial commitments and contractual payment obligations as of December 31, 2007.



|                                     |  |                                            |        |                 |   |          |  |          |        |                  |   |       |  |   |       
|------------------------------------ |  | ------------------------------------------ | ------ | --------------- | - | -------- |  | -------- | ------ | ---------------- | - | ----- |  | - | ------
|                                     |  | Amount of Commitment Expiration per Period
|Commercial Commitments               |  | Total                                      |        | Less than1 year |   | 1-3years |  | 4-5years |        | More than5 years
|                                     |  | (Dollars in thousands)                    
|Loan commitments and lines of credit |  | $                                          | 91,552 |                 | $ | 44,319   |  | $        | 23,380 |                  | $ | 1,788 |  | $ | 22,065
|Standby letters of credit            |  |                                            | 623    |                 |   | 81       |  |          | 542    |                  |   |      |  |   |      
|                                     |  |                                            |        |                 |   |          |  |          |        |                  |   |       |  |   |       
|Total commercial commitments         |  | $                                          | 92,175 |                 | $ | 44,400   |  | $        | 23,922 |                  | $ | 1,788 |  | $ | 22,065
|                                     |  |                                            |        |                 |   |          |  |          |        |                  |   |       |  |   |       



33



---

|                              |  |                                   |         |                 |   |          |  |          |        |                  |   |       |  |   |      
|----------------------------- |  | --------------------------------- | ------- | --------------- | - | -------- |  | -------- | ------ | ---------------- | - | ----- |  | - | -----
|                              |  | Amount of Payments Due per Period
|Contractual Obligations       |  | Total                             |         | Less than1 year |   | 1-3years |  | 4-5years |        | More than5 years
|                              |  | (Dollars in thousands)           
|Short-term borrowings         |  |                                   | 43,174  |                 |   | 43,174   |  |          |       |                  |   |      |  |   |     
|Operating leases              |  |                                   | 2,578   |                 |   | 483      |  |          | 454    |                  |   | 354   |  |   | 1,287
|Deposits                      |  |                                   | 526,361 |                 |   | 499,966  |  |          | 24,350 |                  |   | 2,045 |  |   |     
|                              |  |                                   |         |                 |   |          |  |          |        |                  |   |       |  |   |      
|Total contractual obligations |  | $                                 | 572,113 |                 | $ | 543,623  |  | $        | 24,804 |                  | $ | 2,399 |  | $ | 1,287
|                              |  |                                   |         |                 |   |          |  |          |        |                  |   |       |  |   |      



Investment Portfolio



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



Our investment securities totaled $125.9 million at December 31, 2007, $125.9 million at December 31, 2006 and $104.7 million at
December 31, 2005. The investment portfolio remained flat from 2006 to 2007. From 2005 to 2006 the increase in investment securities of $21.1 million or 20.2% is principally due to a $25.0 million prefund strategy implemented early
in the fourth quarter of 2006. We preinvested future cash flows with short-term borrowing in order to capture currently available high yields versus waiting for cash roll off later that may have to be reinvested at lower rates. Additions to the
investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as
interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.



The carrying values of investment securities held by us at the dates indicated are summarized as follows:



Investment Portfolio Composition



|                                                |  |                        |         |            |       |   |      |   |            |  |       |      |  |            |         |  |       |  
|----------------------------------------------- |  | ---------------------- | ------- | ---------- | ----- | - | ---- | - | ---------- |  | ----- | ---- |  | ---------- | ------- |  | ----- | -
|                                                |  | December 31,           |        
|                                                |  | 2007                   |         | Percentage |       |   | 2006 |   | Percentage |  |       | 2005 |  | Percentage |        
|                                                |  | (Dollars in thousands) |        
|Securities available-for-sale:                  |  |                        |         |            |       |   |      |   |            |  |       |      |  |            |         |  |       |  
|Government-sponsored enterprises and FFCB bonds |  | $                      | 33,022  |            | 26.2  | % |      | $ | 36,760     |  | 29.2  | %    |  | $          | 23,265  |  | 22.2  | %
|Collaterized mortgage obligations               |  |                        | 21,687  |            | 17.2  |   |      |   | 21,221     |  | 16.9  |      |  |            | 16,969  |  | 16.2  |  
|Corporate notes                                 |  |                        | 2,958   |            | 2.3   |   |      |   | 3,046      |  | 2.4   |      |  |            |        |  |      |  
|Mortgage-backed securities                      |  |                        | 31,453  |            | 25.0  |   |      |   | 32,223     |  | 25.6  |      |  |            | 35,737  |  | 34.1  |  
|Tax-exempt municipal securities                 |  |                        | 35,941  |            | 28.6  |   |      |   | 32,610     |  | 25.9  |      |  |            | 28,752  |  | 27.5  |  
|Equity securities                               |  |                        | 827     |            | 0.7   |   |      |   |           |  |      |      |  |            |        |  |      |  
|                                                |  |                        |         |            |       |   |      |   |            |  |       |      |  |            |         |  |       |  
|Total investments                               |  | $                      | 125,888 |            | 100.0 | % |      | $ | 125,860    |  | 100.0 | %    |  | $          | 104,723 |  | 100.0 | %
|                                                |  |                        |         |            |       |   |      |   |            |  |       |      |  |            |         |  |       |  



34



---

The following table shows maturities of the carrying values and the weighted-average yields of investment
securities held by us at December 31, 2007.



Investment
Portfolio Maturity Schedule



|                                                |  |                        |       |   |                           |   |        |                          |  |   |                               |   |  |              |        |   |             |   |        |   |  |   |         |  
|----------------------------------------------- |  | ---------------------- | ----- | - | ------------------------- | - | ------ | ------------------------ |  | - | ----------------------------- | - |  | ------------ | ------ | - | ----------- | - | ------ | - |  | - | ------- | -
|                                                |  | 3 monthsor less        |       |   | Over3 monthsthrough1 year |   |        | Over1 yearthrough5 years |  |   | Over5 yearsbut within10 years |   |  | Over10 years |        |   |             |  
|                                                |  | Amount/Yield           |       |   | Amount/Yield              |   |        | Amount/Yield             |  |   | Amount/Yield                  |   |  | Amount/Yield |        |   | Total/Yield |  
|                                                |  | (Dollars in thousands) |      
|Securities available-for-sale:                  |  |                        |       |   |                           |   |        |                          |  |   |                               |   |  |              |        |   |             |   |        |   |  |   |         |  
|Government-sponsored enterprises and FFCB bonds |  | $                      | 2,997 |   |                           | $ | 11,882 |                          |  | $ | 12,498                        |   |  | $            | 1,497  |   |             | $ | 4,148  |   |  | $ | 33,022  |  
|                                                |  |                        | 4.39  | % |                           |   | 4.45   | %                        |  |   | 4.95                          | % |  |              | 5.15   | % |             |   | 5.92   | % |  |   | 4.85    | %
|Collaterized mortgage obligations(1)            |  |                        |      |   |                           |   |       |                          |  |   | 21,687                        |   |  |              |       |   |             |   |       |   |  |   | 21,687  |  
|                                                |  |                        |      |   |                           |   |       |                          |  |   | 4.51                          |   |  |              |       |   |             |   |       |   |  |   | 4.51    |  
|Corporate notes                                 |  |                        |      |   |                           |   |       |                          |  |   |                              |   |  |              | 2,958  |   |             |   |       |   |  |   | 2,958   |  
|                                                |  |                        |      |   |                           |   |       |                          |  |   |                              |   |  |              | 5.55   |   |             |   |       |   |  |   | 5.55    |  
|Mortgage-backed securities(1)                   |  |                        |      |   |                           |   |       |                          |  |   | 25,251                        |   |  |              | 6,202  |   |             |   |       |   |  |   | 31,453  |  
|                                                |  |                        |      |   |                           |   |       |                          |  |   | 5.04                          |   |  |              | 4.87   |   |             |   |       |   |  |   | 5.01    |  
|Tax-exempt municipal securities(2)              |  |                        | 3,769 |   |                           |   | 1,372  |                          |  |   | 11,015                        |   |  |              | 12,503 |   |             |   | 7,282  |   |  |   | 35,941  |  
|                                                |  |                        | 4.22  |   |                           |   | 5.76   |                          |  |   | 5.85                          |   |  |              | 5.43   |   |             |   | 6.09   |   |  |   | 5.58    |  
|Equity securities(3)                            |  |                        |      |   |                           |   |       |                          |  |   |                              |   |  |              |       |   |             |   | 827    |   |  |   | 827     |  
|                                                |  |                        |      |   |                           |   |       |                          |  |   |                              |   |  |              |       |   |             |   | 6.04   |   |  |   | 6.04    |  
|                                                |  |                        |       |   |                           |   |        |                          |  |   |                               |   |  |              |        |   |             |   |        |   |  |   |         |  
|Total investments                               |  | $                      | 6,766 |   |                           | $ | 13,254 |                          |  | $ | 70,451                        |   |  | $            | 23,160 |   |             | $ | 12,257 |   |  | $ | 125,888 |  
|                                                |  |                        |       |   |                           |   |        |                          |  |   |                               |   |  |              |        |   |             |   |        |   |  |   |         |  
|                                                |  |                        | 4.30  | % |                           |   | 4.58   | %                        |  |   | 4.98                          | % |  |              | 5.28   | % |             |   | 6.03   | % |  |   | 5.06    | %
|                                                |  |                        |       |   |                           |   |        |                          |  |   |                               |   |  |              |        |   |             |   |        |   |  |   |         |  

---

|(1) |  | Mortgage-backed securities (MBS) and collaterized mortgage obligations (CMO) maturities are based on the average life at the projected prepayment assumptions.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $560
thousand, $598 thousand, and $590 thousand for the years 2007, 2005, and 2004, respectively.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Equity securities yield is based on annualized dividends received in 2007.
|--- |  | --------------------------------------------------------------------------



The weighted average yields shown are calculated on the basis of cost and effective yields for the scheduled maturity of each security. At
December 31, 2007, the market value of the investment portfolio was approximately $728 thousand below its book value, which is primarily the result of higher market interest rates compared to the interest rates on the investments in the
portfolio.



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



|                                         |  |                        |        |              |   |       
|---------------------------------------- |  | ---------------------- | ------ | ------------ | - | ------
|                                         |  | Amortized Cost         |        | Market Value
|                                         |  | (Dollars in thousands)
|Federal National Mortgage Corporation    |  | $                      | 24,390 |              | $ | 23,998
|Federal Home Loan Mortgage Corporation   |  |                        | 20,842 |              |   | 20,739
|Federal Home Loan Banks                  |  |                        | 26,772 |              |   | 27,017
|Government National Mortgage Association |  |                        | 8,407  |              |   | 8,404 



At December 31,
2007, we held $8.0 million in bank owned life insurance, compared to $7.7 million at December 31, 2006.



35



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Deposits



Deposits increased to $526.4 million, up 2.8% as of December 31, 2007 compared to deposits of $512.2 million at December 31, 2006.
Non-interest-bearing deposits decreased $1.3 million from year-end 2006 to year-end 2007, while total interest-bearing deposits increased $15.4 million over the same period. The most significant increases in deposits are attributed to time deposits,
including wholesale time deposits, with a $6.0 million increase in time deposits of $100,000 or more and a $1.9 million increase in other time deposits. We believe that we can improve our core deposit funding by improving our branch network and
providing more convenient opportunities for customers to bank with us. For this reason, we added two additional branches in the Greenville, NC area and converted an existing loan production office in Ocean Isle Beach, NC to a full-service branch in
2007. We will also be adding additional offices in the Wilmington area during 2008 to 2009. We anticipate that our deposits will continue to increase throughout 2008.



Total deposits at December 31, 2006 increased $47.0 million or 10.1% compared to total deposits of $465.2 million at
December 31, 2005. Non interest-bearing deposits decreased $2.0 million from year-end 2005 to year-end 2006, while total interest-bearing deposits increased $49.0 million over the same period. Time deposits increased $51.9 million during 2006
of which $33.9 million was attributable to increases in time deposits of $100,000 or more.



The average balance of deposits and interest rates thereon for the years ended December 31, 2007, 2006, and 2005 are summarized below.



Average Deposits



|                                 |  |                         |         |      |      |   |                |      |         |  |      |                |  |      |         |  |      |  
|-------------------------------- |  | ----------------------- | ------- | ---- | ---- | - | -------------- | ---- | ------- |  | ---- | -------------- |  | ---- | ------- |  | ---- | -
|                                 |  | Year ended December 31, |        
|                                 |  | 2007                    |         |      | 2006 |   |                | 2005 |        
|                                 |  | AverageBalance          |         | Rate |      |   | AverageBalance |      | Rate    |  |      | AverageBalance |  | Rate |        
|                                 |  | (Dollars in thousands)  |        
|Interest-bearing demand deposits |  | $                       | 95,008  |      | 1.87 | % |                | $    | 92,830  |  | 1.35 | %              |  | $    | 91,453  |  | 0.59 | %
|Savings deposits                 |  |                         | 18,740  |      | 0.50 |   |                |      | 21,708  |  | 0.50 |                |  |      | 23,168  |  | 0.50 |  
|Time deposits                    |  |                         | 303,927 |      | 5.02 |   |                |      | 271,671 |  | 4.42 |                |  |      | 231,069 |  | 3.03 |  
|                                 |  |                         |         |      |      |   |                |      |         |  |      |                |  |      |         |  |      |  
|Total interest-bearing deposits  |  |                         | 417,675 |      | 4.10 |   |                |      | 386,209 |  | 3.46 |                |  |      | 345,690 |  | 2.21 |  
|Non-interest-bearing deposits    |  |                         | 94,397  |      |      |   |                |      | 92,988  |  |      |                |  |      | 93,996  |  |      |  
|                                 |  |                         |         |      |      |   |                |      |         |  |      |                |  |      |         |  |      |  
|Total deposits                   |  | $                       | 512,072 |      | 3.33 | % |                | $    | 479,197 |  | 2.79 | %              |  | $    | 439,686 |  | 1.74 | %
|                                 |  |                         |         |      |      |   |                |      |         |  |      |                |  |      |         |  |      |  



Over the past three
years, our average non-interest-bearing deposits have been approximately 20% of our average total deposits. Owing to our loan growth, during 2007 we continued to look to the wholesale funds market to augment our core funding. As part of our
liquidity and funding strategy, we replaced a portion of deposits of local municipalities, which require us to pledge qualifying investment securities as collateral, with wholesale funds. We subscribe to an Internet bulletin board service to
advertise our deposit rates. At year-end 2007 and 2006, we had approximately $42.6 million and $67.0 million, respectively, in these types of deposits, most of which have a maturity of two years or less and carried an interest rate slightly higher
than the rates we pay for deposits in our local markets.



As of
December 31, 2007, we held approximately $132.9 million in time deposits of $100,000 or more of individuals, local governments or municipal entities and $29.4 million of wholesale deposits of $100,000 or more. Non-brokered time deposits less
than $100,000 were approximately $133.5 million at December 31, 2007. The following table is a maturity schedule of our time deposits as of December 31, 2007.



36



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Time Deposit Maturity Schedule



|                                                               |  |                        |        |           |   |            |  |               |         |       |   |        |  |   |        
|-------------------------------------------------------------- |  | ---------------------- | ------ | --------- | - | ---------- |  | ------------- | ------- | ----- | - | ------ |  | - | -------
|                                                               |  | 3 monthsor less        |        | 4-6months |   | 7-12months |  | Over 12months |         | Total
|                                                               |  | (Dollars in thousands)
|Non-wholesale time certificates of deposit of $100,000 or more |  | $                      | 48,436 |           | $ | 24,342     |  | $             | 50,658  |       | $ | 9,454  |  | $ | 132,890
|Non-wholesale time certificates of deposit less than $100,000  |  |                        | 38,376 |           |   | 35,136     |  |               | 50,351  |       |   | 9,607  |  |   | 133,470
|Wholesale time certificates of deposit of $100,000 or more     |  |                        | 5,225  |           |   | 3,493      |  |               | 13,631  |       |   | 7,037  |  |   | 29,386 
|Wholesale time certificates of deposit less than $100,000      |  |                        | 677    |           |   | 4,023      |  |               | 8,182   |       |   | 298    |  |   | 13,180 
|                                                               |  |                        |        |           |   |            |  |               |         |       |   |        |  |   |        
|Total time deposits                                            |  | $                      | 92,714 |           | $ | 66,994     |  | $             | 122,822 |       | $ | 26,396 |  | $ | 308,926
|                                                               |  |                        |        |           |   |            |  |               |         |       |   |        |  |   |        



Borrowings



Short-term borrowings include sweep accounts, advances from the Federal
Home Loan Bank of Atlanta (the FHLB) having maturities of one year or less, Federal Funds purchased and repurchase agreements. Our short-term borrowings totaled $43.2 million on December 31, 2007, compared to $31.1 million on
December 31, 2006, an increase of $12.1 million. Advances from FHLB increased $25.0 million while repurchase agreements decreased $16.1 million and sweep accounts increased $3.2 million from December 31, 2006 to December 31, 2007



On June 26, 2007, we redeemed all of our trust preferred
securities ($10.3 million) originally issued June 26, 2002 and as a result we had no long-term obligations as of December 31, 2007.



Liquidity



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



Consistent with our general approach to liquidity management, loans and other assets of the Bank are funded primarily using a core of local deposits,
proceeds from retail repurchase agreements and excess Bank capital. To date, these core funds, supplemented by FHLB advances and a modest amount of brokered deposits, have been adequate to fund loan demand in our market areas, while maintaining the
desired level of immediate liquidity and an investment securities portfolio available for both immediate and secondary liquidity purposes.



We are a member of the Federal Home Loan Bank of Atlanta. Membership, along with a blanket collateral commitment of our one-to-four family residential
mortgage loan portfolio, as well as our commercial real estate loan portfolio, provided us the ability to draw up to $128.8 million, $124.8 million and $109.5 million of advances from the FHLB at December 31, 2007, 2006 and 2005, respectively.
At December 31, 2007, we had outstanding FHLB advances totaling $28.0 million compared to $3.0 million and $21.0 million at December 31, 2006 and 2005, respectively.



As a requirement for membership, we invest in stock of the FHLB in the amount of 1.0% of our outstanding residential loans
or 5.0% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At December 31, 2007, we owned 23,822 shares of the FHLBs $100 par value capital stock,
compared to 12,293 and 19,477 shares at December 31, 2006 and 2005, respectively. No ready market exists for FHLB stock, which is carried at cost.



