Ecb Bancorp (ECBE) 10-Q 2007 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2007

or

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

For the transition period from            to            

Commission File No. 0-24753

ECB Bancorp, Inc.

(Exact 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) (Zip Code)

(252) 925-9411

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

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

On November 2, 2007, there were 2,921,992 outstanding shares of Registrant’s common stock.

This Form 10-Q has 35 pages.

Table of Contents

Index	Begins on Page
Part 1 – Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets at September 30, 2007 and December 31, 2006	3
Consolidated Income Statements for Three and Nine Months Ended September 30, 2007 and 2006	4
Consolidated Statements of Changes in Shareholders’ Equity for Nine Months Ended September 30, 2007 and 2006	5
Consolidated Statements of Cash Flows for Nine Months Ended September 30, 2007 and 2006	6
Notes to Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures About Market Risk	29
Item 4. Controls and Procedures	29
Part II – Other Information
Item 1. Legal Proceedings	29
Item 1A. Risk Factors	29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 3. Defaults upon Senior Securities	29
Item 4. Submission of Matters to a Vote of Security Holders	30
Item 5. Other Information	30
Item 6. Exhibits	30
Signatures	31
Exhibit Index	32
EX- 31.1	33
EX- 31.2	34
EX- 32	35

2

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets

September 30, 2007 and December 31, 2006

(Dollars in thousands, except per share data)

	September 30, 2007			December 31, 2006*
	(unaudited)
Assets
Non-interest bearing deposits and cash	$	19,900		$	15,591
Interest bearing deposits		876			891
Overnight investments		525			23,575
Total cash and cash equivalents		21,301			40,057
Investment securities
Available-for-sale, at market value (cost of $126,491 and $128,005 at September 30, 2007 and December 31, 2006, respectively)		124,581			125,860
Loans		440,340			417,943
Allowance for loan losses		(4,351	)		(4,725	)
Loans, net		435,989			413,218
Real estate and repossessions acquired in settlement of loans, net		82			240
Federal Home Loan Bank common stock, at cost		1,775			1,229
Bank premises and equipment, net		24,693			23,042
Accrued interest receivable		5,020			4,619
Bank owned life insurance		7,958			7,741
Other assets		8,280			8,064
Total	$	629,679		$	624,070
Liabilities and Shareholders’ Equity
Deposits
Demand, noninterest bearing	$	105,547		$	96,890
Demand, interest bearing		97,211			94,569
Savings		18,187			19,809
Time		306,423			300,981
Total deposits		527,368			512,249
Accrued interest payable		2,877			2,363
Short-term borrowings		29,128			31,105
Long-term obligations		—			10,310
Other liabilities		4,967			5,250
Total liabilities		564,340			561,277
Shareholders’ equity
Common stock, par value $3.50 per share; authorized 10,000,000 shares; issued and outstanding 2,921,992 at September 30, 2007 and 2,902,242 at December 31, 2006.		10,188			10,119
Capital surplus		27,004			26,680
Retained earnings		29,342			27,333
Accumulated other comprehensive loss		(1,195	)		(1,339	)
Total shareholders’ equity		65,339			62,793
Total	$	629,679		$	624,070

* Derived from audited consolidated financial statements.

See accompanying notes to consolidated financial statements.

3

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Income Statements

For the three and nine months ended September 30, 2007 and 2006

(Dollars in thousands, except per share data)

	Three months ended September 30,				Nine months ended September 30,
	2007		2006		2007			2006
	(unaudited)		(unaudited)		(unaudited)			(unaudited)
Interest income:
Interest and fees on loans	$	8,651	$	8,176	$	25,103		$	22,923
Interest on investment securities:
Interest exempt from federal income taxes		302		263		907			795
Taxable interest income		1,091		855		3,300			2,505
Dividend income		41		24		88			100
Other interest		125		49		499			270
Total interest income		10,210		9,367		29,897			26,593
Interest expense:
Deposits:
Demand accounts		527		357		1,363			901
Savings		23		27		71			83
Time		3,873		2,971		11,374			8,397
Short-term borrowings		467		161		1,850			377
Long-term obligations		—		446		—			1,301
Total interest expense		4,890		3,962		14,658			11,059
Net interest income		5,320		5,405		15,239			15,534
Provision for loan losses		—		50		(99	)		450
Net interest income after provision for loan losses		5,320		5,355		15,338			15,084
Noninterest income:
Service charges on deposit accounts		736		656		2,270			2,269
Other service charges and fees		445		505		1,174			1,108
Mortgage origination brokerage fees		243		264		804			704
Income from bank owned life insurance		72		70		217			227
Income from investments in SBIC’s		—		235		—			235
Recapture of reserve for unfunded loans		—		—		240			—
Other operating income		86		23		143			74
Total noninterest income		1,582		1,753		4,848			4,617
Noninterest expenses:
Salaries		2,221		1,901		6,267			5,519
Retirement and other employee benefits		709		681		2,102			2,013
Occupancy		483		408		1,345			1,218
Equipment		411		424		1,458			1,292
Professional fees		53		78		527			157
Supplies		116		78		314			236
Telephone		146		133		415			370
Other operating expenses		1,146		888		3,059			2,694
Total noninterest expenses		5,285		4,591		15,487			13,499
Income before income taxes		1,617		2,517		4,699			6,202
Income taxes		282		822		1,155			1,994
Net income	$	1,335	$	1,695	$	3,544		$	4,208
Net income per share—basic	$	0.46	$	0.59	$	1.22		$	1.60
Net income per share—diluted	$	0.46	$	0.58	$	1.22		$	1.58
Weighted average shares outstanding—basic		2,913,279		2,886,440		2,906,797			2,638,050
Weighted average shares outstanding—diluted		2,919,190		2,910,721		2,914,825			2,663,337

See accompanying notes to consolidated financial statements.

4

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Shareholders’ Equity

Nine months ended September 30, 2007 and 2006

(Dollars in thousands, except per share data)

	Common Stock					Capital surplus			Retained earnings			Deferred compensation- restricted stock			Accumulated other comprehensive loss			Comprehensive income		Total
	Number		Amount
Balance January 1, 2006	2,040,042		$	7,140		$	5,408		$	23,724		$	(255	)	$	(1,452	)			$	34,565
Unrealized gain, net of income tax of $ (51)																81		$	81		81
Net income										4,208									4,208		4,208
Total comprehensive income																		$	4,289
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			116														134
Reclass of deferred restricted stock compensation due to adoption of SFAS No. 123R				(58	)		(197	)					255
Cash dividends ($.51 per share)										(1,479	)										(1,479	)
Balance September 30, 2006	2,902,242		$	10,119		$	26,572		$	26,453		$	—		$	(1,371	)			$	61,773
	Common Stock					Capital surplus			Retained earnings			Deferred compensation- restricted stock			Accumulated other comprehensive loss			Comprehensive income		Total
	Number		Amount
Balance January 1, 2007	2,902,242		$	10,119		$	26,680		$	27,333		$	—		$	(1,339	)			$	62,793
Unrealized gain, net of income tax of $ (90)																144		$	144		144
Net income										3,544									3,544		3,544
Total comprehensive income																		$	3,688
Stock options exercised	19,750			69			168														237
Stock based compensation							156														156
Cash dividends ($0.525 per share)										(1,535	)										(1,535	)
Balance September 30, 2007	2,921,992		$	10,188		$	27,004		$	29,342		$	—		$	(1,195	)			$	65,339

See accompanying notes to consolidated financial statements.

