ECB BANCORP INC, SB-2/A, 1998-11-10

ECB BANCORP INC
SB-2/A, 1998-11-10
STATE COMMERCIAL BANKS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER , 1998

REGISTRATION NO. 333-61839
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

AMENDMENT NO. 3

FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------
ECB BANCORP, INC.
(Exact name of registrant as specified in its charter)

NORTH CAROLINA 56-2090738
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

HIGHWAY 264, POST OFFICE BOX 337
ENGELHARD, NORTH CAROLINA 27824
(252) 925-9411
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)

---------------
ARTHUR H. KEENEY, III
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ECB BANCORP, INC.
POST OFFICE BOX 337
ENGELHARD, NORTH CAROLINA 27824
(252) 925-9411
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

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COPY TO:
WILLIAM R. LATHAN, JR., ESQ. GARY C. IVEY, ESQ.
WARD AND SMITH, P.A. PARKER, POE, ADAMS & BERNSTEIN L.L.P.
1001 COLLEGE COURT 2500 CHARLOTTE PLAZA
NEW BERN, NORTH CAROLINA 28560 CHARLOTTE, NORTH CAROLINA 28244

(252) 633-1000 (704) 372-9000
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.

If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]

---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

PRELIMINARY PROSPECTUS DATED NOVEMBER , 1998
SUBJECT TO COMPLETION

PROSPECTUS

300,000 SHARES

[ECB LOGO APPEARS HERE]

ECB BANCORP, INC.

COMMON STOCK
ECB Bancorp, Inc. (the "Company") hereby offers for sale 300,000 shares of
its common stock, $3.50 par value (the "Common Stock"), at a price of $14.25
per share (the "Offering"). The Common Stock currently is traded on the Nasdaq
Over-the-Counter Bulletin Board (the "Nasdaq Bulletin Board") under the symbol
"ECBE," and an application has been made to list the Common Stock on the Nasdaq
SmallCap Market (the "Nasdaq SmallCap").

The Company is a North Carolina corporation that was formed on March 4,
1998, to serve as the bank holding company for The East Carolina Bank (the
"Bank"). The Company became the Bank's parent company on July 22, 1998.

SEE "RISK FACTORS" COMMENCING ON PAGE 6 FOR A DESCRIPTION OF CERTAIN
CONSIDERATIONS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
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THESE SECURITIES ARE NOT DEPOSITS, SAVINGS ACCOUNTS OR OTHER OBLIGATIONS OF A
BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY.

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

---------------
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSION(1) ISSUER(2)
<S> <C> <C> <C>
Per share ......... $ 14.25 $ 1.07 $ 13.18
Total(3) .......... $4,275,000 $320,625 $3,954,375
</TABLE>

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(1) The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting Offering expenses estimated at $225,000, all of which are
payable by the Company. See "Use of Proceeds."
(3) The Company has granted to the Underwriter a 30-day option to purchase up
to 45,000 additional shares of the Common Stock at the price to the
public, less underwriting discount, solely to cover over-allotments, if
any. If all of such shares of Common Stock are purchased, the total price
to the public, underwriting discount and proceeds to the Company will be
$4,916,250, $368,719 and $4,547,531, respectively. See "Underwriting."

The shares of Common Stock are offered by the Underwriter, subject to
prior sale, receipt and acceptance by it, and subject to the right of the
Underwriter to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1998.

[INTERSTATE/JOHNSON LANE LOGO APPEARS HERE]

CORPORATION

The date of this Prospectus is , 1998.
<PAGE>

[ECB LOGO APPEARS HERE]

ECB BANCORP, INC.

MARKET AREA

[MAP APPEARS BELOW OF EASTERN NORTH CAROLINA
DEPICTING THE ECB BANCORP, INC. MARKET AREA]

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF SUCH INFORMATION.

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON
STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN
SUCH SECURITIES, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THIS
OFFERING. IN ADDITION, IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER ALSO
MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON NASDAQ
IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED (THE "EXCHANGE ACT"). FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."

2
<PAGE>

SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND THE FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE OR INCORPORATED BY
REFERENCE HEREIN. WHENEVER USED IN THIS PROSPECTUS, THE TERM "BANK" SHALL REFER
TO THE EAST CAROLINA BANK, AND THE TERM "COMPANY" SHALL REFER TO ECB BANCORP,
INC. OR, IF THE CONTEXT SHALL SO REQUIRE, THE COMPANY AND THE BANK ON A
CONSOLIDATED BASIS. PROSPECTIVE INVESTORS ALSO SHOULD CONSIDER CAREFULLY THE
FACTORS SET FORTH HEREIN UNDER "RISK FACTORS."

THE COMPANY
GENERAL

ECB Bancorp, Inc. (the "Company") is a bank holding company headquartered
in Engelhard, North Carolina. The Company's wholly-owned subsidiary, The East
Carolina Bank (the "Bank"), was founded in 1919 as an eastern North Carolina
community bank. The Bank offers commercial and consumer banking services
through its 15 full-service offices in six counties. The Bank's primary markets
are located in the east central and northeastern portions of North Carolina and
along North Carolina's Outer Banks, and are divided into three regions: the
Central Region, the Western Region and the Outer Banks Region. As of June 30,
1998, the Company had total consolidated assets of approximately $199.1
million, total consolidated deposits of approximately $180.8 million and total
consolidated shareholders' equity of approximately $16.7 million.

Following the hiring of its current President and Chief Executive Officer,
Arthur H. Keeney, III, in the fall of 1995, the Bank's Board of Directors
engaged a consultant to assist the Board and the Bank's senior management team
in designing and implementing a five-year strategic plan to enhance shareholder
value and expand the Bank's franchise. The plan, adopted in early 1996, focused
the efforts of the Board and the management team on increased profitability,
the development of new products and services and the addition of select DE NOVO
branches in key markets. From December 31, 1995 to June 30, 1998, the Bank's
assets, loans and deposits have increased by 20.4%, 38.6% and 20.2%,
respectively. During January 1998, in an effort to improve the liquidity and
increase the trading volume in the Bank's common stock, the Bank applied for
and received listing of the stock on the Nasdaq Bulletin Board. In addition,
the Bank's Board of Directors approved the formation of the Company to serve as
the Bank's holding company (the "Reorganization") and a three-for-one split of
the Bank's common stock, each of which was effected on July 22, 1998.
Management believes that the Company is taking the appropriate steps to
establish a platform for future growth.

BUSINESS STRATEGY

The Company's business strategy is to expand the Bank's franchise by
focusing on community-oriented banking via localized lending, core deposit
funding, conservative balance sheet management and stable growth. The primary
elements of this strategy are to:

o provide community-oriented banking services through the Bank, with a focus
on offering a variety of financial services targeted toward individuals and
small- and medium-sized businesses within the communities served by the
Bank;

o increase profitability and maintain appropriate core financial ratios while
also maintaining above-average credit quality measurements;

o seek opportunities to further penetrate its existing banking markets and
expand its current markets through increasing the market share of existing
branches, DE NOVO branching, acquisitions of other financial institutions
or offices of such other institutions, and acquisitions of non-bank
providers of financial services; and

o invest in both people and technology as necessary to remain competitive
with the larger banking organizations in its markets from a product
delivery and customer service standpoint.

ADDITIONAL INFORMATION

The Company's principal executive offices are the same as those of the
Bank and are located on Highway 264 in Engelhard, North Carolina. The Company's
mailing address is Post Office Box 337, Engelhard, North Carolina 27824, and
its telephone number is (252) 925-9411.

For additional information regarding the Company and its financial
condition and results of operations, see "Capitalization," "Selected
Consolidated Financial Data and Other Information," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business,"
"Supervision, Regulation and Other Matters," "Management," "Beneficial
Ownership of Common Stock," "Management Compensation," "Certain Relationships
and Related Transactions," "Description of Capital Stock," "Available
Information," "Index to Consolidated Financial Statements," "ECB Bancorp, Inc.
and Subsidiary Supplemental Consolidated Financial Statements" and "The East
Carolina Bank and Subsidiaries Consolidated Financial Statements."

3
<PAGE>

THE OFFERING

Common Stock.................... 300,000 shares of Common Stock are being
offered for sale by the Underwriter to the
public at a price per share of $14.25. See
"Description of Capital Stock" and
"Underwriting." The Company has granted to
the Underwriter a 30-day option to purchase
up to 45,000 additional shares of the Common
Stock at that price, less underwriting
discounts. The Underwriter may exercise such
option only to cover over-allotments made in
connection with the sale of the Common Stock
in the Offering. If purchased, the
Underwriter will offer such additional shares
on the same terms as those on which the
300,000 shares are being offered. The
Offering will terminate on or before December
31, 1998.

Market for Common Stock......... The Common Stock is currently traded on the
Nasdaq Bulletin Board under the symbol
"ECBE," and an application has been made to
list the Common Stock on the Nasdaq SmallCap.
See "Market Price of Common Stock." There can
be no assurance that the Nasdaq SmallCap
application will be approved. See "Risk
Factors -- Absence of Trading Market."

Common Stock Outstanding after
the Offering.................... 2,080,254 shares (2,125,254 shares if the
Underwriter's over-allotment option is
exercised). The shares sold in the Offering
will be approximately 14.4% of the Company's
total outstanding shares (16.2% if the
Underwriter's over-allotment option is
exercised).

Use of Proceeds................. All of the net proceeds received by the
Company from the Offering will be transferred
by the Company to the Bank in the form of
contributions of additional capital and will
be used by the Bank as additional funding to
support its internal growth of earning assets
and deposits. Portions of such additional
capital also may be used by the Bank in the
future for other general corporate purposes,
including without limitation the financing of
possible DE NOVO branches, acquisitions of
other financial institutions or their assets
and related liabilities (including
acquisitions of branch offices of other
financial institutions) or of non-bank
providers of financial or other services and
the continued expansion and upgrade of the
Bank's products, systems and operations. See
"Use of Proceeds."

RISK FACTORS
An investment in the Common Stock will involve certain risks that should
be considered before subscribing for any Common Stock. See "Risk Factors."
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INFORMATION CONTAINED IN THIS PROSPECTUS CONTAINS "FORWARD LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995, WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD LOOKING TERMINOLOGY,
SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE," OR "CONTINUE" OR THE
NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. SEE
"FORWARD LOOKING STATEMENTS." THE MATTERS SET FORTH UNDER THE CAPTION "RISK
FACTORS" IN THIS PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING
IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD LOOKING STATEMENTS, INCLUDING
CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE IN SUCH FORWARD LOOKING STATEMENTS.

4
<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION

<TABLE>
<CAPTION>
AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30(1),
---------------------------
1998 1997
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(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE DATA
AND RATIOS)
<S> <C> <C>
INCOME STATEMENT DATA:
Net interest income ................... $ 4,492 $ 3,968
Provision for loan losses ............. 120 210
Non-interest income ................... 942 919
Non-interest expense .................. 4,142 3,453
Net income ............................ 902 869
BALANCE SHEET DATA:
Assets ................................ $ 199,110 $ 186,777
Loans ................................. 130,964 121,621
Allowance for loan losses ............. 2,690 2,546
Deposits .............................. 180,818 170,117
Shareholders' equity .................. 16,679 15,140
PER COMMON SHARE DATA(2):
Net income, basic and diluted(3) ...... $ 0.51 $ 0.49
Cash dividends declared ............... -- --
Book value ............................ 9.37 8.50
OTHER DATA:
Branch offices ........................ 15 13
Full-time equivalent employees ........ 138 136
PERFORMANCE RATIOS(4):
Return on average assets .............. 0.96% 1.00%
Return on average equity .............. 11.16 11.87
Net interest margin (taxable
equivalent) .......................... 5.04 5.12
Dividend payout ....................... -- --
Efficiency(5) ......................... 73.69 69.00
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans ..................... 2.05% 2.09%
Allowance for loan losses to period
end non-performing loans ............. 252.11 130.63
Net charge-offs to average loans ...... 0.07 0.05
Non-performing assets to period end
loans and real estate acquired in
settlement of loans .................. 0.81 1.60
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets ...... 8.64% 8.38%
Leverage .............................. 8.73 8.32
Tier 1 risk-based ..................... 12.00 12.11
Total risk-based ...................... 13.26 13.37
Average loans to average deposits ..... 73.46 73.50

<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31(1),
---------------------------------------------------------------------
1997 1996 1995 1994 1993
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(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net interest income ................... $ 8,275 $ 7,373 $ 6,588 $ 6,350 $ 5,813
Provision for loan losses ............. 354 497 515 397 549
Non-interest income ................... 1,946 1,718 1,670 1,581 1,474
Non-interest expense .................. 7,544 6,785 6,168 5,787 5,563
Net income ............................ 1,673 1,334 912 1,247 905
BALANCE SHEET DATA:
Assets ................................ $ 188,228 $ 167,218 $ 165,408 $ 153,553 $ 153,448
Loans ................................. 121,209 112,656 94,489 85,997 79,737
Allowance for loan losses ............. 2,660 2,400 1,950 1,900 1,600
Deposits .............................. 170,909 151,336 150,436 141,044 141,137
Shareholders' equity .................. 15,713 14,250 13,427 11,904 11,724
PER COMMON SHARE DATA(2):
Net income, basic and diluted(3) ...... $ 0.94 $ 0.75 $ 0.51 $ 0.70 $ 0.51
Cash dividends declared ............... 0.23 0.21 0.20 0.19 0.18
Book value ............................ 8.83 8.00 7.54 6.69 6.59
OTHER DATA:
Branch offices ........................ 15 13 12 12 12
Full-time equivalent employees ........ 140 130 117 113 115
PERFORMANCE RATIOS(4):
Return on average assets .............. 0.93% 0.80% 0.74% 0.82% 0.61%
Return on average equity .............. 11.07 9.55 9.16 10.37 7.80
Net interest margin (taxable
equivalent) .......................... 5.19 5.06 4.65 4.80 4.51
Dividend payout ....................... 24.47 28.00 29.85 27.14 35.29
Efficiency(5) ......................... 71.95 72.69 72.57 70.87 74.15
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans ..................... 2.19% 2.13% 2.06% 2.21% 2.01%
Allowance for loan losses to period
end non-performing loans ............. 134.01 175.57 122.95 121.41 58.14
Net charge-offs to average loans ...... 0.08 0.05 0.50 0.12 0.53
Non-performing assets to period end
loans and real estate acquired in
settlement of loans .................. 1.91 1.21 1.99 2.13 3.98
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets ...... 8.37% 8.42% 8.04% 7.93% 7.83%
Leverage .............................. 8.53 8.53 8.16 8.33 7.92
Tier 1 risk-based ..................... 12.40 12.49 12.29 12.55 12.43
Total risk-based ...................... 13.66 13.75 13.54 13.80 13.68
Average loans to average deposits ..... 71.90 69.17 63.26 60.10 57.77
</TABLE>

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(1) The Company was incorporated on March 4, 1998, and became the parent
company of the Bank on July 22, 1998, upon consummation of the
Reorganization. The above table reflects the Reorganization that was
consummated and became effective on the dates and during the periods
indicated.
(2) All per share numbers have been restated retroactively to reflect the
effect of the three-for-one stock split which became effective on July 22,
1998.
(3) For the periods presented, there were no dilutive securities.
(4) Calculations for the year ended December 31, 1995 are based on income
before a non-recurring charge for the cumulative effect of a change in
accounting for postretirement benefits of $279,000, net of income taxes.
(5) Computed by dividing non-interest expense by the sum of taxable equivalent
net interest income and non-interest income.

5
<PAGE>

RISK FACTORS

AN INVESTMENT IN SHARES OF COMMON STOCK WILL INVOLVE A SIGNIFICANT DEGREE
OF RISK. ACCORDINGLY, EACH PROSPECTIVE INVESTOR, BEFORE PLACING AN ORDER FOR
ANY SHARES OF COMMON STOCK, SHOULD CAREFULLY READ THIS PROSPECTUS IN ITS
ENTIRETY AND SHOULD CONSIDER THE FOLLOWING RISKS AND SPECULATIVE FEATURES
INHERENT IN AND AFFECTING THIS OFFERING AND THE BUSINESS PROPOSED TO BE CARRIED
ON BY THE COMPANY, AS WELL AS GENERAL INVESTMENT RISKS. AN INVESTMENT IN COMMON
STOCK SHOULD BE UNDERTAKEN ONLY BY PERSONS WHO CAN AFFORD AN INVESTMENT
INVOLVING SUCH RISKS.

DEPENDENCE ON REGIONAL AND LOCAL ECONOMIES

Consistent with the Bank's community banking philosophy, a majority of its
depositors are located in and doing business within its banking markets, and
the Bank lends a substantial portion of its capital and deposits to individual
and commercial borrowers in its banking markets. Accordingly, the local
economies of these areas have a direct impact on the ability of the Bank to
generate deposits to support loan growth, the demand for loans, the ability of
residents who are borrowers from the Bank to repay loans, the value of
collateral securing such loans (particularly loans secured by real estate) and
the Bank's ability to collect, liquidate and restructure problem loans. Should
the economy of any of the Bank's banking markets be adversely affected by a
general economic downturn or by other specific events or trends, the resulting
economic impact could have a direct adverse effect on the Bank and its
operating results. See "Business -- The Bank."

Approximately 43% and 51%, respectively, of the Bank's outstanding loan
and deposit balances are attributed to its branch offices located along North
Carolina's Outer Banks. The economy of this area is seasonal and is based
primarily on the tourist industry and construction and sale of resort real
estate and vacation homes, each of which is substantially dependent on the
general state of the economy. In particular, the tourist industry and the
economy of the Outer Banks region can be significantly affected by weather
events, including hurricanes and other coastal storms which can reduce revenues
derived from tourism, erode shorelines and damage or destroy vacation homes,
businesses and infrastructure. Future adverse economic conditions or other
developments or events (such as a major hurricane) specifically affecting the
Outer Banks region, or affecting North Carolina or the country in general,
could have a material adverse impact on these industries and the economy of the
Outer Banks and, thereby, have an adverse effect on the Bank's business in that
region.

Approximately 17% of the Bank's loans at June 30, 1998 were made for a
purpose related to crop production (primarily corn, soybeans and vegetables) or
other agricultural activities (such as the acquisition of related equipment or
farmland). Adverse conditions or events (such as a drought or a general
decrease in prices for which specific crops can be sold) could have a material
adverse impact on the agricultural industry in the Bank's geographic markets
and, thereby, have an adverse effect on the Bank's business in that region.

The Bank currently has no loans made for the purpose of tobacco or
livestock production, and its loans directly related to commercial fishing are
limited. However, the tobacco, livestock, commercial fishing and related
seafood industries contribute significantly to the economy of eastern North
Carolina, including certain of the eastern North Carolina counties in which the
Bank operates. For several decades, tobacco has come under increasing criticism
for potential health risks, and the swine industry has come under increasing
criticism for the perceived adverse environmental impact of livestock
operations. The commercial fishing and related seafood industries are
threatened by declining catches and the increasing threat of pollution in North
Carolina's coastal waters and the resulting closures of fishing grounds.
Adverse events or trends relating to these industries could have a general
adverse effect on the economy of the counties in which the Bank operates and,
thereby, have an adverse effect on the Bank's business.

FLUCTUATIONS IN OPERATING PERFORMANCE

The Bank's operating results can fluctuate substantially from period to
period as a result of a number of factors, including the volume of loan
production, changes in interest rates, credit losses, the seasonality of the
economy in the Outer Banks region of North Carolina, and changes in the economy
in general, including the local economy in the Bank's market areas. In
particular, the Bank's results are strongly influenced by its ability to
generate loan production, which is influenced by the interest rate environment
and other economic factors. Accordingly, while the Bank's expenses
(particularly its overhead expenses) will, to a great extent, be fixed, its
revenues may fluctuate substantially from period to period for reasons beyond
its control.

INTEREST RATE RISK

Changes in interest rates can have differing effects on various aspects of
the Bank's business, particularly on its net interest income. The Bank's
profitability is dependent to a large extent on its net interest income, which
is the difference

6
<PAGE>

between its income on interest-earning assets and its expense on
interest-bearing liabilities. The Bank, like most financial institutions, is
affected by changes in general interest rate levels and by other economic
factors beyond its control. Interest rate risk arises in part from the mismatch
(i.e., the interest sensitivity gap) between the dollar amount of repricing or
maturing interest-earning assets and interest-bearing liabilities, and is
measured in terms of the ratio of the interest rate sensitivity gap to total
assets. More interest-earning assets than interest-bearing liabilities
repricing or maturing over a given time period is considered asset-sensitive
and is reflected as a positive gap, and more liabilities than assets repricing
or maturing over a given time period is considered liability-sensitive and is
reflected as a negative gap. A liability-sensitive position (i.e., a negative
gap) may generally enhance net interest income in a falling interest rate
environment and reduce net interest income in a rising interest rate
environment, while an asset-sensitive position (i.e., a positive gap) may
generally enhance net interest income in a rising interest rate environment and
will reduce net interest income in a falling interest rate environment. The
Bank's ability to manage its gap position determines to a great extent its
ability to operate profitably. However, fluctuations in interest rates are not
predictable or controllable, and there is no assurance that management of the
Bank will continue to be able to manage the Bank's gap position in a manner
that will allow the Bank to remain profitable.

At December 31, 1997, the Company had a negative one-year cumulative
interest sensitivity gap of 30.5%, which means that, during a one-year period,
interest bearing liabilities will reprice at a faster rate than interest
earning assets, and a falling rate environment will generally have a positive
effect on the Bank's earnings, while a rising rate environment will generally
have a negative effect on the Bank's earnings. As of the same date, the Bank's
total cumulative interest sensitivity gap was a positive 19.8%. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

CREDIT RISK

While management of the Bank employs underwriting procedures and criteria
designed to minimize delinquencies and loan losses, the nature of lending is
such that there is no assurance all borrowers will repay their loans.
Regardless of the underwriting criteria used by the Bank, losses likely will be
experienced as a result of various factors beyond the Bank's control,
including, among other things, changes in market, economic or personal
conditions affecting the value of properties, fluctuations in interest rates
and the abilities of borrowers to repay. The Bank establishes an allowance for
possible loan losses which is maintained at a level considered adequate by its
Board of Directors based on various factors, including an analysis of the risk
characteristics of various classifications of loans, previous loan loss
experience, specific loans which have loan loss potential, delinquency trends,
estimated fair value of underlying collateral, current economic conditions, the
views of the Bank's regulators (who have the authority to require additional
reserves), and geographic and industry loan concentrations. If delinquency
levels increase in the future as a result of adverse general economic
conditions or other factors, there is no assurance that the Bank's allowance
for loan losses will be adequate to cover resulting losses, and any losses that
are charged to the allowance will result in the requirement that the Bank set
aside additional funds to the allowance which will be charged against its net
income.

REAL ESTATE LENDING

At June 30, 1998, approximately 55% of the Bank's loan portfolio consisted
of loans secured by first or junior liens on real estate, approximately 75% of
which were made for purposes related to the real estate collateral (including
loans made to individuals and businesses for the purchase and improvement of,
or investment in, real estate, including construction loans to individuals and
builders). While substantially all the Bank's real estate loans are secured
primarily by real estate located in its geographic markets which is owner
occupied or operated (whether commercial or residential real estate), future
events or circumstances that adversely affect real estate values in the Bank's
geographic markets could have an adverse effect on the value of the collateral
securing the Bank's real estate loans and, in the event of nonpayment, the
Bank's ability to collect fully certain loans through foreclosure or the resale
of foreclosed real estate.