We also had unsecured federal funds lines in the aggregate amount of $32.0 million available to us at December 31, 2007 under which we can borrow
funds to meet short-term liquidity needs. At December 31, 2007, we did not have any borrowings outstanding under these federal funds lines. Another source of funding is loan participations sold to other commercial banks (in which we retain the
servicing rights). As of December 31, 2007, we did not have any loan participations sold. We believe that our liquidity sources are adequate to meet our operating needs.



37



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Capital Resources and Shareholders Equity



Shareholders equity increased by approximately $4.0 million to $66.8 million at December 31, 2007 from
$62.8 million at December 31, 2006. We experienced net income in 2007 of $4.8 million, $237 thousand from the exercise of stock options and recognized stock compensation of $205 thousand on restricted stock awards and stock options.
We had a decrease in net unrealized losses on available-for-sale securities of $871 thousand and we declared cash dividends of $2.0 million or $0.70 per share during 2007. During the fourth quarter of 2007 we repurchased 1,223 shares of our
outstanding common stock at a cost of $31 thousand.



Shareholders equity increased by approximately $28.2 million to $62.8 million at December 31, 2006 from $34.6 million at December 31, 2005. We sold an additional 862,500 shares of common stock in March 2006 for gross
proceeds of $26.5 million. We experienced net income in 2007 of $5.6 million and recognized stock compensation of $242 thousand on restricted stock awards and stock options. We had a decrease in net unrealized losses on available-for-sale
securities of $133 thousand and we declared cash dividends of $2.0 million or $0.68 per share during 2007. The adoption of SFAS No. 158 required us to record a decrease to accumulated other comprehensive income of $20 thousand.



The following table presents information concerning capital required of us
and our actual capital ratios.



|                                         |  |                                                              |       |   |                                            |   |      |          |  |       |             |  |       |  
|---------------------------------------- |  | ------------------------------------------------------------ | ----- | - | ------------------------------------------ | - | ---- | -------- |  | ----- | ----------- |  | ----- | -
|                                         |  | To be wellcapitalizedunder promptcorrective actionprovisions |       |   | Minimumrequired forcapitaladequacypurposes |   |      | OurRatio |  |       | BanksRatio | 
|                                         |  | Ratio                                                        |       |   | Ratio                                      |   |      |         
|As of December 31, 2007:                 |  |                                                              |       |   |                                            |   |      |          |  |       |             |  |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                            | 5.00  | % |                                            | 3 | 3.00 | %        |  | 10.66 | %           |  | 8.98  | %
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                            | 6.00  |   |                                            | 3 | 4.00 |          |  | 12.94 |             |  | 10.90 |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                            | 10.00 |   |                                            | 3 | 8.00 |          |  | 13.72 |             |  | 11.69 |  
|As of December 31, 2006:                 |  |                                                              |       |   |                                            |   |      |          |  |       |             |  |       |  
|Tier 1 Capital (to Average Assets)       |  | 3                                                            | 5.00  | % |                                            | 3 | 3.00 | %        |  | 12.05 | %           |  | 8.81  | %
|Tier 1 Capital (to Risk Weighted Assets) |  | 3                                                            | 6.00  |   |                                            | 3 | 4.00 |          |  | 15.08 |             |  | 11.04 |  
|Total Capital (to Risk Weighted Assets)  |  | 3                                                            | 10.00 |   |                                            | 3 | 8.00 |          |  | 16.04 |             |  | 12.00 |  



Inflation and Other Issues



Because our assets and liabilities are primarily monetary in
nature, the effect of inflation on our assets is less significant compared to most commercial and industrial companies. However, inflation does have an impact on the growth of total assets in the banking industry and the resulting need to increase
capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation also has a significant effect on other expenses, which tend to rise during periods of general inflation. Notwithstanding these effects of
inflation, management believes our financial results are influenced more by our ability to react to changes in interest rates than by inflation.



Except as discussed in this Managements Discussion and Analysis, management is not aware of trends, events or uncertainties that will have or that
are reasonably likely to have a material adverse effect on the liquidity, capital resources or operations. Management is not aware of any current recommendations by regulatory authorities which, if they were implemented, would have such an effect.



Recent Accounting Pronouncements



Please refer to Note (1) (S) of our consolidated financial
statements for a summary of recent authoritative pronouncements that could impact our accounting, reporting, and/or disclosure of financial information.



38



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Summary Quarterly Financial Information



The following table contains summary financial information for each quarterly period listed below. This information has been
derived from our unaudited interim consolidated financial statements. This information has not been audited but, in the opinion of our management, it includes all adjustments (consisting only of normal recurring adjustments) which management
considers necessary for a fair presentation of our results for those periods. You should read this information in conjunction with our audited year end consolidated financial statements that appear in Item 8 of this report. Our results for
quarterly periods shown in the table are not necessarily indicative of our results for any future period.



|                                       |  |                                               |           |   |              |   |           |               |  |   |              |   |  |               |           |   |              |   |           |               |  |   |              |   |  |   |           |   |  |   |           |  
|-------------------------------------- |  | --------------------------------------------- | --------- | - | ------------ | - | --------- | ------------- |  | - | ------------ | - |  | ------------- | --------- | - | ------------ | - | --------- | ------------- |  | - | ------------ | - |  | - | --------- | - |  | - | --------- | -
|                                       |  | 2007                                          |           |   | 2006         |  
|                                       |  | FourthQuarter                                 |           |   | ThirdQuarter |   |           | SecondQuarter |  |   | FirstQuarter |   |  | FourthQuarter |           |   | ThirdQuarter |   |           | SecondQuarter |  |   | FirstQuarter |  
|                                       |  | (Dollars in thousands, except per share data) |          
|Summary of Operations                  |  |                                               |           |   |              |   |           |               |  |   |              |   |  |               |           |   |              |   |           |               |  |   |              |   |  |   |           |   |  |   |           |  
|                                       |  |                                               |           |   |              |   |           |              
|Income Statement Data:                 |  |                                               |           |   |              |   |           |               |  |   |              |   |  |               |           |   |              |   |           |               |  |   |              |   |  |   |           |   |  |   |           |  
|Interest income                        |  | $                                             | 10,086    |   |              | $ | 10,210    |               |  | $ | 9,871        |   |  | $             | 9,816     |   |              | $ | 9,993     |               |  | $ | 9,367        |   |  | $ | 8,929     |   |  | $ | 8,297     |  
|Interest expense                       |  |                                               | 4,777     |   |              |   | 4,890     |               |  |   | 4,905        |   |  |               | 4,863     |   |              |   | 4,830     |               |  |   | 3,962        |   |  |   | 3,667     |   |  |   | 3,430     |  
|Net interest income                    |  |                                               | 5,309     |   |              |   | 5,320     |               |  |   | 4,966        |   |  |               | 4,953     |   |              |   | 5,163     |               |  |   | 5,405        |   |  |   | 5,262     |   |  |   | 4,867     |  
|Provision for loan losses              |  |                                               |          |   |              |   |          |               |  |   | (489         | ) |  |               | 390       |   |              |   | (99       | )             |  |   | 50           |   |  |   | 200       |   |  |   | 200       |  
|Net interest income after provision    |  |                                               | 5,309     |   |              |   | 5,320     |               |  |   | 5,455        |   |  |               | 4,563     |   |              |   | 5,262     |               |  |   | 5,355        |   |  |   | 5,062     |   |  |   | 4,667     |  
|Non-interest income                    |  |                                               | 1,338     |   |              |   | 1,582     |               |  |   | 1,585        |   |  |               | 1,681     |   |              |   | 1,566     |               |  |   | 1,753        |   |  |   | 1,549     |   |  |   | 1,315     |  
|Non-interest expense                   |  |                                               | 4,857     |   |              |   | 5,285     |               |  |   | 5,241        |   |  |               | 4,961     |   |              |   | 5,038     |               |  |   | 4,591        |   |  |   | 4,506     |   |  |   | 4,402     |  
|Income before income taxes             |  |                                               | 1,790     |   |              |   | 1,617     |               |  |   | 1,799        |   |  |               | 1,283     |   |              |   | 1,790     |               |  |   | 2,517        |   |  |   | 2,105     |   |  |   | 1,580     |  
|Income taxes                           |  |                                               | 522       |   |              |   | 282       |               |  |   | 542          |   |  |               | 331       |   |              |   | 416       |               |  |   | 822          |   |  |   | 690       |   |  |   | 482       |  
|Net income                             |  |                                               | 1,268     |   |              |   | 1,335     |               |  |   | 1,257        |   |  |               | 952       |   |              |   | 1,374     |               |  |   | 1,695        |   |  |   | 1,415     |   |  |   | 1,098     |  
|                                       |  |                                               |           |   |              |   |           |              
|Per Share Data and Shares Outstanding: |  |                                               |           |   |              |   |           |               |  |   |              |   |  |               |           |   |              |   |           |               |  |   |              |   |  |   |           |   |  |   |           |  
|Net incomebasic                       |  | $                                             | 0.44      |   |              | $ | 0.46      |               |  | $ | 0.43         |   |  | $             | 0.33      |   |              | $ | 0.48      |               |  | $ | 0.59         |   |  | $ | 0.49      |   |  | $ | 0.51      |  
|Net incomediluted                     |  |                                               | 0.43      |   |              |   | 0.46      |               |  |   | 0.43         |   |  |               | 0.33      |   |              |   | 0.47      |               |  |   | 0.58         |   |  |   | 0.49      |   |  |   | 0.51      |  
|Cash dividends                         |  |                                               | 0.175     |   |              |   | 0.175     |               |  |   | 0.175        |   |  |               | 0.175     |   |              |   | 0.17      |               |  |   | 0.17         |   |  |   | 0.17      |   |  |   | 0.17      |  
|Book value at period end               |  |                                               | 22.88     |   |              |   | 22.36     |               |  |   | 21.71        |   |  |               | 21.84     |   |              |   | 21.64     |               |  |   | 21.28        |   |  |   | 20.45     |   |  |   | 20.43     |  
|Shares outstanding at period end       |  |                                               | 2,920,769 |   |              |   | 2,921,992 |               |  |   | 2,921,992    |   |  |               | 2,921,992 |   |              |   | 2,902,242 |               |  |   | 2,902,242    |   |  |   | 2,902,242 |   |  |   | 2,902,542 |  
|                                       |  |                                               |           |   |              |   |           |              
|Balance Sheet Data:                    |  |                                               |           |   |              |   |           |               |  |   |              |   |  |               |           |   |              |   |           |               |  |   |              |   |  |   |           |   |  |   |           |  
|Total assets                           |  | $                                             | 643,889   |   |              | $ | 629,679   |               |  | $ | 629,573      |   |  | $             | 616,042   |   |              | $ | 624,070   |               |  | $ | 599,534      |   |  | $ | 579,137   |   |  | $ | 581,771   |  
|Investments                            |  |                                               | 125,888   |   |              |   | 124,581   |               |  |   | 125,413      |   |  |               | 129,424   |   |              |   | 125,860   |               |  |   | 114,449      |   |  |   | 104,672   |   |  |   | 104,241   |  
|Loans                                  |  |                                               | 454,198   |   |              |   | 440,340   |               |  |   | 436,610      |   |  |               | 418,308   |   |              |   | 417,943   |               |  |   | 422,975      |   |  |   | 413,432   |   |  |   | 394,986   |  
|Interest-earning assets                |  |                                               | 588,168   |   |              |   | 568,097   |               |  |   | 570,164      |   |  |               | 559,697   |   |              |   | 569,498   |               |  |   | 547,431      |   |  |   | 520,851   |   |  |   | 526,576   |  
|Deposits                               |  |                                               | 526,361   |   |              |   | 527,368   |               |  |   | 518,285      |   |  |               | 502,980   |   |              |   | 512,249   |               |  |   | 474,232      |   |  |   | 478,254   |   |  |   | 482,487   |  
|Long-term obligations                  |  |                                               |          |   |              |   |          |               |  |   |             |   |  |               |          |   |              |   | 10,310    |               |  |   | 10,310       |   |  |   | 18,310    |   |  |   | 18,310    |  
|Shareholders equity                   |  |                                               | 66,841    |   |              |   | 65,339    |               |  |   | 63,436       |   |  |               | 63,821    |   |              |   | 62,793    |               |  |   | 61,773       |   |  |   | 59,340    |   |  |   | 59,286    |  
|                                       |  |                                               |           |   |              |   |           |              
|Selected Performance Ratios:           |  |                                               |           |   |              |   |           |               |  |   |              |   |  |               |           |   |              |   |           |               |  |   |              |   |  |   |           |   |  |   |           |  
|Rate of return (annualized) on:        |  |                                               |           |   |              |   |           |               |  |   |              |   |  |               |           |   |              |   |           |               |  |   |              |   |  |   |           |   |  |   |           |  
|Total assets                           |  |                                               | 0.80      | % |              |   | 0.85      | %             |  |   | 0.82         | % |  |               | 0.62      | % |              |   | 0.89      | %             |  |   | 1.16         | % |  |   | 0.99      | % |  |   | 0.79      | %
|Shareholders equity                   |  |                                               | 7.67      |   |              |   | 8.30      |               |  |   | 7.89         |   |  |               | 6.00      |   |              |   | 8.83      |               |  |   | 11.16        |   |  |   | 9.54      |   |  |   | 11.51     |  
|Dividend payout ratio                  |  |                                               | 39.77     |   |              |   | 38.04     |               |  |   | 40.70        |   |  |               | 53.03     |   |              |   | 35.42     |               |  |   | 28.81        |   |  |   | 34.69     |   |  |   | 33.33     |  



39



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CAUTIONARY NOTE ABOUT FORWARD-LOOKING STATEMENTS



The above discussion includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Those statements include statements about our profitability, liquidity, allowance for loan losses, nonperforming loans, interest rate
sensitivity, market risk, ability to compete in our markets, business strategies, and other such statements that are not historical facts. They usually will contain qualifying words such as may, will, expect,
believe, anticipate, intend, plan, project, likely, estimate, continue, could, would, should, or similar terms, or
the negative or other variations of those terms. We have based those forward-looking statements on our current expectations and projections about future events, but we do not guarantee our future performance described in the statements or that the
facts or events described in the statements actually will happen. Our actual performance, or any of those events or facts, may never occur or be realized, or they may be materially different from, or occur in a way substantially different from, the
results, facts or events indicated by the forward-looking statements. Those statements involve a number of risks and uncertainties, including, among other things, the factors discussed in Item 1A under the heading Risk Factors.
Other factors that could influence the accuracy of those forward-looking statements include, among other things:



| | · |  | customer acceptance of our services, products and fee structure;
| | - |  | ----------------------------------------------------------------



| | · |  | the financial success or changing strategies of our customers;
| | - |  | --------------------------------------------------------------



| | · |  | the competitive nature of the financial services industry and our ability to compete effectively against other financial institutions in our banking markets;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | weather and similar conditions (particularly the effect of hurricanes on our customers and the coastal communities in which we do business);
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| | · |  | actions of government regulators;
| | - |  | ---------------------------------



| | · |  | the level of market interest rates;
| | - |  | -----------------------------------



| | · |  | general economic conditions; and
| | - |  | --------------------------------



| | · |  | other developments or changes in our business we do not expect.
| | - |  | ---------------------------------------------------------------



All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety
by the cautionary statements in this section. We have no obligation, and do not intend, to publicly update or otherwise revise any of the forward-looking statements as a result of any new information, future events or otherwise.



Item 7A.    Quantitative and Qualitative
Disclosures About Market Risk

---



Information required by this Item is included in Managements Discussion and Analysis of Financial Condition and Results of Operations contained in Item 7 under the caption Market Risk.



40



---

Item 8.    Financial Statements and Supplementary Data

---



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                     |  |     
|---------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                     |  | Page
|Audited Financial Statements for the years ended December 31, 2007, 2005 and 2004                    |  |     
|                                                                                                     | 
|Report of Dixon Hughes PLLC                                                                          |  | 42  
|                                                                                                     | 
|Consolidated Balance Sheets as of December 31, 2007 and 2006                                         |  | 43  
|                                                                                                     | 
|Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005               |  | 44  
|                                                                                                     | 
|Consolidated Statements of Stockholders Equity for the years ended December 31, 2007, 2006 and 2005 |  | 45  
|                                                                                                     | 
|Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005           |  | 46  
|                                                                                                     | 
|Notes to Consolidated Financial StatementsDecember 31, 2007 and 2006                                |  | 48  



41



---

LOGO



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM



The Board of Directors

ECB Bancorp, Inc.

Engelhard, North Carolina



We have audited the accompanying consolidated balance sheets of ECB Bancorp,
Inc. and Subsidiary (the Company) as of December 31, 2007 and 2006 and the related consolidated statements of income, shareholders equity, and cash flows for each of the years in the three-year period ended December 31,
2007. These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ECB Bancorp, Inc. and Subsidiary as of December 31, 2007 and 2006, and
the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.



We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), ECB Bancorp, Inc. and Subsidiarys internal control over financial reporting as of December 31, 2007, based on criteria established inInternal ControlIntegrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 10, 2008 expressed an unqualified opinion.