5

ECB BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows

Nine months ended September 30, 2007 and 2006

(Dollars in thousands)

	Nine months ended September 30,
	2007			2006
	(unaudited)			(unaudited)
Cash flows from operating activities:
Net income	$	3,544		$	4,208
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,138			906
Amortization of premium on investment securities, net		37			85
Provision for loan losses		(99	)		450
Net charge-offs on loans		(275	)		(2	)
Gain on sale of securities		(3	)		—
Stock based compensation		156			134
Impairment on community bank trust services investment		90			—
Increase in accrued interest receivable		(401	)		(962	)
Gain on disposal of premises and equipment		(3	)		—
Loss on sale of real estate and repossession acquired in settlement of loans		24			—
Income from Bank owned life insurance		(217	)		(227	)
(Increase) decrease in other assets		(1,396	)		1,958
Increase in accrued interest payable		514			716
Decrease in other liabilities, net		(303	)		(144	)
Net cash provided by operating activities		2,806			7,122
Cash flows from investing activities:
Proceeds from sales of investment securities classified as available-for-sale		2,960			—
Proceeds from maturities of investment securities classified as available-for-sale		7,809			6,629
Purchases of investment securities classified as available-for-sale		(8,289	)		(16,308	)
Purchase of Federal Home Loan Bank common stock		(546	)		(406	)
Purchases of premises and equipment		(2,786	)		(3,228	)
Proceeds from disposal of real estate and repossessions acquired in settlement of loans		170			—
Net loan originations		(22,433	)		(36,504	)
Net cash used by investing activities		(23,115	)		(49,817	)
Cash flows from financing activities:
Net increase in deposits		15,119			9,024
Net (decrease) increase in borrowings		(12,287	)		14,586
Dividends paid		(1,516	)		(1,312	)
Net proceeds from issuance of common stock		237			24,264
Net cash provided by financing activities		1,553			46,562
Increase (decrease) in cash and cash equivalents		(18,756	)		3,867
Cash and cash equivalents at beginning of period		40,057			18,839
Cash and cash equivalents at end of period	$	21,301		$	22,706
Cash paid during the period:
Interest	$	14,144		$	10,343
Taxes		1,454			833
Supplemental disclosures of noncash financing and investing activities:
Cash dividends declared but not paid	$	511		$	493
Unrealized gains on available-for-sale securities, net of deferred taxes		144			81
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			—
Transfer to and from loans to real estate and repossessions acquired in settlement of loans		36			315

See accompanying notes to consolidated financial statements.

6

ECB BANCORP, INC. AND SUBSIDIARY

Notes to Consolidated Financial Statements

(1) Basis of Presentation

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

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

The consolidated financial statements as of September 30, 2007 were prepared pursuant to the rules and regulations of the Securities and Exchange Commission relating to interim financial statements. All adjustments considered necessary for a fair presentation of the results for the interim periods presented have been included (such adjustments are normal and recurring in nature). The notes to consolidated financial statements in Bancorp’s annual report on Form 10-K should be referenced when reading these unaudited interim financial statements. Operating results for the period ended September 30, 2007, are not necessarily indicative of the results that may be expected for the year ending December 31, 2007.

Reclassification

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

(2) Net Income Per Share

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

Diluted net income per share is computed by assuming the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. Restricted stock is considered outstanding for purposes of diluted net income per share. The amount of compensation cost attributed to future services and not yet recognized is considered “proceeds” using the treasury stock method. For the nine months ended September 30, 2007 and 2006, diluted weighted average shares outstanding increased by 5,519 and 16,207, respectively, due to the dilutive impact of restricted stock. For the three months ended September 30, 2007 and 2006, diluted weighted average shares outstanding increased by 5,911 and 15,802, 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. For the nine months ended September 30, 2007 and 2006, diluted weighted average shares outstanding increased by 2,509 and 9,080, respectively, due to the

7

dilutive impact of options. For the three months ended September 30, 2006, diluted weighted average shares outstanding increased by 8,479 due to the dilutive impact of options. The options had no dilutive effect on diluted weighted average shares for the three months ended September 30, 2007. There were 52,699 anti-dilutive (not in the money) options outstanding for the three months ended September 30, 2007 compared to none for the three months ended September 30, 2006. There were 13,317 anti-dilutive options outstanding for the nine months ended September 30, 2007 compared to no anti-dilutive options outstanding for the nine-month period ended September 30, 2006.

The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per Share for the nine months ended September 30.

	Nine months ended September 30, 2007
	(Dollars in thousands, except per share data)
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income per share	$	3,544	2,906,797	$	1.22
Effect of dilutive securities		—	8,028
Diluted net income per share	$	3,544	2,914,825	$	1.22
	Nine months ended September 30, 2006
	(Dollars in thousands, except for per share data)
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income per share	$	4,208	2,638,050	$	1.60
Effect of dilutive securities		—	25,287
Diluted net income per share	$	4,208	2,663,337	$	1.58

8

The following is a reconciliation of the numerators and denominators used in computing Basic and Diluted Net Income Per Share for the three months ended September 30.

	Three months ended September 30, 2007
	(Dollars in thousands, except per share data)
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income per share	$	1,335	2,913,279	$	0.46
Effect of dilutive securities		—	5,911
Diluted net income per share	$	1,335	2,919,190	$	0.46
	Three months ended September 30, 2006
	(Dollars in thousands, except per share data)
	Income (Numerator)		Shares (Denominator)	Per Share Amount
Basic net income per share	$	1,695	2,886,440	$	0.59
Effect of dilutive securities		—	24,281
Diluted net income per share	$	1,695	2,910,721	$	0.58

(3) Stock Option Plan (dollars in thousands, except per share data)

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

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

	Nine months ended September 30,
	2007			2006
Weighted-average fair value of options granted During the year	$	8.73		$	8.75
Assumptions:
Average risk free interest rate		4.66	%		4.52	%
Average expected volatility		24.82	%		30.37	%
Expected dividend rate		2.40	%		2.40	%
Expected life in years		7.00			7.01

9

A summary of option activity under the Plan as of September 30, 2007, and changes during the nine-month period ended September 30, 2007 is presented below:

	Options Outstanding		Weighted Average Exercise Price		Average Remaining Contractual Term	Aggregate Intrinsic Value
	(Dollars in thousands, except per share data)
Outstanding at December 31, 2006	61,476		$	21.83
Granted	16,525		$	32.60
Forfeited	1		$	13.25
Exercised	(19,750	)	$	11.98
Outstanding at September 30, 2007	58,252		$	28.22	7.29 years	$	84
Exercisable at September 30, 2007	19,630		$	23.96	5.91 years	$	84

There were 15,802 shares of non-vested restricted stock as of December 31, 2006. 6,589 shares vested on January 1, 2007 and 500 shares vested on June 21, 2007 resulting in a balance of non-vested restricted stock of 8,713 shares as of September 30, 2007.