COMPETITION

Commercial banking in the Bank's banking markets and in North Carolina as
a whole is extremely competitive. North Carolina is the home of three of the
largest commercial banks in the Southeast, each of which has branches located
in the Bank's Western and Outer Banks Regions, and 14 other commercial banks,
thrift institutions and credit unions also are represented in the Bank's market
areas. Many of the Bank's competitors have greater resources, broader
geographic markets and higher lending limits than the Bank, and they can offer
more products and services and better afford and make more effective use of
media advertising, support services and electronic technology than can the
Bank. The Bank depends on its reputation as a community bank in its local
markets, its direct customer contact, its ability to make credit and other
business decisions locally, and its personalized service to counter these
competitive disadvantages. Additionally, with the elimination of restrictions
on interstate banking, a North Carolina commercial bank may be required to
compete not only with other

7
<PAGE>

North Carolina financial institutions, but also with out-of-state financial
institutions which may acquire North Carolina institutions and are able to
conduct certain specific financial services across state lines, thereby adding
to the competitive atmosphere of the industry in general. In terms of assets,
the Bank is one of the smaller commercial banks in North Carolina, and there is
no assurance that the Bank will be or continue as an effective competitor in
the current financial services environment. See "Business -- Competition."

POTENTIAL RISKS ASSOCIATED WITH ACQUISITIONS AND DE NOVO BRANCHING

In the future, the Company may expand its business through selective
acquisition of other financial institutions, existing branch offices of other
financial institutions or other providers of financial services. However, there
can be no assurance that the Company will be able to negotiate successfully,
finance or consummate, or if consummated, integrate successfully, any such
future acquisitions or that the Company will not incur disruption and
unexpected expenses in connection with any such transactions. Although the
Company currently has no agreements or understandings, either written or oral,
with respect to any acquisition, in the future the Company will evaluate
opportunities to effect acquisitions that would complement or expand the
Company's business. In evaluating acquisition opportunities, the Company will
compete with other potential bidders, many of which have greater financial and
operational resources. Furthermore, the process of evaluating and negotiating
an acquisition transaction, and of integrating an acquired entity or branch
office, could divert management time and resources; and, any acquisition may
expose the Company to losses resulting from liabilities of the acquired entity.
There can be no assurance that any given acquisition that is consummated will
not have a material adverse effect on the Company's business, results of
operations or financial condition.

In pursuing its growth strategy, the Bank may expand its presence into new
geographic markets through DE NOVO branching. Due to the personnel and fixed
assets costs associated with a DE NOVO branch, any such branch offices
established by the Bank in a new banking market likely would operate at a loss
for a period of time until a sufficient base of business could be established
to operate profitably. Also, when entering new markets, the Bank likely would
be faced with competitors having greater knowledge of those new local markets,
and the Bank will need to hire or have in place, and would be reliant upon,
well trained local managers who have local affiliations and to whom it would be
necessary for the Bank to give significant autonomy. There can be no assurance
that any DE NOVO branch office established by the Bank would not, for some
period of time, operate at a loss and have an adverse affect on the Bank's
earnings, that the Bank would be able to hire managers who could successfully
operate any such branch offices, or that the Bank would become an effective
competitor in any such new banking market. See "Business -- Business Strategy."

MANAGEMENT DISCRETION REGARDING USE OF PROCEEDS

All of the net Offering proceeds received by the Company will be
transferred by the Company to the Bank in the form of a contribution of
additional capital and will serve as additional funding to support growth in
its earning assets and deposits. However, the net proceeds will become a part
of the general funds of the Bank, and management will have substantial
discretion as to how those funds are applied in the future. Portions of the net
proceeds from the Offering may be used by the Bank in the future for various
general corporate purposes, including without limitation the financing of
possible DE NOVO branches, acquisitions of other financial institutions or
their assets and related liabilities (including acquisitions of branch offices
of other financial institutions) or of non-bank providers of financial or other
services and the continued expansion and upgrade of the Bank's products,
systems and operations. See "Use of Proceeds."

POSSIBLE NEED FOR ADDITIONAL CAPITAL

Management of the Company believes that the net proceeds from the Offering
will provide adequate additional capital to fund anticipated growth and sustain
the Company's and the Bank's operations for one to three years. See "Use of
Proceeds" and "Capitalization." At June 30, 1998, the Bank's regulatory capital
ratios were such as to qualify it as a "well capitalized" bank. See
"Supervision, Regulation and Other Matters -- Capital Adequacy" and " -- Prompt
Corrective Action." However, no assurance can be given that, in the future, the
Company will not seek additional capital by offering and selling additional
shares of Common Stock in order to fund additional growth in the Bank's
operations or to satisfy regulatory requirements. If it becomes necessary to
raise additional capital to support the Company's and the Bank's operations,
there is no assurance that additional capital will be available to the Company,
that additional capital can be obtained on terms favorable to the Company, or
that the price at which additional shares of Common Stock may be offered in the
future will not be less than the purchase price of shares in this Offering. The
effect on existing shareholders of any such future sales of additional shares
of Common Stock cannot presently be determined, and such sales could have a
dilutive effect on the interests of investors who purchase Common Stock in this
Offering.

8
<PAGE>

DEPENDENCE ON KEY PERSONNEL

The Company and the Bank are highly dependent on the services and
performance of their executive officers. Smaller banks located in the more
sparsely populated areas of North Carolina have found it more difficult to
attract experienced management personnel than is the case with banks located in
metropolitan regions. Therefore, the loss of the services of any of the
Company's and the Bank's officers who leave the employ of the Company and the
Bank or who otherwise unexpectedly become unavailable, or the failure of such
officers to perform satisfactorily, could have a material adverse effect on the
Company and the Bank and their operating results. See "Management -- Executive
Officers."

ABSENCE OF TRADING MARKET

The Common Stock currently is listed for trading on the Nasdaq Bulletin
Board, and an application has been made to list the Common Stock on the Nasdaq
SmallCap. However, there currently is not an active trading market for the
Common Stock, there is no assurance that the Company's listing application will
be approved, and it is not likely that there will be an active trading market
in the near future. In order for the Common Stock to be approved for listing on
the Nasdaq SmallCap, there must be at least three market makers for such stock.
While the Company currently has three market makers, there can be no assurance
that, in the future, a sufficient number of market makers will be maintained,
or that other criteria required by the Nasdaq SmallCap will continue to be met,
in order for the Common Stock to continue to be traded on the Nasdaq SmallCap.
In the event that the Common Stock is not approved for listing on Nasdaq
SmallCap, or is approved but subsequently delisted, the Common Stock likely
would continue to be listed, or would return to listing, on the Nasdaq Bulletin
Board. Continued listing, or a return to listing, of the Common Stock on the
Nasdaq Bulletin Board could impair the liquidity of the Common Stock due to
several factors, including increased difficulty in obtaining quotations of the
market price of the Common Stock, delays in the timing of transactions and a
reduction in security analysts' and the news media's coverage of the Company.
Also, a public trading market for the stock of any issuer, including the
Company, having the desirable characteristics of depth, liquidity and
orderliness, depends upon, among other things, the presence in the marketplace
of both willing buyers and willing sellers of that stock at any given time, as
well as the activity of market makers for the stock. The presence of buyers and
sellers in numbers sufficient to create an active market in the Common Stock in
the future will be dependent upon the individual decisions of persons who may
wish to buy or sell such stock, which decisions the Company will not be able to
control. Therefore, there is no assurance that investors will be able to resell
their shares of Common Stock if they need to liquidate their investments to
meet unexpected financial needs, and investors should consider the illiquid
nature of their investments and be prepared and financially able to hold any
shares they purchase for an indefinite period of time. See "Market Price of
Common Stock."

YEAR 2000 ISSUE

Banks are heavily dependent on complex computer systems for all phases of
their operations. The year 2000 issue common to most corporations concerns the
inability of certain software and databases to recognize date-sensitive
information beginning on January 1, 2000. If not corrected, this problem could
result in a disruption to the operations of financial institutions, which are
particularly sensitive to such disruptions. The Bank maintains its own data
processing function, but it is dependent on third-party vendors for its
software systems and support. As a result, the Bank is dependent on the efforts
of those vendors to insure that their data processing systems accommodate year
2000 information. Additionally, the Bank could be adversely affected by year
2000 problems experienced by others (including its customers, vendors,
customers' vendors, correspondent banks, government agencies, and by the
financial services industry in general) over which it has no control. The Bank
has retained consultants to assist it in surveying its data processing systems
and has developed and currently is implementing a program to make and test
modifications necessary to accommodate year 2000 information. The Bank also is
attempting to determine the extent to which its vendors and certain of its
customers have taken similar steps to modify their own systems and software,
and, in conjunction with its loan underwriting and credit review processes and
otherwise, it is attempting to educate its customers with respect to potential
year 2000 issues. However, no assurances can be given that the Company and the
Bank will not be adversely affected by year 2000 problems relating to its own
systems or those of third parties, and those problems could have a material
adverse effect on the Company's financial condition and results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Year 2000 Issue" for a description of the Company's plan to
address the year 2000 issue.

DEVELOPMENTS IN TECHNOLOGY

The market for financial services, including banking services, is
increasingly affected by advances in technology, including developments in
telecommunications, data processing, computers, automation, Internet-based
banking, debit cards and so-called "smart" cards, and the Bank's ability to
compete successfully in its banking markets may depend on the extent to which
it

9
<PAGE>

is able to offer new services that are dependent on technology, or to integrate
such technological changes into its operations. The Bank provides its own data
processing function rather than using the services of a service bureau or other
third-party provider of those services. The Bank's small size and limited
resources may make it impractical or impossible for it to keep pace with its
competitors, and the upgrading of data processing and operating systems in
response to future advances in technology may require the Bank to incur
substantial expenses that would adversely affect its operating results.

DIVIDEND POLICY; RELIANCE ON DIVIDENDS FROM THE BANK

All of the Company's consolidated operating assets are owned by the Bank,
and the Company currently has no separate assets. Further, the Company will
rely primarily on dividends from the Bank to meet its separate obligations and
for payment of dividends on the Common Stock. The payment of dividends by the
Bank to the Company is subject to certain legal and regulatory limitations
(including the requirement that the Bank's equity capital be maintained at
certain minimum levels), is subject to ongoing review by banking regulators
and, under certain circumstances, may require prior approval by banking
regulatory authorities. At June 30, 1998, approximately $4.4 million was
available for payment of dividends by the Bank to the Company without affecting
the Bank's current classification as a "well capitalized" bank under federal
bank regulatory capital guidelines and without regulatory approval. However, no
assurance can be given that the Bank will have funds available to pay dividends
to the Company at any particular time in the future. See "Dividends" and
"Supervision, Regulation and Other Matters -- Payment of Dividends." The Bank
also is subject to certain restrictions under federal law on extensions of
credit to, and certain other transactions with, the Company, and on investments
in the stock or other securities thereof. Such restrictions prevent the Company
from borrowing from the Bank unless the loans are secured by various types of
collateral. Further, such secured loans or other transactions and investments
by the Bank are generally limited in amount as to the Company to 10% of the
Bank's capital and surplus.

The payment of dividends by either the Company or the Bank in the future
will be subject to their respective Board of Directors' evaluation of operating
results, financial condition, future growth plans, general business conditions,
and to tax and other relevant considerations. Management of the Company expects
that its board of directors will declare and pay cash dividends on the Common
Stock in a manner similar to the practices of the Bank's Board of Directors in
effect prior to the Reorganization. However, there is no assurance that, in the
future, any dividends will be declared and paid by the Company or, if declared,
what the amount of such dividends will be or that any such dividends will be
regularly declared and paid. See "Dividends," "Supervision, Regulation and
Other Matters" and "Description of Capital Stock -- Dividends."

RISK OF CLAIMS; ENVIRONMENTAL MATTERS

In the ordinary course of its business, the Bank may become subject to
claims made against it by borrowers arising from, among other things, losses
that are claimed to have been incurred as a result of alleged breaches of
fiduciary obligations, errors and omissions of employees, officers and agents
of the Bank, incomplete or inaccurate loan documentation or disclosure, and
failures by the Bank to comply with various laws and regulations applicable to
its business. Relying as it does on employee interaction with customers, the
Bank may encounter circumstances where employees knowingly or unknowingly
violate laws or regulations without the knowledge of management, in which case
the Bank may be liable for these acts. While management of the Bank is not
aware of any material pending or threatened claims against the Bank relating to
such matters, any such claims that are asserted in the future may result in
legal expenses or liabilities which could have a material adverse effect on the
Bank's results of operations and financial condition.

In the course of its business, through the foreclosure process the Bank
from time to time acquires properties securing loans that are in default.
Therefore, there is a risk that the Bank could be required to investigate and
clean up hazardous or toxic substances or chemical releases at such properties
after their acquisition and may be held liable to a governmental entity or to
third-parties for property damage, personal injury and investigation and
cleanup costs incurred by such parties in connection with the contamination. To
date, the Bank has not been required to perform any investigation or cleanup
activities of any material nature. No assurance can be given, however, that
this will remain the case in the future.

SUPERVISION AND REGULATION; GOVERNMENT MONETARY POLICY

The Bank operates in a highly regulated environment and is subject to
supervision by various governmental agencies, changes in state and federal
regulations and governmental policy, and to the monetary and fiscal policies of
various regulatory authorities, all of which have a significant effect on the
Bank and its operating results. Future changes in governmental economic and
monetary policies may affect the ability of the Bank to attract deposits and to
make loans. The rates of interest payable on deposits and chargeable on loans
are affected by governmental regulation and fiscal policy as well as by
national, state and local economic conditions. See "Supervision, Regulation and
Other Matters."

10
<PAGE>

DETERMINATION OF OFFERING PRICE

Since the Company's Common Stock was issued and began trading on the
Nasdaq Bulletin Board on July 22, 1998, there has been minimal trading activity
and, although trading prices are reported, those prices are not necessarily
indicative of the Company's true enterprise value. Therefore, the Company and
the Underwriter regard the Offering to be essentially the equivalent of an
initial public offering. The purchase price of the Company's Common Stock was
determined through negotiations between the Company and the Underwriter based
on recent market prices of shares of similar companies in relation to their
earnings and other financial measures. There is no assurance that investors
will be able to resell their shares of Common Stock at any time in the future
for a price per share that is equal to or more than the purchase price in this
Offering.

MANAGEMENT OWNERSHIP OF STOCK

RESALES OF STOCK BY MANAGEMENT

The Company's directors and executive officers collectively own an
aggregate of 613,038 shares of the Company's outstanding Common Stock (34.4% of
total outstanding shares), and they may purchase additional shares of the
Common Stock in the Offering for their own investment purposes. A corporation's
directors, executive officers, principal shareholders and other persons who may
be deemed to "control" the corporation ("Control Persons") generally are
subject to certain restrictions on their sale of shares of the corporation's
equity securities held by them and certain of their related interests ("Control
Shares"). Control Shares may only be sold pursuant to an effective registration
statement filed with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act of 1933 (the "Securities Act") or pursuant to an
available exemption from the registration requirements of the Securities Act.
Rule 144 promulgated by the Commission under the Securities Act is the
exemption from registration most commonly utilized by Control Persons to sell
Control Shares. In the case of the shares of the Company's Common Stock held by
its Control Persons (including shares purchased in the Offering), Rule 144
generally will permit sales, subject to certain conditions but without any
holding period, up to a limit of 1% of the Company's total outstanding shares
during any three-month period. The Company's directors and executive officers
have agreed with the Underwriter that, for a period of 90 days following
consummation of the Offering, they will not sell any shares of Common Stock
owned by them. See "Underwriting." However, following the end of that period,
there will be no significant restrictions on the sale of any shares of the
Company's Common Stock held by its Control Persons except as provided in Rule
144. With the exception of shares held by its Control Persons, none of the
Company's Common Stock that is currently outstanding or that will be issued in
connection with the Offering are or will be subject to any sale restrictions.
Sales of shares of Common Stock following the Offering, including sales by the
Company's Control Persons, could have an adverse affect on the market price of
the Common Stock and, thus, the price at which an investor could resell the
shares he or she purchases in the Offering. See "Beneficial Ownership of Common
Stock."

11
<PAGE>

USE OF PROCEEDS

The net proceeds from the Offering are expected to be approximately
$3,729,375 (or $4,322,531 if the Underwriter's over-allotment option is
exercised in full), after deductions for the Underwriter's discount and
estimated Offering expenses which are estimated will be an aggregate of
approximately $545,625 (or $593,719 if the Underwriter's over-allotment option
is exercised in full). The amount of net proceeds actually received could be
more or less than the amounts estimated above, depending on the amounts of
expenses actually incurred in the Offering.

All of the net Offering proceeds received by the Company will be
transferred by the Company to the Bank in the form of a contribution of
additional capital and will serve as additional funding to support growth in
its earning assets and deposits. The Company and the Bank currently are
considered to be "well capitalized" under applicable bank regulatory
guidelines. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Capital Resources" and "Supervision, Regulation
and Other Matters -- Capital Adequacy." However, the Company's business
strategy contemplates that it will seek to take advantage of appropriate
opportunities to further penetrate its existing markets and expand its markets.
See "Business -- Business Strategy." Continued growth in the Bank's assets and
liabilities (whether generated internally, through DE NOVO branching or through
acquisition of the assets of other financial institutions or non-bank providers
of financial or other services) naturally will reduce the Company's and the
Bank's capital ratios unless the amount of their capital also is increased. The
net proceeds from the Offering will augment their current capital and future
retained earnings to support such growth. By engaging in the Offering at the
present time, the Company chose to seek additional capital before specific uses
for the net proceeds had been identified and before such proceeds otherwise
were actually required to sustain its operations, and to take advantage of the
increased awareness of the Company and the Bank that resulted from the Bank's
three-for-one stock split and Reorganization that became effective during July
1998. Additionally, management of the Company is hopeful that the issuance of
additional shares will reinforce its efforts to improve the liquidity in the
Common Stock and thereby enhance the Company's access to the capital markets.
See "Business -- General" and " -- Bank Holding Company Reorganization."

Portions of the net proceeds from the Offering may be used by the Bank in
the future for general corporate purposes, including without limitation the
financing of possible DE NOVO branches, acquisitions of other financial
institutions or their assets and related liabilities (including acquisitions of
branch offices of other financial institutions) or of non-bank providers of
financial or other services and the continued expansion and upgrade of the
Bank's products, systems and operations. Currently, the Bank is constructing
two new office facilities. The first, in Manteo, North Carolina, will house the
Bank's existing Manteo branch office and Outer Banks regional headquarters. The
second facility, in Washington, North Carolina, will house a DE NOVO branch
office and the Bank's existing loan production facility in that town. Estimated
costs associated with these new facilities (including the cost of land and
construction, upfitting and equipment) are $900,000 and $950,000, respectively.
Additionally, the Bank is in the process of upgrading its item processing,
statement rendering and records retention systems by installing imaging
technology. The aggregate cost of computer hardware, software and set-up with
respect to that new technology is estimated to be $500,000. During 1998, the
Bank completed construction of an addition to its operations center facility in
Engelhard, North Carolina, and it established a DE NOVO branch office in Barco,
North Carolina, at total costs of approximately $250,000 and $400,000,
respectively. While these current or completed projects are not dependent upon
successful completion of the Offering, the net Offering proceeds will replace
currently available funds used or earmarked for those projects.

MARKET PRICE OF COMMON STOCK

There is not an active public trading market for the Common Stock.
However, the Common Stock is listed on the Nasdaq Bulletin Board (under the
trading symbol "ECBE"), and an application has been made to list the Common
Stock on the Nasdaq SmallCap. There can be no assurance that the Nasdaq
SmallCap application will be approved. See "Risk Factors -- Absence of Trading
Market." Management of the Company has been informed that, since July 22, 1998
(the date on which the Company's outstanding Common Stock was issued in
conjunction with the Reorganization), the Common Stock has traded in isolated
transactions on the Nasdaq Bulletin Board at prices ranging from $15.25 to
$20.00 per share.

Prior to February 17, 1998, there was no trading market for the Bank's
common stock. However, on that date the Bank's common stock was listed for
trading on the Nasdaq Bulletin Board, and, between that date and July 22, 1998
(the date on which the Company became the Bank's parent holding company), the
Bank's common stock traded in isolated transactions on the Nasdaq Bulletin
Board at prices ranging from $12.50 to $15.00 (as adjusted for the
three-for-one stock split which was effective on July 22, 1998).

On September 30, 1998, there were approximately 664 holders of record of
the Company's Common Stock.

12
<PAGE>

DIVIDENDS

Since its organization, the Company has not paid any dividends on the
Common Stock. The Company's sole source of funds for the payment of dividends
on the Common Stock will be dividends paid to it by the Bank on the shares of
the Bank's common stock held by the Company, and the declaration and payment of
future dividends by the Bank will continue to depend on the Bank's earnings and
financial condition, capital requirements, general economic conditions,
compliance with regulatory requirements generally applicable to North Carolina
banks, and other factors. The Company's ability to pay dividends also will be
subject to its own separate factors, including its earnings and financial
condition, capital requirements and regulatory restrictions applicable to bank
holding companies. See "Supervision, Regulation and Other Matters -- Payment of
Dividends" and "Description of Capital Stock -- Dividends." The Company
believes that dividends paid by it will not differ materially from those paid
by the Bank.

The Bank historically has paid an annual dividend during December of each
fiscal year. The following table lists the amounts of cash dividends paid by
the Bank on its common stock during each of the fiscal years indicated.

<TABLE>
<CAPTION>
AMOUNT OF CASH DIVIDEND
FISCAL YEAR(1) DECLARED PER SHARE(2)
- ------------------- ------------------------
<S> <C>
1996 ............ $ .210
1997 ............ $ .233
1998(3) ......... $ .255
</TABLE>

- ---------
(1) Each dividend was paid during December of the indicated year.

(2) Amounts of cash dividends per share have been restated to reflect the
effect of the three-for-one stock split which was effective on July 22,
1998.

(3) During October 1998 the Company's Board of Directors declared a cash
dividend of $.255 per share, payable on December 7, 1998 to shareholders
of record on November 9, 1998.

13
<PAGE>

CAPITALIZATION

The following table summarizes the capitalization of the Company at June
30, 1998, and the pro forma capitalization of the Company based on the sale of
the shares of Common Stock being offered. This table should be read in
conjunction with the Company's audited and unaudited supplemental consolidated
financial statements, including the notes thereto, appearing elsewhere in this
Prospectus. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Available Information," "Index to Consolidated
Financial Statements," and "ECB Bancorp, Inc. and Subsidiary Supplemental
Consolidated Financial Statements."

<TABLE>
<CAPTION>
AT JUNE 30, 1998(1)(2)
-------------------------------
AS ADJUSTED
FOR SALE OF
300,000
SHAREHOLDERS' EQUITY ACTUAL SHARES(3)
- ----------------------------------------------------------------------------------- ---------------- --------------
<S> <C> <C>
Common stock, $3.50 par value; 10,000,000 shares authorized, 1,780,254 shares
outstanding at June 30, 1998; 2,080,254 shares outstanding following the Offering $ 6,230,889 $ 7,280,889
Surplus ........................................................................... 3,200,000 6,104,375
Retained earnings ................................................................. 6,877,531 6,877,531
Unrealized gains on available-for-sale securities, net ............................ 371,005 371,005
Offering expenses(4) .............................................................. -- (225,000)
------------ -----------
Total shareholders' equity ....................................................... $ 16,679,425 $20,408,800
============ ===========
Book value per share .............................................................. $ 9.37 $ 9.81
------------ -----------
</TABLE>

- ---------
(1) The Company was incorporated on March 4, 1998, and became the parent
company of the Bank on July 22, 1998, upon consummation of the
Reorganization. The above table assumes that the Reorganization had been
consummated and become effective on June 30, 1998.
(2) Restated retroactively to reflect the effect of the three-for-one stock
split which became effective on July 22, 1998.