LOGO



Greenville, North Carolina

March 10, 2008



42



---

ECB BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED
BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

(Dollars in thousands, except per share data)



|                                                                                                                                                     |  |      |         |   |      |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                                                                                                                     |  | 2007 |         |   | 2006 |  
|ASSETS                                                                                                                                               |  |      |         |   |      |   |         |  
|Non-interest bearing deposits and cash                                                                                                               |  | $    | 16,303  |   |      | $ | 15,591  |  
|Interest-bearing deposits                                                                                                                            |  |      | 925     |   |      |   | 891     |  
|Overnight investments                                                                                                                                |  |      | 4,775   |   |      |   | 23,575  |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total cash and cash equivalents                                                                                                                      |  |      | 22,003  |   |      |   | 40,057  |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Investment securities available-for-sale, at fair value (cost of $126,616 and $128,005 at December 31, 2007 and 2006,
respectively)                  |  |      | 125,888 |   |      |   | 125,860 |  
|Loans                                                                                                                                                |  |      | 454,198 |   |      |   | 417,943 |  
|Allowance for loan losses                                                                                                                            |  |      | (4,083  | ) |      |   | (4,725  | )
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Loans, net                                                                                                                                           |  |      | 450,115 |   |      |   | 413,218 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Real estate and repossessions acquired in settlement of loans, net                                                                                   |  |      | 66      |   |      |   | 240     |  
|Federal Home Loan Bank common stock, at cost                                                                                                         |  |      | 2,382   |   |      |   | 1,229   |  
|Bank premises and equipment, net                                                                                                                     |  |      | 24,450  |   |      |   | 23,042  |  
|Accrued interest receivable                                                                                                                          |  |      | 4,456   |   |      |   | 4,619   |  
|Bank owned life insurance                                                                                                                            |  |      | 8,030   |   |      |   | 7,741   |  
|Other assets                                                                                                                                         |  |      | 6,499   |   |      |   | 8,064   |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total                                                                                                                                                |  | $    | 643,889 |   |      | $ | 624,070 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                 |  |      |         |   |      |   |         |  
|Deposits                                                                                                                                             |  |      |         |   |      |   |         |  
|Demand, non-interest-bearing                                                                                                                         |  | $    | 95,596  |   |      | $ | 96,890  |  
|Demand, interest-bearing                                                                                                                             |  |      | 103,347 |   |      |   | 94,569  |  
|Savings                                                                                                                                              |  |      | 18,492  |   |      |   | 19,809  |  
|Time                                                                                                                                                 |  |      | 308,926 |   |      |   | 300,981 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total deposits                                                                                                                                       |  |      | 526,361 |   |      |   | 512,249 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Accrued interest payable                                                                                                                             |  |      | 2,525   |   |      |   | 2,363   |  
|Short-term borrowings                                                                                                                                |  |      | 43,174  |   |      |   | 31,105  |  
|Long-term obligations                                                                                                                                |  |      |        |   |      |   | 10,310  |  
|Other liabilities                                                                                                                                    |  |      | 4,988   |   |      |   | 5,250   |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total liabilities                                                                                                                                    |  |      | 577,048 |   |      |   | 561,277 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|                                                                                                                                                     |  |     
|Commitments and contingent liabilities                                                                                                               |  |      |         |   |      |   |         |  
|                                                                                                                                                     |  |     
|SHAREHOLDERS EQUITY                                                                                                                                 |  |      |         |   |      |   |         |  
|Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,920,769 and 2,902,242 in 2007 and 2006,
respectively |  |      | 10,184  |   |      |   | 10,119  |  
|Capital surplus                                                                                                                                      |  |      | 27,026  |   |      |   | 26,680  |  
|Retained earnings                                                                                                                                    |  |      | 30,099  |   |      |   | 27,333  |  
|Accumulated other comprehensive loss                                                                                                                 |  |      | (468    | ) |      |   | (1,339  | )
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total shareholders equity                                                                                                                           |  |      | 66,841  |   |      |   | 62,793  |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  
|Total                                                                                                                                                |  | $    | 643,889 |   |      | $ | 624,070 |  
|                                                                                                                                                     |  |      |         |   |      |   |         |  



See accompanying Notes
to Consolidated Financial Statements.



43



---

ECB BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED
STATEMENTS OF INCOME

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(Dollars in thousands, except per share data)



|                                                    |  |                          |           |   |      |   |           |  |   |          
|--------------------------------------------------- |  | ------------------------ | --------- | - | ---- | - | --------- |  | - | ---------
|                                                    |  | Years Ended December 31,
|                                                    |  | 2007                     |           |   | 2006 |   | 2005     
|INTEREST INCOME                                     |  |                          |           |   |      |   |           |  |   |          
|Interest and fees on loans                          |  | $                        | 33,688    |   |      | $ | 31,277    |  | $ | 24,012   
|Interest on investment securities:                  |  |                          |           |   |      |   |           |  |   |          
|Interest exempt from federal income taxes           |  |                          | 1,225     |   |      |   | 1,088     |  |   | 1,135    
|Taxable interest income                             |  |                          | 4,384     |   |      |   | 3,598     |  |   | 3,104    
|Dividend income                                     |  |                          | 137       |   |      |   | 126       |  |   | 111      
|Other interest                                      |  |                          | 549       |   |      |   | 497       |  |   | 241      
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Total interest income                               |  |                          | 39,983    |   |      |   | 36,586    |  |   | 28,603   
|                                                    |  |                          |           |   |      |   |           |  |   |          
|INTEREST EXPENSE                                    |  |                          |           |   |      |   |           |  |   |          
|Deposits                                            |  |                          |           |   |      |   |           |  |   |          
|Demand accounts                                     |  |                          | 1,779     |   |      |   | 1,254     |  |   | 536      
|Savings                                             |  |                          | 94        |   |      |   | 109       |  |   | 116      
|Time                                                |  |                          | 15,256    |   |      |   | 12,007    |  |   | 6,992    
|Short-term borrowings                               |  |                          | 2,306     |   |      |   | 765       |  |   | 468      
|Long-term obligations                               |  |                          |          |   |      |   | 1,754     |  |   | 1,539    
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Total interest expense                              |  |                          | 19,435    |   |      |   | 15,889    |  |   | 9,651    
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Net interest income                                 |  |                          | 20,548    |   |      |   | 20,697    |  |   | 18,952   
|Provision for loan losses                           |  |                          | (99       | ) |      |   | 351       |  |   | 757      
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Net interest income after provision for loan losses |  |                          | 20,647    |   |      |   | 20,346    |  |   | 18,195   
|                                                    |  |                          |           |   |      |   |           |  |   |          
|NON-INTEREST INCOME                                 |  |                          |           |   |      |   |           |  |   |          
|Service charges on deposit accounts                 |  |                          | 3,028     |   |      |   | 3,027     |  |   | 3,323    
|Other service charges and fees                      |  |                          | 1,508     |   |      |   | 1,364     |  |   | 1,301    
|Mortgage origination brokerage fees                 |  |                          | 1,091     |   |      |   | 1,013     |  |   | 756      
|Net gain (loss) on sale of securities               |  |                          | (161      | ) |      |   |          |  |   | 107      
|Income from investments in SBICs                   |  |                          | 72        |   |      |   | 375       |  |   |         
|Income from bank owned life insurance               |  |                          | 289       |   |      |   | 305       |  |   | 255      
|Recapture of reserve for unfunded loans             |  |                          | 240       |   |      |   |          |  |   |         
|Gain on sale of credit card portfolio               |  |                          |          |   |      |   |          |  |   | 375      
|Other operating income                              |  |                          | 119       |   |      |   | 99        |  |   | 108      
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Total non-interest income                           |  |                          | 6,186     |   |      |   | 6,183     |  |   | 6,225    
|                                                    |  |                          |           |   |      |   |           |  |   |          
|NON-INTEREST EXPENSE                                |  |                          |           |   |      |   |           |  |   |          
|Salaries                                            |  |                          | 8,431     |   |      |   | 7,509     |  |   | 6,651    
|Retirement and other employee benefits              |  |                          | 2,503     |   |      |   | 2,753     |  |   | 2,624    
|Occupancy                                           |  |                          | 1,788     |   |      |   | 1,621     |  |   | 1,559    
|Equipment                                           |  |                          | 1,885     |   |      |   | 1,727     |  |   | 1,701    
|Professional fees                                   |  |                          | 673       |   |      |   | 356       |  |   | 469      
|Supplies                                            |  |                          | 432       |   |      |   | 341       |  |   | 330      
|Telephone                                           |  |                          | 563       |   |      |   | 506       |  |   | 498      
|Other operating expenses                            |  |                          | 4,069     |   |      |   | 3,724     |  |   | 3,633    
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Total non-interest expense                          |  |                          | 20,344    |   |      |   | 18,537    |  |   | 17,465   
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Income before income taxes                          |  |                          | 6,489     |   |      |   | 7,992     |  |   | 6,955    
|Income taxes                                        |  |                          | 1,677     |   |      |   | 2,410     |  |   | 2,102    
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Net income                                          |  | $                        | 4,812     |   |      | $ | 5,582     |  | $ | 4,853    
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Net income per sharebasic                          |  | $                        | 1.65      |   |      | $ | 2.07      |  | $ | 2.41     
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Net income per sharediluted                        |  | $                        | 1.65      |   |      | $ | 2.05      |  | $ | 2.37     
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Weighted average shares outstandingbasic           |  |                          | 2,908,371 |   |      |   | 2,700,663 |  |   | 2,014,879
|                                                    |  |                          |           |   |      |   |           |  |   |          
|Weighted average shares outstandingdiluted         |  |                          | 2,914,352 |   |      |   | 2,724,717 |  |   | 2,046,129
|                                                    |  |                          |           |   |      |   |           |  |   |          



See accompanying Notes
to Consolidated Financial Statements.



44



---

ECB BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(Dollars in thousands, except per share data)



|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------- | ------ | ------------ | - | ------ | -------------- | ------ | - | ---------------- | - | ------ | ------------------------------------ |  | - | ------------------------------------------ | - |  | ------------------- | ---- | - | ----- | - | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                                                   |        | Common stock |   |        | Capitalsurplus |        |   | Retainedearnings |   |        | Deferredcompensationrestrictedstock |  |   | Accumulatedothercomprehensiveincome (loss) |   |  | Comprehensiveincome |      |   | Total |  
|                                                                                   | Number |              |   | Amount |                |        |   |                  |   |        |                                     
|BALANCEDecember 31, 2004                                                          |        | 2,038,242    |   |        | $              | 7,134  |   |                  | $ | 5,360  |                                      |  | $ | 20,176                                     |   |  | $                   | (306 | ) |       | $ | (287   | ) |  |   |        |   |  | $ | 32,077 |  
|Unrealized losses, net of income tax benefit of $ 730                              |        |             |   |        |                |       |   |                  |   |       |                                      |  |   |                                           |   |  |                     |     |   |       |   | (1,165 | ) |  | $ | (1,165 | ) |  |   | (1,165 | )
|Net income                                                                         |        |             |   |        |                |       |   |                  |   |       |                                      |  |   | 4,853                                      |   |  |                     |     |   |       |   |       |   |  |   | 4,853  |   |  |   | 4,853  |  
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                         |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  | $ | 3,688  |   |  |   |        |  
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Deferred compensationrestricted stock issuance                                    |        | 1,800        |   |        |                | 6      |   |                  |   | 48     |                                      |  |   |                                           |   |  |                     | (54  | ) |       |   |       |   |  |   |        |   |  |   |       |  
|Recognition of deferred compensationrestricted stock                              |        |             |   |        |                |       |   |                  |   |       |                                      |  |   |                                           |   |  |                     | 105  |   |       |   |       |   |  |   |        |   |  |   | 105    |  
|Cash dividends ($.64 per share)                                                    |        |             |   |        |                |       |   |                  |   |       |                                      |  |   | (1,305                                     | ) |  |                     |     |   |       |   |       |   |  |   |        |   |  |   | (1,305 | )
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|BALANCEDecember 31, 2005                                                          |        | 2,040,042    |   |        |                | 7,140  |   |                  |   | 5,408  |                                      |  |   | 23,724                                     |   |  |                     | (255 | ) |       |   | (1,452 | ) |  |   |        |   |  |   | 34,565 |  
|Unrealized gains, net of income tax expense of $ 83                                |        |             |   |        |                |       |   |                  |   |       |                                      |  |   |                                           |   |  |                     |     |   |       |   | 133    |   |  | $ | 133    |   |  |   | 133    |  
|Net income                                                                         |        |             |   |        |                |       |   |                  |   |       |                                      |  |   | 5,582                                      |   |  |                     |     |   |       |   |       |   |  |   | 5,582  |   |  |   | 5,582  |  
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                         |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  | $ | 5,715  |   |  |   |        |  
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Issuance of common stock                                                           |        | 862,500      |   |        |                | 3,019  |   |                  |   | 23,503 |                                      |  |   |                                           |   |  |                     |     |   |       |   |       |   |  |   |        |   |  |   | 26,522 |  
|Expenses related to issuance of common stock                                       |        |             |   |        |                |       |   |                  |   | (2,258 | )                                    |  |   |                                           |   |  |                     |     |   |       |   |       |   |  |   |        |   |  |   | (2,258 | )
|Stock based compensation                                                           |        | (300         | ) |        |                | 18     |   |                  |   | 224    |                                      |  |   |                                           |   |  |                     |     |   |       |   |       |   |  |   |        |   |  |   | 242    |  
|Reclass of deferred restricted stock compensation due to adoption of SFAS No. 123R |        |             |   |        |                | (58    | ) |                  |   | (197   | )                                    |  |   |                                           |   |  |                     | 255  |   |       |   |       |   |  |   |        |   |  |   |       |  
|Cash dividends ($ .68 per share)                                                   |        |             |   |        |                |       |   |                  |   |       |                                      |  |   | (1,973                                     | ) |  |                     |     |   |       |   |       |   |  |   |        |   |  |   | (1,973 | )
|Adjustment to initially apply                                                      |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|SFAS No. 158, net of income tax benefit of $ 13                                    |        |             |   |        |                |       |   |                  |   |       |                                      |  |   |                                           |   |  |                     |     |   |       |   | (20    | ) |  |   |        |   |  |   | (20    | )
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|BALANCEDecember 31, 2006                                                          |        | 2,902,242    |   |        |                | 10,119 |   |                  |   | 26,680 |                                      |  |   | 27,333                                     |   |  |                     |     |   |       |   | (1,339 | ) |  |   |        |   |  |   | 62,793 |  
|Unrealized gains, net of income tax expense of $ 546                               |        |             |   |        |                |       |   |                  |   |       |                                      |  |   |                                           |   |  |                     |     |   |       |   | 871    |   |  | $ | 871    |   |  |   | 871    |  
|Net income                                                                         |        |             |   |        |                |       |   |                  |   |       |                                      |  |   | 4,812                                      |   |  |                     |     |   |       |   |       |   |  |   | 4,812  |   |  |   | 4,812  |  
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Total comprehensive income                                                         |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  | $ | 5,683  |   |  |   |        |  
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|Stock options exercised                                                            |        | 19,750       |   |        |                | 69     |   |                  |   | 168    |                                      |  |   |                                           |   |  |                     |     |   |       |   |       |   |  |   |        |   |  |   | 237    |  
|Stock based compensation                                                           |        |             |   |        |                |       |   |                  |   | 205    |                                      |  |   |                                           |   |  |                     |     |   |       |   |       |   |  |   |        |   |  |   | 205    |  
|Repurchase of common stock                                                         |        | (1,223       | ) |        |                | (4     | ) |                  |   | (27    | )                                    |  |   |                                           |   |  |                     |     |   |       |   |       |   |  |   |        |   |  |   | (31    | )
|Cash dividends ($ .70 per share)                                                   |        |             |   |        |                |       |   |                  |   |       |                                      |  |   | (2,046                                     | ) |  |                     |     |   |       |   |       |   |  |   |        |   |  |   | (2,046 | )
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  
|BALANCEDecember 31, 2007                                                          |        | 2,920,769    |   |        | $              | 10,184 |   |                  | $ | 27,026 |                                      |  | $ | 30,099                                     |   |  | $                   |     |   |       | $ | (468   | ) |  |   |        |   |  | $ | 66,841 |  
|                                                                                   |        |              |   |        |                |        |   |                  |   |        |                                      |  |   |                                            |   |  |                     |      |   |       |   |        |   |  |   |        |   |  |   |        |  



See accompanying Notes
to Consolidated Financial Statements.



45



---

ECB BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED
STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(Dollars in thousands)



|                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                        |  | Years Ended December 31, |        
|                                                                                        |  | 2007                     |         |   | 2006 |   |         | 2005 | 
|CASH FLOWS FROM OPERATING ACTIVITIES                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Net income                                                                              |  | $                        | 4,812   |   |      | $ | 5,582   |      |  | $ | 4,853   |  
|Adjustments to reconcile net income to net cash provided by operating activities:       |  |                          |         |   |      |   |         |      |  |   |         |  
|Depreciation                                                                            |  |                          | 1,470   |   |      |   | 1,212   |      |  |   | 1,271   |  
|Amortization of premium on investment securities, net                                   |  |                          | 43      |   |      |   | 105     |      |  |   | 233     |  
|Provision for loan losses                                                               |  |                          | (99     | ) |      |   | 351     |      |  |   | 757     |  
|Deferred income taxes                                                                   |  |                          | (1      | ) |      |   | (136    | )    |  |   | 721     |  
|(Gain) loss on sale of securities                                                       |  |                          | 161     |   |      |   |        |      |  |   | (107    | )
|Gain on sale of credit card portfolio                                                   |  |                          |        |   |      |   |        |      |  |   | (375    | )
|Impairment charge on community bank trust services investment                           |  |                          | 90      |   |      |   |        |      |  |   |        |  
|Stock based compensation                                                                |  |                          | 205     |   |      |   | 242     |      |  |   | 105     |  
|(Gain) loss on sale of real estate and repossessions acquired in settlement of loans    |  |                          | 20      |   |      |   |        |      |  |   | (18     | )
|Write-down on repossessed loan collateral                                               |  |                          |        |   |      |   | 75      |      |  |   |        |  
|(Gain) loss on disposal of premises and equipment                                       |  |                          | 11      |   |      |   |        |      |  |   | (3      | )
|(Increase) decrease in accrued interest receivable                                      |  |                          | 163     |   |      |   | (1,057  | )    |  |   | (803    | )
|Income from bank owned life insurance                                                   |  |                          | (289    | ) |      |   | (305    | )    |  |   | (255    | )
|(Increase) decrease in other assets                                                     |  |                          | (380    | ) |      |   | 2,183   |      |  |   | (3,199  | )
|Increase in accrued interest payable                                                    |  |                          | 162     |   |      |   | 839     |      |  |   | 554     |  
|Increase (decrease) in other liabilities                                                |  |                          | (280    | ) |      |   | 331     |      |  |   | 1,782   |  
|                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by operating activities                                               |  |                          | 6,088   |   |      |   | 9,422   |      |  |   | 5,516   |  
|                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Proceeds from sales of investment securities classified as available-for-sale           |  |                          | 12,143  |   |      |   |        |      |  |   | 9,159   |  
|Proceeds from maturities of investment securities classified as available-for-sale      |  |                          | 10,418  |   |      |   | 11,514  |      |  |   | 11,776  |  
|Purchases of investment securities classified as available-for-sale                     |  |                          | (20,376 | ) |      |   | (32,540 | )    |  |   | (15,357 | )
|Redemption (purchase) of Federal Home Loan Bank common stock                            |  |                          | (1,153  | ) |      |   | 719     |      |  |   | (1      | )
|Proceeds from disposal of premises and equipment                                        |  |                          |        |   |      |   |        |      |  |   | 3       |  
|Purchases of premises and equipment                                                     |  |                          | (2,889  | ) |      |   | (5,395  | )    |  |   | (3,192  | )
|Proceeds from disposal of real estate and repossessions acquired in settlement of loans |  |                          | 187     |   |      |   |        |      |  |   | 101     |  
|Proceeds from sale of credit card portfolio                                             |  |                          |        |   |      |   |        |      |  |   | 2,727   |  
|Purchase of life insurance                                                              |  |                          |        |   |      |   |        |      |  |   | (490    | )
|Net loan originations                                                                   |  |                          | (36,831 | ) |      |   | (31,508 | )    |  |   | (60,063 | )
|                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash used in investing activities                                                   |  |                          | (38,501 | ) |      |   | (57,210 | )    |  |   | (55,337 | )
|                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES                                                    |  |                          |         |   |      |   |         |      |  |   |         |  
|Net increase in deposits                                                                |  |                          | 14,112  |   |      |   | 47,041  |      |  |   | 54,075  |  
|Net increase (decrease) in borrowings                                                   |  |                          | 2,069   |   |      |   | (493    | )    |  |   | (12,409 | )
|Dividends paid                                                                          |  |                          | (2,028  | ) |      |   | (1,806  | )    |  |   | (1,269  | )
|Repurchase of common stock                                                              |  |                          | (31     | ) |      |   |        |      |  |   |        |  
|Net proceeds from issuance of common stock                                              |  |                          | 237     |   |      |   | 24,264  |      |  |   |        |  
|                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Net cash provided by financing activities                                               |  |                          | 14,359  |   |      |   | 69,006  |      |  |   | 40,397  |  
|                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash and cash equivalents                                        |  |                          | (18,054 | ) |      |   | 21,218  |      |  |   | (9,424  | )
|Cash and cash equivalents at beginning of year                                          |  |                          | 40,057  |   |      |   | 18,839  |      |  |   | 28,263  |  
|                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  
|Cash and cash equivalents at end of year                                                |  | $                        | 22,003  |   |      | $ | 40,057  |      |  | $ | 18,839  |  
|                                                                                        |  |                          |         |   |      |   |         |      |  |   |         |  



See accompanying Notes
to Consolidated Financial Statements.