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

	Stock Options		Restricted Stock Grants		Total
	(Dollars in thousands)
October 1 – December 31, 2007	$	31	$	19	$	50
2008		110		47		157
2009		42		—		42
2010		29		—		29
2011		14		—		14
2012		1		—		1
Total	$	227	$	66	$	293

The intrinsic value of options exercised during the nine months ended September 30, 2007 was $422 thousand. $237 thousand was received for options exercised.

10

(4) Postretirement Benefits

The Company has a postretirement benefit plan whereby the Company pays postretirement health care benefits for certain of its retirees that have met minimum age and service requirements. Net periodic postretirement benefit cost for the nine- and three-month periods ended September 30, 2007 and 2006 includes the following components.

	Nine months ended September 30,
	(Dollars in thousands)
	2007			2006
Service cost	$	3		$	6
Interest cost		33			33
Prior service cost		(6	)		—
Net periodic postretirement benefit cost	$	30		$	39
	Three months ended September 30,
	(Dollars in thousands)
	2007			2006
Components of net periodic cost:
Service cost	$	1		$	2
Interest cost		11			11
Prior service cost		(2	)		—
Net periodic postretirement benefit cost	$	10		$	13

The Company expects to contribute $40 thousand to its postretirement benefit plan in 2007. No contributions were made in the first nine months of 2007.

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

The following table sets forth the amount of unrealized losses (that is, the amount by which cost or amortized cost exceeds fair value), and the related fair value of investments with unrealized losses, none of which are considered to be other than temporarily impaired. The table segregates investments that have been in continuous unrealized-loss position for less than 12 months from those that have been in a continuous unrealized-loss position for more than 12 months, as of September 30, 2007:

	Less than 12 months				12 months or longer				Total
	(Dollars in thousands)
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Government-sponsored enterprises and Farm Credit bonds.	$	4,050	$	25	$	20,650	$	102	$	24,700	$	127
Obligations of states and political subdivisions		10,165		102		12,779		434		22,944		536
Mortgage-backed securities		10,424		53		39,195		1,175		49,619		1,228
Corporate bonds		2,940		89		—		—		2,940		89
Equity securities		920		80		—		—		920		80
Total	$	28,499	$	349	$	72,624	$	1,711	$	101,123	$	2,060

11

As of September 30, 2007, management has concluded that the unrealized losses above (which consisted of 149 securities) are temporary in nature since they are not related to the underlying credit quality of the issuers, and the Company has the intent and ability to hold these investments for a time necessary to recover its cost. The losses above with the exception of the equity securities are on securities that have contractual maturity dates and are primarily related to market interest rates. Securities that have been in an unrealized loss position for longer than 1 year include fifty-two (52) municipal obligations, thirty-eight (38) mortgage-backed securities and twenty (20) securities of U.S. government sponsored enterprises. The unrealized losses associated with these securities are not considered to be other-than-temporary because they are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or the issuer.

During the first quarter 2007, Triangle Mezzanine converted from a privately held SBIC to a publicly traded entity called Triangle Capital Corporation (“TCAP”). As a result, the Bank reclassified the asset as an equity security in our investment portfolio with no gain or loss on the transaction.

(6) Comprehensive Income

A summary of comprehensive income is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(Dollars in thousands)
Net Income	$	1,335	$	1,695	$	3,544		4,208
Other comprehensive income (loss):
Net increase (decrease) in the fair value of Investment securities available for sale, net of tax		1,022		1,184		144		81
Total comprehensive income	$	2,357	$	2,879	$	3,688	$	4,289

(7) Recent Accounting Pronouncements

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting, and/or disclosure of financial information by the Company. In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in enterprises’ financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attributable for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transitions. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company adopted FIN 48 on January 1, 2007 with no material impact to its financial position, results of operations or cash flows. The Company and the Bank’s tax filings for years ended 2004 through 2006 are currently open to audit under statutes of limitation by the Internal Revenue Service and North Carolina Department of Revenue. The Company’s policy is to classify any interest or penalties recognized in accordance with FIN 48 as interest expense or noninterest expense, respectively.

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

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

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

On June 14, 2007, the FASB ratified the consensuses reached by the EITF on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” to provide guidance on how an entity should recognize the income tax benefit received on dividends that are (a) paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options and (b) charged to retained earnings under Statement 123(R). This Issue should be applied prospectively to the income tax benefits that result from dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Early application is permitted as of the beginning of a fiscal year for which interim or annual financial statements have not yet been issued. Retrospective application to previously issued financial statements is prohibited. This issue will not have a material impact on the Company’s financial position, results of operations or cash flows.

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.

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

Forward-Looking Statements

Statements in this Report and exhibits relating to plans, strategies, economic performance and trends, projections of results of specific activities or investments, expectations or beliefs about future events or results, and other statements that are not descriptions of historical facts, may be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking information is inherently subject to risks and uncertainties, and actual results could differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, risk factors discussed in the Company’s Annual Report on Form 10-K and in other documents filed by the Company with the Securities and Exchange Commission from time to time. Forward-looking statements may be identified by terms such as “may”, “will”, “should”, “could”, “expects”, “plans”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, “forecasts”, “potential” or “continue,” or similar terms or the negative of these terms, or other statements concerning opinions or judgments of the Company’s management about future events. Factors that could influence the accuracy of such forward-looking statements include, but are not limited to, the financial success or changing strategies of the Company’s customers, actions of government regulators, the impact on our profits of increased staffing and other expenses resulting form expansion, the level of market interest rates, weather and similar conditions, particularly the effect of hurricanes on the Company’s banking and operations facilities and on the Company’s customers and the communities in which it does business, changes in general economic conditions and the real estate values in our banking market (particularly changes that affect our loan portfolio), the abilities of our borrowers to repay their loans, and the values of loan collateral. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance or achievements. All forward-looking statements attributable to the Company are expressly qualified in their entirety by the cautionary statements in this paragraph. The Company has no obligations, and does not intend, to update these forward-looking statements.

Executive Summary

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

As of September 30, 2007, we had consolidated assets of approximately $629.7 million, total loans of approximately $440.3 million, total deposits of approximately $527.4 million and shareholders’ equity of approximately $65.3 million. For the three months ended September 30, 2007, we had consolidated net income of $1.3 million or $0.46 basic and diluted earnings per share, compared to net income of $1.7 million, or $0.59 basic and $0.58 diluted earnings per share for the three months ended September 30, 2006. For the nine months ended September 30, 2007, we had consolidated net income of $3.5 million or $1.22 basic and diluted earnings per share, compared to net income of $4.2 million or $1.60 basic and $1.58 diluted earnings per share for the nine months ended September 30, 2006.

The decrease in earnings per share is primarily due to increased operating expense and continued interest margin compression resulting in a decrease in earnings for the first nine months of 2007 compared to the same period in 2006 and the sale of 862,500 additional shares of common stock near the end of the first quarter of 2006 for $26.5 million. The proceeds from the common stock sale are being used to support the Bank’s various strategic initiatives for expansion and growth over the next several years.