(3) Reflects pro forma amounts based on the sale of the 300,000 shares of
Common Stock in the Offering at $14.25 per share, less estimated
underwriting discounts.

(4) Reflects estimates by the Company of aggregate Offering expenses. Actual
expenses could be more or less than estimated. See "Use of Proceeds."

SELECTED CONSOLIDATED FINANCIAL DATA AND OTHER INFORMATION

The following table sets forth selected consolidated financial data
concerning the Company as of the dates and for the periods indicated. The
selected data presented for and as of the end of each of the years in the
five-year period ended December 31, 1997, is derived from the supplemental
consolidated financial statements of the Company, all of which have been
audited by KPMG Peat Marwick LLP, independent certified public accountants. The
data presented for and as of the end of the six-months periods ended June 30,
1998 and 1997 has not been audited. This selected data is not necessarily
indicative of the Company's results for any future period and is qualified in
its entirety by, and should be read in conjunction with, the detailed
information contained in the Company's supplemental consolidated financial
statements as of December 31, 1997 and 1996, and for each of the years in the
three-year period ended December 31, 1997, together with the Company's
unaudited supplemental consolidated financial statements as of June 30, 1998
and for the six months ended June 30, 1998 and 1997, which are included
elsewhere in this Prospectus, as well as all other information included
elsewhere or incorporated herein by reference. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Available
Information," "Index to Consolidated Financial Statements," "ECB Bancorp, Inc.
and Subsidiary Supplemental Consolidated Financial Statements" and "The East
Carolina Bank and Subsidiaries Consolidated Financial Statements."

14
<PAGE>

<TABLE>
<CAPTION>
AS OF AND FOR THE SIX
MONTHS ENDED JUNE 30(1),
---------------------------
1998 1997
------------- -------------
(UNAUDITED)
(DOLLARS IN THOUSANDS,
EXCEPT FOR PER SHARE DATA
AND RATIOS)
<S> <C> <C>
INCOME STATEMENT DATA:
Interest income ....................... $ 7,165 $ 6,599
Interest expense ...................... 2,673 2,631
--------- ---------
Net interest income ................... 4,492 3,968
Provision for loan losses ............. 120 210
Non-interest income ................... 942 919
Non-interest expense .................. 4,142 3,453
Income tax expense .................... 270 355
--------- ---------
Cumulative effect of a change in
accounting for postretirement
benefits, net of taxes ............... -- --
--------- ---------
Net income ............................ $ 902 $ 869
========= =========
BALANCE SHEET DATA:
Assets ................................ $ 199,110 $ 186,777
Loans ................................. 130,964 121,621
Allowance for loan losses ............. 2,690 2,546
Deposits .............................. 180,818 170,117
Shareholders' equity .................. 16,679 15,140
PER COMMON SHARE DATA(2):
Net income, basic and diluted(3) ...... $ 0.51 $ 0.49
Cash dividends declared ............... -- --
Book value ............................ 9.37 8.50
OTHER DATA:
Branch offices ........................ 15 13
Full-time equivalent employees ........ 138 136
PERFORMANCE RATIOS(4):
Return on average assets .............. 0.96% 1.00%
Return on average equity .............. 11.16 11.87
Net interest margin (taxable
equivalent) .......................... 5.04 5.12
Dividend payout ....................... -- --
Efficiency(5) ......................... 73.69 69.00
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans ..................... 2.05% 2.09%
Allowance for loan losses to period
end non-performing loans ............. 252.11 130.63
Net charge-offs to average loans ...... 0.07 0.05
Non-performing assets to period
end loans and real estate
acquired in settlement of loans ...... 0.81 1.60
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets ...... 8.64% 8.38%
Leverage .............................. 8.73 8.32
Tier 1 risk-based ..................... 12.00 12.11
Total risk-based ...................... 13.26 13.37
Average loans to average deposits ..... 73.46 73.50

<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31(1),
--------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------ ------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income ....................... $ 13,639 $ 12,214 $ 11,804 $ 9,914 $ 9,481
Interest expense ...................... 5,364 4,841 5,216 3,564 3,668
--------- --------- -------- --------- ---------
Net interest income ................... 8,275 7,373 6,588 6,350 5,813
Provision for loan losses ............. 354 497 515 397 549
Non-interest income ................... 1,946 1,718 1,670 1,581 1,474
Non-interest expense .................. 7,544 6,785 6,168 5,787 5,563
Income tax expense .................... 650 475 384 500 270
--------- --------- -------- --------- ---------
Cumulative effect of a change in
accounting for postretirement
benefits, net of taxes ............... -- -- (279) -- --
--------- --------- -------- --------- ---------
Net income ............................ $ 1,673 $ 1,334 $ 912 $ 1,247 $ 905
========= ========= ======== ========= =========
BALANCE SHEET DATA:
Assets ................................ $ 188,228 $ 167,218 $165,408 $ 153,553 $ 153,448
Loans ................................. 121,209 112,656 94,489 85,997 79,737
Allowance for loan losses ............. 2,660 2,400 1,950 1,900 1,600
Deposits .............................. 170,909 151,336 150,436 141,044 141,137
Shareholders' equity .................. 15,713 14,250 13,427 11,904 11,724
PER COMMON SHARE DATA(2):
Net income, basic and diluted(3) ...... $ 0.94 $ 0.75 $ 0.51 $ 0.70 $ 0.51
Cash dividends declared ............... 0.23 0.21 0.20 0.19 0.18
Book value ............................ 8.83 8.00 7.54 6.69 6.59
OTHER DATA:
Branch offices ........................ 15 13 12 12 12
Full-time equivalent employees ........ 140 130 117 113 115
PERFORMANCE RATIOS(4):
Return on average assets .............. 0.93% 0.80% 0.74% 0.82% 0.61%
Return on average equity .............. 11.07 9.55 9.16 10.37 7.80
Net interest margin (taxable
equivalent) .......................... 5.19 5.06 4.65 4.80 4.51
Dividend payout ....................... 24.47 28.00 29.85 27.14 35.29
Efficiency(5) ......................... 71.95 72.69 72.57 70.87 74.15
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans ..................... 2.19% 2.13% 2.06% 2.21% 2.01%
Allowance for loan losses to period
end non-performing loans ............. 134.01 175.57 122.95 121.41 58.14
Net charge-offs to average loans ...... 0.08 0.05 0.50 0.12 0.53
Non-performing assets to period
end loans and real estate
acquired in settlement of loans ...... 1.91 1.21 1.99 2.13 3.98
CAPITAL AND LIQUIDITY RATIOS:
Average equity to average assets ...... 8.37% 8.42% 8.04% 7.93% 7.83%
Leverage .............................. 8.53 8.53 8.16 8.33 7.92
Tier 1 risk-based ..................... 12.40 12.49 12.29 12.55 12.43
Total risk-based ...................... 13.66 13.75 13.54 13.80 13.68
Average loans to average deposits ..... 71.90 69.17 63.26 60.10 57.77
</TABLE>

15
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management's discussion and analysis of financial condition and results of
operations are presented to assist in understanding the financial condition and
results of operations of ECB Bancorp, Inc. and its wholly-owned operating
subsidiary, The East Carolina Bank, for the years 1997, 1996 and 1995. Whenever
used in this discussion, the term "Bank" shall refer to The East Carolina Bank,
and the term "Company" shall refer to ECB Bancorp, Inc. or, if the context
shall so require, the Company and the Bank on a consolidated basis. This
discussion and the related financial data should be read in conjunction with
the audited consolidated financial statements and related footnotes thereto
included elsewhere in this Prospectus.

OVERVIEW

During 1997 and the first six months of 1998, the Company expanded its
operations by opening two full-service branches in Avon and Barco and a loan
production office in Washington, North Carolina. This expansion was in line
with the Company's business strategy to expand the Bank's franchise by focusing
on community-oriented banking via localized lending, core deposit funding,
conservative balance sheet management and stable growth.

In 1997 and the first six months of 1998, the Company also focused on
improving profitability and credit quality, which also are important elements
within its business strategy. The Company's steady improvement in earnings
performance continued despite increased expenses associated with the expansion
and the upgrade of the Company's technology systems. During the second half of
1998 and in 1999, the Company expects to incur additional costs in these areas
as it seeks to achieve its growth objectives consistent with its business
strategy. See "Use of Proceeds" and "Business -- Business Strategy."

RESULTS OF OPERATIONS

SIX MONTHS ENDED JUNE 30, 1998 VERSUS SIX MONTHS ENDED JUNE 30, 1997

Total interest income increased $566,000 for the six months ended June 30,
1998 compared to the six months ended June 30, 1997, principally due to an
increase in the average volume of loans of $7.7 million. Total interest expense
increased $42,000 for the six months ended June 30, 1998 compared to the six
months ended June 30, 1997, principally due to an increase in certificate of
deposit balances of $4.0 million.

Net interest income for the six months ended June 30, 1998 was $4.5
million, an increase of $524,000 or 13.2% when compared to net interest income
of $4.0 million for the six months ended June 30, 1997. The net yield on
interest-earning assets, on a tax-effected basis, for the six months ended June
30, 1998 was 5.04% compared to 5.12% in 1997.

The provision for possible loan losses charged to operations during the
first half of 1998 was $120,000, compared to $210,000 during the first half of
1997. Net charge-offs for the six months ended June 30, 1998 totaled $90,000,
or 0.07% of average loans (on an annualized basis), compared to net charge-offs
of $64,000, or 0.05% of average loans (on an annualized basis), during the same
period of 1997. The reduction in provision for possible loan losses is the
result of management's review and evaluation of the portfolio under current and
projected economic conditions, past due loans, past loan loss experience and
significant reduction of nonperforming loans. Nonperforming loans decreased
from $2.0 million at December 31, 1997 to $1.1 million at June 30, 1998 due to
the pay-off of two large nonperforming relationships during the first six
months of the year.

Non-interest income increased $23,000 to $942,000 for the six months ended
June 30, 1998 from $919,000 for the same period in 1997. This increase is
principally due to increased ATM surcharge fees of $35,000 that were effected
by the Bank after the first quarter of 1997 and mortgage loan origination fees
of $12,000 generated by the Company's new mortgage loan product. These
increases were partially offset by a decrease in NSF service charges of $29,000
when compared to the same period in 1997.

Non-interest expense increased $689,000 to $4.1 million for the six months
ended June 30, 1998 from $3.5 million for the same period in 1997. This
increase is principally due to the opening of new full service branches in Avon
and Barco, and a loan production office in Washington, North Carolina. Salaries
and related personnel expense increased $163,000 over the first half of 1997
due principally to opening of these new offices. When compared to June 30,
1997, net occupancy expense increased $54,000 as a result of opening the
aforementioned offices and equipment expense increased $79,000 due to the
Company upgrading its host computer system and introduction of branch platform
automation. The Company's telephone expense increased $40,000 over the first
six months of 1997 as a result of increased usage of the Company's Xpress phone
banking service introduced during the second quarter of 1997. Professional fees
increased approximately $113,000 in connection with non-recurring legal and
accounting fees incurred related to the formation of a holding company. Other
operating expenses

16
<PAGE>

increased $219,000 from $577,000 for the six months ended June 30, 1997 to
$796,000 for the six months ended June 30, 1998. This increase is primarily
attributable to increases in marketing expenses, employee related travel
expenses, and regulatory agency expenses. Marketing expense increased
approximately $144,000 during the first half of the year as the Company
launched a broad range of mortgage products and its new Club 7 Visa Card, a
program done in conjunction with a local television station. In addition,
employee related travel expense increased approximately $30,000 while fees paid
to regulatory agencies increased approximately $20,000.

Income tax expense for the six months ended June 30, 1998 and 1997 was
$270,000 and $355,000, respectively, resulting in effective tax rates of 23.04%
and 29.00%, respectively. The decrease in the effective tax rate during the six
months ended June 30, 1998 as compared to the same period last year is due to
higher tax exempt interest income resulting from the Bank's increased purchases
of state and municipal obligations during 1997 and the first half of 1998.

For the six months ended June 30, 1998, the Company had net income of
$902,000, or $0.51 basic and diluted earnings per share (as restated for the
three-for-one stock split effected July 22, 1998), compared to $869,000, or
$0.49 basic and diluted earnings per share (as restated for the three-for-one
stock split effected July 22, 1998), for the six months ended June 30, 1997.
The primary reason for this 3.8% increase in net income was the 13.2% increase
in net interest income and the lower effective tax rate, mitigated by the
$689,000 increase in non-interest expense, all of which are discussed above.

FISCAL YEAR ENDED DECEMBER 31, 1997 VERSUS FISCAL YEAR ENDED DECEMBER 31,
1996

In 1997, the Company had net income of $1.7 million, an increase of
$339,000 compared to 1996 net income. Net interest income after the provision
for possible loan losses increased $1.0 million as a result of an increase in
interest income of $1.4 million mitigated by an increase in interest expense of
$524,000. The provision for possible loan losses for 1997 decreased $143,000
when compared to 1996 provision expense of $497,000.

Non-interest income, principally charges for use of the Company's
services, is a significant contributor to net income. Non-interest income for
1997 increased $228,000 or 13.3% when compared to 1996. Year-to-date service
charges on deposit accounts increased $288,000 as a result of an increased
collection rate of NSF fees on transaction accounts. Other service charges and
fees increased $106,000 or 25.3% as a result of increased ATM transaction fees
of $67,000 and merchant discount income, net of merchant processing expense, of
$39,000. The current year other non-interest income decreased $166,000 due
principally to gains realized in 1996 on the sale of real estate acquired in
settlement of loans totaling $111,000 and other miscellaneous income totaling
$22,000 in 1996. Generally, the Company has been able to increase non-interest
income by increasing the prices of its services to partially offset increases
in non-interest expense.

Non-interest expense increased by 11.2% in 1997. A significant component
of non-interest expense is salaries and employee benefits. Personnel expense
increased $200,000 or 5.4% compared to 1996. This increase was caused in part
by the opening of a new branch in Avon and a loan production office in
Washington, North Carolina. Net occupancy expense increased $73,000 or 13.3% in
1997 as a result of opening the aforementioned offices as well as an addition
to the Company's home office. Equipment expense increased $205,000 or 36.4%
when compared to 1996 due in part to the opening of new offices, but
principally due to the Company's 1997 initiative to provide deposit and loan
platform automation at its branch locations. As part of this initiative, the
Company installed approximately 50 personal computers and related equipment,
upgraded its IBM A/S 400 host processor and doubled the number of proof
machines used in its item processing center. Other non-interest expense
increased $281,000 principally due to expenses of $80,000 associated with its
"BEST" account product offering, increased telephone and data communication
cost of approximately $41,000 and stationery and supplies increases of $38,000.

FISCAL YEAR ENDED DECEMBER 31, 1996 VERSUS FISCAL YEAR ENDED DECEMBER 31,
1995

In 1996, the Company had net income of $1.3 million, an increase of
$144,000 compared to 1995 net income of $1.2 million before the cumulative
effect of a required change in accounting method for postretirement benefits.
Net interest income after the provision for possible loan losses increased
$803,000 as a result of an increase in interest income of $410,000 and a
decrease in interest expense of $375,000. The provision for possible loan
losses decreased $18,000 when compared to 1995 provision expense of $515,000.

Non-interest income for 1996 increased $48,000 or 2.9% when compared to
1995. Year-to-date service charges on deposit accounts increased $120,000 for
1996 as a result of increased collection rate of NSF fees on transaction
accounts. Other service charges and fees decreased $98,000 or 18.9% as a result
of lower origination fees recognized on certain loans.

Non-interest expense increased 10.0% in 1996. Personnel expense increased
$467,000 or 14.4% compared to 1995. This increase was caused in part by the
opening of an in-store branch in Greenville, North Carolina. Personnel expense
increased $250,000 in the form of incentive pay awards. Retirement and other
employee benefit expense also increased

17
<PAGE>

$69,000 between 1995 and 1996 principally as a result of increases in
retirement plan expense of $30,000 and personnel related taxes and insurance of
$39,000.

The following table analyzes the Company's average balances and net
interest income for the periods indicated.

AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1997 1996
-------------------------------- --------------------------------
AVERAGE YIELD/ INCOME/ AVERAGE YIELD/ INCOME/
BALANCE RATE EXPENSE BALANCE RATE EXPENSE
----------- ---------- --------- ----------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Loans, net(1) ..................... $115,487 9.43% $10,887 $101,950 9.34% $ 9,522
Taxable securities ................ 29,705 5.89% 1,750 33,672 5.70% 1,919
Non-taxable securities(2) ......... 10,254 7.57% 512 9,279 7.71% 472
Federal funds sold ................ 9,125 5.38% 491 5,750 5.23% 301
-------- ---- ------- -------- ---- -------
Total interest-earning assets ..... 164,571 8.45% 13,640 150,651 8.27% 12,214
Cash and due from banks ........... 7,715 7,472
Bank premises and
equipment, net ................... 5,929 5,617
Other assets ...................... 2,300 2,229
-------- --------
Total assets ...................... $180,515 $165,969
======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits ......... $135,789 3.95% $ 5,365 $123,986 3.90% $ 4,831
Borrowed funds .................... -- -- -- 188 5.32% 10
-------- ---- ------- -------- ---- -------
Total interest-bearing
liabilities ...................... 135,789 3.95% 5,365 124,174 3.90% 4,841
Non-interest-bearing deposits 28,574 26,788
Other liabilities ................. 1,039 1,035
Shareholders' equity .............. 15,113 13,972
-------- --------
Total liabilities and
shareholders' equity ............. $180,515 $165,969
======== ========
Net interest income and net
yield on interest-earning
assets (FTE) ..................... 5.19% $ 8,275 5.06% $ 7,373
==== ======= ==== =======
Interest rate spread (FTE) ........ 4.50% 4.37%

<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995
---------------------------------
AVERAGE YIELD/ INCOME/
BALANCE RATE EXPENSE
----------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Loans, net(1) ..................... $ 91,511 9.57% $ 8,755
Taxable securities ................ 39,403 5.60% 2,208
Non-taxable securities(2) ......... 9,316 7.63% 469
Federal funds sold ................ 6,555 5.68% 372
-------- ---- -------
Total interest-earning assets ..... 146,785 8.21% 11,804
Cash and due from banks ........... 6,907
Bank premises and
equipment, net ................... 5,374
Other assets ...................... 2,495
--------
Total assets ...................... $161,561
========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-bearing deposits ......... $123,745 4.21% $ 5,207
Borrowed funds .................... 155 5.81% 9
-------- ---- -------
Total interest-bearing
liabilities ...................... 123,900 4.21% 5,216
Non-interest-bearing deposits 24,199
Other liabilities ................. 475
Shareholders' equity .............. 12,987
--------
Total liabilities and
shareholders' equity ............. $161,561
========
Net interest income and net
yield on interest-earning
assets (FTE) ..................... 4.65% $ 6,588
==== =======
Interest rate spread (FTE) ........ 4.00%
</TABLE>

- ---------
(1) Average loans, net of the allowance for possible loan losses and unearned
income. These figures include non-accruing loans, the effect of which is
to lower the average rates.

(2) Yields on tax-exempt investments have been adjusted to a fully
taxable-equivalent basis (FTE) using the federal income tax rate of 34%.

Net interest income for 1997 was $8.3 million, up $902,000 from $7.4
million for 1996. This increase was primarily due to a $13.9 million increase
in average earning asset volume, which outpaced the $11.6 million increase in
interest-bearing liabilities volume. The mix of this growth impacted net
interest income positively by $807,000 while the effect of changes in interest
rates was less dramatic, increasing net interest income by only $95,000.

The net interest margin (net taxable equivalent interest income divided by
average interest-earning assets) increased 13 basis points to 5.19% for 1997
compared to 5.06% for 1996. The interest rate spread (the difference between
the average earning asset yield and the average rate paid on interest-bearing
liabilities) also increased 13 basis points to 4.50% for 1997. The average
yield on earning assets was 8.45% in 1997 and 8.27% in 1996, while the rate
paid for funding was 3.95% and 3.90% in 1997 and 1996, respectively. The margin
was positively impacted by loans growing to represent a greater percentage of
earning assets during 1997, principally because loans carry higher yields than
investments.

18
<PAGE>

Changes in interest income and interest expense can result from variances
in both volume and rates. The table below analyzes the effect of variances in
volume and rate on taxable-equivalent interest income, interest expenses and
net interest income.

VOLUME AND RATE VARIANCE ANALYSIS

<TABLE>
<CAPTION>
1997 COMPARED TO 1996 1996 COMPARED TO 1995
--------------------------------- ----------------------------------
VOLUME(1) RATE(1) NET VOLUME(1) RATE(1) NET
----------- ----------- --------- ----------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Loans ............................. $1,270 $ 95 $1,365 $ 987 $(220) $ 767
Taxable securities ................ (230) 61 (169) (324) 35 (289)
Non-taxable securities(2) ......... 49 (9) 40 (2) 5 3
Federal funds sold ................ 179 11 190 (44) (27) (71)
------ ----- ------ ------- ----- ------
Interest income ................... 1,268 158 1,426 617 (207) 410
Interest-bearing deposits ......... 466 68 534 10 (386) (376)
Borrowed funds .................... (5) (5) (10) 2 (1) 1
-------- ------ ------ ------- -------- ------
Interest expense .................. 461 63 524 12 (387) (375)
------- ----- ------ ------- ------- ------
Net interest income ............... $ 807 $95 $ 902 $ 605 $ 180 $ 785
======= ===== ====== ======= ======= ======
</TABLE>

- ---------
(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 using the federal income tax rate of 34%.

19
<PAGE>

Rate sensitivity analysis, 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 the Company's interest sensitivity analysis at December 31, 1997, and
describes, at various cumulative maturity intervals, the gap ratios (ratios of
rate-sensitive assets to rate-sensitive liabilities) for assets and liabilities
that management considers rate sensitive.