46



---

ECB BANCORP, INC. AND SUBSIDIARY



CONSOLIDATED STATEMENTS OF CASH FLOWS, continued

FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

(Dollars in thousands)



|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|------------------------------------------------------------------------------------ |  | ------------------------ | ------ | ---- | - | ------ | ---- |  | - | ------ | -
|                                                                                     |  | Years Ended December 31, |       
|                                                                                     |  | 2007                     |        | 2006 |   |        | 2005 | 
|SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING AND INVESTING ACTIVITIES                |  |                          |        |      |   |        |      |  |   |        |  
|Unrealized gains (losses) on available-for-sale securities, net of deferred taxes    |  | $                        | 871    |      | $ | 133    |      |  | $ | (1,165 | )
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|Unfunded portion of postretirement plan, net of deferred taxes                       |  | $                        |       |      | $ | (20    | )    |  | $ |       |  
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|Cash dividends declared but not paid                                                 |  | $                        | 511    |      | $ | 493    |      |  | $ | 326    |  
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|Debt transferred from long-term to short-term                                        |  | $                        |       |      | $ |       |      |  | $ | 13,000 |  
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|Reserve transferred from allowance for loan losses to other liabilities              |  | $                        |       |      | $ | 240    |      |  | $ |       |  
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|Investment in SBIC transferred from other assets to available-for-sale securities    |  | $                        | 1,000  |      | $ |       |      |  | $ |       |  
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|Redemption of trust preferred common stock                                           |  | $                        | 310    |      | $ |       |      |  | $ |       |  
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|Transfer from loans to real estate and repossessions acquired in settlement of loans |  | $                        | 33     |      | $ | 315    |      |  | $ | 40     |  
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                     |  |                          |        |      |   |        |      |  |   |        |  
|Interest paid                                                                        |  | $                        | 19,273 |      | $ | 15,050 |      |  | $ | 9,097  |  
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  
|Taxes paid                                                                           |  | $                        | 1,570  |      | $ | 1,426  |      |  | $ | 2,936  |  
|                                                                                     |  |                          |        |      |   |        |      |  |   |        |  



See accompanying Notes
to Consolidated Financial Statements.



47



---

ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DECEMBER 31, 2007 and 2006



(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



(A)    Consolidation



The
consolidated financial statements include the accounts of ECB Bancorp, Inc. (Bancorp) and its wholly owned subsidiary, The East Carolina Bank (the Bank) (collectively referred to hereafter as the Company). The Bank has one wholly-owned subsidiary,
ECB Financial Services, Inc., which formerly provided courier services to the Bank but is currently inactive. All significant inter-company transactions and balances have been eliminated in consolidation.



(B)    Basis of Financial Statement Presentation



The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the 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 significantly from those estimates.



Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses
and the valuation of the deferred tax asset.



(C)    Business



Bancorp
is a bank holding company incorporated in North Carolina on March 4, 1998. The principal activity of Bancorp is ownership of the Bank. The Bank provides financial services through its branch network located in eastern North Carolina. The Bank
competes with other financial institutions and numerous other non-financial services commercial entities offering financial services products. The Bank is further subject to the regulations of certain federal and state agencies and undergoes
periodic examinations by those regulatory authorities. The Company has no foreign operations, and the Companys customers are principally located in eastern North Carolina.



(D)    Cash and Cash Equivalents



Cash and cash equivalents include demand and time deposits (with original maturities of ninety days or less) at other financial
institutions and federal funds sold. Generally, federal funds are purchased and sold for one-day periods.



(E)    Investment Securities



Certain debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. Trading securities are recorded at fair
value with changes in fair value included in earnings. Securities not classified as held to maturity or trading, including equity securities with readily determinable fair values, are classified as available for sale and recorded at fair
value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.



Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value
of held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. In determining whether other-than-temporary impairment exists, management considers many
factors, including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its
investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.



48



---

ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



(F)    Loans



Loans are generally stated at their outstanding unpaid principal balances
adjusted for charge-offs, the allowance for loan losses and any deferred fees or costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related
loans using the level-yield method.



Interest on loans is
recorded based on the principal amount outstanding. The Company ceases accruing interest on loans (including impaired loans) when, in managements judgment, the collection of interest appears doubtful or the loan is past due 90 days or more.
All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to
accrual. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectibility of
the total contractual principal and interest is no longer in doubt.



(G)    Allowance for Loan Losses



As a result of the Interagency Policy Statement of the Allowance for Loan and Lease Losses jointly issued in December 2006 by the federal banking regulatory agencies, management re-evaluated and adjusted the methodology it uses to estimate
the allowance for loan losses during the second quarter of 2007. The allowance for loan losses (AFLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the AFLL, and
subsequent recoveries, if any, are credited to the allowance. The AFLL represents managements estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Managements periodic evaluation of the adequacy of
the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Companys market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio.
This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Thus, future changes to the
AFLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Companys AFLL. Such agencies may require the
Company to recognize adjustments to the AFLL based on their judgments about information available to them at the time of their examination.



Under the provisions of Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as
amended by SFAS No. 118, Accounting by Creditors for Impairment of a LoanIncome Recognition and Disclosures (collectively referred to hereafter as SFAS No. 114), the AFLL related to loans that are identified for
evaluation and deemed impaired is based on discounted cash flows using the loans initial effective interest rate, the loans observable market price, or the fair value of the collateral for collateral dependent loans. Loans evaluated for
impairment and not considered impaired are assessed under SFAS No. 5, Accounting for Contingencies.



(H)    Real Estate and Repossessions Acquired in Settlement of Loans



Real estate acquired in settlement of loans consists of property acquired through a foreclosure proceeding or acceptance of
a deed-in-lieu of foreclosure. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial recorded value may be subsequently reduced
by additional allowances, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Costs related to the improvement of the property are capitalized, whereas
those related to holding the property are expensed. Such properties are held for sale and, accordingly, no depreciation or amortization expense is recognized. Repossessions are recorded at the lower of cost or market.



49



---

ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



(I)    Membership/Investment in Federal Home Loan Bank Stock



The Company is a member of the Federal Home Loan Bank of
Atlanta (FHLB). Membership, along with a signed blanket collateral agreement, provided the Company with the ability to draw $128.8 million and $124.8 million of advances from the FHLB at December 31, 2007 and 2006, respectively. At
December 31, 2007 and 2006, the Company had outstanding advances totaling $28.0 million and $3.0 million, respectively, from the FHLB.



As a requirement for membership, the Company invests in stock of the FHLB in the amount of 1% of its outstanding residential loans or 5% of its
outstanding advances from the FHLB, whichever is greater. Such stock is pledged as collateral for any FHLB advances drawn by the Company. At December 31, 2007 and 2006, the Company owned 23,822 and 12,293 shares, respectively, of the
FHLBs $100 par value capital stock. No ready market exists for such stock, which is carried at cost. Due to the redemption provisions of the FHLB, cost approximates market value.



(J)    Premises and Equipment



Land is carried at cost. Buildings and equipment are stated at cost less accumulated depreciation. Depreciation is computed
by the straight-line method and is charged to operations over the estimated useful lives of the assets which range from 25 to 50 years for bank premises and 3 to 10 years for furniture and equipment.



Maintenance, repairs, renewals and minor improvements are charged to expense
as incurred. Major improvements are capitalized and depreciated.



(K)    Short-Term Borrowings



Short-term borrowings consist of securities sold under agreements to repurchase, overnight sweep accounts, federal funds purchased and short-term FHLB advances.



(L)    Long-Term Obligations



On June 26, 2002, the Company completed a private issuance of $10 million in trust preferred securities as part of a pooled resecuritization
transaction with several other financial institutions. The trust preferred securities had a floating rate of interest of 3.45% over the three-month LIBOR rate that was payable quarterly. Bancorp had used the net proceeds for market expansion, the
repurchase of Bancorp stock and for other corporate and strategic purposes. On June 26, 2007, the Company redeemed all of the trust preferred securities originally issued June 26, 2002 and as a result had no long-term obligations as of
December 31, 2007.



The trust preferred securities were
issued by a wholly owned finance subsidiary of Bancorp, ECB Statutory Trust I (the Trust), and Bancorp had fully and unconditionally guaranteed the repayment of those securities. The proceeds from the issuance of trust preferred securities were
invested in debentures issued by Bancorp and that investment became the sole asset of the trust.



(M)    Income Taxes



The Company records income taxes using the asset and liability method. Under this method, deferred income taxes are determined based on temporary differences between the financial statement and tax bases of assets and
liabilities and gives current recognition to changes in tax rates and laws.



In 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxesan Interpretation of SFAS No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with SFAS No. 109, Accounting for Income



50



---

ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



Taxes. FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in a companys tax
return. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on the Companys
consolidated financial position.



(N)    Advertising
Costs



Advertising costs are expensed as incurred.



(O)    Stock Option Plan



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



The Company adopted SFAS No. 123R using the modified prospective application as permitted under SFAS No. 123R. Accordingly, prior period
amounts have not been restated. Under this application, the Company is required to record compensation expense for all awards granted after the date of adoption and for the unvested portion of previously granted awards that remain outstanding at the
date of adoption.



Prior to the adoption of SFAS No. 123R,
the Company used the intrinsic value method as prescribed by APB No. 25 and thus recognized no compensation expense for options granted with exercise prices equal to the fair market value of the Companys common stock on the date of grant.



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



51



---

ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



Prior to the adoption of SFAS No. 123R on January 1, 2006, 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
(dollars in thousands, except per share data):



|                                                                                            |  |      |       |  
|------------------------------------------------------------------------------------------- |  | ---- | ----- | -
|                                                                                            |  | 2005 |      
|Net income, as reported                                                                     |  | $    | 4,853 |  
|Total stock-based employee compensation expense included in net income                      |  |      | 105   |  
|Deduct: Total stock-based employee compensation                                             |  |      |       |  
|expense determined under fair value based method for all awards, net of related tax effects |  |      | (137  | )
|                                                                                            |  |      |       |  
|Proforma net income                                                                         |  | $    | 4,821 |  
|                                                                                            |  |      |       |  
|Earnings per share:                                                                         |  |      |       |  
|Basicas reported                                                                           |  | $    | 2.41  |  
|                                                                                            |  |      |       |  
|Basicproforma                                                                              |  | $    | 2.39  |  
|                                                                                            |  |      |       |  
|Dilutedas reported                                                                         |  | $    | 2.37  |  
|                                                                                            |  |      |       |  
|Dilutedproforma                                                                            |  | $    | 2.36  |  
|                                                                                            |  |      |       |  



(P)    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, unvested 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. Diluted weighted-average shares outstanding increased by 6 thousand, 16 thousand and
16 thousand shares for 2007, 2006 and 2005, 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. Diluted weighted-average shares
outstanding did not increase during 2007. In 2006 and 2005 diluted weighted-average shares outstanding increased 8 thousand and 15 thousand, respectively, due to the dilutive impact of options.



The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net income per share (amounts in thousands, except per share data).



|                              |  |                              |       |                     |       |                |   |     
|----------------------------- |  | ---------------------------- | ----- | ------------------- | ----- | -------------- | - | ----
|                              |  | Year Ended December 31, 2007
|                              |  | Income(Numerator)            |       | Shares(Denominator) |       | PerShareAmount
|Basic net income per share    |  | $                            | 4,812 |                     | 2,908 |                | $ | 1.65
|                              |  |                              |       |                     |       |                |   |     
|Effect of dilutive securities |  |                              |      |                     | 6     |                |   |     
|                              |  |                              |       |                     |       |                |   |     
|Diluted net income per share  |  | $                            | 4,812 |                     | 2,914 |                | $ | 1.65
|                              |  |                              |       |                     |       |                |   |     



52



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



At December 31, 2007, there were 17 thousand
options outstanding with an exercise price above the market value of the Companys stock at that date.



|                              |  |                              |       |                     |       |                |   |     
|----------------------------- |  | ---------------------------- | ----- | ------------------- | ----- | -------------- | - | ----
|                              |  | Year Ended December 31, 2006
|                              |  | Income(Numerator)            |       | Shares(Denominator) |       | PerShareAmount
|Basic net income per share    |  | $                            | 5,582 |                     | 2,701 |                | $ | 2.07
|                              |  |                              |       |                     |       |                |   |     
|Effect of dilutive securities |  |                              |      |                     | 24    |                |   |     
|                              |  |                              |       |                     |       |                |   |     
|Diluted net income per share  |  | $                            | 5,582 |                     | 2,725 |                | $ | 2.05
|                              |  |                              |       |                     |       |                |   |     



At
December 31, 2006, there were no options outstanding with an exercise price above the market value of the Companys stock at that date.



|                              |  |                              |       |                     |       |                |   |     
|----------------------------- |  | ---------------------------- | ----- | ------------------- | ----- | -------------- | - | ----
|                              |  | Year Ended December 31, 2005
|                              |  | Income(Numerator)            |       | Shares(Denominator) |       | PerShareAmount
|Basic net income per share    |  | $                            | 4,853 |                     | 2,015 |                | $ | 2.41
|                              |  |                              |       |                     |       |                |   |     
|Effect of dilutive securities |  |                              |      |                     | 31    |                |   |     
|                              |  |                              |       |                     |       |                |   |     
|Diluted net income per share  |  | $                            | 4,853 |                     | 2,046 |                | $ | 2.37
|                              |  |                              |       |                     |       |                |   |     



At
December 31, 2005, there were 18 thousand options outstanding with an exercise price above the market value of the Companys stock at that date.



(Q)    Comprehensive Income



Comprehensive income is defined as the change in equity during a period for non-owner transactions and is divided into net income and other comprehensive
income. Other comprehensive income includes revenues, expenses, gains, and losses that are excluded from earnings under current accounting standards. The components of other comprehensive income included in comprehensive income for the periods
presented are as follows (dollars in thousands):



|                                                    |  |      |       |   |      |   |     |      |  |   |        |  
|--------------------------------------------------- |  | ---- | ----- | - | ---- | - | --- | ---- |  | - | ------ | -
|                                                    |  | 2007 |       |   | 2006 |   |     | 2005 | 
|Unrealized gains (losses) arising during the period |  | $    | 1,256 |   |      | $ | 216 |      |  | $ | (1,788 | )
|Tax benefit (expense)                               |  |      | (484  | ) |      |   | (83 | )    |  |   | 689    |  
|Reclassification to realized (gains) losses         |  |      | 161   |   |      |   |    |      |  |   | (107   | )
|Tax (benefit) expense                               |  |      | (62   | ) |      |   |    |      |  |   | 41     |  
|                                                    |  |      |       |   |      |   |     |      |  |   |        |  
|Other comprehensive income (loss)                   |  | $    | 871   |   |      | $ | 133 |      |  | $ | (1,165 | )
|                                                    |  |      |       |   |      |   |     |      |  |   |        |  



(R)    Reclassifications



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



(S)    New Accounting Pronouncements



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



53



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



In September 2006, the FASB issued SFAS No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This standard eliminates
inconsistencies found in various prior pronouncements but does not require any new fair value measurements. SFAS 157 was effective for the Company on January 1, 2008 and did not impact the Companys accounting measurements but will result
in additional disclosures.



In September 2006, The FASB
ratified the consensuses reached by the FASBs Emerging Issues Task Force (EITF) relating to EITF 06-4, Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
Arrangements (EITF 06-4). Entities purchase life insurance for various reasons including protection against loss of key employees and to fund postretirement benefits. The two most common types of life insurance arrangements are
endorsement split dollar life and collateral assignment split dollar life. EITF 06-4 covers the former and EITF 06-10 (which does not apply to the Company) covers the latter. EITF 06-4 states that entities with endorsement split-dollar life
insurance arrangements that provide a benefit to an employee that extends to postretirement periods should recognize a liability for future benefits in accordance with SFAS No. 106, Employers Accounting for Postretirement Benefits
Other Than Pensions, (if, in substance, a postretirement benefit plan exists) or Accounting Principles Board (APB) Opinion No. 12, Omnibus Opinion1967 (if the arrangement is, in substance, an individual
deferred compensation contract). Entities should recognize the effects of applying this Issue through either (a) a change in accounting principle through a cumulative-effect adjustment to retained earnings or to other components of equity or
net assets in the statement of financial position as of the beginning of the year of adoption or (b) a change in accounting principle through retrospective application to all prior periods. EITF 06-4 was effective for the Company on
January 1, 2008. The Company recorded a liability of $359 thousand on January 1, 2008 to record the postretirement benefit related to split-dollar life insurance arrangements.