Critical Accounting Policies

The Company’s significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements contained in the Form 10-K Annual Report for the fiscal year ended December 31, 2006. Of these significant accounting policies, the Company considers its policy regarding the allowance for loan losses to be its most critical accounting policy, because it requires management’s most subjective and complex judgments. In addition, changes in economic conditions can have a significant impact on the allowance for loan losses and

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therefore the provision for loan losses and results of operations. The Company has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses, recognizing that this process requires a number of assumptions and estimates with respect to its loan portfolio. The Company’s assessments may be impacted in future periods by changes in economic conditions, the results of regulatory examinations, and the discovery of information with respect to borrowers that is not known to management at the time of the issuance of the consolidated financial statements. For additional discussion concerning the Company’s allowance for loan losses and related matters, see “Asset Quality”.

Comparison of the Results of Operations for the Three- and Nine-Month Periods Ended September 30, 2007 and 2006

Results of Operations

The following table summarizes components of income and expense and the changes in those components for the three- and nine-month periods ended September 30, 2007 as compared to the same periods in 2006.

	Condensed Consolidated Statements of Income
	(Dollars in thousands)
	For the Three Months Ended September 30, 2007			Changes from the Prior Year					For the Nine Months Ended September 30, 2007			Changes from the Prior Year
				Amount			%					Amount			%
Gross interest income	$	10,210		$	843		9.0		$	29,897		$	3,304		12.4
Gross interest expense		4,890			928		23.4			14,658			3,599		32.5
Net interest income		5,320			(85	)	(1.6	)		15,239			(295	)	(1.9	)
Provision for loan losses		(—	)		(50	)	(100.0	)		(99	)		(549	)	N/A
Net interest income after Provision for loan losses		5,320			(35	)	(0.7	)		15,338			254		1.7
Noninterest income		1,582			(171	)	(9.8	)		4,848			231		5.0
Noninterest expense		5,285			694		15.1			15,487			1,988		14.7
Income before income taxes		1,617			(900	)	(35.8	)		4,699			(1,503	)	(24.2	)
Income tax provision		282			(540	)	(65.7	)		1,155			(839	)	(42.1	)
Net income	$	1,335		$	(360	)	(21.2	)	$	3,544		$	(664	)	(15.8	)

Net Interest Income

Net interest income (the difference between the interest earned on assets, such as loans and investment securities, and the interest paid on liabilities, such as deposits and other borrowings) is our primary source of operating income. Net interest income for the three months ended September 30, 2007 was $5.3 million, a decrease of $85 thousand or 1.6% when compared to net interest income of $5.4 million for the three months ended September 30, 2006. For the nine months ended September 30, 2007, net interest income was $15.2 million, a decrease of $295 thousand or 1.9% when compared to net interest income of $15.5 million for the same period in 2006.

The level of net interest income is determined primarily by the average balances (volume) of interest-earning assets and interest-bearing liabilities and the various rate spreads between our interest-earning assets and our

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interest-bearing liabilities. Changes in net interest income from period to period result from increases or decreases in the volume of interest-earning assets and interest-bearing liabilities, increases or decreases in the average interest rates earned and paid on such assets and liabilities, the ability to manage the interest-earning asset portfolio (which includes loans), and the availability of particular sources of funds, such as non-interest-bearing deposits.

Interest income increased $843 thousand or 9.0% for the three months ended September 30, 2007 compared to the same three months of 2006. Interest income increased $3.3 million or 12.4% for the nine months ended September 30, 2007 compared to the same nine months in 2006. The increases for the three and nine months ended September 30, 2007 are primarily due to increases in volume of average earning assets of $44.9 million and $47.8 million, respectively, as compared to the same periods in 2006. We funded the increases in interest-earning assets primarily with in-market certificates of deposit (“CD’s”) and repurchase agreements. The tax equivalent yield on average earning assets increased 4 basis points for the quarter ended September 30, 2007 to 7.25% from 7.21% for the same period in 2006. For the first nine months of 2007, the yield on average earning assets, on a tax-equivalent basis, increased 20 basis points to 7.24% compared to 7.04% at September 30, 2006. Management attributes the increase in the yield on our earning assets for the comparative nine-month periods to the increase in short-term market interest rates. The Federal Reserve Board raised its target for federal funds rate by 100 basis points during the first nine months of 2006. The full impact of these increases is reflected in 2007. Approximately $222.7 million or 50.5% 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 31 basis points when compared to the nine-month period ended September 30, 2006.

Our average cost of funds during the third quarter of 2007 was 4.25%, an increase of 44 basis points when compared to 3.81% for the third quarter of 2006. Average rates paid on money market checking accounts increased approximately 51 basis points from 1.33% to 1.84% while bank certificates of deposit increased 58 basis points from 4.51% for the quarter ended September 30, 2007 to 5.09% for the third quarter of 2006. Total interest expense increased $928 thousand or 23.4% during the third quarter of 2007 compared to the same period in 2006, primarily the result of increased market rates paid on certificates of deposit. Our cost of borrowed funds decreased 135 basis points compared to the same period a year ago, the result of the retirement of trust preferred securities that carried an interest rate of LIBOR plus 345 basis points. For the nine months ended September 30, 2007, our cost of funds was 4.30%, an increase of 78 basis points when compared to 3.52% for the same period in 2006. Average rates paid on bank certificates of deposit increased 80 basis points from 4.24% to 5.04% for the first nine months of 2007. Total interest expense increased $3.6 million or 32.5% during the nine months of 2007 compared to the same period in 2006, the result of increased volume of interest-bearing liabilities and increased market rates paid on these liabilities. The volume of average interest-bearing liabilities increased approximately $36.2 million from September 30, 2006 to September 30, 2007.

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

Our annualized net interest margin, on a tax-equivalent basis and net of the allowance for loan losses, for the three months ended September 30, 2007 was 3.83% compared to 4.21% in the third quarter of 2006 while our net interest spread decreased 40 basis points during the same period. For the nine months ended September 30, 2007, our net interest margin, on a tax-equivalent basis and net of allowance for loan losses, was 3.74% compared to 4.15% in the nine months of 2006 while our net interest spread decreased 58 basis points. The decrease in our net interest margin and spread is the result of increased competitive pricing for money market accounts and certificates of deposit. Average interest-bearing liabilities, as a percentage of interest-earning assets for the quarters ended September 30, 2007 and 2006 were 80.5% and 79.0%, respectively. For the nine months ended September 30, 2007, average interest-bearing liabilities as a percentage of interest-earning assets were 81.2% compared to 81.8% for the nine months ended September 30, 2006.

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Margin pressure began to decline in the third quarter of 2007 as our net interest margin increased approximately 14 basis points when compared to the second quarter of 2007.