RATE SENSITIVITY ANALYSIS AS OF DECEMBER 31, 1997

<TABLE>
<CAPTION>
3 MONTHS 4 TO 12
OR LESS MONTHS
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
EARNING ASSETS
Loans, gross ............................................... $ 51,009 $ 15,388
Investment securities ...................................... 6,189 3,397
FHLB stock ................................................. 503 --
Federal funds sold ......................................... 4,425 --
--------- ---------
Total earning assets ....................................... $ 62,126 $ 18,785
========= =========
Percent of total earning assets ............................ 35.9% 10.8%
Cumulative % of total earning assets ....................... 35.9% 46.7%
INTEREST-BEARING LIABILITIES
Time deposits of $100,000 or more .......................... $ 11,736 $ 7,160
Savings, NOW and Money Market deposits ..................... 55,969 --
Other time deposits ........................................ 21,843 37,122
--------- ---------
Total interest-bearing liabilities ......................... $ 89,548 $ 44,282
========= =========
Percent of total interest-bearing liabilities .............. 64.4% 31.9%
Cumulative percent of total interest-bearing liabilities 64.4% 96.3%
RATIOS
Ratio of earning assets to interest-bearing liabilities
(gap ratio) ............................................... 69.4% 42.4%
Cumulative ratio of earning assets to interest-bearing
liabilities (cumulative gap ratio) ........................ 69.4% 60.5%
Interest sensitivity gap ................................... $ (27,422) $ (25,501)
Cumulative interest sensitivity gap ........................ $ (27,422) $ (52,923)
As a percent of total earning assets ....................... (15.8%) (30.5%)

<CAPTION>
TOTAL WITHIN OVER 12
12 MONTHS MONTHS TOTAL
-------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
EARNING ASSETS
Loans, gross ............................................... $ 66,397 $ 54,812 $ 121,209
Investment securities ...................................... 9,586 37,534 47,120
FHLB stock ................................................. 503 -- 503
Federal funds sold ......................................... 4,425 -- 4,425
--------- --------- ---------
Total earning assets ....................................... $ 80,911 $ 92,346 $ 173,257
========= ========= =========
Percent of total earning assets ............................ 46.7% 53.3% 100.0%
Cumulative % of total earning assets ....................... 46.7% 100.0%
INTEREST-BEARING LIABILITIES
Time deposits of $100,000 or more .......................... $ 18,896 $ 607 $ 19,503
Savings, NOW and Money Market deposits ..................... 55,969 -- 55,969
Other time deposits ........................................ 58,969 4,575 63,540
--------- --------- ---------
Total interest-bearing liabilities ......................... $ 133,834 $ 5,182 $ 139,012
========= ========= =========
Percent of total interest-bearing liabilities .............. 96.3% 3.7% 100.0%
Cumulative percent of total interest-bearing liabilities 96.3% 100.0%
RATIOS
Ratio of earning assets to interest-bearing liabilities
(gap ratio) ............................................... 60.5% 1783.4%
Cumulative ratio of earning assets to interest-bearing
liabilities (cumulative gap ratio) ........................ 60.5% 124.6%
Interest sensitivity gap ................................... $ (52,923) $ 87,168 $ 34,245
Cumulative interest sensitivity gap ........................ $ (52,923) $ 34,245 $ 34,245
As a percent of total earning assets ....................... (30.5%) 19.8% 19.8%
</TABLE>

The above table reflects the rate sensitivity of the Company's balance
sheet as of a specific date and is not necessarily indicative of future
results. Because of this and other limitations, management also monitors
interest rate sensitivity through the use of a model which estimates the change
in net portfolio value of equity and net interest income in response to a range
of assumed changes in market interest rates. Based on rate sensitivity measures
at December 31, 1997, management believes that the Company's interest rate risk
is at an acceptable level.

Rate sensitivity or market risk arises primarily from interest rate risk
inherent in lending and deposit taking activities. Management seeks to manage
this risk through the use of appropriate matching of rate sensitive asset and
liability maturities. The composition and size of the investment portfolio is
managed so as to reduce the interest rate risk in the deposit and loan
portfolios while at the same time maximizing the yield generated by the
portfolio. The Company's investment portfolio consists primarily of short-term
government and agency investments and has an average life of approximately 2.8
years as of December 31, 1997. To minimize interest rate risk within its loan
portfolio, the Company follows a loan strategy of making either variable rate
loans tied to the Bank's prime rate or making fixed-rate loans which contain 3
to 5 year repricing opportunities. The Company's rate-sensitive liabilities
consist of savings, interest bearing checking and certificates of deposit. A
significant portion of the Company's rate-sensitive liabilities can be repriced
within one year.

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).

20
<PAGE>

As of December 31, 1997, the Company had a negative one year cumulative
gap of 30.5%, with interest earning assets of $80.9 million maturing or
repricing within one year and interest bearing liabilities of $133.8 million
repricing or maturing within one year. This is primarily the result of stable
core deposits 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) will reprice at a faster rate than interest
earning assets (loans and investments). In a falling rate environment, this
position will generally have a positive effect on earnings, while in a rising
rate environment this will generally have a negative effect on earnings.

The Company's savings and core time deposits of $119.5 million include
savings and interest bearing checking accounts of $56.0 million. These deposits
are considered as repricing in the earliest period because the rate can be
changed weekly. However, history has shown that decreases in the rates paid on
these deposits have little, if any, effect on their movement out of the
Company. Therefore, in reality, they are not sensitive to changes in market
rates and could be considered in the Non-Rate Sensitive column. In the
assessment of financial institutions' rate-sensitivity gaps, an assumption
frequently used in the industry is that one-third of an institution's
non-maturing savings and interest bearing checking accounts will mature in the
one-year horizon while the remaining two-thirds will mature outside the
one-year horizon. If the Company used that approach, it would have had a
negative one-year cumulative gap of approximately 9.0% at December 31, 1997.
Thus, the Company is fairly evenly matched in the one-year horizon.

MARKET RISK

<TABLE>
<CAPTION>
MATURING IN YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1998 1999 2000 2001 2002
------------ ------------ ------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Assets
Loans
Fixed Rate ................... $ 12,777 $ 12,552 $ 14,868 $ 10,518 $ 7,857
Average rate (%) ............. 9.01% 9.55% 9.08% 9.12% 9.14%
Variable Rate ................ 27,346 4,340 4,670 5,266 3,222
Average rate (%) ............. 10.00% 9.33% 9.20% 9.42% 8.92%
Investment securities
Fixed Rate ..................... 9,585 7,357 9,612 5,527 5,714
Average rate (%) ............... 5.79% 6.08% 6.09% 6.58% 6.40%
Liabilities
Savings and Interest bearing
checking
Variable Rate ................ 55,969 -- -- -- --
Average rate (%) ............. 1.77% -- -- -- --
Certificates of deposits
Fixed Rate ................... 77,561 4,100 1,083 -- --
Average rate (%) ............. 5.35% 5.54% 5.19% -- --
Variable Rate ................ 296 3 -- -- --
Average rate (%) ............. 3.44% 3.44% -- -- --

<CAPTION>
THEREAFTER TOTAL FAIR VALUE
------------ ------------ -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Assets
Loans
Fixed Rate ................... $ 12,396 $ 70,968 $71,513
Average rate (%) ............. 8.26% 9.02%
Variable Rate ................ 5,397 50,241 50,241
Average rate (%) ............. 9.48% 9.68%
Investment securities
Fixed Rate ..................... 8,860 46,655 47,120
Average rate (%) ............... 7.87% 6.46%
Liabilities
Savings and Interest bearing
checking
Variable Rate ................ -- 55,969 55,969
Average rate (%) ............. -- 1.77%
Certificates of deposits
Fixed Rate ................... -- 82,744 82,913
Average rate (%) ............. -- 5.35%
Variable Rate ................ -- 299 299
Average rate (%) ............. -- 3.44%
</TABLE>

21
<PAGE>

Non-interest income, principally charges for use of the Company's
services, is a significant contributor to net income. Non-interest income for
1997 increased $228,000 or 13.3% when compared to 1996. Year-to-date service
charges on deposit accounts increased $288,000 as a result of an increased
collection rate of NSF fees on transaction accounts. Other service charges and
fees increased $106,000 or 25.3% as a result of increased ATM transaction fees
of $67,000 and merchant discount income, net of merchant processing expense, of
$39,000. For 1997, other non-interest income decreased $166,000 due principally
to gains realized in 1996 on the sale of real estate acquired in settlement of
loans totaling $111,000 and other miscellaneous income totaling $22,000 in
1996. Generally, the Company has been able to increase non-interest income by
increasing the prices of its services to partially offset increases in
non-interest expense.

NON-INTEREST INCOME

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service charges on deposit accounts ......... $1,391 $1,103 $ 983
Other service charges and fees .............. 525 419 517
Other ....................................... 30 196 170
------ ------ ------
Total ....................................... $1,946 $1,718 $1,670
====== ====== ======
</TABLE>

Non-interest expense increased by 11.2% in 1997. A significant component
of other non-interest expense is salaries and employee benefits. Personnel
expense increased $200,000 or 5.4% compared to 1996. This increase was caused
in part by the opening of a new branch in Avon and a loan production office in
Washington, North Carolina during 1997. Net occupancy expense increased $73,000
or 13.3% as a result of opening the aforementioned offices as well as an
addition to the Company's home office. Equipment expense increased $205,000 or
36.4% when compared to 1996. This increase was due in part to the opening of
new offices, but principally to the Company's 1997 initiative to provide
deposit and loan platform automation at its branch locations. During the year,
the Company installed approximately 50 personal computers and related
equipment. In addition, the Company upgraded its IBM AS/400 host processor and
doubled the number of proof machines used in its item processing center. Other
non-interest expense increased $281,000 principally due to expenses of $80,000
associated with the "BEST" account product offering, increased telephone and
data communication cost of approximately $41,000, and stationery and supplies
increases of $38,000.

NON-INTEREST EXPENSE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salaries and employee benefits .......................... $3,910 $3,710 $3,243
Net occupancy expense ................................... 623 550 478
Equipment rentals, depreciation and maintenance ......... 768 563 500
Other ................................................... 2,243 1,962 1,947
------ ------ ------
Total ................................................... $7,544 $6,785 $6,168
====== ====== ======
</TABLE>

22
<PAGE>

FINANCIAL CONDITION

Management believes that the Company's financial condition is sound. The
following discussion focuses on the factors considered by management to be
important in assessing the Company's financial condition.

The following table sets forth the percentage of significant components of
the Company's balance sheets at December 31, 1997 and 1996.

DISTRIBUTION OF ASSETS AND LIABILITIES

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Loans (net) ..................................... $118,549 63.0% $110,256 65.9%
Investment securities ........................... 47,120 25.0% 34,589 20.7%
FHLB stock ...................................... 503 0.3% -- --
Federal funds sold .............................. 4,425 2.4% 6,550 3.9%
-------- ----- -------- -----
Total earning assets ............................ 170,597 90.7% 151,395 90.5%
Cash and due from banks ......................... 8,281 4.4% 7,862 4.7%
Bank premises and equipment, net ................ 6,266 3.3% 5,538 3.3%
Other assets .................................... 3,084 1.6% 2,423 1.5%
-------- ----- -------- -----
Total assets .................................... $188,228 100.0% $167,218 100.0%
======== ===== ======== =====
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits ................................. $ 31,897 16.9% $ 27,211 16.3%
Savings, NOW and Money Market deposits .......... 55,969 29.7% 54,206 32.4%
Time deposits of $100,000 or more................ 19,503 10.4% 17,835 10.7%
Other time deposits ............................. 63,540 33.8% 52,084 31.1%
-------- ----- -------- -----
Total deposits .................................. 170,909 90.8% 151,336 90.5%
Accrued expense and other liabilities ........... 1,606 0.9% 1,632 1.0%
-------- ----- -------- -----
Total liabilities ............................... 172,515 91.7% 152,968 91.5%
Shareholders' equity ............................ 15,713 8.3% 14,250 8.5%
-------- ----- -------- -----
Total liabilities and shareholders' equity ...... $188,228 100.0% $167,218 100.0%
======== ===== ======== =====
</TABLE>

Total assets increased $10.9 million to $199.1 million at June 30, 1998,
an increase of 5.8% when compared to $188.2 million at December 31, 1997. Asset
growth was funded primarily by increased non-interest-bearing demand deposits
of $9.6 million as the Company entered into its summer tourist season on North
Carolina's Outer Banks.

Loans receivable increased from $121.2 million at December 31, 1997 to
$131.0 million at June 30, 1998. The Company has continued to expand its
lending base and the size of its loan portfolio despite increased competitive
pressures in its primary lending markets. The Company experiences seasonal loan
growth during the first and second quarters of each year as farm production
loans and commercial lines of credit are used by the Company's agricultural
customer base and tourist related businesses on the Outer Banks. Seasonal lines
of credit have increased $7.2 million since December 31, 1997.

Stockholders' equity increased from $15.7 million at December 31, 1997 to
$16.7 million at June 30, 1998, as the Company generated net income of $902,000
and experienced an increase of net unrealized gains on available-for-sale
securities of $64,000. No dividends were paid during the first half of 1998.

23
<PAGE>

INVESTMENT PORTFOLIO. The carrying values of investment securities held by
the Company at the dates indicated are summarized as follows:

INVESTMENT PORTFOLIO COMPOSITION

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
--------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
SECURITIES AVAILABLE-FOR-SALE:
U.S. Treasury ............................ $25,228 53.6% $15,995 46.2%
U.S. Government agencies ................. 7,835 16.6% 9,340 27.0%
State and political subdivisions ......... 14,057 29.8% 9,254 26.8%
------- ----- ------- -----
Total investments ........................ $47,120 100.0% $34,589 100.0%
======= ===== ======= =====
</TABLE>

The following table shows maturities of the carrying values of investment
securities held by the Company at December 31, 1997, and the weighted average
yields.

INVESTMENT PORTFOLIO MATURITY SCHEDULES

<TABLE>
<CAPTION>
AFTER ONE YEAR AFTER FIVE YEARS
WITHIN BUT WITHIN BUT WITHIN AFTER
ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
------------------- --------------------- ------------------- -------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD TOTAL YIELD
-------- ---------- ---------- ---------- -------- ---------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE-
FOR-SALE:
U.S. Treasury ........... $5,998 5.55% $19,230 6.07% -- -- -- -- $25,228 5.95%
U.S. Government
agencies ............... 3,295 5.67% 3,757 6.37% -- -- $ 783 7.01% 7,835 6.14%
State and political
subdivisions(1) ........ 190 6.90% 5,611 7.82% $3,781 7.61% 4,475 7.25% 14,057 7.57%
------ ---- ------- ---- ------ ---- ------ ---- ------- ----
Total ................... $9,483 5.64% $28,598 6.45% $3,781 7.61% $5,258 7.21% $47,120 6.46%
====== ==== ======= ==== ====== ==== ====== ==== ======= ====
</TABLE>

- ---------
(1) Yields on tax-exempt investments have been adjusted to a fully
taxable-equivalent basis using the federal income tax rate of 34%. 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, 1997 the market value of the investment portfolio was approximately
$465,000 above its book value, which is the result of lower market
interest rates compared to the interest rates on the investments in the
portfolio.

LOAN PORTFOLIO. The Company's management believes that the loan portfolio
is adequately diversified. The Company has no foreign loans. Real estate loans
represent approximately 52.2% of the Company's loan portfolio. Real estate
loans are primarily loans secured by real estate, mortgage, and construction
loans. The Company does not have a large portfolio of home mortgage loans.
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, 1997, the ten largest
loans of the Company accounted for approximately 6.8% of the Company's
outstanding loans. As of December 31, 1997, the Company had outstanding loan
commitments of approximately $16.3 million. The amounts of loans outstanding
and the percentage that such loans represented of total loans at the indicated
dates are shown in the following table according to loan type.

24
<PAGE>

LOAN PORTFOLIO COMPOSITION

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1997 1996
--------------------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate(1) ......................... $ 63,300 52.2% $ 65,253 57.9%
Installment loans ...................... 25,424 21.0% 18,472 16.4%
Credit cards and related plans ......... 3,415 2.8% 3,183 2.8%
Commercial and all other loans ......... 29,070 24.0% 25,748 22.9%
-------- ----- -------- -----
Total .................................. $121,209 100.0% $112,656 100.0%
======== ===== ======== =====
</TABLE>

- ---------
(1) The majority of these loans are various consumer and commercial loans with
approval based on operating cash flows. The majority of the commercial
real estate is owner-occupied and operated.

The following table sets forth the maturity distribution of the Company's
loans as of December 31, 1997. A significant majority of loans maturing after
one year are repriced at two and three year intervals. In addition,
approximately 38.9% of the Company's loan portfolio is comprised of variable
rate loans.

LOAN MATURITIES

<TABLE>
<CAPTION>
CREDIT CARDS COMMERCIAL
REAL AND RELATED AND ALL
ESTATE INSTALLMENT PLANS OTHER LOANS TOTAL
---------- ------------- -------------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Due in 1 year or less ............. $14,555 $ 2,765 $3,415 $19,388 $ 40,123
Due after 1 year through 5 years:
Floating interest rates ......... 13,149 3,245 -- 3,835 20,229
Fixed interest rates ............ 26,831 18,719 -- 2,614 48,164
Due after 5 years:
Floating interest rates ......... 3,152 175 -- 2,909 6,236
Fixed interest rates ............ 5,613 520 -- 324 6,457
------- ------- ------ ------- --------
Total ............................. $63,300 $25,424 $3,415 $29,070 $121,209
======= ======= ====== ======= ========
</TABLE>

DEPOSITS. The average amounts of deposits of the Company for the years
ended December 31, 1997, and 1996 are summarized below.

AVERAGE DEPOSITS

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996
---------------------- ----------------------
AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
----------- ---------- ----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Interest-bearing demand deposits ......... $ 40,029 1.75% $ 37,851 1.85%
Savings deposits ......................... 14,956 2.06% 15,242 2.15%
Time deposits ............................ 80,804 5.39% 70,893 5.37%
-------- ---- -------- ----
Total interest-bearing deposits .......... 135,789 3.95% 123,986 3.90%
-------- ---- -------- ----
Non-interest-bearing deposits ............ 28,574 -- 26,788 --
-------- ---- -------- ----
Total deposits ........................... $164,363 3.26% $150,774 3.20%
======== ==== ======== ====
</TABLE>

The Company has a large, stable base of time deposits with little
dependence on volatile deposits of $100,000 or more. The time deposits are
principally certificates of deposits and individual retirement accounts
obtained from individual customers. Deposits of certain local governments and
municipal entities represented approximately 7.6% of the Company's total
deposits at December 31, 1997. All such public funds are collateralized by
investment securities. The Company does not purchase brokered deposits.

25
<PAGE>

As of December 31, 1997, the Company held approximately $19.5 million in
time deposits of $100,000 or more and $63.5 million of time deposits less than
$100,000. The following table is a maturity schedule of time deposits as of
December 31, 1997.

TIME DEPOSIT MATURITY SCHEDULE

<TABLE>
<CAPTION>
3 MONTHS 4 TO 6 7 TO 12 OVER 12
OR LESS MONTHS MONTHS MONTHS TOTAL
---------- ---------- --------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Time certificates of deposit of $100,000 or more $11,736 $ 3,502 $ 3,658 $ 607 $19,503
Time certificates of deposit less than $100,000 . 21,843 19,477 17,645 4,575 63,540
------- ------- ------- ------ -------
Total time deposits ............................. $33,579 $22,979 $21,303 $5,182 $83,043
======= ======= ======= ====== =======
</TABLE>

RETURN ON AVERAGE ASSETS AND EQUITY. 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 in the period ended December 31, 1997. Calculations for the
year ended December 31, 1995 are based on income before a non-recurring charge
for the cumulative effect of a change in accounting for postretirement benefits
of $279,000, net of income taxes.

RETURN ON AVERAGE ASSETS AND EQUITY

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Return on average assets ............................... 0.93% 0.80% 0.74%
Return on average equity ............................... 11.07% 9.55% 9.16%
Dividend payout ........................................ 24.47% 28.00% 29.85%
Average shareholders' equity to average assets ......... 8.37% 8.42% 8.04%
</TABLE>

ASSET QUALITY

Management continuously analyzes the growth and risk characteristics of
the total loan portfolio under current and projected economic conditions in
order to evaluate the adequacy of the reserve for loan losses. The factors that
influence management's judgment in determining the amount charged to operating
expense include past loan loss experience, composition of the loan portfolio,
evaluation of possible future loan losses and current economic conditions. The
Company's watch committee, which includes three members of senior management as
well as regional managers and other credit administration personnel, conducts a
quarterly review of all credits classified as substandard. This review follows
a re-evaluation by the account officer who has primary responsibility for the
relationship. Nonperforming assets, which consists of loans not accruing
interest, restructured loans and real estate acquired in settlement of loans,
totaled $1.1 million and $2.3 million at June 30, 1998 and December 31, 1997,
respectively. This decrease in nonperforming assets was due to the pay-off of
two large nonperforming lending relationships during the first six months of
1998 and the sale of the remaining balance of real estate acquired in
settlement of loans. The Company does not anticipate a loss on any of the
remaining non-accrual loans. Through sales, the Company has liquidated all real
estate acquired in settlement of loans reducing the balance from $340,000 at
December 31, 1997 to $-0- at June 30, 1998.

A loan is placed on non-accrual status when, in management's 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
included in other assets and represent other real estate that has been acquired
through loan foreclosures or deeds in lieu of foreclosure. Such properties are
initially recorded at the lower of cost or fair value less estimated selling
costs. Thereafter, a property may be subsequently reduced by additional
allowances if the estimated fair value of the property declines below the
initial recorded value.

26
<PAGE>

The following table summarizes the Company's nonperforming assets and past
due loans at the dates indicated.

NONPERFORMING ASSETS AND PAST DUE LOANS

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------
1998 1997 1996
--------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-accrual loans ............................ $ 559 $1,463 $1,017
Loans past due 90 or more days still accruing 140 -- 35
Restructured loans ........................... 508 522 350
Foreclosed properties ........................ -- 340 --
------ ------ ------
Total ........................................ $1,207 $2,325 $1,402
====== ====== ======
</TABLE>

At December 31, 1997 and 1996, nonperforming assets and loans past due 90
or more days still accruing were approximately 1.92% and 1.24%, respectively,
of the loans outstanding at such dates.

The allowance for possible loan losses is created by direct charges to
operations. Losses on loans are charged against the allowance in the period in
which such loans, in management's opinion, become uncollectible. Recoveries
during the period are credited to this allowance. The factors that influence
management's judgment in determining the amount charged to operating expense
include past loan loss experience, composition of the loan portfolio,
evaluation of possible future loan losses and current economic conditions. The
Company's loan watch committee, which includes three members of senior
management as well as regional managers and other credit administration
personnel, conducts a quarterly review of all credits classified as
substandard. This review follows a re-evaluation by the account officer who has
primary responsibility for the relationship.

At June 30, 1998, the Company had approximately $3.2 million in loans
which were internally classified on its "watch list." However, such loans
currently are performing and, therefore, are not included as nonperforming or
past due loans in the above table.

The following table sets forth the allowance for possible loan losses at
June 30, 1998 and December 31, 1997 and 1996.

ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
JUNE 30,
1998 1997 1996
------------------------- ------------------------- ------------------------
PERCENT OF PERCENT OF PERCENT OF
TOTAL LOANS IN TOTAL LOANS IN TOTAL LOANS IN
AMOUNT EACH CATEGORY AMOUNT EACH CATEGORY AMOUNT EACH CATEGORY
-------- ---------------- -------- ---------------- -------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Real estate .................... $1,734 60.5% $1,690 52.2% $1,398 57.9%
Installment loans .............. 154 18.0% 389 21.0% 218 16.4%
Credit cards and related plans . 347 2.6% 149 2.8% 137 2.8%
Commercial and all other loans . 438 18.9% 390 24.0% 367 22.9%
------ ----- ------ ----- ------ -----
Total allocated ................ 2,673 100.0% 2,618 100.0% 2,120 100.0%
Unallocated .................... 17 42 280
------ ------ ------
Total .......................... $2,690 $2,660 $2,400
====== ====== ======
</TABLE>

Management considers the allowance for possible loan losses adequate to
cover possible loan losses on the loans outstanding as of each reporting
period. It must be emphasized, however, that the determination of the allowance
using the Company's procedures and methods rests upon various judgments and
assumptions about future economic conditions and other factors affecting loans.
No assurance can be given that the Company 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 possible loan losses or future charges to earnings.

27
<PAGE>

For the six months ended June 30, 1998 and the years ended December 31,
1997, 1996 and 1995, the following table summarizes the Company's 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.