In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS 159). This statement permits, but does not require, entities to measure many financial instruments at fair value. The objective is to provide entities
with an opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Entities electing this option will apply it when the entity
first recognizes an eligible instrument and will report unrealized gains and losses on such instruments in current earnings. This statement 1) applies to all entities, 2) specifies certain election dates, 3) can be applied on an
instrument-by-instrument basis with some exceptions, 4) is irrevocable and 5) applies only to entire instruments. One exception is demand deposit liabilities which are explicitly excluded as qualifying for fair value. With respect to SFAS 115,
available-for-sale and held-to-maturity securities at the effective date are eligible for the fair value option at that date. If the fair value option is elected for those securities at the effective date, cumulative unrealized gains and losses at
that date shall be included in the cumulative-effect adjustment and thereafter, such securities will be accounted for as trading securities. SFAS 159 was effective for the Company on January 1, 2008 with no effect to the financial statements.



In June 2007, the FASB ratified the consensus reached by the
EITF with respect to EITF 06-11, Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF 06-11). Under EITF 06-11, a realized income tax benefit from dividends or dividend equivalents that are
charged to retained earnings and are paid to employees for equity-classified nonvested equity shares, nonvested equity share units and outstanding equity share options should be recognized as an increase in additional paid-in capital. This EITF is
to be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared beginning in 2008, and interim periods within those fiscal years. The adoption of EITF 06-11
did not have a material impact on financial position, results of operations or cash flows.



In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, (SFAS 141(R)) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in
a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from
a bargain purchase; and



54



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
FAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing
accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) if and when a future acquisition occurs.



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



(2)    INVESTMENT SECURITIES



The following is a summary of the securities portfolio by major classification (dollars in thousands):



|                                                 |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|------------------------------------------------ |  | ----------------- | ------- | -------------------- | - | --------------------- |  | - | ---------- | - |  | - | -------
|                                                 |  | December 31, 2007
|                                                 |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Securities available-for-sale:                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Government-sponsored enterprises and FFCB bonds  |  | $                 | 32,723  |                      | $ | 306                   |  | $ | (7         | ) |  | $ | 33,022 
|Obligations of states and political subdivisions |  |                   | 36,227  |                      |   | 154                   |  |   | (440       | ) |  |   | 35,941 
|Mortgage-backed securities                       |  |                   | 53,638  |                      |   | 130                   |  |   | (628       | ) |  |   | 53,140 
|Corporate Bonds                                  |  |                   | 3,028   |                      |   |                      |  |   | (70        | ) |  |   | 2,958  
|Equity securities                                |  |                   | 1,000   |                      |   |                      |  |   | (173)      |   |  |   | 827    
|                                                 |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                 |  | $                 | 126,616 |                      | $ | 590                   |  | $ | (1,318     | ) |  | $ | 125,888
|                                                 |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                 | 
|                                                 |  | December 31, 2006
|                                                 |  | AmortizedCost     |         | GrossUnrealizedGains |   | GrossUnrealizedLosses |  |   | Fair Value
|Securities available-for-sale:                   |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|Government-sponsored enterprises and FFCB bonds  |  | $                 | 37,142  |                      | $ | 16                    |  | $ | (398       | ) |  | $ | 36,760 
|Obligations of states and political subdivisions |  |                   | 32,919  |                      |   | 133                   |  |   | (442       | ) |  |   | 32,610 
|Mortgage-backed securities                       |  |                   | 54,914  |                      |   | 1                     |  |   | (1,471     | ) |  |   | 53,444 
|Corporate Bonds                                  |  |                   | 3,030   |                      |   | 16                    |  |   |           |   |  |   | 3,046  
|                                                 |  |                   |         |                      |   |                       |  |   |            |   |  |   |        
|                                                 |  | $                 | 128,005 |                      | $ | 166                   |  | $ | (2,311     | ) |  | $ | 125,860
|                                                 |  |                   |         |                      |   |                       |  |   |            |   |  |   |        



Gross realized gains
and losses on sales of securities for the years ended December 31, 2007, 2006 and 2005 were as follows (dollars in thousands):



|                            |  |      |      |   |      |   |      |  |   |     |  
|--------------------------- |  | ---- | ---- | - | ---- | - | ---- |  | - | --- | -
|                            |  | 2007 |      |   | 2006 |   | 2005 | 
|Gross realized gains        |  | $    | 10   |   |      | $ |     |  | $ | 122 |  
|Gross realized losses       |  |      | (171 | ) |      |   |     |  |   | (15 | )
|                            |  |      |      |   |      |   |      |  |   |     |  
|Net realized (losses) gains |  | $    | (161 | ) |      | $ |     |  | $ | 107 |  
|                            |  |      |      |   |      |   |      |  |   |     |  



Impairment of
Certain Investments in Debt and Equity Securities. The following tables set forth the amount of unrealized losses at December 31, 2007 and 2006 (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 tables are 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 12 months or longer (dollars in thousands).



55



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



December 31, 2007



|                                                 |  |                     |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|------------------------------------------------ |  | ------------------- | ------ | ------------------- | - | --------- |  | ---------------- | ------ | --------- | - | ---------------- |  | - | ------ |  | - | -----
|                                                 |  | Less Than 12 Months |        | 12 Months or longer |   | Total    
|                                                 |  | FairValue           |        | UnrealizedLosses    |   | FairValue |  | UnrealizedLosses |        | FairValue |   | UnrealizedLosses
|Government-sponsored enterprises and FFCB bonds  |  | $                   |       |                     | $ |          |  | $                | 5,986  |           | $ | 7                |  | $ | 5,986  |  | $ | 7    
|Obligations of states and political subdivisions |  |                     | 8,496  |                     |   | 74        |  |                  | 11,806 |           |   | 366              |  |   | 20,302 |  |   | 440  
|Mortgage-backed securities                       |  |                     | 1,438  |                     |   | 7         |  |                  | 31,658 |           |   | 621              |  |   | 33,096 |  |   | 628  
|Corporate bonds                                  |  |                     | 2,958  |                     |   | 70        |  |                  |       |           |   |                 |  |   | 2,958  |  |   | 70   
|Equity securities                                |  |                     | 827    |                     |   | 173       |  |                  |       |           |   |                 |  |   | 827    |  |   | 173  
|                                                 |  |                     |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|Total                                            |  | $                   | 13,719 |                     | $ | 324       |  | $                | 49,450 |           | $ | 994              |  | $ | 63,169 |  | $ | 1,318
|                                                 |  |                     |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|                                                 |  |                     |        |                     |   |          
|December 31, 2006                                |  |                     |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|                                                 |  | Less Than 12 Months |        | 12 Months or longer |   | Total    
|                                                 |  | FairValue           |        | UnrealizedLosses    |   | FairValue |  | UnrealizedLosses |        | FairValue |   | UnrealizedLosses
|Government-sponsored enterprises and FFCB bonds  |  | $                   | 7,448  |                     | $ | 62        |  | $                | 22,357 |           | $ | 336              |  | $ | 29,805 |  | $ | 398  
|Obligations of states and political subdivisions |  |                     | 3,913  |                     |   | 53        |  |                  | 13,868 |           |   | 389              |  |   | 17,781 |  |   | 442  
|Mortgage-backed securities                       |  |                     | 7,889  |                     |   | 39        |  |                  | 44,368 |           |   | 1,432            |  |   | 52,257 |  |   | 1,471
|                                                 |  |                     |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      
|Total                                            |  | $                   | 19,250 |                     | $ | 154       |  | $                | 80,593 |           | $ | 2,157            |  | $ | 99,843 |  | $ | 2,311
|                                                 |  |                     |        |                     |   |           |  |                  |        |           |   |                  |  |   |        |  |   |      



As of
December 31, 2007 and 2006, management has concluded that the unrealized losses presented above 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 their cost. The losses above, except for equity securities, are on debt securities that have contractual maturity dates and are primarily related to market interest rates. The unrealized losses
associated with these securities are not considered to be other-than-temporary, because they are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or the issuer.



During the first quarter 2007, Triangle Mezzanine converted from a privately
held SBIC to a publicly traded entity called Triangle Capital Corporation (TCAP). As a result, the Bank reclassified the asset as an equity security in the investment portfolio with no gain or loss on the transaction since the proceeds
to the Bank equaled its initial cost of the investment. Based upon the Banks ability and intent to hold the investment for a reasonable period of time sufficient for a forecasted recovery of fair value, the Bank does not consider the
investment to be other-than-temporarily impaired.



56



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



The aggregate amortized cost and fair value of the available-for-sale
securities portfolio at December 31, 2007 by remaining contractual maturity are as follows (dollars in thousands):



|                                                  |  |               |         |           |   |        
|------------------------------------------------- |  | ------------- | ------- | --------- | - | -------
|                                                  |  | AmortizedCost |         | FairValue
|Government-sponsored enterprises and FFCB bonds:  |  |               |         |           |   |        
|Due in one year or less                           |  | $             | 14,863  |           | $ | 14,879 
|Due in one through five years                     |  |               | 12,287  |           |   | 12,498 
|Due in five through ten years                     |  |               | 1,497   |           |   | 1,497  
|Due after ten years                               |  |               | 4,076   |           |   | 4,148  
|Obligations of states and political subdivisions: |  |               |         |           |   |        
|Due in one year or less                           |  |               | 3,571   |           |   | 3,575  
|Due in one through five years                     |  |               | 10,690  |           |   | 10,796 
|Due in five through ten years                     |  |               | 12,340  |           |   | 12,053 
|Due after ten years                               |  |               | 9,626   |           |   | 9,517  
|Mortgage-backed securities:                       |  |               |         |           |   |        
|Due in five through ten years                     |  |               | 6,586   |           |   | 6,522  
|Due after ten years                               |  |               | 47,052  |           |   | 46,618 
|Corporate Bonds:                                  |  |               |         |           |   |        
|Due in five through ten years                     |  |               | 3,028   |           |   | 2,958  
|Equity securities:                                |  |               |         |           |   |        
|Due after ten years                               |  |               | 1,000   |           |   | 827    
|                                                  |  |               |         |           |   |        
|Total securities                                  |  | $             | 126,616 |           | $ | 125,888
|                                                  |  |               |         |           |   |        



Securities with an
amortized cost of $98.6 million at December 31, 2007 are pledged as collateral. Of this total, amortized cost of $11.7 million and fair value of $11.5 million are pledged as collateral for FHLB advances.



(3)    LOANS



Loans at December 31, 2007 and 2006 classified by type are as follows
(dollars in thousands):



|                                              |  |      |         |      |   |        
|--------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                              |  | 2007 |         | 2006
|Real estate loans:                            |  |      |         |      |   |        
|Construction and land development             |  | $    | 104,518 |      | $ | 116,500
|Secured by farmland                           |  |      | 25,949  |      |   | 31,236 
|Secured by residential properties             |  |      | 70,873  |      |   | 57,747 
|Secured by nonfarm, nonresidential properties |  |      | 138,242 |      |   | 122,779
|Consumer installment                          |  |      | 5,712   |      |   | 6,070  
|Credit cards and related plans                |  |      | 2,001   |      |   | 2,167  
|Commercial and all other loans:               |  |      |         |      |   |        
|Commercial and industrial                     |  |      | 66,793  |      |   | 45,329 
|Loans to finance agricultural production      |  |      | 20,344  |      |   | 19,211 
|All other loans                               |  |      | 20,015  |      |   | 17,426 
|                                              |  |      |         |      |   |        
|                                              |  |      | 454,447 |      |   | 418,465
|Less deferred fees and costs, net             |  |      | 249     |      |   | 522    
|                                              |  |      |         |      |   |        
|                                              |  | $    | 454,198 |      | $ | 417,943
|                                              |  |      |         |      |   |        
|Included in the above:                        |  |      |         |      |   |        
|Nonaccrual loans                              |  | $    | 393     |      | $ | 130    
|Restructured loans                            |  |      | 73      |      |   | 54     



57



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006





At December 31, 2007, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $10.4 million and the allowance for loan losses allocated to these loans was $630 thousand. At December 31,
2006, the recorded investment in loans that are considered to be impaired under SFAS No. 114 was $86 thousand and the allowance for loan losses allocated to these loans was $0. At December 31, 2005 there were no loans that are considered
to be impaired under SFAS No. 114. At December 31, 2005 the Company was classifying loans under the SFAS No. 114 guidance only if they were on non-accrual status or were considered Troubled Debt Restructured loans. In 2007, the
Company adopted a more aggressive method of evaluating it potential for impairment under SFAS No. 114 which included, in addition to the above, doing analyses on loans risk graded as special mention or classified.



The average recorded investment in loans that are considered to be impaired
under SFAS No. 114 during the year ended December 31, 2007 was $12.9 million. For the year ended December 31, 2007, the Company recognized approximately $1.0 million of interest income on impaired loans.



The average recorded investment in loans that are considered to be impaired
under SFAS No. 114 during the year ended December 31, 2006 was $87 thousand. For the year ended December 31, 2006, the Company recognized approximately $4 thousand of interest income on impaired loans.



The average recorded investment in loans that are considered to be impaired
under SFAS No. 114 during the year ended December 31, 2005 was $121 thousand. For the year ended December 31, 2005, the Company recognized approximately $11 thousand of interest income on impaired loans.



The Company, through its normal lending activity, originates and maintains
loans receivable that are substantially concentrated in the Eastern region of North Carolina, where its offices are located. The Companys policy calls for collateral or other forms of repayment assurance to be received from the borrower at the
time of loan origination. Such collateral or other form of repayment assurance is subject to changes in economic value due to various factors beyond the control of the Company, and such changes could be significant.



At December 31, 2007 and 2006, included in mortgage, commercial, and
residential loans were loans collateralized by owner-occupied residential real estate of approximately $50.1 million and $57.3 million, respectively.



Loans of approximately $27.3 million at December 31, 2007 are pledged as eligible collateral for FHLB advances.



(4)    ALLOWANCE FOR LOAN LOSSES



An analysis of the allowance for loan losses for the years ended
December 31, 2007, 2006 and 2005 follows (dollars in thousands):



|                                 |  |              |       |   |      |   |       |      |  |   |       |  
|-------------------------------- |  | ------------ | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                 |  | December 31, |      
|                                 |  | 2007         |       |   | 2006 |   |       | 2005 | 
|Beginning balance                |  | $            | 4,725 |   |      | $ | 4,650 |      |  | $ | 4,300 |  
|Provision for loan losses        |  |              | (99   | ) |      |   | 351   |      |  |   | 757   |  
|Recoveries                       |  |              | 94    |   |      |   | 91    |      |  |   | 35    |  
|Loans charged off                |  |              | (637  | ) |      |   | (127  | )    |  |   | (306  | )
|Adjustment for loans sold(1)     |  |              |      |   |      |   |      |      |  |   | (136  | )
|Adjustment for unfunded loans(2) |  |              |      |   |      |   | (240  | )    |  |   |      |  
|                                 |  |              |       |   |      |   |       |      |  |   |       |  
|Ending balance                   |  | $            | 4,083 |   |      | $ | 4,725 |      |  | $ | 4,650 |  
|                                 |  |              |       |   |      |   |       |      |  |   |       |  

---

|(1) |  | During 2005 the Bank sold its credit card portfolio with outstanding balances of approximately $2.7 million. Prior to the sale, the Bank had reserved 5% of the outstanding balances
in the allowance for loan losses. The allowance was reduced by $136 thousand when the credit card portfolio was sold.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | $240 thousand allocated to approximately $80 million of committed but unfunded loan obligations was reclassed to other liabilities from the Banks allowance for loan loss
reserve.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



58



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



(5)    BANK PREMISES AND EQUIPMENT



The components of bank premises and equipment at December 31, 2007 and
2006 are as follows (dollars in thousands):



|                         |  |      |        |                         |   |                   |  |   |       
|------------------------ |  | ---- | ------ | ----------------------- | - | ----------------- |  | - | ------
|                         |  | Cost |        | AccumulatedDepreciation |   | UndepreciatedCost
|December 31, 2007:       |  |      |        |                         |   |                   |  |   |       
|Land                     |  | $    | 9,407  |                         | $ |                  |  | $ | 9,407 
|Land improvements        |  |      | 245    |                         |   | 210               |  |   | 35    
|Buildings                |  |      | 16,572 |                         |   | 3,738             |  |   | 12,834
|Furniture and equipment  |  |      | 6,960  |                         |   | 4,786             |  |   | 2,174 
|                         |  |      |        |                         |   |                   |  |   |       
|Total                    |  | $    | 33,184 |                         | $ | 8,734             |  | $ | 24,450
|                         |  |      |        |                         |   |                   |  |   |       
|December 31, 2006:       |  |      |        |                         |   |                   |  |   |       
|Land                     |  | $    | 8,792  |                         | $ |                  |  | $ | 8,792 
|Land improvements        |  |      | 213    |                         |   | 195               |  |   | 18    
|Buildings                |  |      | 14,797 |                         |   | 3,184             |  |   | 11,613
|Furniture and equipment  |  |      | 7,074  |                         |   | 5,008             |  |   | 2,066 
|Construction in progress |  |      | 553    |                         |   |                  |  |   | 553   
|                         |  |      |        |                         |   |                   |  |   |       
|Total                    |  | $    | 31,429 |                         | $ | 8,387             |  | $ | 23,042
|                         |  |      |        |                         |   |                   |  |   |       



(6)    INCOME
TAXES



The components of income tax expense (benefit) are
as follows (dollars in thousands):



|                              |  |         |       |           |   |      |       |  |   |      
|----------------------------- |  | ------- | ----- | --------- | - | ---- | ----- |  | - | -----
|                              |  | Current |       | Deferred* |   |      | Total
|Year ended December 31, 2007: |  |         |       |           |   |      |       |  |   |      
|Federal                       |  | $       | 1,457 |           | $ | (22  | )     |  | $ | 1,435
|State                         |  |         | 221   |           |   | 21   |       |  |   | 242  
|                              |  |         |       |           |   |      |       |  |   |      
|                              |  | $       | 1,678 |           | $ | (1   | )     |  | $ | 1,677
|                              |  |         |       |           |   |      |       |  |   |      
|Year ended December 31, 2006: |  |         |       |           |   |      |       |  |   |      
|Federal                       |  | $       | 2,133 |           | $ | (167 | )     |  | $ | 1,966
|State                         |  |         | 413   |           |   | 31   |       |  |   | 444  
|                              |  |         |       |           |   |      |       |  |   |      
|                              |  | $       | 2,546 |           | $ | (136 | )     |  | $ | 2,410
|                              |  |         |       |           |   |      |       |  |   |      
|Year ended December 31, 2005: |  |         |       |           |   |      |       |  |   |      
|Federal                       |  | $       | 1,153 |           | $ | 539  |       |  | $ | 1,692
|State                         |  |         | 228   |           |   | 182  |       |  |   | 410  
|                              |  |         |       |           |   |      |       |  |   |      
|                              |  | $       | 1,381 |           | $ | 721  |       |  | $ | 2,102
|                              |  |         |       |           |   |      |       |  |   |      



|* |  | Included in deferred tax is release of valuation allowance adjustment of $165 thousand.
|- |  | ---------------------------------------------------------------------------------------