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

For the Three Months Ended September 30, 2007 and 2006

	Average Balance		2007 Yield/ Rate		Income/ Expense		Average Balance		2006 Yield/ Rate		Income/ Expense
	(Dollars in thousands)
Assets
Loans – net (1)	$	433,057	7.93	%	$	8,651	$	413,628	7.84	%	$	8,176
Taxable securities		93,949	4.78	%		1,132		78,653	4.43	%		879
Non-taxable securities (2)		32,672	5.56	%		458		28,650	5.52	%		398
Other investments		7,774	6.38	%		125		1,613	12.05	%		49
Total interest- earning assets		567,452	7.25	%	$	10,366		522,544	7.21	%	$	9,502
Cash and due from banks		15,660						16,365
Bank premises and equipment, net		24,728						21,352
Other assets		18,674						17,501
Total assets	$	626,514					$	577,762
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	420,680	4.17	%	$	4,423	$	375,940	3.54	%	$	3,355
Short-term borrowings		35,873	5.16	%		467		14,558	4.39	%		161
Long-term obligations		—	—			—		22,344	7.92	%		446
Total interest- bearing liabilities		456,553	4.25	%		4,890		412,842	3.81	%		3,962
Non-interest-bearing deposits		100,365						100,067
Other liabilities		5,284						4,349
Shareholders’ equity		64,312						60,504
Total liabilities and Shareholders’ equity	$	626,514					$	577,762
Net interest income and net interest margin (FTE) (3)			3.83	%	$	5,476			4.21	%	$	5,540
Interest rate spread (FTE) (4)			3.00	%					3.40	%

(1) Average loans include non-accruing loans, net of allowance for loan losses. Amortization of deferred loan fees of $ 181 thousand and $125 thousand for periods ended September 30, 2007 and 2006, respectively, are included in interest income.

(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $156 thousand and $135 thousand for periods ended September 30, 2007 and 2006, respectively.

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

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

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For the Nine Months Ended September 30, 2007 and 2006

	Average Balance		2007 Yield/ Rate		Income/ Expense		Average Balance		2006 Yield/ Rate		Income/ Expense
	(Dollars in thousands)
Assets
Loans – net (1)	$	421,413	7.96	%	$	25,103	$	400,666	7.65	%	$	22,923
Taxable securities		95,703	4.73	%		3,388		78,403	4.44	%		2,605
Non-taxable securities (2)		32,701	5.62	%		1,374		28,826	5.59	%		1,205
Other investments		11,112	6.00	%		499		5,217	6.92	%		270
Total interest- earning assets		560,929	7.24	%	$	30,364		513,112	7.04	%	$	27,003
Cash and due from banks		15,313						19,283
Bank premises and equipment, net		24,308						20,253
Other assets		18,445						17,625
Total assets	$	618,995					$	570,273
Liabilities and Shareholders’ Equity
Interest-bearing deposits	$	415,320	4.12	%	$	12,808	$	381,075	3.29	%	$	9,381
Short-term borrowings		40,371	6.13	%		1,850		11,248	4.48	%		377
Long-term obligations		—	—			—		27,167	6.40	%		1,301
Total interest- bearing liabilities		455,691	4.30	%		14,658		419,490	3.52	%		11,059
Non-interest-bearing deposits		94,536						94,352
Other liabilities		5,429						3,738
Shareholders’ equity		63,339						52,693
Total liabilities and Shareholders’ equity	$	618,995					$	570,273
Net interest income and net interest margin (FTE) (3)			3.74	%	$	15,706			4.15	%	$	15,944
Interest rate spread (FTE) (4)			2.94	%					3.52	%

(1) Average loans include non-accruing loans, net of allowance for loan losses. Amortization of deferred loan fees of $ 611 thousand and $397 thousand for periods ended September 30, 2007 and 2006, respectively, are included in interest income.

(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $467 thousand and $410 thousand for periods ended September 30, 2007 and 2006, respectively.

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

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

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

Change in Interest Income and Expense on Tax Equivalent Basis

For the Three Months Ended September 30, 2007 and 2006

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

	2007 compared to 2006
	Volume (1)			Rate (1)			Net
	(Dollars in thousands)
Loans	$	386		$	89		$	475
Taxable securities		178			75			253
Non-taxable securities (2)		56			4			60
Other investments		143			(67	)		76
Interest income		763			101			864
Interest-bearing deposits		435			633			1,068
Short-term borrowings		257			49			306
Long-term obligations		(223	)		(223	)		(446	)
Interest expense		469			459			928
Net interest income	$	294		$	(358	)	$	(64	)

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

(2) Yields on tax-exempt investments have been adjusted to a fully taxable-equivalent basis (FTE) using the federal income tax rate of 34%. The taxable equivalent adjustment was $156 thousand and $135 thousand for periods ended September 30, 2007 and 2006, respectively.

For the Nine Months Ended September 30, 2007 and 2006

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

	2007 compared to 2006
	Volume (1)			Rate (1)			Net
	(Dollars in thousands)
Loans	$	1,211		$	969		$	2,180
Taxable securities		594			189			783
Non-taxable securities (2)		162			7			169
Other investments		285			(56	)		229
Interest income		2,252			1,109			3,361
Interest-bearing deposits		950			2,477			3,427
Short-term borrowings		1,155			318			1,473
Long-term obligations		(651	)		(650	)		(1,301	)
Interest expense		1,454			2,145			3,599
Net interest income	$	798		$	(1,036	)	$	(238	)

(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 $467 thousand and $410 thousand for periods ended September 30, 2007 and 2006, respectively.

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Provision for loan losses

During the second quarter 2007 management implemented improvements to the methodology used to estimate the allowance for loan loss (“AFLL”). As a result, we recorded no provision expense for the third quarter of 2007 and recorded a negative provision expense of $99 thousand for the nine-month period ended September 30, 2007. The provision for loan losses charged to operations during the three and nine months ended September 30, 2006 was $50 thousand and $450 thousand, respectively. As a percentage of loans, the AFLL was reduced to 0.99% at September 30, 2007, down from 1.13% at December 31, 2006. The Bank had net charge-offs of $124 thousand for the quarter ended September 30, 2007 compared to net recoveries of $49 thousand during the third quarter of 2006. For the nine-month periods ended September 30, 2007 and 2006, the Bank had net charge-offs of $275 thousand and $2 thousand, respectively. We use the results of our allowance for loan loss model to estimate the dollar amount of provision expense needed to maintain the adequacy of our allowance for loan losses. Our management analyzes the adequacy of the allowance on a monthly basis and adjustments to the provision expense are made as necessary. Also, see Asset Quality.

Noninterest income

Noninterest income, principally charges and fees assessed for the use of our services, is a significant contributor to net income. The following table presents the components of noninterest income for the three- and nine-months periods ended September 30, 2007 and dollar and percentage changes from the prior year.