LOAN LOSS AND RECOVERY EXPERIENCE

<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------
1998 1997 1996 1995
----------------- ------------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total loans outstanding at end of period ...................... $ 130,964 $ 121,209 $ 112,656 $ 94,489
========= ========= ========= ========
Average loans outstanding ..................................... $ 124,554 $ 118,185 $ 104,297 $ 93,584
========= ========= ========= ========
Allowance for possible loan losses at beginning of period ..... 2,660 $ 2,400 $ 1,950 $ 1,900
Loans charged off:
Real estate .................................................. 21 6 12 89
Installment loans ............................................ 48 62 62 72
Credit cards and related plans ............................... 61 110 111 49
Commercial and all other loans ............................... -- 17 81 338
--------- --------- --------- --------
Total charge-offs ............................................. 130 195 266 548
Recoveries of loans previously charged off:
Real estate .................................................. -- -- 118 --
Installment loans ............................................ 14 22 26 31
Credit cards and related plans ............................... 7 36 34 19
Commercial and all other loans ............................... 19 43 41 33
--------- --------- --------- --------
Total recoveries .............................................. 40 101 219 83
Net charge-offs ............................................... 90 94 47 465
Additions to the allowance charged to expense ................. 120 354 497 515
--------- --------- --------- --------
Allowance for possible loan losses at end of period ........... $ 2,690 $ 2,660 $ 2,400 $ 1,950
========= ========= ========= ========
RATIOS
Net charge-offs during period to average loans outstanding
during period ................................................ 0.07% 0.08% 0.05% 0.50%
Net charge-offs during period to loans at period-end .......... 0.07% 0.08% 0.04% 0.49%
Allowance for possible loan losses to average loans ........... 2.16% 2.25% 2.30% 2.08%
Allowance for possible loan losses to loans at period-end ..... 2.05% 2.19% 2.13% 2.06%
Net charge-offs to allowance for possible loan losses ......... 3.35% 3.53% 1.96% 23.85%
Net charge-offs to provision for possible loan losses ......... 75.00% 26.55% 9.46% 90.29%
</TABLE>

28
<PAGE>

CAPITAL RESOURCES
As a North Carolina-chartered bank, the Bank is subject to the capital
requirements of the FDIC and the State Banking Commission. The FDIC requires
the Bank to maintain minimum ratios of Tier I capital to total risk-weighted
assets and total capital to risk-weighted assets of 4% and 8%, respectively. To
be "well capitalized," the FDIC requires ratios of Tier I capital to total
risk-weighted assets and total capital to risk-weighted assets of 6% and 10%,
respectively. Tier I capital consists of total stockholders' equity calculated
in accordance with generally accepted accounting principles less intangible
assets, and total capital is comprised of Tier I capital plus certain
adjustments, the only one of which is applicable to the Bank is the allowance
for possible loan losses. Risk-weighted assets reflect the Bank's on- and
off-balance sheet exposures after such exposures have been adjusted for their
relative risk levels using formulas set forth in FDIC regulations. As of June
30, 1998, the Bank was in compliance with all of the aforementioned capital
requirements and satisfies the "well capitalized" definition that is used by
the FDIC in its evaluation of banks.

Sufficient levels of capital are necessary to sustain growth and absorb
losses. To this end, the FDIC, which regulates the Company, has established
capital adequacy guidelines. These guidelines relate to the Company's Leverage
Capital ratio, Tier 1 Capital ratio and Total Risk Based Capital ratio ("RBC").

For the Company, Tier 1 Capital consists of total shareholders' equity
excluding unrealized gains on available-for-sale securities. As of December 31,
1997, the Company's Leverage Capital ratio, which is calculated based on the
Company's Tier 1 Capital, was 8.53% compared to 8.53% and 8.16% at December 31,
1996 and 1995, respectively. For regulatory purposes, a 5.00% or greater
Leverage Ratio represents a "well capitalized" financial institution.

Within the RBC calculations, the Company's assets, including loan
commitments and other off-balance sheet items, are weighted according to
regulatory guidelines for risk considered inherent in the assets. The Company's
Tier 1 RBC ratio as of December 31, 1997 was 12.40% which is, along with a
ratio of 12.49% and 12.29% for 1996 and 1995, respectively, representative of a
"well capitalized" institution. The calculation of the RBC ratio allows, in the
Company's circumstances, the inclusion of the allowance for loan losses in
capital, but only to the maximum of 1.25% of risk weighted assets. As of
December 31, 1997, the Company's RBC ratio was 13.66% which is representative
of a "well capitalized" institution. The Company's RBC ratios for 1996 and 1995
were 13.75% and 13.54%, respectively, both of which were representative of a
"well capitalized" financial institution.

As of December 31, 1997, shareholders' equity totaled $15.7 million
compared to $14.2 million at December 31, 1996. The shareholders' equity for
1997 and 1996 included, as discussed above, $307,000 and $101,000,
respectively, of net unrealized gains on available-for-sale securities.

An adequate capital position provides the Company with expansion
capabilities. Retention of sufficient earnings to maintain that adequate
capital position is an important factor in determining dividends. During 1997,
the Company paid $415,000 in dividends, versus $380,000 in 1996 and $356,000 in
1995. As a percentage of net income, dividends were 24.5% and represented an
increase of 9.2% over dividends paid in 1996.

LIQUIDITY
Liquidity is the Company's ability to generate cash to fund asset growth,
to meet deposit withdrawals, to maintain regulatory reserve requirements and to
pay operating expenses. The principal sources of liquidity are the Company's
investment portfolio, interest from loans and investments, loan principal
repayments and increases in deposits.

The Company relies on the investment portfolio as a source of liquidity,
with maturities designed to provide needed cash flows. Further, retail deposits
generated throughout the branch network has enabled management to fund asset
growth and maintain liquidity. These sources have allowed limited dependence on
short-term borrowed funds for liquidity or for asset expansion. External
sources of funds include the ability to access advances from the Federal Home
Loan Bank of Atlanta and Fed Fund lines with correspondent banks.

The Company's liquidity ratio, which is defined as cash plus short term
and marketable securities divided by deposits and short term liabilities, was
27.6% at December 31, 1997, compared to 27.3% and 38.7% at year-end 1996 and
1995, respectively. In addition, the Company has a $13 million line of credit
with the Federal Home Loan Bank to meet liquidity needs.

Any maturing investments, the funds represented by which are not
immediately necessary to sustain the Company's liquidity, are invested in
similar instruments or used to fund any increased loan demand. All of the
Company's investment securities are classified available-for-sale, thus giving
the Company the ability to sell certain investments to meet any short-term
liquidity needs.

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The Company's consolidated statements of cash flows reflect the principal
sources and uses of cash from operating, investing and financing activities for
1997, 1996 and 1995. In 1997, operating activities of the Company provided cash
flows of $2.2 million. Net income of $1.7 million, adjusted for non-cash
operating activities, provided the majority of cash generated from operations.
Investing activities, including lending, utilized $23.1 million of the
Company's cash flow. Loans originated, net of principal collected, used $9.1
million. Securities purchases, net of maturities and sales, utilized $12.8
million. The Company utilized $1.3 million in cash in connection with
expenditures for premises and equipment. Net additional cash inflows of $19.2
million resulted from financing activities in 1997. Net deposit inflows of
$19.6 million were reduced by payments of cash dividends on stock totaling
$415,000.

In 1996, operating activities of the Company provided cash flows of $2.1
million. Net income of $1.3 million, adjusted for non-cash operating
activities, provided the majority of cash generated from operations. Investing
activities, including lending, utilized $5.3 million of the Company's cash
flow. Loans originated, net of principal collected, used $18.1 million.
Securities, net of purchases, provided cash of $12.9 million, and expenditures
for premises and equipment, net of proceeds from disposal of real estate and
equipment, utilized $163,000. Net additional cash inflows of $545,000 resulted
from financing activities in 1996, principally from deposit inflows of
$925,000, reduced by payments for cash dividends totaling $380,000.

In 1995, operating activities of the Company provided cash flows of $2.5
million. Net income of $912,000, adjusted for non-cash operating activities,
provided the majority of cash generated from operations. Investing activities,
including lending, utilized $4.7 million of the Company's cash flow. Loans
originated, net of principal collected, used $9.0 million. Securities, net of
purchases, provided cash of $4.8 million, and expenditures for premises and
equipment, net of proceeds from disposal of real estate and equipment, utilized
$510,000. Net additional cash inflows of $9.0 million resulted from financing
activities in 1995, principally from deposit inflows of $9.4 million, reduced
by payments for cash dividends totaling $356,000.

The Company has no brokered deposits. Jumbo certificates of deposit
("CDs") are considered to include all CDs of $100,000 or more. The Company does
not aggressively bid on those deposits, and it does not seek nor does it accept
deposits from outside its general trade areas. Almost all the Company's jumbo
CD customers have other relationships with the Company, including savings,
demand and other time deposits and, in some cases, loans. At December 31, 1997
and 1996, jumbo CDs represented 11.4% and 11.8% of total deposits,
respectively.

In the opinion of management, the Company has the ability to generate
sufficient amounts of cash to cover normal funding requirements and any
additional needs which may arise, within realistic limitations, within the next
twelve months, and management is not aware of any known demands or commitments
that will affect liquidity in a material way.

REGULATORY MATTERS

Management is not presently aware of any current recommendation to the
Company by regulatory authorities which, if they were to be implemented, would
have a material effect on the Company's liquidity, capital resources or
operations.

IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and accompanying footnotes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration of changes in the relative purchasing
power of money over time due to inflation. The assets and liabilities of the
Company are primarily monetary in nature and changes in interest rates have a
greater impact on the Company's performance than does the effect of inflation.

ACCOUNTING AND OTHER MATTERS

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." This statement establishes standards of computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock or potential common stock. This Statement simplifies the standards for
computing earnings per share previously found in APB Opinion No. 15, Earnings
Per Share, and makes them comparable to international EPS standards. It
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures and requires
a reconciliation of the numerator and the denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997 and requires restatement of all prior-period EPS data
presented. The Company adopted SFAS No. 128 in 1997 without any significant
impact on its consolidated financial statements.

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On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of financial
statements. 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. This statement does not change or modify the reporting or display in
the income statement. For the six months ended June 30, 1998 and 1997, the
Company's total comprehensive income, consisting of net income and changes in
unrealized securities gains and losses, net of tax effects, was $966,000 and
$890,000, respectively.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments on
an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
This Statement is effective for financial statements for periods beginning
after December 15, 1997 and in the initial year of application, comparative
information for earlier years is to be restated. The Company plans to adopt
SFAS No. 131 at December 31, 1998 and does not anticipate any significant
impact on its consolidated financial statements.

In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits." This statement standardizes
the disclosure requirements of pensions and other postretirement benefits. This
statement does not change any measurement of recognition provisions, and thus
will not materially impact the Company's consolidated financial statements.
This statement is effective for fiscal years beginning after December 15, 1997.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. This statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 1998. Earlier
application of all of the provisions of this statement is encouraged. The
Company plans to adopt this statement on January 1, 2000 and does not
anticipate any material effect on its consolidated financial statements.

The FASB also issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the
public, to revisions by the FASB and to final issuance by the FASB as
statements of financial accounting standards. Management considers the effect
of the proposed statements on the consolidated financial statements of the
Company and monitors the status of changes to issued exposure drafts and to
proposed effective dates.

Management is not aware of any known trends, events, uncertainties, or
current recommendations by regulatory authorities that will or that are
reasonably likely to have a material effect on the Company's liquidity, capital
resources or other operations.

YEAR 2000 ISSUE

GENERAL. The year 2000 ("Y2K") issue confronting the Company and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing
computer programs and systems originally were programmed with six digit dates
that provided only two digits to identify the calendar year in the date field.
With the impending new millennium, these programs and computers will recognize
"00" as the year 1900 rather than the year 2000.

Financial institution regulators recently have increased their focus upon
Y2K compliance issues and have issued guidance concerning the responsibilities
of senior management and directors. The Federal Financial Institutions
Examination Council ("FFIEC") has issued several interagency statements on Y2K
Project Management Awareness. These statements require financial institutions
to, among other things, examine the Y2K implications of their reliance on
vendors and with respect to data exchange and the potential impact of the Y2K
issue on their customers, suppliers and borrowers. These statements also
require each federally regulated financial institution to survey its exposure,
measure its risk and prepare a plan to address the Y2K issue. In addition, the
federal banking regulators have issued safety and soundness guidelines to be
followed by insured depository institutions, such as the Bank, to assure
resolution of any Y2K problems. The federal banking agencies have asserted that
Y2K testing and certification is a key safety and soundness issue in
conjunction with regulatory exams and, thus, that an institution's failure to
address appropriately the Y2K issue could result in supervisory action,
including the reduction of the institution's supervisory ratings, the denial of
applications for approval of mergers or acquisitions or the imposition of civil
money penalties.

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RISKS. Like most financial service providers, the Company and its
operations may be significantly affected by the Y2K issue due to its dependence
on technology and date-sensitive data. Computer software and hardware and other
equipment, both within and outside the Company's direct control, and third
parties with whom the Company electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operating
functions, could generate results which are significantly misstated, and the
Company could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the Y2K issue could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could result in a significant adverse impact on the Company's operations
and, in turn, its financial condition and results of operations.

STATE OF READINESS. During November 1997, the Company formulated its plan
to address the Y2K issue. Since that time, the Company has taken the following
steps:

o Established senior management advisory and review responsibilities;

o Completed a company-wide inventory of applications and system software;

o Built an internal tracking database for application and vendor software;

o Developed compliance plans and schedules for all lines of business;

o Begun computer code testing;

o Initiated vendor compliance verification;

o Begun awareness and education activities for employees through existing
internal communication channels; and

o Developed a process to respond to customer inquiries as well as help
educate customers on the Y2K issue.

The following paragraphs summarize the phases of the Company's Y2K plan:

AWARENESS PHASE. The Company formally established a Y2K plan headed by a
senior manager, and a project team was assembled for management of the Y2K
project. The project team created a plan of action that includes
milestones, budget estimates, strategies, and methodologies to track and
report the status of the project. Members of the project team also attended
conferences and information sharing sessions to gain more insight into the
Y2K issue and potential strategies for addressing it. This phase is
substantially complete.

ASSESSMENT PHASE. The Company's strategies were further developed with
respect to how the objectives of the Y2K plan would be achieved, and a Y2K
business risk assessment was made to quantify the extent of the Company's
Y2K exposure. A corporate inventory (which is periodically updated as new
technology is acquired and as systems progress through subsequent phases)
was developed to identify and monitor Y2K readiness for information systems
(hardware, software, utilities, and vendors) as well as environmental
systems (security systems, facilities, etc.). Systems were prioritized
based on business impact and available alternatives. Mission critical
systems supplied by vendors were researched to determine Y2K readiness. If
Y2K-ready versions were not available, the Company began identifying
functional replacements which were either upgradable or currently
Y2K-ready, and a formal plan was developed to repair, upgrade or replace
all mission critical systems. This phase is substantially complete.

In August 1997, the Company began Y2K discussions with its larger borrowers
at the time of the annual review of their loans. Beginning in January 1998,
all credits greater than $250,000 were evaluated for Y2K exposure by the
relationship account officer using a questionnaire developed by the
Company's credit administration staff. As part of the current credit
approval process, all new and renewed loans are evaluated for Y2K risk.
During the course of these evaluations, Company personel have met
individually with each of its larger borrowers to discuss and obtain
information regarding each borrower's dependence on information technology
and third party vendors and the nature of steps being taken by the
borrowers to address their Y2K risk. While the Company will continue to
monitor the progress being made by its larger borrowers in addressing their
own Y2K issues, to date the Company is generally satisfied with these
customers' responses to the Company's inquiries and their progress in
addressing their Y2K risk.

RENOVATION PHASE. The Company's corporate inventory revealed that Y2K
upgrades were available for all vendor supplied mission critical systems,
and all these Y2K-ready versions have been delivered and placed into
production and have entered the validation process (with the exception of
hardware upgrades to certain of the Company's automated teller machines
which are expected to be completed by December 31, 1998).

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VALIDATION PHASE. The validation phase is designed to test the ability of
hardware and software to accurately process date sensitive data. The
Company currently is in the process of validation testing of each mission
critical system, with the degree of completion of such testing ranging from
25% to 100%. The Company has created a test environment comprised of an IBM
Model 170 dedicated to Y2K testing which is virtually insulated from
production and development environments. The Company anticipates that the
validation phase will follow the estimated industry norm in that it will
absorb approximately 50% of the total Y2K resources (computer and
personnel) over the life cycle of the project. The Company has increased
staff in anticipation of that work effort. The Company's validation phase
is expected to be completed by December 31, 1998 for all mission critical
systems (with the exception of the Company's automated teller machine
network as to which validation testing will be completed during the first
quarter of 1999). During the validation testing process to date, no
significant Y2K problems have been identified relating to any modified or
upgraded mission critical systems.

IMPLEMENTATION PHASE. The Company's plan calls for putting Y2K-ready code
into production before having actually completed Y2K validation testing.
Y2K-ready modified or upgraded versions have been installed and placed into
production with respect to all mission critical systems (with the exception
of the Company's automated teller machine network as to which hardware
upgrades are expected to be completed and in production by December 31,
1998).

COMPANY RESOURCES INVESTED. The Company's Y2K project team has been
assigned the task of ensuring that all systems across the Company are
identified, analyzed for Y2K compliance, corrected if necessary, tested, and
changes put into service by the end of 1998. The Y2K project team members
represent all functional areas of the Company, including branches, data
processing, loan administration, accounting, item processing and operations,
compliance, internal audit, human resources, and marketing. The team is headed
by a vice president who reports directly to a member of the Company's senior
management team. The Company's Board of Directors oversees the Y2K plan and
provides guidance and resources to, and receives quarterly updates from, the
Y2K project team.

The Company is expensing all costs associated with required system changes
as those costs are incurred, and such costs are being funded through operating
cash flows. The total cost of the Y2K conversion project for the Company is
estimated to be $200,000. Expenses of approximately $23,000 were incurred and
expensed by the Company through June 30, 1998. The Company does not expect
significant increases in future data processing costs relating to Y2K
compliance.

CONTINGENCY PLANS. During the assessment phase, the Company began to
develop back-up or contingency plans for each of its mission critical systems.
Virtually all of the Company's mission critical systems are dependent upon
third party vendors or service providers, therefore, contingency plans include
selecting a new vendor or service provider and converting to their system. In
the event a current vendor's system fails during the validation phase and it is
determined that the vendor is unable or unwilling to correct the failure, the
Company will convert to a new system from a pre-selected list of prospective
vendors. In each case, realistic trigger dates have been established to allow
for orderly and successful conversions. For some systems, contingency plans
consist of using spreadsheet software or reverting to manual systems until
system problems can be corrected.

The majority of the Company's mission critical systems fall into the
categories of its core-banking software, its proof of deposit system, and its
automatic teller machine network. The Company has received warranties from
vendors to the effect that the proof of deposit and automatic teller machine
network software is Y2K-ready. While no warranty has been received with respect
to the core-banking system, that system is used by a number of banking
institutions and has been reviewed by the Federal Reserve Bank of Atlanta and
found to be Y2K-ready.

With respect to each third party with whom the Company interfaces
electronically or from whom it obtains services or supplies (such as the
Company's credit and debit card processors, its correspondent bank, the Federal
Reserve Bank of Richmond, its electric and telephone company, and its suppliers
of business forms), the Company has requested information regarding that
party's preparations and state of preparedness with respect to Y2K issues.
While, in general, no such third parties will give warranties or guarantees
with respect to Y2K issues, the Company has received from each third party in
writing an acknowledgment of that party's awareness of the Y2K issue,
information regarding its plan for addressing Y2K concerns, and an assurance
that steps are being taken to prevent service interruptions. While these
assurances do not give the Company any specific legal rights or remedies, the
Company generally is satisfied with the responses it has received. In the case
of third parties with whom the Company interfaces electronically, testing of
those interfaces is being conducted or is scheduled and interruptions in the
services provided by such third parties have been taken into account in the
Company's contingency plans (which, for example, provide for increased
inventories of business forms and supplies, increased levels of cash on hand,
use of a generator to operate the Company's main computer system and operations
function, manual processing of branch transactions, direct clearing of checks
through the Federal Reserve rather than through a correspondent bank, and,
where possible, a change to a different third party supplier).

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BUSINESS

GENERAL

The Company is a bank holding company headquartered in Engelhard, North
Carolina. The Company operates through, and its principal asset is its
investment in, the Bank which operates as a wholly-owned subsidiary of the
Company.

As of June 30, 1998, the Company had total consolidated assets of
approximately $199.1 million, total consolidated deposits of approximately
$180.8 million and total consolidated shareholders' equity of approximately
$16.7 million.

Following the hiring of its current President and Chief Executive Officer,
Arthur H. Keeney, III, in the fall of 1995, the Bank's Board of Directors
engaged a consultant to assist the Board and the Bank's senior management team
in designing and implementing a five-year strategic plan to enhance shareholder
value and expand the Bank's franchise. The plan, adopted in early 1996, focused
the efforts of the Board and the management team on increased profitability,
the development of new products and services and the addition of select DE NOVO
branches in key markets. From December 31, 1995 to June 30, 1998, the Bank's
assets, loans and deposits have increased by 20.4%, 38.6% and 20.2%,
respectively. During January 1998, in an effort to improve the liquidity and
increase the trading volume in the Bank's common stock, the Bank applied for
and received listing of the stock on the Nasdaq Bulletin Board. In addition,
the Bank's Board of Directors approved the Reorganization and a three-for-one
split of the Bank's common stock, each of which was effected on July 22, 1998.
Management believes that the Company is taking the appropriate steps to
establish a platform for future growth.

BUSINESS STRATEGY

COMMUNITY FOCUS. The Company will distinguish itself from competitors in
its geographic markets by continuing to provide community-oriented banking
services through the Bank, with a focus on offering personalized service and a
variety of financial services targeted toward individuals and small- and
medium-sized businesses within the communities served by the Bank.

PROFITABILITY AND CREDIT QUALITY. Within the context of a
community-oriented financial institution, the Company will seek to increase its
profitability and maintain appropriate core financial ratios, while also
maintaining above-average credit quality measurements.

GROWTH AND EXPANSION. The Company will seek to increase its asset size
through further penetration of its existing banking markets and appropriate
expansion of its current markets. The Company will analyze and take advantage
of opportunities to establish DE NOVO branches, to acquire other financial
institutions or offices of such other institutions, and to acquire non-bank
providers of financial services, if the Company believes such actions would be
appropriate and would enhance the Bank's franchise and, in the long term, its
profitability. Management believes that as its larger competitors continue to
focus on larger transactions and less personalized forms of customer service,
the Bank will have significant opportunities to continue to expand its
franchise in its existing markets and in new markets.

TECHNOLOGY AND PEOPLE. As banking becomes more and more technology driven,
the Company will make the necessary investments in technology to remain
competitive with the larger banking organizations in its markets from a product
and product delivery standpoint. However, the Company believes that its most
valuable resources are its employees who provide the personalized service that
separates it as a community-oriented financial institution from the larger
institutions in its geographic markets and who provide it with an important
basis upon which to compete. Therefore, the Company also will invest in the
people who will manage and carry out the Bank's business.

BANK HOLDING COMPANY REORGANIZATION

As part of the Bank's growth strategy, management of the Bank perceived
that the Reorganization likely would result in certain advantages, including,
without limitation, additional flexibility in expansion of the Bank's business
through the acquisition of other financial institutions, in the raising of
additional capital through borrowing (if needed) and with respect to other
activities and corporate matters. Additionally, the Reorganization could
benefit the Bank's shareholders through increased public awareness and
additional liquidity in the trading market for the holding company's
outstanding equity securities. As a result, the Company was organized on March
4, 1998, by the Bank and at the direction of the Bank's Board of Directors, to
serve as the Bank's parent holding company. Effective July 22, 1998, and to
effect the Reorganization, (i) an "interim bank" subsidiary of the Company
(newly formed for the purpose of such transaction) was merged into the Bank
(with the

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Bank as the surviving corporation), (ii) the outstanding shares of the Bank's
common stock were converted into an identical number of shares of the Company's
Common Stock with the result that the then current shareholders of the Bank
became shareholders of the Company (with the same relative ownership interests
that they had in the Bank) and (iii) the Company became the sole shareholder of
the Bank.