59



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



Total income tax expense was less than the amount computed by applying the
federal income tax rate of 34% to income before income taxes. The reasons for the difference were as follows (dollars in thousands):



|                                      |  |                          |       |   |      |   |       |      |  |   |       |  
|------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                      |  | Years ended December 31, |      
|                                      |  | 2007                     |       |   | 2006 |   |       | 2005 | 
|Income taxes at statutory rate        |  | $                        | 2,206 |   |      | $ | 2,717 |      |  | $ | 2,365 |  
|Increase (decrease) resulting from:   |  |                          |       |   |      |   |       |      |  |   |       |  
|Effect of non-taxable interest income |  |                          | (437  | ) |      |   | (493  | )    |  |   | (383  | )
|Decrease in valuation allowance       |  |                          | (165  | ) |      |   |      |      |  |   | (35   | )
|Bank owned life insurance             |  |                          | (98   | ) |      |   | (104  | )    |  |   | (87   | )
|State taxes, net of federal benefit   |  |                          | 160   |   |      |   | 280   |      |  |   | 271   |  
|Other, net                            |  |                          | 11    |   |      |   | 10    |      |  |   | (29   | )
|                                      |  |                          |       |   |      |   |       |      |  |   |       |  
|Applicable income taxes               |  | $                        | 1,677 |   |      | $ | 2,410 |      |  | $ | 2,102 |  
|                                      |  |                          |       |   |      |   |       |      |  |   |       |  



The tax effects of
temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2007 and 2006 are presented below (dollars in thousands):



|                                                                            |  |      |       |   |      |   |       |  
|--------------------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | -
|                                                                            |  | 2007 |       |   | 2006 |  
|Deferred tax assets:                                                        |  |      |       |   |      |   |       |  
|Allowance for loan losses                                                   |  | $    | 1,472 |   |      | $ | 1,643 |  
|Unrealized loss associated with FNMA and FHLMC preferred stock              |  |      | 335   |   |      |   | 501   |  
|Postretirement benefits                                                     |  |      | 269   |   |      |   | 264   |  
|Unrealized losses on securities available for sale                          |  |      | 280   |   |      |   | 826   |  
|Unfunded postretirement benefits                                            |  |      | 13    |   |      |   | 13    |  
|Other                                                                       |  |      | 954   |   |      |   | 852   |  
|                                                                            |  |      |       |   |      |   |       |  
|Total gross deferred tax assets                                             |  | $    | 3,323 |   |      | $ | 4,099 |  
|Valuation allowance                                                         |  |      | (335  | ) |      |   | (501  | )
|                                                                            |  |      |       |   |      |   |       |  
|Total net deferred tax assets                                               |  |      | 2,988 |   |      |   | 3,598 |  
|                                                                            |  |      |       |   |      |   |       |  
|Deferred tax liabilities:                                                   |  |      |       |   |      |   |       |  
|Bank premises and equipment, principally due to differences in depreciation |  |      | 1,873 |   |      |   | 1,506 |  
|Other                                                                       |  |      | 94    |   |      |   | 362   |  
|                                                                            |  |      |       |   |      |   |       |  
|Total gross deferred tax liabilities                                        |  |      | 1,967 |   |      |   | 1,868 |  
|                                                                            |  |      |       |   |      |   |       |  
|Net deferred tax asset                                                      |  | $    | 1,021 |   |      | $ | 1,730 |  
|                                                                            |  |      |       |   |      |   |       |  



The valuation
allowance for deferred tax assets was $335 thousand at December 31, 2007 and $501 thousand at December 31, 2006. The valuation allowance required at December 31, 2007 and 2006 was for certain 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. In order for
these capital losses to be realized, the Company would need capital gains to offset them.



During 2007, the Company recognized capital gains which decreased the valuation allowance. However the Company does not have plans in place to generate any capital gains in the future. Accordingly, it is more likely
than not that these capital losses will fail to be realized and a valuation allowance is required on this portion of the deferred tax asset.



Based on the Companys historical and current earnings, management believes it is more likely than not the Company will realize the benefits of the
deferred tax assets which are not provided for under the valuation allowance.



60



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



The Company has analyzed the tax positions taken or expected to be taken in
its tax returns and concluded it has no liability related to uncertain tax positions in accordance with FIN 48. The Companys policy is to classify any interest or penalties recognized in accordance with FIN 48 as interest expense or
noninterest expense, respectively. Years ended December 31, 2004 through December 31, 2006 remain open for audit for all major jurisdictions.



(7)    BORROWED FUNDS



Borrowed funds and the corresponding weighted average rates (WAR) at December 31, 2007 and 2006 are summarized as follows (dollars in thousands):



|                               |  |      |        |     |   |      |      |  |     |        |  |   |      |  
|------------------------------ |  | ---- | ------ | --- | - | ---- | ---- |  | --- | ------ |  | - | ---- | -
|                               |  | 2007 |        | WAR |   |      | 2006 |  | WAR |       
|Sweep accounts                 |  | $    | 6,814  |     |   | 2.99 | %    |  | $   | 3,599  |  |   | 5.34 | %
|Advances from FHLB             |  |      | 28,000 |     |   | 4.67 |      |  |     | 3,000  |  |   | 3.70 |  
|Repurchase agreements          |  |      | 8,360  |     |   | 5.42 |      |  |     | 24,506 |  |   | 5.43 |  
|                               |  |      |        |     |   |      |      |  |     |        |  |   |      |  
|Total short-term borrowings    |  |      | 43,174 |     |   | 4.55 |      |  |     | 31,105 |  |   | 5.26 |  
|                               |  |      |        |     |   |      |      |  |     |        |  |   |      |  
|Junior subordinated debentures |  |      |       |     |   |     |      |  |     | 10,310 |  |   | 8.82 |  
|                               |  |      |        |     |   |      |      |  |     |        |  |   |      |  
|Total long-term obligations    |  |      |       |     |   |     |      |  |     | 10,310 |  |   | 8.82 |  
|                               |  |      |        |     |   |      |      |  |     |        |  |   |      |  
|Total borrowed funds           |  | $    | 43,174 |     | $ | 4.55 | %    |  | $   | 41,415 |  | $ | 6.14 | %
|                               |  |      |        |     |   |      |      |  |     |        |  |   |      |  



Pursuant to a
collateral agreement with the FHLB, advances are collateralized by all the Companys FHLB stock and qualifying first mortgage loans. The eligible residential 1-4 family first mortgage loans as of December 31, 2007, were $27.3 million. This
agreement with the FHLB provides for a line of credit up to 20% of the Banks assets. In addition, the Bank had $11.5 million of investment securities held as collateral by the FHLB on advances as of December 31, 2007. The maximum month
end balances were $28.0 million, $31.0 million and $24.0 million during the years ended December 31, 2007, 2006 and 2005, respectively.



At December 31, 2007 the Bank had a 30-day $28.0 million advance from the Federal Home Loan Bank that matured in January 2008. Subsequent to the
maturity, management converted $20.0 million of the $28.0 million into a 12-month fixed rate advance. The remaining portion was maintained as a 30-day advance.



The Company has established various credit facilities to provide additional liquidity if and as needed. These include unsecured lines of credit with
correspondent banks totaling $32.0 million.



On June 26,
2007, the Company redeemed all of our trust preferred securities originally issued June 26, 2002 and as a result had no long-term obligations as of December 31, 2007. The trust preferred securities had a floating rate of interest of 3.45%
over the three-month LIBOR rate that was payable quarterly.



The Company enters into agreements with customers to transfer excess funds in demand accounts into repurchase agreements. Under the repurchase agreement, the Company sells the customer an interest in government-sponsored enterprise
securities. The customers interest in the underlying security shall be repurchased by the Company at the opening of the next banking day. The rate paid fluctuates with the weekly average federal funds rate minus 125 basis points and has a
floor of 50 basis points. Securities with a fair value of $13.6 million secured repurchase agreements as of December 31, 2007.



61



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



(8)    RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS



The Company has a defined contribution 401(k) plan that
covers all eligible employees. The Company matches employee contributions up to certain amounts as defined in the plan. Total expense related to this plan was $314 thousand, $291 thousand and $254 thousand in 2007, 2006 and 2005, respectively. The
Company also 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.



In 2002, the Company adopted a supplemental executive retirement plan to provide benefits for members of management and
directors. The liability is calculated by discounting the anticipated future cash flows at 5.8%. The liability accrued for this obligation was $1.7 million and $1.3 million at December 31, 2007 and 2006, respectively. Charges to income are
based on changes in the cash value of insurance, which funds the liability. The related expense for the years ended December 31, 2007, 2006 and 2005 was $375 thousand, $384 thousand and $294 thousand, respectively.



The following tables provide information relating to the Companys
postretirement health care benefit plan using a measurement date of December 31 (dollars in thousands):



|                                      |  |      |     |   |      |   |     |  
|------------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                                      |  | 2007 |     |   | 2006 |  
|Reconciliation of benefit obligation: |  |      |     |   |      |   |     |  
|Net benefit obligation, January 1     |  | $    | 718 |   |      | $ | 661 |  
|Service cost                          |  |      | 5   |   |      |   | 8   |  
|Interest cost                         |  |      | 43  |   |      |   | 44  |  
|Plan amendment                        |  |      | (8  | ) |      |   | (30 | )
|Actuarial loss                        |  |      |    |   |      |   | 63  |  
|Benefit paid                          |  |      | (29 | ) |      |   | (28 | )
|                                      |  |      |     |   |      |   |     |  
|Net benefit obligation, December 31   |  | $    | 729 |   |      | $ | 718 |  
|                                      |  |      |     |   |      |   |     |  
|Fair value of plan assets             |  | $    |    |   |      | $ |    |  
|                                      |  |      |     |   |      |   |     |  
|Funded status:                        |  |      |     |   |      |   |     |  
|Funded status, December 31            |  | $    | 729 |   |      | $ | 718 |  
|Unrecognized prior service cost       |  |      | 22  |   |      |   | 30  |  
|Unrecognized actuarial loss           |  |      | (55 | ) |      |   | (63 | )
|                                      |  |      |     |   |      |   |     |  
|Net amount recognized                 |  | $    | 696 |   |      | $ | 685 |  
|                                      |  |      |     |   |      |   |     |  
|Recognized on balance sheet:          |  |      |     |   |      |   |     |  
|Other liabilities                     |  | $    | 729 |   |      | $ | 718 |  
|Other assets                          |  |      | (13 | ) |      |   | (13 | )
|Accumulated other comprehensive loss  |  |      | (20 | ) |      |   | (20 | )
|                                      |  |      |     |   |      |   |     |  
|Net amount recognized                 |  | $    | 696 |   |      | $ | 685 |  
|                                      |  |      |     |   |      |   |     |  



Recognized in
accumulated other comprehensive loss:



|                                |  |      |     |   |      |   |     |  
|------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                                |  | 2007 |     |   | 2006 |  
|Unrecognized prior service cost |  | $    | (22 | ) |      | $ | (30 | )
|Unrecognized net loss           |  |      | 55  |   |      |   | 63  |  
|Deferred tax asset              |  |      | (13 | ) |      |   | (13 | )
|                                |  |      |     |   |      |   |     |  
|                                |  | $    | 20  |   |      | $ | 20  |  
|                                |  |      |     |   |      |   |     |  



62



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



The Company expects to recognize amortization of prior service costs of $8
thousand in 2008.



Net periodic postretirement benefit cost for
2007, 2006 and 2005 includes the following components (dollars in thousands):



|                                         |  |      |    |   |      |   |      |  |   |   
|---------------------------------------- |  | ---- | -- | - | ---- | - | ---- |  | - | --
|                                         |  | 2007 |    |   | 2006 |   | 2005
|Service cost                             |  | $    | 5  |   |      | $ | 8    |  | $ | 7 
|Interest cost                            |  |      | 43 |   |      |   | 44   |  |   | 43
|Amortization of loss                     |  |      | (8 | ) |      |   |     |  |   |  
|                                         |  |      |    |   |      |   |      |  |   |   
|Net periodic postretirement benefit cost |  | $    | 40 |   |      | $ | 52   |  | $ | 50
|                                         |  |      |    |   |      |   |      |  |   |   



The following table
presents assumptions relating to the plan at December 31, 2007 and 2006:



|                                                      |  |       |    |  |       |   
|----------------------------------------------------- |  | ----- | -- |  | ----- | --
|                                                      |  | 2007  |    |  | 2006  |   
|Discount rate in determining benefit obligation       |  | 5.8   | %  |  | 6.0   | % 
|Annual health care cost trend rate                    |  | 8.0   | %  |  | 8.0   | % 
|Ultimate medical trend rate                           |  | 8.0   | %  |  | 8.0   | % 
|Medical trend rate period (in years)                  |  | 4     |    |  | 4     |   
|Effect of 1% increase in assumed health care cost on: |  |       |    |  |       |   
|Service and interest cost                             |  | 13.5  | %  |  | 13.6  | % 
|Benefit obligation                                    |  | 12.5  | %  |  | 12.5  | % 
|Effect of 1% decrease in assumed health care cost on: |  |       |    |  |       |   
|Service and interest cost                             |  | (11.3 | )% |  | (11.3 | )%
|Benefit obligation                                    |  | (10.5 | )% |  | (10.5 | )%



The Company adopted
Statement of Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, (SFAS No. 158) as of December 31, 2006. SFAS No. 158 requires the Company to
recognize the overfunded or underfunded status of its defined benefit retirement plan in its statement of financial position and to recognize changes in the funded status in comprehensive income. The adoption of SFAS No. 158 had the following
implications on the balance sheet as of December 31, 2006:



|                                     |  |                                   |         |   |             |   |     |                                  |  |   |         |  
|------------------------------------ |  | --------------------------------- | ------- | - | ----------- | - | --- | -------------------------------- |  | - | ------- | -
|                                     |  | BeforeApplication ofStatement 158 |         |   | Adjustments |   |     | AfterApplication ofStatement 158 | 
|Other assets                         |  | $                                 | 8,051   |   |             | $ | 13  |                                  |  | $ | 8,064   |  
|Total assets                         |  |                                   | 624,057 |   |             |   | 13  |                                  |  |   | 624,070 |  
|Other liabilities                    |  |                                   | 5,217   |   |             |   | 33  |                                  |  |   | 5,250   |  
|Total liabilities                    |  |                                   | 561,244 |   |             |   | 33  |                                  |  |   | 561,277 |  
|Accumulated other comprehensive loss |  |                                   | (1,319  | ) |             |   | (20 | )                                |  |   | (1,339  | )
|Total shareholders equity           |  |                                   | 62,813  |   |             |   | (20 | )                                |  |   | 62,793  |  



(9)    STOCK
OPTION AND RESTRICTED STOCK PLANS



Compensation cost
charged to income during the years ended December 31, 2007 and 2006 was approximately $123 thousand related to stock options for both years and $82 thousand and $119 thousand, respectively, related to restricted stock. No income tax benefit was
recognized for share-based compensation, as the Company does not have any outstanding nonqualified stock options.



63



---

ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



A summary of the status of stock options as of December 31, 2007, 2006
and 2005, and changes during the years then ended, is presented below:



|                                       |  |         |   |      |                            |       |        |        |                            |   |        |  |                            |  |   |      
|-------------------------------------- |  | ------- | - | ---- | -------------------------- | ----- | ------ | ------ | -------------------------- | - | ------ |  | -------------------------- |  | - | -----
|                                       |  | 2007    |   | 2006 |                            | 2005 
|                                       |  | Number  |   |      | WeightedAverageOptionPrice |       | Number |        | WeightedAverageOptionPrice |   | Number |  | WeightedAverageOptionPrice
|Options outstanding, beginning of year |  | 61,476  |   |      | $                          | 21.83 |        | 43,389 |                            | $ | 19.04  |  | 25,302                     |  | $ | 11.92
|Granted                                |  | 16,525  |   |      |                            | 32.60 |        | 18,087 |                            |   | 28.52  |  | 18,087                     |  |   | 29.00
|Exercised                              |  | (19,750 | ) |      |                            | 11.98 |        |       |                            |   |       |  |                           |  |   |     
|                                       |  |         |   |      |                            |       |        |        |                            |   |        |  |                            |  |   |      
|Options outstanding, end of year       |  | 58,251  |   |      | $                          | 28.22 |        | 61,476 |                            | $ | 21.83  |  | 43,389                     |  | $ | 19.04
|                                       |  |         |   |      |                            |       |        |        |                            |   |        |  |                            |  |   |      



The following table
summarizes information about the stock options outstanding at December 31, 2007:



|                |  |                                   |  |                                                  |  |                                   |  |                               |       |                                                  |    
|--------------- |  | --------------------------------- |  | ------------------------------------------------ |  | --------------------------------- |  | ----------------------------- | ----- | ------------------------------------------------ | ---
|                |  | Options Outstanding               |  | Options Exercisable                             
|Exercise Price  |  | NumberOutstandingDecember 31,2007 |  | Weighted-AverageRemainingContractualLife (Years) |  | NumberOutstandingDecember 31,2007 |  | Weighted-AverageExercisePrice |       | Weighted-AverageRemainingContractualLife (Years)
|$10.00  $13.00 |  | 2,702                             |  | 2.1                                              |  | 2,702                             |  | $                             | 10.00 |                                                  | 2.1
|$13.01  $28.50 |  | 2,850                             |  | 4.1                                              |  | 2,850                             |  |                               | 13.25 |                                                  | 4.0
|$28.51  $29.00 |  | 36,174                            |  | 6.7                                              |  | 14,078                            |  |                               | 28.81 |                                                  | 7.6
|$29.01  $32.60 |  | 16,525                            |  | 9.1                                              |  |                                  |  |                               |      |                                                  |   
|                |  |                                   |  |                                                  |  |                                   |  |                               |       |                                                  |    
|                |  | 58,251                            |  | 7.0                                              |  | 19,630                            |  | $                             | 23.96 |                                                  | 4.4
|                |  |                                   |  |                                                  |  |                                   |  |                               |       |                                                  |    



The aggregate
intrinsic value of both options outstanding and options exercisable at December 31, 2007 was $77 thousand. The aggregate intrinsic value of options outstanding and options exercisable at December 31, 2006 was $662 thousand and $575
thousand, respectively. Cash received for options exercised in 2007 was $237 thousand with an intrinsic value of $422 thousand. No options were exercised in 2006.