	For the Three Months Ended September 30, 2007		Changes from the Prior Year					For the Nine Months Ended September 30, 2007		Changes from the Prior Year
			Amount			%				Amount			%
	(Dollars in thousands)
Service charges on deposit accounts	$	736	$	80		12.2		$	2,270	$	1		(0.0	)
Other service charges and fees		445		(60	)	(11.9	)		1,174		66		6.0
Mortgage origination brokerage fees		243		(21	)	(8.0	)		804		100		14.2
Income from bank owned life insurance		72		2		2.9			217		(10	)	(4.4	)
Income from investment in SBIC’s		—		(235	)	(100.0	)		—		(235	)	(100.0	)
Recapture of reserve for unfunded loans		—		—		—			240		240		NA
Other operating income		86		63		273.9			143		69		93.2
Total noninterest income	$	1,582	$	(171	)	(9.8	)	$	4,848	$	231		5.0

Noninterest income decreased $171 thousand or 9.8% to $1.58 million for the third quarter of this year compared to $1.75 million for the same period in 2006. For the nine months ended September 30, 2007, noninterest income increased $231 thousand or 5.0% to $4.85 million compared to $4.62 million for the same period in 2006. The decrease in noninterest income for the three months ended September 30, 2007 compared to the same period in 2006 was primarily due to the decrease of income distributions received from investments in Small Business Investment Companies (SBIC’s). During the third quarter of 2006 we received income distributions totaling $235 thousand compared to none in the same period of 2007. Service charges on demand accounts increased $80 thousand during the third quarter of 2007 compared to the same period of 2006 due to increased overdraft protection fees. Other service charges and fees decreased $60 as our merchant discount fees decreased approximately $51 thousand for the third quarter of 2007 compared to third quarter of 2006. Other operating income increased $63 for the third quarter of 2007 compared to third quarter of 2006 principally due to a gain of $46 thousand on the sale of other real estate owned during the third quarter of 2007. The year to date increase in noninterest income is primarily the result of the recapture of $240 thousand representing our allowance for losses on unfunded loan commitments. 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 of $235 thousand received from investments in Small Business Investment Companies (SBIC’s) in 2006. Other service charges and fees increased $66 thousand or 6.0% compared to the prior

20

year period due to increased merchant discount income of $63 thousand generated by our merchant services unit. Year to date mortgage loan origination brokerage fees increased $100 thousand compared to the previous year nine- month period as we continue to expand our mortgage loan origination effort.

Noninterest expense

Noninterest expense increased 15.1% and 14.7%, respectively for the three and nine months ended September 30, 2007, as compared to the same periods in 2006. The increases in the three-month and nine-month periods are principally due to general increases in salary and benefits expense, professional fees and other operating expense. The following table presents the components of noninterest expense for the three- and nine-months ended September 30, 2007 and dollar and percentage changes from the prior year.

	For the Three Months Ended September 30, 2007		Changes from the Prior Year					For the Nine Months Ended September 30, 2007		Changes from the Prior Year
			Amount			%				Amount		%
	(Dollars in thousands)
Salaries	$	2,221	$	320		16.8		$	6,267	$	748	13.6
Retirement and other employee benefits		709		28		4.1			2,102		89	4.4
Occupancy		483		75		18.4			1,345		127	10.4
Equipment		411		(13	)	(3.1	)		1,458		166	12.8
Professional fees		53		(25	)	(32.1	)		527		370	235.7
Supplies		116		38		48.7			314		78	33.1
Telephone		146		13		9.8			415		45	12.2
Other operating expenses		1,146		258		29.1			3,059		365	13.5
Total noninterest expenses	$	5,285	$	694		15.1		$	15,487	$	1,988	14.7

Salaries and benefits increased 13.5% and 11.1%, respectively for the three and nine months ended September 30, 2007, as compared to the same periods in 2006. Salaries and benefits increased $348 thousand for the three-month period ended September 30, 2007 compared to the same period of 2006, as we staffed four new branches opening in the coming months and hired three management trainees during the second quarter of 2007 as we prepare for future growth. On a nine month comparison between 2007 and 2006, salaries and benefits increased $837 thousand or 11.1% due to the addition of business development officers in some of our newer markets, additional mortgage loan originators to our expanding mortgage loan brokerage service, one additional member to financial services sales group and the aforementioned branch staffing and trainees. As of September 30, 2007, we had 217 full time equivalent employees and operated 23 full service banking offices.

Occupancy expense increased $75 thousand or 18.4% during the third quarter of 2007 compared to the third quarter of 2006 and $127 thousand or 10.4% in the first nine months of 2007 when compared to the same period in 2006. The increase in both the three- and nine-month periods is primarily due to cost associated with the new branches being opened.

Equipment expense decreased during the third quarter of 2007 by $13 thousand or 3.1% compared to the third quarter of 2006 due to decreases in equipment maintenance expense. When compared on a year-to-date basis, equipment expense increased $166 thousand or 12.8%. Early in 2007 management elected to outsource the Bank’s check processing function. We accelerated the remaining depreciation on our check processing equipment and software to coincide with our back-office change-over scheduled to occur in June of 2007 which resulted in an increase of $193 thousand in equipment depreciation expense on comparative 2007 and 2006 year to date basis. The decision to outsource is expected to produce cost savings in future periods.

Professional fees, which include consulting, audit and legal fees, decreased $25 thousand for the three months ended September 30, 2007 as audit fees decreased by $29 thousand when compared to the same period of

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2006. When compared on a year to date basis to the prior year period, professional fees increased $370 thousand. For the nine month periods ended September 30, 2007 and 2006, consulting expense increased $216 thousand over the prior year and accounted for most of the increase in professional fees. Loan related consulting fees increased by $120 thousand while our Human Resources department incurred $76 thousand in consultant fees and our Information Technology (“IT”) department contracted a third party vendor to perform intrusion tests on the Bank’s network and software upgrades at a cost of $17 thousand. Audit and accounting fees for the nine month period ended September 30, 2007 increased $120 thousand over the prior year nine month period, a portion of which can be contributed to Sarbanes-Oxley Section 404 compliance. Legal fees increased $34 thousand for the first nine months of 2007 compared to the same period of 2006 due to increased general corporate reporting and disclosure matters.

Supplies expense increased $38 thousand in the third quarter of 2007 compared to same period of 2006 and for the comparative nine-month basis we experienced an increase of $78 thousand. The increase of supplies expense in both periods is primarily the result of our decision to outsource our item processing which required us to purchase various new forms and documents and the opening of new branches.

Other operating expenses increased $258 thousand or 29.1% from $888 thousand for the three months ended September 30, 2006 to $1.1 million for the three months ended September 30, 2007. Item processing fees paid in the third quarter of 2007 to our third party vendor increased by $94 thousand over the prior year three-month period. During the third quarter of 2007, we recorded a loss of $70 thousand on the disposal of repossessed loan collateral. Recruiting expense in the third quarter of 2007 increased by $30 thousand over the prior year period and charitable contributions increased by $21 thousand in the same period comparison. On a year to date comparison for the nine-month period ended September 30, 2007 and 2006, other operating expense increased $365 thousand or 13.5%. Item processing fees paid in the first nine months of 2007 to our third party vendor increased by $96 thousand over the same prior year period. 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 and recorded a loss of $70 thousand on the disposal of repossessed loan collateral. In addition to the aforementioned items, we experienced increases in other outside service of $66 thousand, increased corporate franchise taxes of $60 thousand and increased recruiting expense of $57 thousand. These increases over the prior year nine-month period were partially offset by decreases in courier related expense of $44 thousand as a result of outsourcing our item processing, a decrease of automated teller machine expense of $39 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).