The Bank continues to exist under its separate charter and bylaws but as
the wholly-owned subsidiary of the Company, and will continue to conduct its
banking business at all its previous banking offices.

THE BANK

GENERAL. The Bank is an FDIC-insured, North Carolina-chartered bank which
was organized in 1919 and is engaged in a general, community-oriented
commercial and consumer banking business. The Bank currently maintains 15
full-service banking offices in six counties in North Carolina, together with
one loan production office, and its deposits are insured under the FDIC's Bank
Insurance Fund ("BIF") to the maximum amount permitted by law. The Bank has two
wholly-owned subsidiaries. Carolina Financial Realty, Inc. ("CFR") holds title
to five of the Bank's branch offices which it leases to the Bank. The second
subsidiary, Carolina Financial Courier, Inc., formerly provided courier
services to the Bank but currently contracts with a third-party for such
services.

SERVICES. The Bank's operations are primarily retail oriented and directed
toward individuals, small- and medium-sized businesses and local governmental
units located in its banking markets, and its deposits and loans are derived
primarily from customers in its banking markets. While the Bank provides most
traditional commercial and consumer banking services, its principal activities
are the taking of demand and time deposits and the making of secured and
unsecured loans. The Bank's primary source of revenue is interest income from
its lending activities, and it has pursued a strategy of growth through
internal expansion by establishing branch offices in communities within its
banking markets.

BANKING MARKETS. The Bank's banking markets are located in the east
central and northeastern portions of North Carolina and along North Carolina's
Outer Banks, and are divided into the following three regions:

CENTRAL REGION: The Central Region is located on the peninsula that divides
the Pamlico Sound and the Albermarle Sound on the mainland of North
Carolina, and it includes the Bank's three offices located in Hyde County
(its Main Office in Engelhard and its branch offices in Swan Quarter and
Fairfield), one banking office located in each of Tyrrell County (Columbia)
and Washington County (Creswell), and its one loan production office
located in Beaufort County (Washington, which is expected to be converted
to a full-service branch during 1999 in a new facility which currently is
under construction). At June 30, 1998, approximately 36% and 38%,
respectively, of the Bank's total deposits and total loans were attributed
to its Central Region banking offices.

The Central Region is mostly rural and had a total population in 1997 of
approximately 67,000. The local economy is heavily dependent on agriculture
(primarily corn, soybeans, cotton and wheat), forestry products and seafood
related industries. Based on its location between the Pamlico and Albemarle
Sounds and the location of Lake Mattamuskeet, the region provides many
recreational opportunities and benefits from tourism.

Major industrial employers in the Central Region include Weyerhauser
Company, which operates a large lumber mill in Washington County, and PCS
Phosphate and Standyne Automotive Corp., which maintain large mining and
manufacturing facilities, respectively, in Beaufort County. Coastal land
use restrictions make it difficult to attract industry to this area.
However, the prospects for future economic expansion in the Central Region
are improving due to active economic development efforts through the
region's Northeast Partnership, one of seven regional partnerships of
county governments formed in 1993 by the North Carolina Legislature to work
in concert with the State's Department of Commerce and other agencies to
promote regional growth. For 1997, the average unemployment rate in the
region was 6.5% and the average annual per capita income was approximately
$21,000.

WESTERN REGION: The Western Region is located in the east central section
of North Carolina's Coastal Plains, and it currently includes the Bank's
three branch offices located in Pitt County (all in Greenville, including
the Bank's only in-store branch which is located in a WalMart Supercenter).
At June 30, 1998, approximately 13% and 19%, respectively, of the Bank's
total deposits and total loans were attributed to its Western Region
banking offices.

The Western Region is the most urban and economically diversified of the
Bank's three regions. Major industries contributing to its economy include
manufacturing, retail services, health care and, to a lesser degree,
agriculture. Pitt County is the home of East Carolina University, which is
the state's third largest public university, and, with its medical

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<PAGE>

school and an affiliated regional hospital, is one of the region's largest
employers and has been a significant contributing factor in the region's
growth. Other major employers include Catalytica Pharmaceuticals,
Rubbermaid and Collins and Aikman.

The region's population has grown to approximately 121,000 (with the
population of Greenville rising to 59,000), which has resulted in an
increase in new home construction. Greenville recently was rated as one of
the top 20 cities in the United States in new housing starts. For 1997, the
average unemployment rate in the region was 4.6% and the average annual per
capita income was approximately $23,000.

OUTER BANKS REGION: The Outer Banks Region extends along North Carolina's
Outer Banks from Currituck County on the Virginia border, through Dare
County, and to Ocracoke Island. The region includes the Bank's one branch
office in Currituck County (Barco), five branch offices in Dare County
(Southern Shores/Kitty Hawk, Nags Head, Manteo, Avon and Hatteras), and one
branch office located on Ocracoke Island, and is the Bank's largest region
in terms of a percentage of its business. At June 30, 1998, approximately
51% and 43%, respectively, of the Bank's total deposits and total loans
were attributed to its Outer Banks Region banking offices.

Currituck and Dare Counties are two of the fastest growing counties (in
terms of percentages) in North Carolina, and the total population of the
region has grown to approximately 45,000. The entire region is primarily a
coastal resort, and its local economy is based primarily on tourism.
However, agriculture has a significant influence on the economy of mainland
Currituck County, and the seasonality normally associated with agriculture
and tourism is being tempered somewhat by an increase in the number of
permanent residents (including a large number of retirees) who help to
support year-round retail and service establishments. For 1997, the average
unemployment rate in the region was 4.0% and the average per capita income
was approximately $20,000.

On-going highway improvement projects involving U.S. Highway 64 between
Raleigh and Manteo, and U.S. Highway 168 between the Tidewater area of
Virginia and the Outer Banks, are expected to enhance the economy of the
region.

LENDING ACTIVITIES. The Bank makes a variety of types of consumer and
commercial loans to individuals and small- and medium-sized businesses located
primarily in its banking markets for various personal, business and
agricultural purposes, including term and installment loans, equity lines of
credit and overdraft checking credit. The Bank's loans are concentrated in four
major areas: (i) real estate loans, (ii) commercial and agricultural loans,
(iii) installment loans and (iv) credit card loans.

At June 30, 1998, approximately 55% of the Bank's loan portfolio consisted
of real estate loans. All real estate loans are secured by first or junior
liens on real property located almost exclusively in the Bank's geographic
markets (and substantially all of which, both commercial and residential, is
owner occupied or operated), and management estimates that more than
approximately 75% of those loans actually were made for purposes related to the
real estate collateral (generally, loans made to individuals and businesses for
the purchase and improvement of or investment in real estate, including
construction loans to individuals and builders). However, in addition to such
real estate purpose loans, the Bank also makes loans secured by first or junior
liens on real estate for various other commercial, agricultural and consumer
purposes. Such loans generally are reflective of efforts by management to
minimize credit risk by taking real estate as primary or additional collateral
on loans made for purposes not directly related to the real estate itself. The
Bank does not make conventional, long-term residential mortgage loans in its
own name (see "Mortgage Loans" below), and none of its other real estate loans
are made with the intent to sell them in the secondary market. Therefore, none
of such loans are underwritten to conform to FNMA or FHLMC guidelines.

Loans secured by real estate may be made at fixed or variable interest
rates and for terms of up to 15 years, or which provide for payments based on
an amortization schedule of up to 15 years. However, loans having terms of more
than five years, or which are based on an amortization schedule of more than
five years, generally will contain contractual provisions which allow the Bank
to call the loan in full, or provide for a "balloon" payment in full, at the
end of each five-year period.

The Bank's commercial and agricultural loans include loans to individuals
and small- and medium-sized businesses located in its banking markets for
working capital, equipment purchases and various other business and
agricultural purposes (other than any such loan secured by real estate) and
loans made to finance the production of crops. At June 30, 1998, these loans
made up approximately 28% of the Bank's loan portfolio. A majority of the
Bank's commercial and agricultural loans are secured by inventory, equipment,
crops or similar assets, but these loans also may be made on an unsecured
basis. Commercial and agricultural loans may be made at variable or fixed rates
of interest; however, it currently is the Bank's policy that those loans which
have terms or amortization schedules of longer than five years normally will
carry interest rates which vary with the prime lending rate and may be called
in full at any time after the first five years.

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Approximately 17% of the Bank's total loan portfolio consists of loans
made for various agricultural purposes, including crop production (primarily
corn, soybeans, cotton and wheat) and the purchase of related equipment or
farmland. However, approximately 35% of these agricultural loans are secured by
first or junior liens on real estate and, thus, are included in the Bank's real
estate loans. The Bank currently has no loans made for the purpose of tobacco
or livestock production, and the Bank's loans directly related to commercial
fishing and related seafood industries are limited.

The Bank's installment loan portfolio consists primarily of loans to
individuals for various consumer purposes (other than any such loan secured by
real estate), but also includes the outstanding balances on consumer revolving
credit accounts. The majority of the Bank's installment loans are secured by
liens on various personal assets of the borrowers, but these loans may also be
made on an unsecured basis. Consumer loans generally are made at fixed interest
rates (with the exception of revolving credit accounts which may provide for
variable rates) and for terms which generally do not exceed three years.
However, the Bank will make consumer loans for terms of up to five years.

The Bank is an issuer of MasterCard and Visa credit cards (primarily to
customers within its banking markets) and, at June 30, 1998, had outstanding
credit card receivables of $2.4 million.

None of the Bank's loans are underwritten for sale in any secondary market
and, since the Bank does not make long-term residential mortgage loans for its
own account, there is no established secondary market into which any of the
Bank's loans could be sold. However, while the Bank has not previously sold, or
attempted to sell, any of its loans, management of the Bank believes that,
should the need arise (for purposes of liquidity or otherwise), portions of its
loan portfolio could be sold to other banks or financial institutions on a
privately negotiated basis. Because it believes that the Bank has adequate
other sources of liquidity, and because the Bank's loans generally are made at
variable interest rates and/or for terms of not longer than three to five years
(in order to minimize interest rate risk), management currently does not
foresee a need to sell any of the Bank's loans.

Certain statistical information regarding the Bank's loan portfolio at
December 31, 1997, and June 30, 1998, is contained in this Prospectus under the
caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

MORTGAGE LOANS. During 1998, the Bank began offering long-term,
residential mortgage loans that are originated by the Bank but are underwritten
and funded by, and closed in the name of, third-party lenders. The Bank retains
a portion of the origination fees collected with respect to these loans. This
arrangement permits the Bank to offer this product in its markets and enhance
its fee-based income, but it avoids the credit and interest rate risk
associated with long-term loans since these loans are not in the Bank's loan
portfolio.

LOAN ADMINISTRATION AND UNDERWRITING. As described above, the Bank's loan
portfolio consists primarily of loans made for a variety of commercial,
agricultural and consumer purposes and the Bank does not make long-term
residential mortgage loans for its own account. Because these types of loans
are made based, to a great extent, on the Bank's assessment of borrowers'
income, cash flow, character and ability to repay (as compared to long-term
residential mortgage loans in which greater emphasis is placed on collateral),
such loans are viewed as involving a higher degree of credit risk than is the
case with long-term residential mortgage loans. To manage this risk, the Bank's
loan portfolio is managed under a defined process, which includes guidelines
for loan underwriting standards and risk assessment, procedures for loan
approvals, loan grading, ongoing identification and management of credit
deterioration and portfolio reviews to assess loss exposure and to ascertain
compliance with the Bank's credit policies and procedures. The Bank has
retained an outside credit risk management consultant to advise the Bank with
respect to its credit policies and procedures and to provide on-line credit
manuals that can be modified quickly and efficiently to reflect periodic
changes. The lending and loan administration process includes a centralized
credit review and analysis prior to funding of all credit decisions involving
an aggregate credit relationship in excess of $200,000, a review of all loans
after funding for adequacy of documentation and compliance with regulatory
requirements and a review by credit administration personnel at least annually
of any credit relationship exceeding $100,000. Additionally, the Bank's credit
risk management consultant currently reviews the Bank's 15 largest lending
relationships and other selected loans three times a year (the most recent of
which was during May 1998). Reports of the results of these outside reviews are
made to the Board of Directors.

The Bank's loan approval policies generally provide for various levels of
lending authority for lending personnel based on aggregate credit exposure to
borrowers. Loans involving an aggregate credit exposure of up to $100,000 may
be approved at the branch level. Above that amount, loans involving aggregate
exposures of up to $200,000 require the approval of one of the Bank's Regional
Managers, loans involving aggregate exposures of up to $750,000 require the
approval of the Bank's Chief Credit Officer or President, and loans involving
aggregate exposures of up to $1.3 million require the approval of the Bank's
General Credit Committee (made up of senior management). All individual loans
over $1.0 million require the approval

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of the Executive Committee of the Board of Directors, and all agricultural
loans, without regard to amount, must be approved by one of the Bank's
agri-business lending specialists.

At the time loans are made, and during periodic reviews, loans are
assigned a grade which indicates the level of management attention to be given
to that loan to protect the Bank's position and to reduce loss exposure. During
the life of each loan, its grade is reviewed and validated or modified to
reflect changes in circumstances and risk. Loans are placed in a non-accrual
status if they become 90 days past due or otherwise whenever, in the opinion of
management, collection becomes doubtful, and they are charged off when the
collection of principal and interest is doubtful and the loans can no longer be
considered sound collectible assets (or, in the case of unsecured loans, when
they become 90 days past due).

RESERVE FOR LOAN LOSSES. The General Credit Committee reviews all
substandard loans over $10,000 on a quarterly basis, and management of the Bank
meets regularly to review asset quality trends and to discuss loan policy
issues. Based on these reviews and other factors (including a defined formula
that takes into consideration general and specific credit risks in the Bank's
loan portfolio), the Bank has established a reserve for loan losses. The
adequacy of the reserve is assessed by management of the Bank and reviewed by
the Bank's Board of Directors each month and, at June 30, 1998, was 2.05% of
the Bank's total loans and 252.11% of its non-performing loans.

Certain statistical information regarding the Bank's reserve for loan
losses and its nonaccrual, past due and restructured loans at December 31,
1997, and at June 30, 1998, is contained in this Prospectus under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

DEPOSIT ACTIVITIES. The Bank's deposit services include business and
individual checking accounts, savings accounts, NOW accounts, certificates of
deposit and money market checking accounts. During 1998, the Bank expects to
introduce cash management services designed to accommodate the needs of its
commercial deposit customers. It is the Bank's policy to monitor its
competition in order to keep the rates paid on its deposits at a competitive
level. The Bank's banking markets include primarily smaller communities where
its emphasis on customer service provides it with a stable source of core
funding. At June 30, 1998, transaction accounts and non-interest bearing
accounts equaled approximately 46% and 23%, respectively, of total deposits.
Time deposits of $100,000 and over made up approximately 16% of the Bank's
total deposits at June 30, 1998. The vast majority of the Bank's deposits are
generated from within its banking markets, and the Bank does not accept
brokered deposits but does actively solicit public funds deposits in its
markets.

Certain statistical information regarding the Bank's deposit accounts at
December 31, 1997, and at June 30, 1998, is contained in this Prospectus under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

INVESTMENT PORTFOLIO. At June 30, 1998, the Bank's investment portfolio
consisted almost entirely of U.S. government securities and obligations of
states and political subdivisions, approximately 22% of which mature within one
year and approximately 54% of which mature within one to five years.

Certain statistical information regarding the Bank's investment portfolio
at December 31, 1997, and at June 30, 1998, is contained in this Prospectus
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations."

MARKETING ACTIVITIES. Consistent with its business strategy which includes
increasing the Bank's market share in its existing banking markets, during 1997
the Bank hired a marketing director and renewed its focus on marketing the
Bank's new and existing products, as well as increasing general market
awareness of the Bank as a competitor in its banking markets, through expanded
media advertising and promotional activities.

OTHER SERVICES. The Bank provides most other traditional commercial and
consumer banking services. Discount brokerage services are offered by the Bank
through an unaffiliated broker-dealer.

COMPETITION

The Bank competes for deposits in its banking markets with other
commercial banks, savings banks and other thrift institutions, credit unions,
agencies issuing United States government securities and all other
organizations and institutions engaged in money market transactions. In its
lending activities, the Bank competes with all other financial institutions as
well as consumer finance companies, mortgage companies and other lenders.

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<PAGE>

Bank's Western and Outer Banks Regions, and 14 other commercial banks, thrift
institutions and credit unions also are represented in its banking markets.

Interest rates, both on loans and deposits, and prices of fee-based
services, are significant competitive factors among financial institutions
generally. Other important competitive factors include office location, office
hours, the quality of customer service, community reputation, continuity of
personnel and services, and, in the case of larger commercial customers,
relative lending limits and the ability to offer more sophisticated cash
management and other commercial banking services. Many of the Bank's
competitors have greater resources, broader geographic markets and higher
lending limits than the Bank, and they can offer more products and services and
can better afford and make more effective use of media advertising, support
services and electronic technology than can the Bank. The Bank depends on its
reputation as a community bank in its local markets, its direct customer
contact, its ability to make credit and other business decisions locally, and
its personalized service, to counter these competitive disadvantages.

In recent years, federal and state legislation has heightened the
competitive environment in which all financial institutions must conduct their
business, and the potential for competition among financial institutions of all
types has increased significantly. Additionally, with the elimination of
restrictions on interstate banking, a North Carolina commercial bank may be
required to compete not only with other North Carolina-based financial
institutions, but also with out-of-state financial institutions which may
acquire North Carolina institutions, establish or acquire branch offices in
North Carolina, or otherwise offer financial services across state lines,
thereby adding to the competitive atmosphere of the industry in general. In
terms of assets, the Bank is one of the smaller commercial banks in North
Carolina, and there is no assurance that the Bank will be or continue to be an
effective competitor in the current financial services environment. See "Risk
Factors -- Competition."

EMPLOYEES

The Company does not have any separate employees. As of June 30, 1998, the
Bank employed 128 full-time employees (including its and the Company's
executive officers) and 17 part-time employees. The Bank and its employees are
not parties to any collective bargaining agreement, and the Bank considers its
relations with its employees to be good.

LEGAL PROCEEDINGS

From time to time the Bank may become involved in legal proceedings
occurring in the ordinary course of its business. However, subject to the
uncertainties inherent in any litigation, management believes that there
currently are no pending or threatened proceedings that are reasonably likely
to result in a material adverse change in the Company's financial condition or
operations.

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<PAGE>

PROPERTIES

The Company's offices are located in the Bank's corporate offices in
Engelhard, North Carolina, and the Company does not own or lease any separate
properties. The Bank maintains the following 16 offices, seven of which it
owns, five of which are owned by CFR and leased to the Bank, three of which are
held under leases with unaffiliated third parties, and one of which was
constructed by the Bank on property held under a ground lease with an
unaffiliated third party.

<TABLE>
<S> <C>
CENTRAL REGION: Engelhard main banking and corporate office (owned)
Swan Quarter branch office (owned)
Fairfield branch office (leased from CFR)
Columbia branch office (leased from CFR)
Creswell branch office (owned)
Washington loan production office (leased)
WESTERN REGION: Greenville Arlington branch office (owned)
Greenville University Medical Center branch office (owned)
Greenville WalMart Supercenter branch office (leased)
OUTER BANKS REGION: Barco branch office (ground lease)
Southern Shores/Kitty Hawk branch office (leased from CFR)
Nags Head branch office (leased from CFR)
Manteo branch office (owned)
Avon branch office (leased)
Hatteras branch office (leased from CFR)
Ocracoke branch office (owned)
</TABLE>

All of the Bank's existing banking offices are in good condition and fully
equipped for the Bank's purposes. At June 30, 1998, the Bank's investment in
premises and banking equipment (cost less accumulated depreciation) was
approximately $6.3 million.

ADDITIONAL INFORMATION

For additional information regarding the Company and its consolidated
financial condition and results of operations, see "Capitalization," "Selected
Consolidated Financial Data and Other Information," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Supervision,
Regulation and Other Matters," "Management," "Beneficial Ownership of Common
Stock," "Management Compensation," "Certain Relationships and Related
Transactions," "Description of Capital Stock," "Available Information," "Index
to Consolidated Financial Statements," and "ECB Bancorp, Inc. and Subsidiary
Supplemental Consolidated Financial Statements" and "The East Carolina Bank and
Subsidiaries Consolidated Financial Statements."

THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS ARE NOT DEPOSIT
ACCOUNTS OR OTHER OBLIGATIONS OF OR GUARANTEED BY THE BANK OR THE COMPANY AND
ARE NOT INSURED BY THE FDIC OR ANY OTHER GOVERNMENT AGENCY.

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<PAGE>

SUPERVISION, REGULATION AND OTHER MATTERS

THE FOLLOWING IS A SUMMARY OF CERTAIN STATUTES AND REGULATIONS APPLICABLE
TO THE COMPANY AND THE BANK BUT IS NOT INTENDED TO BE EXHAUSTIVE AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO ALL PARTICULAR STATUTORY OR
REGULATORY PROVISIONS.

The business and operations of the Company and the Bank are subject to
extensive federal and state governmental regulation and supervision.

REGULATION OF THE COMPANY

The Company is a bank holding company registered with the Federal Reserve
under the Bank Holding Company Act of 1956, as amended (the "BHCA"), and is
subject to supervision and examination by, and the regulations and reporting
requirements of, the Federal Reserve. Under the BHCA, the activities of the
Company are limited to banking, managing or controlling banks or engaging in
any other activity which the Federal Reserve determines to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto.

The BHCA prohibits the 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 prior approval of
the Federal Reserve. Additionally, the BHCA prohibits the Company from engaging
in, or acquiring ownership or control of more than 5.0% of the outstanding
voting stock of any company engaged in, a nonbanking activity unless such
activity is determined by the Federal Reserve to be so closely related to
banking as to be a proper incident thereto. In approving an application by the
Company to engage in a nonbanking activity, the Federal Reserve 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.

There are a number of obligations and restrictions imposed by law on a
bank holding company and its insured depository institution subsidiaries that
are designed to minimize potential loss to depositors and federal deposit
insurance funds. For example, if a bank holding company's insured depository
institution subsidiary becomes "undercapitalized," the bank holding company is
required to guarantee (subject to certain limits) the subsidiary's compliance
with the terms of any capital restoration plan filed with its appropriate
federal banking agency. Also, a bank holding company is required to serve as a
source of financial strength to its depository institution subsidiaries and to
commit resources to support such institutions in circumstances where it might
not do so, absent such policy. Under the BHCA, the Federal Reserve has the
authority to require a bank holding company to terminate any activity or to
relinquish control of a nonbank subsidiary upon the Federal Reserve's
determination that such activity or control constitutes a serious risk to the
financial soundness and stability of a depository institution subsidiary of the
bank holding company.

The Company also is registered as a bank holding company under the North
Carolina Bank Holding Company Act and is subject to regulations of the North
Carolina Commissioner of Banks (the "North Carolina Commissioner") thereunder.

REGULATION OF THE BANK

As a North Carolina-chartered bank that is not a member of the Federal
Reserve System, the Bank's primary federal bank regulator is the FDIC. The
Bank's deposits are insured by the FDIC and the Bank is subject to supervision
and examination by, and the regulations and reporting requirements of, the FDIC
and the North Carolina Commissioner.

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

The Federal Reserve, the FDIC and the North Carolina Commissioner have
broad powers to enforce laws and regulations applicable to the Company and the
Bank and to require corrective action of conditions affecting the safety and
soundness of the Bank. Among others, these powers include cease and desist
orders, the imposition of civil penalties and the removal of officers and
directors.