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



|                                                               |  |      |       |   |      |   |       |      |  |   |       |  
|-------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                               |  | 2007 |       |   | 2006 |   |       | 2005 | 
|Weighted average fair value of options granted during the year |  | $    | 8.73  |   |      | $ | 8.75  |      |  | $ | 8.68  |  
|                                                               |  |      |      
|Assumptions:                                                   |  |      |       |   |      |   |       |      |  |   |       |  
|Average risk free interest rate                                |  |      | 4.66  | % |      |   | 4.52  | %    |  |   | 3.88  | %
|Average expected volatility                                    |  |      | 24.82 | % |      |   | 30.37 | %    |  |   | 31.09 | %
|Expected dividend rate                                         |  |      | 2.40  | % |      |   | 2.40  | %    |  |   | 2.40  | %
|Expected life in years                                         |  |      | 7.00  |   |      |   | 7.01  |      |  |   | 7.00  |  



64



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



A summary of activity related to non-vested restricted stock during the year
ended December 31, 2007 is presented below:



|                                 |  |                  |   |  |                                     |      
|-------------------------------- |  | ---------------- | - |  | ----------------------------------- | -----
|                                 |  | Non-vestedShares |   |  | WeightedAverageGrant DateFair Value
|Outstanding at December 31, 2006 |  | 15,802           |   |  | $                                   | 24.68
|Granted                          |  |                 |   |  | $                                   | n/a  
|Forfeited                        |  |                 |   |  | $                                   | n/a  
|Vested                           |  | (7,089           | ) |  | $                                   | 24.36
|                                 |  |                  |   |  |                                     |      
|Outstanding at December 31, 2007 |  | 8,713            |   |  | $                                   | 24.95
|                                 |  |                  |   |  |                                     |      



The total fair value
of shares that contractually vested during 2007 and 2006 was $245 thousand and $195 thousand, respectively.



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



|      |  |                        |     |                       |   |       |  |   |    
|----- |  | ---------------------- | --- | --------------------- | - | ----- |  | - | ---
|      |  | StockOptions           |     | RestrictedStockGrants |   | Total
|      |  | (Dollars in thousands)
|2008  |  | $                      | 110 |                       | $ | 45    |  | $ | 155
|2009  |  |                        | 42  |                       |   |      |  |   | 42 
|2010  |  |                        | 28  |                       |   |      |  |   | 28 
|2011  |  |                        | 14  |                       |   |      |  |   | 14 
|2012  |  |                        | 1   |                       |   |      |  |   | 1  
|      |  |                        |     |                       |   |       |  |   |    
|Total |  | $                      | 195 |                       | $ | 45    |  | $ | 240
|      |  |                        |     |                       |   |       |  |   |    



(10)    DEPOSITS



At
December 31, 2007 and 2006, certificates of deposit of $100,000 or more amounted to approximately $162.3 million and $156.3 million, respectively.



Time deposit accounts as of December 31, 2007, mature in the following years and amounts: 2008$282.5 million; 2009$21.4 million;
2010$3.0 million; 2011$0.5 million; and 2012$1.5 million.



For the years ended December 31, 2007, 2006 and 2005, interest expense on certificates of deposit of $100,000 or more amounted to approximately $7.9 million, $6.3 million and $2.5 million, respectively.



(11)    LEASES



The Company has noncancellable operating leases for three branch locations.
These leases generally contain renewal options for periods ranging from three to twenty years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases during 2007, 2006 and 2005 was
$590 thousand, $558 thousand and $532 thousand, respectively.



65



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 2007 are as follows (dollars in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|Year ending December 31,     |  |  
|2008                         |  | $ | 483  
|2009                         |  |   | 237  
|2010                         |  |   | 217  
|2011                         |  |   | 177  
|2012                         |  |   | 177  
|Thereafter                   |  |   | 1,287
|                             |  |   |      
|Total minimum lease payments |  | $ | 2,578
|                             |  |   |      



(12)    RESERVE
REQUIREMENTS



The aggregate net reserve balances
maintained under the requirements of the Federal Reserve, which are non-interest-bearing, were approximately $447 thousand at December 31, 2007.



(13)    COMMITMENTS AND CONTINGENCIES



The Company has various financial instruments (outstanding commitments) with off-balance sheet risk that are issued in the normal course of business to
meet the financing needs of its customers. These financial instruments included commitments to extend credit of $91.6 million, standby letters of credit of $623 thousand and $347 thousand of unfunded commitments, included in other liabilities, with
two Small Business Administration backed venture and debt investment groups (SBICs) at December 31, 2007. The Company has also committed to invest $1.5 million with the Community Affordable Housing Equity Corporation, of which $419
thousand is not yet funded.



The Companys exposure to
credit loss for commitments to extend credit and standby letters of credit is the contractual amount of those financial instruments. The Company uses the same credit policies for making commitments and issuing standby letters of credit as it does
for on-balance sheet financial instruments. Each customers creditworthiness is evaluated on an individual case-by-case basis. The amount and type of collateral, if deemed necessary by management, is based upon this evaluation of
creditworthiness. Collateral obtained varies, but may include marketable securities, deposits, property, plant and equipment, investment assets, real estate, inventories and accounts receivable. Management does not anticipate any significant losses
as a result of these financial instruments and anticipates funding them from normal operations.



The Company is not involved in any legal proceedings which, in managements opinion, could have a material effect on the consolidated financial
position or results of operations of the Company.



(14)    FAIR VALUE OF FINANCIAL INSTRUMENTS



Fair value estimates are made by management at a specific point in time, based on relevant information about the financial instrument and the market. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the Companys entire holdings of a particular financial instrument nor are potential taxes and other expenses that would be incurred in an actual sale considered. Fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in assumptions and/or the methodology used could significantly affect the estimates disclosed. Similarly, the fair values disclosed could vary significantly from amounts realized in
actual transactions.



66



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments.



The following table presents the carrying values and estimated fair values of the Companys financial instruments at
December 31, 2007 and 2006 (dollars in thousands):



|                            |  |               |         |                     |   |               |  |                     |         |  |   |        
|--------------------------- |  | ------------- | ------- | ------------------- | - | ------------- |  | ------------------- | ------- |  | - | -------
|                            |  | 2007          |         | 2006               
|                            |  | CarryingValue |         | Estimated FairValue |   | CarryingValue |  | Estimated FairValue
|Financial assets:           |  |               |         |                     |   |               |  |                     |         |  |   |        
|Cash and cash equivalents   |  | $             | 22,003  |                     | $ | 22,003        |  | $                   | 40,057  |  | $ | 40,057 
|Investment securities       |  |               | 125,888 |                     |   | 125,888       |  |                     | 125,860 |  |   | 125,860
|FHLB stock                  |  |               | 2,382   |                     |   | 2,382         |  |                     | 1,229   |  |   | 1,229  
|Accrued interest receivable |  |               | 4,456   |                     |   | 4,456         |  |                     | 4,619   |  |   | 4,619  
|Net loans                   |  |               | 450,115 |                     |   | 444,409       |  |                     | 413,218 |  |   | 405,870
|Financial liabilities:      |  |               |         |                     |   |               |  |                     |         |  |   |        
|Deposits                    |  | $             | 526,361 |                     | $ | 527,982       |  | $                   | 512,249 |  | $ | 511,692
|Short-term borrowings       |  |               | 43,174  |                     |   | 43,174        |  |                     | 31,105  |  |   | 31,105 
|Accrued interest payable    |  |               | 2,525   |                     |   | 2,525         |  |                     | 2,363   |  |   | 2,363  
|Long-term obligations       |  |               |        |                     |   |              |  |                     | 10,310  |  |   | 10,310 



The estimated fair
values of net loans, deposits and long-term obligations at December 31 are based on estimated cash flows discounted at market interest rates. The carrying values of other financial instruments, including various receivables and payables,
approximate fair value. Refer to note 1(E) for investment securities fair value information. The fair value of off-balance sheet financial instruments is considered immaterial. As discussed in note 13, these off-balance sheet financial instruments
are commitments to extend credit and are either short-term in nature or subject to immediate repricing.



(15)    REGULATORY MATTERS



The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys and the Banks financial statements. Under capital adequacy guidelines and the regulatory
framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.



Quantitative measures established by regulation to ensure
capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital to
average assets (as defined). Management believes, as of December 31, 2007, that the Bank and the Company meet all capital adequacy requirements to which they are subject.



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



67



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



The Banks actual capital amounts, in thousands, and ratios are
presented in the following table:



|                                         |  |        |        |       |                             |       |       |                                                              |      |       |  |       |  
|---------------------------------------- |  | ------ | ------ | ----- | --------------------------- | ----- | ----- | ------------------------------------------------------------ | ---- | ----- |  | ----- | -
|                                         |  | Actual |        |       | For CapitalAdequacyPurposes |       |       | To be WellCapitalizedUnder PromptCorrective ActionProvisions |     
|                                         |  | Amount |        | Ratio |                             |       | Ratio |                                                              |      | Ratio | 
|As of December 31, 2007:                 |  |        |        |       |                             |       |       |                                                              |      |       |  |       |  
|Total Capital (to Risk Weighted Assets)  |  | $      | 60,705 |       | 3                           | 11.69 | %     |                                                              | 8.00 | %     |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |        | 56,622 |       | 3                           | 10.90 |       |                                                              | 4.00 |       |  | 6.00  |  
|Tier 1 Capital (to Average Assets)       |  |        | 56,622 |       | 3                           | 8.98  |       |                                                              | 4.00 |       |  | 5.00  |  
|                                         |  |        |        |      
|As of December 31, 2006:                 |  |        |        |       |                             |       |       |                                                              |      |       |  |       |  
|Total Capital (to Risk Weighted Assets)  |  |        | 58,917 |       | 3                           | 12.00 |       |                                                              | 8.00 |       |  | 10.00 |  
|Tier 1 Capital (to Risk Weighted Assets) |  |        | 54,192 |       | 3                           | 11.04 |       |                                                              | 4.00 |       |  | 6.00  |  
|Tier 1 Capital (to Average Assets)       |  |        | 54,192 |       | 3                           | 8.81  |       |                                                              | 4.00 |       |  | 5.00  |  



The following table
lists Bancorps actual capital amounts, in thousands, and ratios:



|                                         |  |        |        |       |                            |       |       |                                                              |      |       |  |       |  
|---------------------------------------- |  | ------ | ------ | ----- | -------------------------- | ----- | ----- | ------------------------------------------------------------ | ---- | ----- |  | ----- | -
|                                         |  | Actual |        |       | ForCapitalAdequacyPurposes |       |       | To be WellCapitalizedUnder PromptCorrective ActionProvisions |     
|                                         |  | Amount |        | Ratio |                            |       | Ratio |                                                              |      | Ratio | 
|As of December 31, 2007:                 |  |        |        |       |                            |       |       |                                                              |      |       |  |       |  
|Total Capital (to Risk Weighted Assets)  |  | $      | 71,285 |       | 3                          | 13.72 | %     |                                                              | 8.00 | %     |  | 10.00 | %
|Tier 1 Capital (to Risk Weighted Assets) |  |        | 67,202 |       | 3                          | 12.94 |       |                                                              | 4.00 |       |  | 6.00  |  
|Tier 1 Capital (to Average Assets)       |  |        | 67,202 |       | 3                          | 10.66 |       |                                                              | 3.00 |       |  | 5.00  |  
|                                         |  |        |        |      
|As of December 31, 2006:                 |  |        |        |       |                            |       |       |                                                              |      |       |  |       |  
|Total Capital (to Risk Weighted Assets)  |  |        | 78,856 |       | 3                          | 16.04 |       |                                                              | 8.00 |       |  | 10.00 |  
|Tier 1 Capital (to Risk Weighted Assets) |  |        | 74,131 |       | 3                          | 15.08 |       |                                                              | 4.00 |       |  | 6.00  |  
|Tier 1 Capital (to Average Assets)       |  |        | 74,131 |       | 3                          | 12.05 |       |                                                              | 3.00 |       |  | 5.00  |  



Dividends



The Companys dividend payments are typically made from dividends
received from the Bank. The Bank, as a North Carolina banking corporation, may pay dividends only out of undivided profits (retained earnings) as determined pursuant to North Carolina General Statutes Section 53-87. However, regulatory
authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank.



68



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



(16)    ECB BANCORP, INC. (PARENT COMPANY)



ECB Bancorp, Inc.s principal asset is its investment in the Bank, and
its principal source of income is dividends from the Bank. The Parent Company condensed balance sheets as of December 31, 2007 and 2006, and the related condensed statements of income and cash flows for the years ended December 31, 2007,
2006 and 2005 are as follows:



CONDENSED BALANCE SHEETS (dollars in
thousands)



|                                           |  |      |        |      |   |       
|------------------------------------------ |  | ---- | ------ | ---- | - | ------
|                                           |  | 2007 |        | 2006
|Assets                                     |  |      |        |      |   |       
|Cash                                       |  | $    | 10,580 |      | $ | 19,353
|Receivable from subsidiary                 |  |      | 511    |      |   | 990   
|Investment in subsidiary                   |  |      | 56,261 |      |   | 52,853
|Other assets                               |  |      |       |      |   | 415   
|                                           |  |      |        |      |   |       
|Total assets                               |  | $    | 67,352 |      | $ | 73,611
|                                           |  |      |        |      |   |       
|Liabilities and Shareholders Equity       |  |      |        |      |   |       
|Dividends payable                          |  | $    | 511    |      | $ | 493   
|Accrued interest payable                   |  |      |       |      |   | 15    
|Long-term obligations                      |  |      |       |      |   | 10,310
|                                           |  |      |        |      |   |       
|Total liabilities                          |  |      | 511    |      |   | 10,818
|                                           |  |      |        |      |   |       
|Total stockholders equity                 |  |      | 66,841 |      |   | 62,793
|                                           |  |      |        |      |   |       
|Total liabilities and stockholders equity |  | $    | 67,352 |      | $ | 73,611
|                                           |  |      |        |      |   |       



CONDENSED STATEMENTS OF INCOME
(dollars in thousands)



|                                                 |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------ |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                 |  | 2007 |       |   | 2006 |   |       | 2005 | 
|Dividends from bank subsidiary                   |  | $    | 2,077 |   |      | $ | 1,973 |      |  | $ | 1,164 |  
|Interest                                         |  |      | 508   |   |      |   | 482   |      |  |   |      |  
|Equity in undistributed net income of subsidiary |  |      | 2,332 |   |      |   | 3,288 |      |  |   | 3,699 |  
|Amortization expense                             |  |      | (105  | ) |      |   | (161  | )    |  |   | (10   | )
|                                                 |  |      |       |   |      |   |       |      |  |   |       |  
|Net income                                       |  | $    | 4,812 |   |      | $ | 5,582 |      |  | $ | 4,853 |  
|                                                 |  |      |       |   |      |   |       |      |  |   |       |  



CONDENSED STATEMENTS OF CASH FLOWS
(dollars in thousands)



|                                                 |  |      |         |   |      |   |        |      |  |   |        |  
|------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                                 |  | 2007 |         |   | 2006 |   |        | 2005 | 
|OPERATING ACTIVITIES:                            |  |      |         |   |      |   |        |      |  |   |        |  
|Net income                                       |  | $    | 4,812   |   |      | $ | 5,582  |      |  | $ | 4,853  |  
|Undistributed net income of subsidiary           |  |      | (2,332  | ) |      |   | (3,288 | )    |  |   | (3,699 | )
|Net change in other assets & other liabilities   |  |      | 569     |   |      |   | (487   | )    |  |   | 10     |  
|Stock based compensation                         |  |      | 205     |   |      |   | 242    |      |  |   | 105    |  
|                                                 |  |      |         |   |      |   |        |      |  |   |        |  
|Net cash provided by operating activities        |  |      | 3,254   |   |      |   | 2,049  |      |  |   | 1,269  |  
|                                                 |  |      |         |   |      |   |        |      |  |   |        |  
|INVESTING ACTIVITIES:                            |  |      |         |   |      |   |        |      |  |   |        |  
|Payment for investments in subsidiary            |  |      | (205    | ) |      |   | (5,153 | )    |  |   |       |  
|                                                 |  |      |         |   |      |   |        |      |  |   |        |  
|Net cash used by investing activities            |  |      | (205    | ) |      |   | (5,153 | )    |  |   |       |  
|                                                 |  |      |         |   |      |   |        |      |  |   |        |  
|FINANCING ACTIVITIES:                            |  |      |         |   |      |   |        |      |  |   |        |  
|Repurchase of common stock                       |  |      | (31     | ) |      |   |       |      |  |   |       |  
|Proceeds from issuance of common stock           |  |      | 237     |   |      |   | 24,264 |      |  |   |       |  
|Repayment of debt                                |  |      | (10,000 | ) |      |   |       |      |  |   |       |  
|Cash dividends paid                              |  |      | (2,028  | ) |      |   | (1,807 | )    |  |   | (1,269 | )
|                                                 |  |      |         |   |      |   |        |      |  |   |        |  
|Net cash provided (used) in financing activities |  |      | (11,822 | ) |      |   | 22,457 |      |  |   | (1,269 | )
|                                                 |  |      |         |   |      |   |        |      |  |   |        |  
|Net change in cash                               |  | $    | (8,773  | ) |      | $ | 19,353 |      |  | $ |       |  
|                                                 |  |      |         |   |      |   |        |      |  |   |        |  



69



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ECB BANCORP, INC. AND SUBSIDIARY



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)



DECEMBER 31, 2007 and 2006



(17) RELATED PARTY TRANSACTIONS



Bancorp and the Bank have had, and expect to have in the future, banking
transactions in the ordinary course of business with directors, officers and their associates (Related Parties) on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable
transactions with others. Those transactions neither involve more than normal risk of collectibility nor present any unfavorable features.



Loans at December 31, 2007 and 2006 include loans to officers and directors and their associates totaling approximately $2.9 million and $3.2
million, respectively. During 2007, $1.7 million in loans were disbursed to officers, directors and their associates and principal repayments of $2.0 million were received on such loans.



70



---

Item 9.    Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

---



Not applicable.