Income taxes

Income tax expense for the three months ended September 30, 2007 and 2006 was $282 thousand and $822 thousand, respectively, resulting in effective tax rates of 17.4% and 32.7%, respectively. The effective tax rate for the quarter ended September 30, 2007 decreased significantly principally due to the recognition of a tax benefit associated with the reduction of the valuation allowance on a deferred tax asset of $186 thousand. For the nine-month period ending September 30, 2007, tax expense was $1.2 million compared to $2.0 million for the same period of 2006, which resulted in effective tax rates of 24.6% and 32.2%, respectively. The decreased effective tax rate in 2007 is due to the aforementioned 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.

Balance Sheet

Our total assets were $629.7 million at September 30, 2007, $624.1 million at December 31, 2006 and $599.5 million at September 30, 2006. Deposit growth and short-term borrowings primarily funded our year-over-year asset growth. For the twelve months ended September 30, 2007, we grew our loans $17.4 million or 4.1% while our deposits grew by approximately $53.1 million or 11.2%. Year-over-year, our earning assets grew through loan originations and additions to our available-for-sale investment securities portfolio. For the nine months ended September 30, 2007, we experienced increased loan demand as loans outstanding increased $22.4 million and deposits increased by $15.1 million.

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Loans

As of September 30, 2007, total loans had increased to $440.3 million, up 5.4% from total loans of $417.9 million at December 31, 2006 and up 4.1% from total loans of $423.0 million at September 30, 2006. The year-over-year and first nine months of 2007 increase in loan demand is primarily due to loan growth occurring in our branches in our newer markets. For the nine months ended September 30, 2007, loan demand on the Outer Banks of North Carolina has been a little flatter than we usually see due to a slowing of new construction of vacation rental homes on the Outer Banks. However, vacation home rentals are up over last year and the resulting retail business has been brisk. We expect the Outer Banks’ economy to remain strong.

Asset Quality

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. At September 30, 2007, our allowance for loan losses as a percentage of loans was .99%, 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 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 for the nine months ended September 30, 2007 totaled $275 thousand compared to net charge-offs of $2 thousand during the same period of 2006. We recognized a negative provision of $99 thousand for the nine months ended September 30, 2007 as a result of our adjusted allowance calculation discussed above. The provision for loan losses charged to operations for the nine months ended September 30, 2006 was $450 thousand. The following table presents an analysis of the changes in the allowance for loan losses for the nine months ended September 30, 2007 and 2006.

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Analysis of Changes in Allowance for Loan Losses

	For the Nine Months Ended September 30,
	2007			2006
	(Dollars in thousands)
Total loans outstanding at end of period-gross	$	440,340		$	422,975
Average loans outstanding-gross	$	426,112		$	405,557
Allowance for loan losses at beginning of period	$	4,725		$	4,650
Loans charged off:
Real estate		(93	)		(—	)
Installment loans		(33	)		(31	)
Credit cards and related plans		(—	)		(—	)
Commercial and all other loans		(161	)		(59	)
Total charge-offs		(287	)		(90	)
Recoveries of loans previously charged off:
Real estate		—			7
Installment loans		12			13
Credit cards and related plans		—			3
Commercial and all other loans		—			65
Total recoveries		12			88
Net charge offs		(275	)		(2	)
Provision for loan losses		(99	)		450
Adjustment for unfunded loan reserve (1)		—			(240	)
Allowance for loan losses at end of period	$	4,351		$	4,858
Ratios:
Annualized net charge offs to average loans during the period		0.09	%		0.00	%
Allowance for loan losses to loans at period end		0.99	%		1.15	%
Allowance for loan losses to nonperforming loans at period end		1,738	%		963	%

(1) $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.

Nonperforming Assets

Nonperforming assets consist of loans not accruing interest, restructured debt and real estate acquired in settlement of loans and other repossessed collateral. It is our policy to place loans on nonaccrual status when any portion of principal or interest becomes 90 days past due, or earlier if full collection of principal and interest becomes doubtful. When loans are placed on nonaccrual status, interest receivable is reversed against interest income in the current period. Interest payments received thereafter are applied as a reduction to the remaining principal balance so long as doubt exists as to the ultimate collection of the principal. Loans are removed from nonaccrual status when they become current as to both principal and interest and when the collectibility of principal or interest is no longer doubtful. Nonperforming assets were $0.3 million and $0.4 million, or 0.08% and 0.10% of loans outstanding at September 30, 2007 and December 31, 2006, respectively. Nonaccrual loans decreased by $1.1 million during the third quarter after increasing by $1.2 million during the first six months of 2007. The decrease in nonperforming loans during the third quarter of 2007 is principally the result of liquidating two loans (both loans to same borrower) secured by commercial real estate totaling approximately $0.9 million.

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Loans Considered Impaired under SFAS No. 114

We review our nonperforming loans and other groups of loans based on loan size or other factors for impairment under SFAS No. 114. At September 30, 2007, we had loans totaling $11.0 million (which includes $0.3 million in nonperforming loans) which were considered to be impaired under SFAS No. 114 compared to $0.1 million at December 31, 2006. The increase in volume of loans considered impaired is primarily due to changing economic conditions in the past several months (primarily management’s perception of the effect of the real estate slowdown in several of our primary market areas on some of the Bank’s borrowers). Loans are considered impaired if, based on current information, circumstances or events, it is probable that the Bank will not collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. However, treating a loan as impaired does not necessarily mean that we expect to incur a loss on that loan, and our impaired loans may include loans that currently are performing in accordance with their terms. For example, if we believe it is probable that a loan will be collected, but not according to its original agreed upon payment schedule, we may treat that loan as impaired even though we expect that the loan will be repaid or collected in full. As indicated in the table below, when we believe a loss is probable on an impaired loan, a portion of our reserve is allocated to that probable loss.

The following table sets forth the number and volume of loans considered impaired under SFAS No. 114 and their associated reserve allocation, if any, at September 30, 2007.

	Number of Loans	Loan Balances Outstanding		Allocated Reserves
	(Dollars in millions)
Non-accruals loans	5	$	0.2	$	0.1
Restructured loans	3		0.1		—
Total nonperforming loans	8	$	0.3	$	0.1
Other impaired loans with allocated reserves	8		7.2		1.3
Impaired loans without allocated reserves	3		3.5		—
Total impaired loans	19	$	11.0	$	1.4

Investment Securities and Other Assets

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

Our investment securities totaled $124.6 million at September 30, 2007, $125.9 million at December 31, 2006 and $114.4 million at September 30, 2006. Additions to the investment securities portfolio depend to a large extent on the availability of investable funds that are not otherwise needed to satisfy loan demand. Investable funds not otherwise utilized are temporarily invested as federal funds sold or as interest-bearing balances at other banks, the level of which is affected by such considerations as near-term loan demand and liquidity needs.

At September 30, 2007, the securities portfolio had unrealized net losses of approximately $1.9 million. Our securities portfolio at September 30, 2007 consisted of U.S. government sponsored agencies, collateralized mortgage obligations (CMOs), mortgage-backed securities (MBS), equity securities and tax-exempt municipal securities.