Even though it is not a member of the Federal Reserve System, the business
of the Bank also is influenced by prevailing economic conditions and
governmental policies, both foreign and domestic, and by the monetary and
fiscal policies of the Federal Reserve. The actions and policy directives of
the Federal Reserve determine to a significant degree the cost and the

41
<PAGE>

availability of funds obtained from money market sources for lending and
investing and also influence, directly and indirectly, the rates of interest
paid by commercial banks on their time and savings deposits. The nature and
impact on the Bank of future changes in economic conditions and monetary and
fiscal policies are not predictable.

PAYMENT OF DIVIDENDS

The Company is a legal entity separate and distinct from the Bank. The
principal sources of cash flow of the Company, including cash flow to pay
dividends to its shareholders, are dividends it receives from the Bank. There
are statutory and regulatory limitations on the payment of dividends by the
Bank to the Company, as well as by the Company to its shareholders. As an
insured depository institution, the Bank also is prohibited from making capital
distributions, including the payment of dividends, if, after making such
distribution, it would become "undercapitalized" (as such term is defined in
the Federal Deposit Insurance Act).

If, in the opinion of the FDIC, an insured depository institution under
its jurisdiction is engaged in or is about to engage in an unsafe or unsound
practice (which, depending on the financial condition of the depository
institution, could include the payment of dividends), it may require, after
notice and hearing, that such institution cease and desist from such practice.
The federal banking agencies have indicated that paying dividends that deplete
a depository institution's capital base to an inadequate level would be an
unsafe and unsound banking practice. Under current federal law, a depository
institution may not pay any dividend if payment would cause it to become
undercapitalized or if it already is undercapitalized. See " -- Prompt
Corrective Action." Moreover, the federal agencies have issued policy
statements which provide that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings. The payment of
dividends by the Company and the Bank may also be affected or limited by other
factors, such as the requirement to maintain adequate capital above regulatory
guidelines.

At June 30, 1998, the Bank had approximately $4.4 million available for
payment of dividends to the Company without affecting its classification as a
"well capitalized" bank under federal bank regulatory capital guidelines and
without regulatory approval.

CAPITAL ADEQUACY

The Company and the Bank each is required to comply with the capital
adequacy standards established by the Federal Reserve in the case of the
Company and the FDIC in the case of the Bank. There are two basic measures of
capital adequacy for bank holding companies that have been promulgated by the
Federal Reserve: a risk-based measure and a leverage measure. All applicable
capital standards must be satisfied for a bank holding company to be considered
in compliance.

The minimum guideline for the ratio ("Total Capital Ratio") of total
capital ("Total Capital") to 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 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 ("Tier 1 Capital"). The remainder may consist of certain
subordinated debt, certain hybrid capital instruments and other qualifying
preferred stock, and a limited amount of loan loss reserves ("Tier 2 Capital").
At June 30, 1998, the Company's consolidated Total Capital Ratio and its ratio
of Tier 1 Capital to risk-weighted assets ("Tier 1 Capital Ratio") were 13.26%
and 12.00%, respectively.

In addition, the Federal Reserve has established minimum leverage ratio
guidelines for bank holding companies. These guidelines provide for a minimum
ratio (the "Leverage Capital Ratio") of Tier 1 Capital to average assets, less
goodwill and certain other intangible assets, of 3.0% for bank holding
companies that meet certain specified criteria, including having the highest
regulatory rating. All other bank holding companies generally are required to
maintain an additional cushion of 100 to 200 basis points above the stated
minimums. The guidelines also provide that bank holding companies experiencing
internal growth or making acquisitions will be expected to maintain strong
capital positions substantially above the minimum supervisory levels without
significant reliance on intangible assets. Furthermore, the Federal Reserve has
indicated that it will consider a "Tangible Leverage Ratio" (deducting all
intangibles) and other indicia of capital strength in evaluating proposals for
expansion or new activities. At June 30, 1998, the Company's Leverage Capital
Ratio was 8.73%.

The Bank is subject to risk-based and leverage capital requirements
adopted by the FDIC which are substantially similar to those adopted by the
Federal Reserve for bank holding companies. At June 30, 1998, the Bank's Total
Capital, Tier 1 Capital and Leverage Capital Ratios were 13.26%, 12.00% and
8.73%, respectively, and the Bank was in compliance with all applicable minimum
regulatory capital requirements.

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<PAGE>

Failure to meet capital guidelines could subject a bank to a variety of
enforcement remedies, including issuance of a capital directive, the
termination of deposit insurance by the FDIC, a prohibition on the taking of
brokered deposits, and certain other restrictions on its business. As described
below, substantial additional restrictions can be imposed upon FDIC-insured
depository institutions that fail to meet applicable capital requirements. See
" -- Prompt Corrective Action."

The Federal Reserve 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 the
evaluation of a bank's capital adequacy. The bank regulatory agencies'
methodology for evaluating interest rate risk requires banks with excessive
interest rate risk exposure to hold additional amounts of capital against such
exposures.

PROMPT CORRECTIVE ACTION

Current federal law establishes a system of prompt corrective action to
resolve the problems of undercapitalized institutions. Under this system, which
became effective in December 1992, the federal banking regulators have
established five capital categories (well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized, and critically
undercapitalized) and are required to take certain mandatory supervisory
actions, and are authorized to take other discretionary actions, with respect
to institutions in the three undercapitalized categories. The severity of such
actions taken will depend upon the capital category in which an institution is
placed. Generally, subject to a narrow exception, current federal law requires
the banking regulators to appoint a receiver or conservator for an institution
that is critically undercapitalized.

Under the final agency rules implementing the prompt corrective action
provisions, an institution that (i) 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 (ii) is not subject to any written agreement, order,
capital directive, or prompt corrective action directive issued by the
appropriate federal banking agency, is deemed to be well capitalized. An
institution 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 to be adequately capitalized. A depository institution 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 to be
undercapitalized. A depository institution 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 to be significantly undercapitalized, and an
institution that has a tangible equity capital to assets ratio equal to or less
than 2.0% is deemed to be critically undercapitalized. For purposes of the
regulation, the term "tangible equity" includes core capital elements counted
as Tier 1 Capital for purposes of the risk-based capital standards, plus the
amount of outstanding cumulative perpetual preferred stock (including related
surplus), minus all intangible assets with certain exceptions. A depository
institution may be deemed to be in a capitalization category that is lower than
is indicated by its actual capital position if it receives an unsatisfactory
examination rating.

An institution that is categorized as undercapitalized, significantly
undercapitalized, or critically undercapitalized is required to submit an
acceptable capital restoration plan to its appropriate federal banking agency.
A bank holding company must guarantee that a subsidiary depository institution
meets its capital restoration plan, subject to certain limitations. The
obligation of a controlling bank holding company to fund a capital restoration
plan is limited to the lesser of 5.0% of an undercapitalized subsidiary's
assets or the amount required to meet regulatory capital requirements. An
undercapitalized institution is also generally prohibited from increasing its
average total assets, making acquisitions, establishing any branches, or
engaging in any new line of business, except in accordance with an accepted
capital restoration plan or with the approval of the FDIC. In addition, the
appropriate federal banking agency is given authority with respect to any
undercapitalized depository institution to take any of the actions it is
required to or may take with respect to a significantly undercapitalized
institution as described above if it determines "that those actions are
necessary to carry out the purpose" of the law.

At June 30, 1998, the Bank had the requisite capital levels to qualify as
well capitalized.

RESERVE REQUIREMENTS

Pursuant to regulations of the Federal Reserve, all FDIC-insured
depository institutions must maintain average daily reserves against their
transaction accounts. No reserves are required to be maintained on the first
$4.7 million of transaction accounts, but reserves equal to 3.0% must be
maintained on the aggregate balances of such accounts between $4.7 million and
$47.8 million, and reserves equal to 10.0% must be maintained on aggregate
balances in excess of $47.8 million. These percentages are subject to
adjustment by the Federal Reserve. Because required reserves must be maintained
in the form of vault cash or in a non-interest-bearing account at a Federal
Reserve Bank, the effect of the reserve requirement is to reduce the amount of
the institution's interest-earning assets. As of June 30, 1998, the Bank met
its reserve requirements.

43
<PAGE>

FDIC INSURANCE ASSESSMENTS

The FDIC currently uses a risk-based assessment system that takes into
account the risks attributable to different categories and concentrations of
assets and liabilities for purposes of calculating deposit insurance
assessments to be paid by insured depository institutions. The risk-based
assessment system, which went into effect on January 1, 1994, assigns an
institution to one of three capital categories: (i) well capitalized; (ii)
adequately capitalized; and (iii) undercapitalized. These three categories are
substantially similar to the prompt corrective action categories described
above, with the "undercapitalized" category including institutions that are
undercapitalized, significantly undercapitalized, and critically
undercapitalized for prompt corrective action purposes. An institution is also
assigned by the FDIC to one of three supervisory subgroups within each capital
group. The supervisory subgroup to which an institution is assigned is based on
a supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information which the FDIC determines to be relevant to
the institution's financial condition and the risk posed to the deposit
insurance funds (which may include, if applicable, information provided by the
institution's state supervisor). An institution's insurance assessment rate is
then determined based on the capital category and supervisory category to which
it is assigned. Under the final risk-based assessment system, there are nine
assessment risk classifications (i.e., combinations of capital groups and
supervisory subgroups) to which different assessment rates (ranging from zero
to 31 basis points) are applied.

In 1996, the FDIC imposed a special one-time assessment of approximately
65.7 basis points (0.657%) on a depository institution's assessable deposits
insured by the Savings Association Insurance Fund ("SAIF ") held as of March
31, 1995 (or approximately 52.6 basis points on SAIF deposits acquired by banks
in certain qualifying transactions), and adopted revisions to the assessment
rate schedules that would generally eliminate the disparity between assessment
rates applicable to the deposits insured by the Bank Insurance Fund ("BIF ")
and the SAIF. The Bank has no SAIF-insured deposits and, therefore, was not
required to pay the special assessment.

The Bank currently is not assessed any premiums for deposits insured by
either the BIF or SAIF. However, the Bank continues to pay premiums based on
deposit levels to service debt on Financing Corporation bonds.

Under the Federal Deposit Insurance Act, insurance of deposits may be
terminated by the FDIC upon a finding that the institution has engaged in
unsafe and unsound practices, is in an unsafe or unsound condition to continue
operations, or has violated any applicable law, regulation, rule, order, or
condition imposed by the FDIC.

COMMUNITY REINVESTMENT

Under the Community Reinvestment Act ("CRA"), as implemented by
regulations of the federal bank regulatory agencies, an insured institution 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 financial institutions nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the federal bank regulatory agencies, in connection with their
examination of insured institutions, to assess the institutions' 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
certain applications by those institutions. All institutions are required to
make public disclosure of their CRA performance ratings. The Bank received a
"satisfactory" rating in its last CRA examination in May 1998.

On May 4, 1995, the federal bank regulatory agencies adopted new uniform
CRA regulations that provide guidance to financial institutions on their CRA
obligations and the methods by which those obligations will be assessed and
enforced. The regulations establish three tests applicable to the Bank: (i) a
lending test to evaluate direct lending in low-income areas and indirect
lending to groups that specialize in community lending; (ii) a service test to
evaluate delivery of services to such areas, and (iii) an investment test to
evaluate investment in programs beneficial to such areas. The new CRA
regulations became effective on July 1, 1995, but reporting requirements were
not effective until January 1, 1997. Evaluation under the regulations was not
mandatory until July 1, 1997. The Bank believes its current operations and
policies substantially comply with the regulations and therefore no material
changes to operations or policies are expected.

TRANSACTIONS WITH AFFILIATES

The Bank is subject to restrictions imposed by federal law on extensions
of credit to, and certain other transactions with, the Company and other
affiliates and on investments in the stock or other securities thereof. These
restrictions prevent the Company and other affiliates from borrowing from the
Bank unless the loans are secured by specified collateral, and require such
transactions to have terms comparable to terms of arms-length transactions with
third persons. Further, such

44
<PAGE>

secured loans and other transactions and investments by the Bank are generally
limited in amount as to the Company and as to any other affiliate to 10.0% of
the Bank's capital and surplus and as to the Company and all other affiliates
to an aggregate of 20.0% of the Bank's capital and surplus. These regulations
and restrictions may limit the Company's ability to obtain funds from the Bank
for its cash needs, including funds for acquisitions and for payment of
dividends, interest and operating expenses. The Bank's ability to extend credit
to its and the Company's directors, executive officers, and 10.0% stockholders,
as well as to entities controlled by such persons, is governed by the
requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and
Regulation O of the Federal Reserve thereunder.

INTERSTATE BANKING AND BRANCHING

The BHCA, 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 antitrust 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.

Beginning June 1, 1997, and subject to certain conditions, the Interstate
Banking Law also permitted interstate branching by allowing a bank to merge
with a bank located in a different state. A state was allowed to accelerate the
effective date for interstate mergers by adopting a law authorizing such
transactions prior to June 1, 1997, or it could "opt out" and thereby prohibit
interstate branching by enacting legislation to that effect prior to that date.
The Interstate Banking 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 contained therein, specifically 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.

45
<PAGE>

MANAGEMENT

BOARD OF DIRECTORS

The Company's bylaws provide for a Board of Directors composed of not less
than nine nor more than 15 members divided into three classes, as nearly equal
in number as possible, with the directors in each class being elected to
staggered three-year terms. There currently are eleven members of the Board of
Directors. Each year the terms of directors in one class expire and the number
of persons in that class are elected as directors for new three-year terms. The
following table contains information about the Company's current eleven
directors. Each director of the Company also serves as a director of the Bank.

<TABLE>
<CAPTION>
YEAR FIRST
ELECTED/
POSITION(S) CURRENT TERM PRINCIPAL OCCUPATION AND
NAME AND AGE WITH BANK EXPIRES(1) BUSINESS EXPERIENCE
- ------------------------- ------------------ -------------- ---------------------------------------------------------------
<S> <C> <C> <C>
George T. Davis, Jr.(2) Vice Chairman 1979 / 2000 Attorney, Davis & Davis, Swan Quarter, NC
(44)
C. Gilbert Gibbs(3) Director 1983 / 1999 Owner of C.G. Gibbs Hardware (hardware store) and
(75) Darkwood Farms (farming operations), Engelhard, NC
Gregory C. Gibbs(3) Director 1994 / 2000 Student, NC State University, Raleigh, NC; previously
(38) served as Manager, C.G. Gibbs Hardware (hardware
store), Engelhard, NC
John F. Hughes, Jr. Director 1996 / 2000 Regional Manager, North Carolina Power (utility company),
(53) Manteo, NC
Arthur H. Keeney, III President, Chief 1995 / 2001 President and Chief Executive Officer of the Bank since
(54) Executive 1995; previously served as Vice President and General
Officer and Manager, OMG Co. (manufacturer of electronic and
Director telecommunications training devices), Baltimore, MD
(1994-1995); as Recruiting Consultant, Don Richards and
Associates, Inc. (executive recruiters), Baltimore, MD
(1993-1994); as Executive Director, American
Foundation for Urologic Disease, Baltimore, MD
(1991-1993); and as Executive Vice President, Signet
Bank, Richmond, VA (1983-1991)
J. Bryant Kittrell, III Director 1990 / 1999 President, Kittrell & Associates, Inc. (real estate
(46) development and sales), Greenville, NC
Joseph T. Lamb, Jr. Director 1981 / 2001 President, Joe Lamb, Jr. & Associates, Inc. (real estate
(64) sales and rentals), Nags Head, NC
B. Martelle Marshall Director 1993 / 1999 Owner of Martelle's Barbeque (restaurant), Engelhard, NC;
(48) previously conducted farming operations, Engelhard, NC
Robert L. Mitchell Director 1981 / 2000 Owner of Mitchell's Barber Shop, Columbia, NC
(81)
Ray M. Spencer(4) Director 1974 / 2001 Retired farmer, Scranton, NC
(75)
R. S. Spencer, Jr.(4) Chairman 1963 / 1999 President, R.S. Spencer, Inc. (retail merchant), Engelhard,
(57) NC
</TABLE>

- ---------
(1) The "year first elected" indicates the year in which each individual first
was elected a director of the Bank.
(2) Mr. Davis provided certain legal services to the Bank during 1997 and
continues to do so during 1998.
(3) C. Gilbert Gibbs and Gregory C. Gibbs are father and son, respectively.
(4) Messrs. Ray M. Spencer and R.S. Spencer, Jr. are not related.

The Company's Bylaws authorize the Board of Directors to set and change
the number of directors from time to time (within the minimum and maximum
numbers described above). An increase in the number of directors will result in
a vacancy on the Board of Directors which may be filled by the Board without
shareholder approval. However, any person appointed by the Board to fill a
vacancy could serve as a director only until the next meeting of shareholders
at which directors are to be elected, and his or her continued service as a
director would be subject to reelection by shareholders at that meeting.

46
<PAGE>

EXECUTIVE OFFICERS

The executive officers of the Company and the Bank are listed below.

ARTHUR H. KEENEY, III, age 54, serves as President and Chief Executive
Officer of the Company and the Bank. He has been employed by the Bank since
1995. A listing of other positions held by Mr. Keeney during the past five
years is contained in his listing above as a director.

GARY M. ADAMS, age 45, is a Senior Vice President and serves as Chief
Financial Officer of the Company and the Bank. He has been employed by the Bank
since 1981.

J. DORSON WHITE, JR., age 47, is an Executive Vice President and serves as
Branch Administrator for the Bank. He has been employed by the Bank since 1989.

WILLIAM F. PLYLER, II, age 54, serves as Senior Vice President and Chief
Credit Officer and has been employed by the Bank since 1995. Mr. Plyler has a
total of approximately 32 years of experience in lending and loan
administration positions with banks. He previously served as Vice President in
the Credit Policy Division for Southern National Bank, Winston-Salem, North
Carolina, from 1993 to 1995 and held various positions in Lending and Credit
Administration with Wachovia Bank of North Carolina, N.A., from 1966 to 1993.

SARAH M. STEPHENS, age 40, is a Senior Vice President and serves as the
Bank's Director of Human Resources. She has been employed by the Bank since
1988.

BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table describes the beneficial ownership of the Company's
outstanding Common Stock as of September 30, 1998, by its directors and certain
executive officers, individually, and by all directors and executive officers
as a group. At that date, Mr. C. Gilbert Gibbs (who is included in the table)
was the only person known to management of the Company to beneficially own more
than 5% of the outstanding shares of Common Stock.

<TABLE>
<CAPTION>
NAME OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
- -------------------------------------------------------- ------------------------- ---------
<S> <C> <C>
George T. Davis, Jr. ........................... 20,514 1.15%
C. Gilbert Gibbs (2) ........................... 480,666 (3) 27.00%
Gregory C. Gibbs ............................... 5,628 (3) .32%
John F. Hughes, Jr. ............................ 1,200 .07%
Arthur H. Keeney, III .......................... 750 .04%
J. Bryant Kittrell, III ........................ 4,350 .24%
Joseph T. Lamb, Jr. ............................ 13,983 .79%
B. Martelle Marshall ........................... 1,932 .11%
Robert L. Mitchell ............................. 2,226 .13%
R. S. Spencer, Jr. ............................. 72,963 4.10%
Ray M. Spencer ................................. 7,623 .43%
All current directors and executive officers
as a group (15 persons) ....................... 613,038 34.44%
</TABLE>

- ---------
(1) Except as otherwise noted, to the best knowledge of management of the
Company, the individuals named and included in the group exercise sole
voting and investment power with respect to all shares shown as
beneficially owned other than the following shares as to which such powers
are shared: Mr. Davis -- 6,993 shares; Mr. C.G. Gibbs -- 74,835 shares;
Mr. G.C. Gibbs -- 828 shares; Mr. Kittrell -- 450 shares; Mr. Lamb --
2,265 shares; Mr. Marshall -- 1,041 shares; Mr. Mitchell -- 891 shares;
Mr. R.S. Spencer -- 29,457 shares; all current directors and executive
officers as a group -- 116,760 shares.
(2) Mr. Gibbs' address is Post Office Box 39, Engelhard, North Carolina 27824.
(3) Includes 828 shares listed as beneficially owned by both Mr. G.C. Gibbs and
Mr. C.G. Gibbs which are counted only once in the total shares
beneficially owned by individuals included in the group.

47
<PAGE>

MANAGEMENT COMPENSATION
EXECUTIVE COMPENSATION

The following table shows, for 1997, 1996 and 1995, the cash and certain
other compensation paid to, or received or deferred by, the Bank's Chief
Executive Officer. The Company was organized on March 4, 1998, and commenced
operations as the Bank's parent holding company on July 22, 1998, upon
consummation of the Reorganization. The Company's officers and directors are
compensated by the Bank for their services as officers and directors of the
Bank and do not receive any separate compensation from the Company. All
compensation reflected in the table below was paid by the Bank.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND SALARY COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR ($)(1) BONUS($)(2) ($)(3) ($)(4)
- ----------------------------- ------ ----------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Arthur H. Keeney, III(5), 1997 $103,599 $26,880 $780 $14,939
President and Chief 1996 95,646 33,000 780 19,402
Executive Officer 1995 29,842 -0- -0- 1,400
</TABLE>

- ---------
(1) Includes amounts deferred at Mr. Keeney's election pursuant to the Bank's
Section 401(k) salary deferral plan.
(2) The Bank maintains an annual incentive bonus plan (the "Incentive Plan")
under which cash bonus awards may be paid each year to executive officers
and other officers and employees of the Bank based on the extent to which
the Bank and the participant achieve specific performance goals. The
Bank's Chief Executive Officer each year approves a list of eligible
employees to participate in the Incentive Plan, and participants are
assigned to one of seven tiers based upon job titles and responsibilities.
Each tier is assigned performance goals and bonuses are awarded based upon
the extent to which such goals are achieved. Performance goals under the
Incentive Plan are stated each year as various levels of return on average
assets, return on average equity, operating expenses as a percentage of
average assets, branch performance criteria and department operating
criteria.
(3) In addition to compensation paid in cash, Mr. Keeney received certain
personal benefits, including the use of a vehicle owned by the Bank. The
amount of such non-cash benefits received by Mr. Keeney during each year
did not exceed 10% of his cash compensation for that year.
(4) The amounts reported for 1997 consist of $6,878 attributable to premiums
paid by the Bank on an insurance policy used to fund a supplemental
retirement plan established by the Bank, $5,373 in contributions by the
Bank to the Section 401(k) salary deferral plan for Mr. Keeney's account,
and an aggregate of $2,688 in moving and storage expenses which the Bank
agreed to pay when Mr. Keeney was hired.
(5) Mr. Keeney's employment with the Bank commenced during 1995. He currently
serves as President and Chief Executive Officer of the Bank pursuant to an
employment agreement which provides for a term of three years (commencing
during January 1998). At the end of each year, the term automatically will
be extended for one additional year, subject to the Bank's option that the
agreement not be so extended. The agreement may be terminated by the Bank
for conduct constituting "cause" (as such term is defined in the
agreement) or, upon 90 days' prior written notice, without cause, and may
be terminated by Mr. Keeney upon 90 days' prior written notice. Mr.
Keeney's annual base salary for 1998 under the agreement is $112,000, he
is entitled to discretionary salary increases and bonuses as may be
determined by the Board of Directors from time to time, and he has agreed
not to compete with the Bank in the areas in which it does business
following the termination of his employment. In the event that, within
three months following a "change in control" of the Bank, Mr. Keeney's
employment is terminated without cause, or his duties are substantially
reduced relative to his position prior to such transaction, or he is
required to change his workplace to a location more than 75 miles from
Engelhard, North Carolina, then he will be entitled to receive payment of
an amount equal to 2.99 times the average of his salary, cash bonus and
incentive payments during the preceding three years.