Item 9A.    Controls and Procedures

---

Our
management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15 of the Securities
Exchange Act of 1934 (the Exchange Act). Based on their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were
effective to provide reasonable assurance that we are able to record, process, summarize and report in a timely manner the information required to be disclosed in reports we file under the Exchange Act.



In connection with the above evaluation of our disclosure controls and
procedures no change in our internal control over financial reporting was identified that occurred during our fourth quarter of 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.



71



---

MANAGEMENTS ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



The management of ECB Bancorp, Inc. (ECB) is responsible for establishing
and maintaining adequate internal control over financial reporting. ECBs internal control system was designed to provide reasonable assurance to the Companys management and board of directors regarding the preparation and fair
presentation of published financial statements.



All internal
control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.



ECBs management assessed the effectiveness of the Companys
internal control over financial reporting as of December 31, 2007. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated
Framework. Based on that assessment, we believe that, as of December 31, 2007, the Companys internal control over financial reporting is effective based on those criteria.



ECBs independent auditors have issued an audit report on the Companys internal control over financial reporting.
This report appears on the following page.



|                            |  |  |  |                        
|--------------------------- |  |  |  | -----------------------
|/s/    ARTHUR H. KEENEY III |  |  |  | /s/    GARY M. ADAMS   
|Arthur H. Keeney III        |  |  |  | Gary M. Adams          
|Chief Executive Officer     |  |  |  | Chief Financial Officer



72



---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders

ECB Bancorp, Inc. and Subsidiary



We have audited ECB Bancorp, Inc. and Subsidiarys (the Company) internal control over financial reporting as of December 31, 2007,
based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Annual Report on Internal Control Over Financial Reporting. Our responsibility
is to express an opinion on the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.



A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.



In
our opinion, ECB Bancorp, Inc. and Subsidiary maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.



We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of ECB Bancorp, Inc. and Subsidiary as of and for the year
ended December 31, 2007, and our report dated March 10, 2008, expressed an unqualified opinion on those consolidated financial statements.



/s/ Dixon Hughes PLLC



Greenville, North Carolina

March 10, 2008



73



---

Item 9B.    Other Information

---



None.



PART III



Item 10.    Directors, Executive Officers and Corporate Governance

---



Directors and Executive
Officers.    Information regarding our directors and executive officers is incorporated by reference from the information under the headings Proposal 1: Election of Directors and Executive
Officers in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2008 Annual Meeting.



Audit Committee.    Information regarding our Audit Committee is incorporated by reference from the information under the
captions Committees of Our BoardGeneral and Audit Committee in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2008 Annual Meeting.



Audit Committee Financial Expert.    Rules of
the Securities and Exchange Commission (the SEC) require that we disclose whether our Board of Directors has determined that our Audit Committee includes a member who qualifies as an audit committee financial expert as that
term is defined in the SECs rules. To qualify as an audit committee financial expert under the SECs rules, a person must have a relatively high level of accounting and financial knowledge or expertise which he or she has acquired through
specialized education or training or through experience in certain types of positions.



We currently do not have an independent director who our Board believes can be considered an audit committee financial expert and, for that reason, there is no such person who the Board can appoint to our Audit
Committee. In the future, financial expertise and experience will be one of many factors that our Board considers in selecting candidates to become directors. However, we are not required by any law or regulation to have an audit committee financial
expert on our Board or Audit Committee, and we believe that small companies such as ours will find it difficult to locate persons with the specialized knowledge and experience needed to qualify as audit committee financial experts who are willing to
serve as directors without being compensated at levels higher than we currently pay our directors. Our current Audit Committee members have a level of financial knowledge and experience that we believe is sufficient for banks our size that, like us,
do not engage in a wide variety of business activities, and, for that reason, the ability to qualify as an audit committee financial expert will not be the primary criteria in our Boards selection of candidates to become new directors.



Section 16(a) Beneficial Ownership Reporting
Compliance.    Information regarding compliance by our directors, executive officers and principal shareholders with the reporting requirements of Section 16(a) of the Securities Exchange Act of 1934 is incorporated by
reference from the information under the caption Beneficial Ownership of Our Common StockSection 16(a) Beneficial Ownership Reporting Compliancein our definitive Proxy Statement to be filed with the Securities and Exchange
Commission in connection with our 2008 Annual Meeting.



Code
of Ethics.    Information regarding our Code of Ethics that applies to our directors and to all our executive officers, including without limitation our principal executive officer and principal financial officer, is
incorporated by reference from the information under the caption Corporate GovernanceCode of Ethicsin our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2008 Annual
Meeting.



Item 11.    Executive
Compensation

---



Information regarding compensation paid to our executive officers and directors is incorporated by reference from the information under the headings Compensation Discussion and Analysis, Executive Compensationand Director Compensation in our definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2008 Annual Meeting.



Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters

---



Beneficial Ownership of Securities.    Information regarding the beneficial ownership of our common stock by our directors, executive officers and principal shareholders is incorporated by
reference from the information under the



74



---

heading Beneficial Ownership of Our Common Stock in our definitive Proxy Statement to be filed with the Securities and Exchange Commission
in connection with our 2008 Annual Meeting.



Securities
Authorized for Issuance Under Equity Compensation Plans.    The following table summarizes all compensation arrangements which were in effect on December 31, 2007, and under which shares of our common stock have been
authorized for issuance.



|                                                               |  |                                                                    |     |  |                                                         |       |                                                                                                                                     |        |    
|-------------------------------------------------------------- |  | ------------------------------------------------------------------ | --- |  | ------------------------------------------------------- | ----- | ----------------------------------------------------------------------------------------------------------------------------------- | ------ | ---
|                                                               |  | EQUITY COMPENSATION PLAN INFORMATION (1)                           |    
|Plan category                                                  |  | (a)Number of Shares tobe Issued
UponExercise ofOutstanding Options |     |  | (b)Weighted-averageExercise Price
ofOutstanding Options |       | (c)Number of Shares RemainingAvailable for Future Issuance UnderEquity Compensation Plans (ExcludingShares Reflected In Column (a)) |       
|Equity compensation plans approved by our security holders     |  | 58,251                                                             | (1) |  | $                                                       | 28.22 |                                                                                                                                     | 52,831 | (2)
|Equity compensation plans not approved by our security holders |  | -0-                                                                |     |  |                                                         | N/A   |                                                                                                                                     | -0-    |    
|Total                                                          |  | 58,251                                                             |     |  | $                                                       | 28.22 |                                                                                                                                     | 52,831 |    

---

|(1) |  | Reflects the number of shares that are subject to outstanding, unexercised options previously granted under our Omnibus Stock Ownership and Long-Term Incentive Plan, which provided
for the grant of both stock options and restricted stock awards.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Reflects the number of shares that remained available for future issuance under the plan on December 31, 2007. The plan expired on January 21, 2008, and no new grants or
awards may be made under it after that date.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Item  13.    Certain Relationships and Related Transactions, and Director Independence

---

Information regarding transactions between us and our directors, executive officers and other related persons, and our policies and procedures for
reviewing and approving related person transactions, is incorporated by reference from the information under the caption Transactions with Related Persons in our definitive Proxy Statement to be filed with the Securities and
Exchange Commission in connection with our 2008 Annual Meeting.



Information regarding our independent directors is incorporated by reference from the information under the caption Corporate GovernanceDirector Independence in our definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with our 2008 Annual Meeting.



Item  14.    Principal Accounting Fees and Services

---

Information regarding services provided to us by our independent accountants is incorporated by reference from the information under the caption Services and Fees During 2007 and 2006 in our
definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with our 2008 Annual Meeting.



PART IV



Item 15.    Exhibits and Financial Statement Schedules

---



(a) Financial Statements.    The following
financial statements are included in Item 8 of this Report:



Report of Dixon Hughes PLLC



Consolidated Balance Sheets as of December 31, 2007 and 2006



Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005



Consolidated Statements of Shareholders Equity for the
years ended December 31, 2007, 2006 and 2005



Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005



Notes to Consolidated Financial StatementsDecember 31, 2007 and 2006



(b) Exhibits.    An Exhibit Index listing exhibits that are being filed or furnished with, or
incorporated by reference into, this Report appears immediately following the signature page and is incorporated herein by reference.



(c) Financial Statement Schedules.    No separate financial statement schedules are being filed as all required schedules
either are not applicable or are contained in the financial statements listed above or in Item 7 of this Report.



75



---

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.



|                     |  |                   |  |                                      
|-------------------- |  | ----------------- |  | -------------------------------------
|Date: March 14, 2008 |  | ECB BANCORP, INC.
|                     |  |                  
|                     |  | By:               |  | /s/    ARTHUR H. KEENEY
III          
|                     |  |                   |  | Arthur H. Keeney III                 
|                     |  |                   |  | President and Chief Executive Officer



Pursuant to the
requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.



|                                                    |  |                                                                                                |  |               
|--------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | --------------
|Signature                                           |  | Title                                                                                          |  | Date          
|/s/    ARTHUR H. KEENEY
IIIArthur H. Keeney III     |  | President and Chief Executive Officer (principal executive officer)                            |  | March 14, 2008
|                                                    |  |                                                                                               
|/s/    GARY M. ADAMSGary M. Adams                   |  | Senior Vice President and Chief Financial Officer (principle financial and accounting officer) |  | March 14, 2008
|                                                    |  |                                                                                               
|/s/    GEORGE T. DAVISGeorge T. Davis, Jr.          |  | Vice Chairman                                                                                  |  | March 14, 2008
|                                                    |  |                                                                                               
|/s/    GREGORY C.
GIBBSGregory C.
Gibbs             |  | Director                                                                                       |  | March 14, 2008
|                                                    |  |                                                                                               
|/s/    JOHN F. HUGHES,
JR.John F. Hughes,
Jr.       |  | Director                                                                                       |  | March 14, 2008
|                                                    |  |                                                                                               
|/s/    J. BRYANT KITTRELL
IIIJ. Bryant Kittrell III |  | Director                                                                                       |  | March 14, 2008
|                                                    |  |                                                                                               
|/s/    JOSEPH T. LAMB,
JR.Joseph T. Lamb,
Jr.       |  | Director                                                                                       |  | March 14, 2008
|                                                    |  |                                                                                               
|/s/    B. MARTELLE
MARSHALLB. Martelle
Marshall     |  | Director                                                                                       |  | March 14, 2008
|                                                    |  |                                                                                               
|/s/    R. S. SPENCER,
JR.R. S. Spencer,
Jr.         |  | Chairman                                                                                       |  | March 14, 2008
|                                                    |  |                                                                                               
|/s/    MICHAEL D.
WEEKSMichael D.
Weeks             |  | Director                                                                                       |  | March 14, 2008



76



---

EXHIBIT INDEX



|           |  |                                                                                                                                                                                                                                                                                                               
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description of Exhibit                                                                                                                                                                                                                                                                                        
|           | 
|3.01       |  | Registrants Articles of Incorporation (incorporated by reference from Exhibits to Registration Statement on Form SB-2, Reg. No. 333-61839)                                                                                                                                                                   
|           | 
|3.02       |  | Registrants Bylaws (incorporated by reference from Exhibits to Registration Statement on Form SB-2, Reg. No. 333-61839)                                                                                                                                                                                      
|           | 
|4.01       |  | Specimen common stock certificate (incorporated by reference from Exhibits to Registration Statement on Form S-1, Reg. No. 333-128843)                                                                                                                                                                        
|           | 
|4.02       |  | Indenture dated as of June 26, 2002, between Registrant and State Street Bank and Trust Company of Connecticut, National Association (incorporated by reference from Exhibits to
Registrants June 30, 2002, Quarterly Report on Form 10-QSB)                                                                 
|           | 
|4.03       |  | Amended and Restated Declaration of Trust dated as of June 26, 2002, by and among Registrant, State Street Bank and Trust Company of Connecticut, National Association, and the Administrators
(incorporated by reference from Exhibits to Registrants June 30, 2002, Quarterly Report on Form 10-QSB)       
|           | 
|4.04       |  | Guarantee Agreement dated as of June 26, 2002, between Registrant and State Street Bank and Trust Company of Connecticut, National Association (incorporated by reference from Exhibits to
Registrants June 30, 2002, Quarterly Report on Form 10-QSB)                                                       
|           | 
|10.01      |  | Employment Agreement between Arthur H. Keeney III and the Bank (incorporated by reference from Exhibits to Registration Statement on Form SB-2, Reg. No. 333-61839)                                                                                                                                           
|           | 
|10.02      |  | Agreement between J. Dorson White, Jr. and the Bank (incorporated by reference from Exhibits to Registrants 2001 Annual Report on Form 10-KSB)                                                                                                                                                               
|           | 
|10.03      |  | Agreement between T. Olin Davis and the Bank (filed herewith)                                                                                                                                                                                                                                                 
|           | 
|10.04      |  | Agreement between Gary M. Adams and the Bank (incorporated by reference from Exhibits to Registrants 2002 Annual Report on Form 10-KSB)                                                                                                                                                                      
|           | 
|10.05      |  | Omnibus Stock Ownership and Long Term Incentive Plan (incorporated by reference from Exhibits to Registration Statement on Form SB-2, Reg. No. 333-61839)                                                                                                                                                     
|           | 
|10.06      |  | Form of Employee Stock Option Agreement (incorporated by reference from Exhibits to Registration Statement on Form SB-2, Reg. No. 333-61839)                                                                                                                                                                  
|           | 
|10.07      |  | Form of Restricted Stock Agreement (incorporated by reference from Exhibits to Registration Statement on Form S-8, Reg. No. 333-77689)                                                                                                                                                                        
|           | 
|10.08      |  | Executive Supplemental Retirement Plan Agreement between the Bank and Arthur H. Keeney III (incorporated by reference from Exhibits to Registrants March 31, 2002, Quarterly Report on
Form 10-QSB)                                                                                                          
|           | 
|10.09      |  | Executive Supplemental Retirement Plan Agreement between the Bank and J. Dorson White, Jr. (incorporated by reference from Exhibits to Registrants March 31, 2002, Quarterly Report on
Form 10-QSB)                                                                                                          
|           | 
|10.10      |  | Executive Supplemental Retirement Plan Agreement between the Bank and T. Olin Davis (filed herewith)                                                                                                                                                                                                          
|           | 
|10.11      |  | Executive Supplemental Retirement Plan Agreement between the Bank and Gary M. Adams (incorporated by reference from Exhibits to Registrants 2002 Annual Report on Form
10-KSB)                                                                                                                               
|           | 
|10.12      |  | Split-Dollar Life Insurance Agreement between the Bank and Arthur H. Keeney III (incorporated by reference from Exhibits to Registrants March 31, 2002, Quarterly Report on Form
10-QSB)                                                                                                                     
|           | 
|10.13      |  | Split-Dollar Life Insurance Agreement between the Bank and J. Dorson White, Jr. (incorporated by reference from Exhibits to Registrants March 31, 2002, Quarterly Report on Form 10-QSB)                                                                                                                     
|           | 
|10.14      |  | Split-Dollar Life Insurance Agreement between the Bank and T. Olin Davis (filed herewith)                                                                                                                                                                                                                     
|           | 
|10.15      |  | Split-Dollar Life Insurance Agreement between the Bank and Gary M. Adams (incorporated by reference from Exhibits to Registrants 2002 Annual Report on Form 10-KSB)                                                                                                                                          
|           | 
|10.16      |  | Form of Director Supplemental Retirement Agreements between the Bank and George T. Davis, Jr., John F. Hughes, Jr., Arthur H. Keeney III, Joseph T. Lamb, Jr., R. S. Spencer, Jr. and Ray
M. Spencer (incorporated by reference from Exhibits to Registrants March 31, 2002, Quarterly Report on Form 10-QSB)



---

|           |  |                                                                                                                                                                                                                                                                                                                                                           
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description of Exhibit                                                                                                                                                                                                                                                                                                                                    
|10.17      |  | Form of Director Supplemental Retirement Agreements between the Bank and Gregory C. Gibbs, J. Bryant Kittrell III, and B. Martelle Marshall (incorporated by reference from Exhibits to
Registrants March 31, 2002, Quarterly Report on Form 10-QSB)                                                                                                     
|           | 
|10.18      |  | Form of Split-Dollar Life Insurance Agreements between the Bank and George T. Davis, Jr., Gregory C. Gibbs, John F. Hughes, Jr., Arthur H. Keeney III, J. Bryant Kittrell III, Joseph T.
Lamb, Jr., B. Martelle Marshall, and R. S. Spencer, Jr. (incorporated by reference from Exhibits to Registrants March 31, 2002, Quarterly Report on Form 10-QSB)
|           | 
|10.19      |  | The East Carolina Bank Incentive Plan (incorporated by reference from Exhibits to Registrants 2004 Annual Report on Form 10-KSB)                                                                                                                                                                                                                         
|           | 
|10.20      |  | Consulting Agreement dated November 16, 2006, between the Bank and William F. Plyler II (incorporated by reference from Exhibits to Registrants Current Report on Form 8-K dated November
16, 2006)                                                                                                                                                      
|           | 
|10.21      |  | Agreement dated November 16, 2006 between Registrant and William F. Plyler II (incorporated by reference from Exhibits to Registrants Current Report on Form 8-K dated November 16, 2006)                                                                                                                                                                
|           | 
|10.23      |  | Schedule listing number of shares of common stock for which a purchase option was granted to each of Registrants named executive officers, together with the exercise price, term and
vesting schedule of each option (incorporated by reference from Exhibits to Registrants Current Report on Form 8-K dated March 1, 2007)                           
|           | 
|21.01      |  | List of Registrants subsidiaries (incorporated by reference from Exhibits to Registrants 2004 Annual Report on Form 10-KSB)                                                                                                                                                                                                                             
|           | 
|23.01      |  | Consent of Dixon Hughes PLLC (filed herewith)                                                                                                                                                                                                                                                                                                             
|           | 
|31.01      |  | Certification of Chief Executive Officer (pursuant to Rule 13a-14) (filed herewith)                                                                                                                                                                                                                                                                       
|           | 
|31.02      |  | Certification of Chief Financial Officer (pursuant to Rule 13a-14) (filed herewith)                                                                                                                                                                                                                                                                       
|           | 
|32.01      |  | Certification of Chief Executive Officer and Chief Financial Officer (pursuant to 18 U.S.C. Section 1350) (filed herewith)                                                                                                                                                                                                                                



COPIES OF EXHIBITS
ARE AVAILABLE UPON WRITTEN REQUEST TO GARY M. ADAMS,

CHIEF FINANCIAL OFFICER, AT ECB BANCORP, INC., P.O. BOX 337, ENGELHARD,

NORTH CAROLINA 27824.