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We currently have the ability to hold our available-for-sale investment securities to maturity except for equity securities. However, should conditions change, we may sell unpledged securities. We consider the overall quality of the securities portfolio to be high. All securities held are traded in liquid markets. As of September 30, 2007, we owned securities from issuers in which the aggregate amortized cost from such issuers exceeded 10% of our shareholders’ equity. As of September 30, 2007 the amortized cost and market value of the securities from such issuers were as follows:

	Amortized Cost		Market Value
	(Dollars in thousands)
Federal National Mortgage Corporation	$	28,356	$	27,503
Federal Home Loan Mortgage Corporation		22,900		22,543
Federal Home Loan Banks		29,241		29,221

At September 30, 2007, we held $8.0 million in bank owned life insurance, compared to $7.7 million at December 31, 2006 and September 30, 2006.

Deposits and Other Borrowings

Deposits

Deposits totaled $527.4 million as of September 30, 2007 compared to deposits of $512.2 million at December 31, 2006 and up 11.2% compared to deposits of $474.2 million at September 30, 2006. We attribute our deposit growth during the twelve months ended September 30, 2007 to our management team attracting new customers from other financial institutions and our branching efforts. We believe that we can continue to improve our core deposit funding by improving our branching network and providing more convenient opportunities for customers to bank with us. We anticipate that our deposits will continue to increase during 2007.

Other Borrowings

Short-term borrowings include sweep accounts, advances from the Federal Home Loan Bank of Atlanta (the “FHLB”) having maturities of one year or less, Federal Funds purchased and repurchase agreements. Our short-term borrowings totaled $29.1 million at September 30, 2007, compared to $31.1 million on December 31, 2006, a net decrease of $2.0 million.

Long-Term Obligations

On June 26, 2007, we redeemed all of our junior subordinated debentures ($10.3 million) originally issued June 26, 2002 and as a result we had no long-term obligations as of September 30, 2007.

Liquidity

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

Consistent with our general approach to liquidity management, loans and other assets of the Bank are funded primarily using a core of local deposits, retail repurchase agreements and the Bank’s capital position. To date, these core funds, supplemented by FHLB advances and a modest amount of brokered deposits, have been adequate to fund loan demand in our market areas, while maintaining the desired level of immediate liquidity and an

26

investment securities portfolio available for both immediate and secondary liquidity purposes. It is anticipated that funding sources in the future will include continued use of brokered deposits and, additionally, institutional deposits obtained through the Internet.

We are a member of the FHLB. Membership, along with a blanket collateral commitment of our one-to-four family residential mortgage loan portfolio, as well as our commercial real estate loan portfolio, provided us the ability to draw up to $125.9 million and $124.8 million of advances from the FHLB at September 30, 2007 and December 31, 2006, respectively. At September 30, 2007, we had outstanding FHLB advances totaling $14.0 million compared to $3.0 million and $28.0 million at December 31, 2006 and September 30, 2006, respectively.

As a requirement for membership, we invest in stock of the FHLB in the amount of 1% of our outstanding residential loans or 5% of our outstanding advances from the FHLB, whichever is greater. That stock is pledged as collateral for any FHLB advances drawn by us. At September 30, 2007, we owned 17,747 shares of the FHLB’s $100 par value capital stock, compared to 12,293 and 23,543 shares at December 31, 2006 and September 30, 2006, respectively. No ready market exists for such stock, which is carried at cost.

We also had unsecured federal funds lines in the aggregate amount of $27.0 million available to us at September 30, 2007 under which we can borrow funds to meet short-term liquidity needs. At September 30, 2007, we had no borrowings outstanding under these federal funds lines. Another source of funding is loan participations sold to other commercial banks (in which we retain the servicing rights). We believe that our liquidity sources are adequate to meet our operating needs.

Net cash provided by operations during the nine months ended September 30, 2007 totaled $2.8 million, compared to net cash provided by operations of $7.1 million for the same period in 2006. Net cash used in investing activities decreased to $23.1 million for the nine months ended September 30, 2007, as compared to $49.8 million for the same period in 2006 primarily due to the decrease in net loan originations. Net cash provided by financing activities was $1.5 million for the nine months ended September 30, 2007, compared to net cash provided of $46.6 million for the same period in 2006 due primarily to $24.3 million in net proceeds from the sale of common stock in 2006. Cash and cash equivalents at September 30, 2007 were $21.3 million compared to $22.7 million at September 30, 2006.

Capital Resources

Shareholders’ Equity

Shareholders’ equity increased by approximately $2.5 million to $65.3 million at September 30, 2007 from $62.8 million at December 31, 2006. We generated net income of $3.5 million, experienced a decrease in net unrealized loss on available-for-sale securities of $0.1 million, issued 19,750 shares of common stock or $0.2 million related to exercise of stock awards and recognized stock based compensation expense of $0.2 million on incentive stock awards. We declared cash dividends of $1.5 million or $0.525 per share during the first nine months of 2007.

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

Quantitative measures established by the FDIC to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets (each as defined in the regulations). As a bank holding company, we also are subject, on a consolidated basis, to the capital adequacy guidelines of the Federal Reserve Board. The capital requirements of the Federal Reserve Board are similar to those of the FDIC governing the Bank. As of September 30, 2007, we and the Bank met all capital adequacy requirements to which we are subject.

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During the first nine months of 2007, we experienced a decline in our Tier 1 capital ratios when compared to the periods ending December 31, and September 30, 2006. This decline is primarily due to our decision to call $10.3 million of junior subordinated debentures and the related trust preferred securities in September 2007.

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

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

	To be well capitalized under prompt corrective action provisions Ratio		Minimum required for capital adequacy purposes Ratio		Our Ratio		Bank’s Ratio
As of September 30, 2007:
Tier 1 Capital (to Average Assets)	³    5.00	%	³    3.00	%	10.61	%	8.92	%
Tier 1 Capital (to Risk Weighted Assets)	³    6.00	%	³    4.00	%	12.87		10.82
Total Capital (to Risk Weighted Assets)	³  10.00	%	³    8.00	%	13.71		11.66
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
As of September 30, 2006:
Tier 1 Capital (to Average Assets)	³    5.00	%	³    3.00	%	12.66	%	9.20	%
Tier 1 Capital (to Risk Weighted Assets)	³    6.00	%	³    4.00	%	14.94		10.87
Total Capital (to Risk Weighted Assets)	³  10.00	%	³    8.00	%	15.94		11.86

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

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

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

Item 4. Controls and Procedures

Our management, under the supervision and 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. We review our disclosure controls and procedures, include our internal control over financial reporting, on an ongoing basis and may from time to time make changes aimed at enhancing their effectiveness. In connection with the above evaluation of our disclosure controls and procedures, no change in our internal control over financial reporting was identified that occurred during the quarterly period ended September 30, 2007, and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

None.

Item 1A. Risk Factors

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

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

None.

Item 3. Defaults upon Senior Securities

None.

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

None

Item 5. Other Information

None.

Item 6. Exhibits

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

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SIGNATURES

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

	ECB BANCORP, INC.
	(Registrant)
Date: November 9 2007	By:	/s/ Arthur H. Keeney III
		Arthur H. Keeney III
		President & CEO
Date: November 9, 2007	By:	/s/ Gary M. Adams
		Gary M. Adams
		Senior Vice President & CFO

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EXHIBIT INDEX

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

32