DIRECTOR COMPENSATION

The Bank pays its directors (other than directors who are employees) a fee
of $350 for each Board meeting attended. In addition, members of committees of
the Board receive a fee for each committee meeting attended ($350 for the
Executive Committee and $200 for each other committee), and directors are
reimbursed for travel expenses incurred in attending Board and committee
meetings. No separate fees are paid to directors for their services as
directors of the Company.

E. Royden Clarke, whose service to the Bank totaled 42 years, retired from
his position as a director during December 1997. He previously had served as
Chairman of the Board of Directors until December 1996, and, until his
retirement from

48
<PAGE>

active employment during 1995, he served as the Bank's President and Chief
Executive Officer. In connection with his retirement, the Bank paid Mr. Clarke
a supplemental retirement benefit of $100,000 and transferred to him title to
an automobile valued at $11,875.

STOCK OPTIONS

During January 1998, the Bank's Board of Directors adopted an Omnibus
Stock Ownership and Long Term Incentive Plan (the "Omnibus Plan") which was
approved by the Bank's shareholders at the May 13, 1998 annual meeting and
which provides for the issuance of up to an aggregate of 159,000 shares of
Common Stock pursuant to stock options and other awards granted or issued under
its terms. At that time, the Board of Directors also awarded to certain
officers of the Bank options to purchase an aggregate of 9,516 shares of the
Bank's common stock pursuant to the terms of the Omnibus Plan at a price equal
to the then current market value of $12.50 per share (as such number of shares
and purchase price have been adjusted in accordance with the terms of the
Omnibus Plan to reflect the three-for-one stock split which was effective July
22, 1998). Upon consummation of the Reorganization, the Company assumed the
Bank's obligations under the Omnibus Plan, and each of the then outstanding
options under the Plan were converted, in accordance with its terms, into
options to purchase shares of the Company's Common Stock. The following table
contains certain information regarding options granted to and currently held by
the Company's Chief Executive Officer under the Omnibus Plan.

OPTION/SAR GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE
AT ASSUMED ANNUAL RATES
OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ----------------------------------------------------------------------------------------- ----------------------
% OF TOTAL
NO. OF SECURITIES OPTIONS/SARS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED (#)(1) FISCAL YEAR ($/SHARE)(1) DATE 5% ($) 10% ($)
- --------------------------- ------------------- -------------- -------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Arthur H. Keeney, III .. 4,422 46.5% $ 12.50 01/21/08 $39,264 $102,431
</TABLE>

- ---------
(1) All options become exercisable as to one-third of the covered shares on
January 21 each year, beginning January 21, 2001, and expire ten years
following the date of grant. The number of shares granted and exercise
price have been adjusted in accordance with the terms of the Omnibus Plan
to reflect the effect of the three-for-one stock split in the Bank's
common stock which was effective on July 22, 1998.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The Bank has had, and expects to have in the future, banking transactions
in the ordinary course of business with certain of its directors, executive
officers and their associates. All loans included in such transactions were
made on substantially the same terms, including interest rates, repayment terms
and collateral, as those prevailing at the time such loans were made for
comparable transactions with other persons, and such loans do not involve more
than the normal risk of collectibility or present other unfavorable features.

DESCRIPTION OF CAPITAL STOCK

AUTHORIZED CAPITAL. The Company's authorized capital stock consists of
10,000,000 shares of Common Stock, $3.50 par value per share, of which
1,780,254 shares were issued and outstanding at September 30, 1998.

OPTIONS. There currently are outstanding options under the Omnibus Plan to
purchase an aggregate of 9,516 shares (as adjusted for the three-for-one split
in the Bank's common stock which was effective July 22, 1998) of Common Stock
at a price of $12.50 per share (as adjusted for the stock split).

VOTING RIGHTS. Except as otherwise provided below, the holders of Common
Stock are entitled to one vote per share held of record on all matters
submitted to a vote of shareholders, and are not entitled to vote cumulatively
in the election of directors.

Pursuant to the North Carolina Control Share Acquisition Act, shares of
Common Stock acquired in a "control share acquisition" ("Control Shares") will
have no voting rights unless such rights are granted by resolution adopted by
the holders of at least a majority of the outstanding shares of the Company's
stock entitled to vote in the election of directors, excluding shares held by
the person who has acquired or proposes to acquire the Control Shares and
excluding shares held by any

49
<PAGE>

officer or director who is also an employee of the Company. "Control Shares"
are defined as shares of the Company acquired by any person which, when added
to the shares already owned by such person, would entitle that person (except
for the application of the Act) to voting power in the election of directors
equal to or greater than (i) one-fifth of all voting power, (ii) one-third of
all voting power, or (iii) a majority of all voting power. "Control share
acquisition" means, with certain exceptions, the acquisition by any person of
beneficial ownership of Control Shares, including an acquisition pursuant to
certain agreements of merger or consolidation to which the Company is a party,
and purchases of shares directly from the Company.

CHARTER AMENDMENTS. With certain exceptions, an amendment to the Company's
charter, including a provision to increase the authorized capital stock of the
Company, may be effected if the amendment is recommended to the Company's
shareholders by the Board of Directors and if the votes cast by shareholders in
favor of the amendment exceed the votes cast opposing the amendment.

MERGER, SHARE EXCHANGE, SALE OF ASSETS AND DISSOLUTION. In general, North
Carolina law requires that any merger, share exchange, voluntary liquidation or
transfer of substantially all the assets (other than in the ordinary course of
business) of the Company be recommended to the Company's shareholders by its
board of directors and be approved by the affirmative vote of at least a
majority of all outstanding shares of the Company's voting stock.

The North Carolina Shareholder Protection Act requires the affirmative
vote of the holders of 95% of the outstanding shares of Common Stock (excluding
shares owned by an "interested shareholder") to approve certain business
combinations between the Company and an entity which owns more than 10% of the
Company's voting shares.

DIVIDENDS. Holders of Common Stock are entitled to dividends when and if
declared by the Company's Board of Directors from funds legally available,
whether in cash or in stock. Under North Carolina law, the declaration and
payment of cash dividends is at the discretion of the Company's Board of
Directors; provided, however, that no cash dividend may be paid if, after such
payment, the Company would not be able to pay its debts as they become due in
the usual course of its business or the Company's total assets would be less
than its total liabilities (plus the amount, if any, necessary to satisfy
certain preferential rights of shareholders). See "Dividends" and "Supervision,
Regulation and Certain Other Matters -- Payment of Dividends."

MISCELLANEOUS. In accordance with North Carolina law, holders of Common
Stock are entitled, upon dissolution or liquidation, to participate ratably in
the distribution of assets legally available for distribution to shareholders
after payment of debts. The Company's shareholders do not have preemptive
rights to acquire other or additional shares which might be issued by the
Company, or any redemption, sinking fund or conversion rights.

First-Citizens Bank & Trust Company currently acts as registrar and
transfer agent for Common Stock.

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement,
Interstate/Johnson Lane Corporation (the "Underwriter"), has agreed to purchase
from the Company, and the Company has agreed to sell to the Underwriter, the
number of shares of Common Stock set forth opposite the Underwriter's name
below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
- ---------------------------------------- ----------
<S> <C>
Interstate/Johnson Lane Corporation .. 300,000
-------
300,000
=======
</TABLE>

The Underwriting Agreement provides that the obligations of the
Underwriter are subject to approval of certain legal matters by counsel and to
various other conditions customary in a firm commitment underwritten public
offering. The nature of the Underwriter's obligations is such that it is
committed to purchase and pay for all shares of Common Stock offered hereby if
any are purchased.

The Underwriter proposes to offer the shares of Common Stock being
purchased directly to the public at the public offering price set forth on the
cover page of this Prospectus and to certain securities dealers at such price
less a concession not in excess of $.60 per share of Common Stock. The
Underwriter may allow, and such selected dealers may reallow, a concession not
in excess of $.10 per share to certain other brokers and dealers. After the
Offering, the offering price and other selling terms may be changed. The
Offering will terminate on or before December 31, 1998.

50
<PAGE>

The Company has granted a 30-day option to the Underwriter to purchase up
to a maximum of 45,000 additional shares of Common Stock to cover
over-allotments, if any, at the same public offering price, less the
underwriting discount. The Underwriter may purchase such shares only to cover
over-allotments made in connection with this Offering.

The Underwriter does not intend to sell shares of Common Stock to any
account over which it exercises discretionary authority.

The Company and its executive officers, directors and holders of 5% or
more of the outstanding Common Stock have agreed that they will not sell,
contract to sell, or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock for
a period of 90 days after the date of the consummation of the Offering without
the prior written consent of the Underwriter. The Underwriter may from time to
time be a customer of, engage in transactions with, and perform services for
the Company or the Bank in the ordinary course of business.

Whether or not the Offering is consummated, the Company will pay all
filing fees and expenses associated with required filings with the National
Association of Securities Dealers, Inc. and various state securities
regulators, including the reasonable fees and expenses of counsel to the
Underwriter related thereto, and, if the Offering is terminated with no shares
of Common Stock being sold, the Company will reimburse the Underwriter for its
actual, accountable out-of-pocket expenses (including counsel fees and
expenses) related to the Offering. The Company will also pay its own expenses
incurred in connection with the Offering, including legal, accounting, printing
and mailing expenses. It is expected that all such expenses will amount to
approximately $225,000 and will be paid by the Company from the sales proceeds.
If the Offering is terminated or withdrawn and no shares of Common Stock are
sold, Offering expenses will be charged against the Company's earnings.

The Company has agreed to indemnify the Underwriter against, and to
contribute to certain losses arising out of, certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Securities
Act"), or to contribute payments that the Underwriter may be required to make
in respect thereof.

During and after the Offering, the Underwriter may purchase and sell
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions, "passive" market making (see below) and purchases
to cover syndicate short positions created in connection with the Offering. The
Underwriter also may impose a penalty bid, whereby selling concessions allowed
to other broker-dealers in respect of the Common Stock sold in the Offering for
their account may be reclaimed by the Underwriter if such securities are
repurchased by the Underwriter in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail in
the open market. These transactions may be effected on the Nasdaq SmallCap or
otherwise, and these activities, if commenced, may be discontinued at any time.

As permitted by Rule 103 of Regulation M under the Exchange Act,
Underwriter or prospective underwriters that are market makers ("passive market
makers") in the Common Stock may make bids for or purchases of the Common Stock
in the Nasdaq SmallCap until such time, if any, when a stabilizing bid for such
securities has been made.

INDEMNIFICATION

North Carolina law and the Company's Bylaws generally provide for the
indemnification of the Company's officers and directors in the manner described
below.

PERMISSIBLE INDEMNIFICATION. The North Carolina Business Corporation Act
(the "NCBCA") allows a corporation, by charter, bylaw, contract or resolution,
to indemnify or agree to indemnify its officers, directors, employees and
agents and any person who is or was serving at the corporation's request as a
director, officer, employee or agent of another entity or enterprise or as a
trustee or administrator under an employee benefit plan, against liability and
expenses, including reasonable attorneys' fees, in any proceeding (including
without limitation a proceeding brought by or on behalf of the corporation
itself) arising out of their status as such or their activities in any of the
foregoing capacities as summarized herein. Any provision in a corporation's
charter or bylaws or in a contract or resolution may include provisions for
recovery from the corporation of reasonable costs, expenses and attorneys' fees
in connection with the enforcement of rights to indemnification granted therein
and may further include provisions establishing reasonable procedures for
determining and enforcing such rights.

The corporation may indemnify such person against liability expenses
incurred only where such person conducted himself or herself in good faith and
reasonably believed (i) in the case of conduct in his or her official corporate
capacity, that his or her conduct was in the corporation's best interests, and
(ii) in all other cases, that his or her conduct was at least not opposed to
the corporation's best interests; and, in the case of a criminal proceeding, he
or she had no reasonable cause to believe his or her conduct was unlawful;
provided, however, that a corporation may not indemnify such person either in

51
<PAGE>

connection with a proceeding by or in the right of the corporation in which
such person was adjudged liable to the corporation, or in connection with any
other proceeding charging improper personal benefit to such person (whether or
not involving action in an official capacity) in which such person was adjudged
liable on the basis that personal benefit was improperly received.

MANDATORY INDEMNIFICATION. Unless limited by the corporation's charter,
the NCBCA requires a corporation to indemnify a director or officer of the
corporation who is wholly successful, on the merits or otherwise, in the
defense of any proceeding to which such person was a party because he or she is
or was a director or officer of the corporation against reasonable expenses
incurred in connection with the proceeding.

ADVANCE FOR EXPENSES. Expenses incurred by a director, officer, employee
or agent of the corporation in defending a proceeding may be paid by the
corporation in advance of the final disposition of the proceeding as authorized
by the board of directors in the specific case, or as authorized by the charter
or bylaws or by any applicable resolution or contract, upon receipt of an
undertaking by or on behalf of such person to repay amounts advanced unless it
ultimately is determined that such person is entitled to be indemnified by the
corporation against such expenses.

COURT-ORDERED INDEMNIFICATION. Unless otherwise provided in the
corporation's charter, a director or officer of the corporation who is a party
to a proceeding may apply for indemnification to the court conducting the
proceeding or to another court of competent jurisdiction. On receipt of an
application, the court, after giving any notice the court deems necessary, may
order indemnification if it determines either (I) that the director or officer
is entitled to mandatory indemnification as described above, in which case the
court also will order the corporation to pay the reasonable expenses incurred
to obtain the court-ordered indemnification, or (II) that the director or
officer is fairly and reasonably entitled to indemnification in view of all the
relevant circumstances, whether or not such person met the requisite standard
of conduct or was adjudged liable to the corporation in connection with a
proceeding by or in the right of the corporation or on the basis that personal
benefit was improperly received in connection with any other proceeding so
charging (but if adjudged so liable, indemnification is limited to reasonable
expenses incurred).

PARTIES ENTITLED TO INDEMNIFICATION. The NCBCA defines "director" to
include ex-directors and the estate or personal representative of a director.
Unless its charter provides otherwise, a corporation may indemnify and advance
expenses to an officer, employee or agent of the corporation to the same extent
as to a director and also may indemnify and advance expenses to an officer,
employee or agent who is not a director to the extent, consistent with public
policy, as may be provided in its charter or bylaws, by general or specific
action of its board of directors, or by contract.

INDEMNIFICATION BY REGISTRANT. The Company's Bylaws provide for
indemnification of its directors and officers to the fullest extent permitted
by North Carolina law, and require its Boards of Directors to take all actions
necessary and appropriate to authorize such indemnification.

Under North Carolina law, a corporation also may purchase insurance on
behalf of any person who is or was a director or officer against any liability
arising out of his status as such. The Company currently maintains a directors'
and officers' liability insurance policy.

LEGAL MATTERS

The validity of the shares of Common Stock offered hereby has been passed
upon for the Company by Ward and Smith, P.A., Raleigh, North Carolina. Certain
legal matters related to this offering will be passed upon for the Underwriter
by Parker, Poe, Adams & Bernstein L.L.P., Charlotte, North Carolina.

EXPERTS

The supplemental consolidated balance sheets of ECB Bancorp, Inc. and
subsidiary as of December 31, 1997 and 1996, and the related supplemental
consolidated statements of income, shareholders' equity and cash flows for each
of the years in the three-year period ended December 31, 1997, have been
included herein and in the Registration Statement in reliance upon the report
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of such firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP covering the aforementioned
supplemental consolidated financial statements states that the supplemental
consolidated financial statements give retroactive effect to the merger of ECB
Bancorp, Inc. and The East Carolina Bank on July 22, 1998, which has been
accounted for in a manner similar to a pooling-of-interest as described in note
15 to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling-of-interests method in financial
statements that do not include the date of consummation. However, they

52
<PAGE>

will become the historical consolidated financial statements of ECB Bancorp,
Inc. and subsidiary after financial statements covering the date of
consummation of the business combination are issued. Additionally, the report
of KPMG Peat Marwick LLP contains an explanatory paragraph that states that the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 106, EMPLOYER'S ACCOUNTING FOR
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.

The consolidated balance sheets of The East Carolina Bank and subsidiaries
as of December 31, 1997 and 1996, 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, 1997, have been included herein and in the
Registration Statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of such firm as experts in accounting and auditing. The report of
KPMG Peat Marwick LLP covering the aforementioned consolidated financial
statements refers to the Bank's adoption of the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
106, EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of Sections 13
and 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and in accordance therewith files reports and other information with the
Commission. Any reports, proxy and information statements and other information
filed by the Company with the Commission may be inspected and copied at the
public reference facilities maintained by the Commission at Judiciary Plaza,
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices in Chicago, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, and in New York, Seven World Trade Center, 13th Floor,
New York, New York 10048. Copies of such material may also be obtained by mail
from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants who file
electronically with the Commission, including Registrant.

This Prospectus constitutes a part of a Registration Statement on Form
SB-2 (together with all exhibits thereto, the "Registration Statement") filed
by the Company with the Commission under the Securities Act. This Prospectus
does not contain all the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission, and reference is hereby made to the Registration Statement
for further information with respect to the Company and the Common Stock. Any
statements contained herein concerning the provisions of any document are not
necessarily complete and, in each instance, reference is made to the copy of
such document filed as an exhibit to the Registration Statement or otherwise
filed with the Commission. Each such statement is qualified in its entirety by
such reference.

This Prospectus may contain or incorporate by reference statements which
may constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. Prospective
investors are cautioned that any such forward-looking statements are not
guarantees for future performance and involve risks and uncertainties, and that
actual results may differ materially from those contemplated by such
forward-looking statements. Important factors currently known to management
that could cause actual results to differ materially from those in
forward-looking statements include significant fluctuations in interest rates,
inflation, economic recession, significant changes in the federal and state
legal and regulatory environment and tax laws, significant underperformance in
the Company's portfolio of outstanding loans, and competition in the Company's
markets. The Company does not undertake any obligation to update or revise
forward-looking statements to reflect changed assumptions, the occurrence of
unanticipated events or changes to future operating results over time.

53
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
ECB BANCORP, INC. AND SUBSIDIARY:
Independent Auditors' Report ............................................................. F-2
Supplemental Consolidated Balance Sheets as of June 30, 1998 (unaudited), and as of
December 31, 1997 and
1996 .................................................................................... F-3
Supplemental Consolidated Statements of Income for the six months ended June 30, 1998 and
1997 (unaudited),
and for each of the years in the three-year period ended December 31, 1997 .............. F-4
Supplemental Consolidated Statements of Shareholders' Equity for each of the years in the
three-year period ended
December 31, 1997 and for the six months ended June 30, 1998 (unaudited) ................ F-5
Supplemental Consolidated Statements of Cash Flows for the six months ended June 30, 1998
and 1997
(unaudited), and for each of the years in the three-year period ended December 31, 1997 . F-6
Notes to Supplemental Consolidated Financial Statements .................................. F-7
THE EAST CAROLINA BANK AND SUBSIDIARIES:
Independent Auditors' Report ............................................................. F-18
Consolidated Balance Sheets as of June 30, 1998 (unaudited), and as of December 31, 1997 F-19
and 1996
Consolidated Statements of Income for the six months ended June 30, 1998 and 1997
(unaudited), and for each of
the years in the three-year period ended December 31, 1997 .............................. F-20
Consolidated Statements of Shareholders' Equity for each of the years in the three-year
period ended
December 31, 1997 and for the six months ended June 30, 1998 (unaudited) ................ F-21
Consolidated Statements of Cash Flows for the six months ended June 30, 1998 and 1997
(unaudited), and for
each of the years in the three-year period ended December 31, 1997 ...................... F-22
Notes to Consolidated Financial Statements ............................................... F-23
</TABLE>

F-1
<PAGE>

INDEPENDENT AUDITORS' REPORT

THE BOARD OF DIRECTORS
ECB BANCORP, INC.:

We have audited the accompanying supplemental consolidated balance sheets of
ECB Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1997 and
1996, and the related supplemental consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1997. These supplemental consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. 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, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

The supplemental consolidated financial statements give retroactive effect to
the merger of ECB Bancorp, Inc. and The East Carolina Bank on July 22, 1998,
which has been accounted for in a manner similar to a pooling-of-interests as
described in note 15 to the supplemental consolidated financial statements.
Generally accepted accounting principles proscribe giving effect to a
consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These consolidated financial statements do not extend through the date of
consummation. However, they will become the historical consolidated financial
statements of ECB Bancorp, Inc. and subsidiary after financial statements
covering the date of consummation of the business combination are issued.

In our opinion, the supplemental 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles applicable after financial statements are issued
for a period which includes the date of consummation of the business
combination.

As discussed in note 7 to the supplemental consolidated financial statements,
on January 1, 1995, the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
106, EMPLOYER'S ACCOUNTING FOR POSTRETIREMENT BENEFITS OTHER THAN PENSIONS.

/s/ KPMG PEAT MARWICK LLP

Raleigh, North Carolina
February 4, 1998, except
note 15 which is as of July 22, 1998

F-2
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY

SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, 1998 -------------------------------
(UNAUDITED) 1997 1996
---------------- --------------- ---------------
<S> <C> <C> <C>
ASSETS
Non-interest bearing deposits and cash (note 11) ..................... $ 15,525,442 $ 8,280,694 $ 7,861,625
Federal funds sold ................................................... 1,850,000 4,425,000 6,550,000
------------ ------------ ------------
Total cash and cash equivalents ................................... 17,375,442 12,705,694 14,411,625
------------ ------------ ------------
Investment securities (note 2):
Available-for-sale (cost: $43,292,953, $46,655,155 and $34,435,638,
respectively) ..................................................... 43,855,081 47,119,973 34,588,505
Loans (note 3) ....................................................... 130,963,770 121,208,810 112,655,981
Allowance for possible loan losses (note 4) .......................... (2,690,474) (2,660,000) (2,400,000)
------------ ------------ ------------
Loans, net ........................................................ 128,273,296 118,548,810 110,255,981
------------ ------------ ------------
Real estate acquired in settlement of loans, net ..................... -- 340,000 --
Real estate held for sale, net ....................................... -- 150,000 200,000
Federal Home Loan Bank common stock, at cost ......................... 564,800 503,000 --
Bank premises and equipment, net (note 5) ............................ 6,316,325 6,266,283 5,538,229
Accrued interest receivable .......................................... 2,106,461 1,922,814 1,519,320
Other assets (note 6) ................................................ 618,630 671,148 703,934
------------ ------------ ------------
$199,110,035 $188,227,722 $167,217,594
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (note 9):
Demand, noninterest bearing ......................................... 41,488,495 31,897,001 27,211,047
Demand, interest bearing ............................................ 41,426,399 41,256,397 39,052,101
Savings ............................................................. 14,509,606 14,712,835 15,153,369
Time ................................................................ 83,393,054 83,042,628 69,919,045
------------ ------------ ------------
Total deposits .................................................... 180,817,554 170,908,861 151,335,562
------------ ------------ ------------
Accrued interest payable ............................................. 771,003 698,997 583,732
Postretirement benefit liability (note 7) ............................ 527,640 515,640 473,640
Other liabilities (note 7) ........................................... 314,413 390,931 575,114
------------ ------------ ------------
Total liabilities ................................................. 182,430,610 172,514,429 152,968,048
------------ ------------ ------------
Shareholders' equity (notes 14 and 15):
Common stock, par value $3.50 per share; authorized 10,000,000
shares; issued and outstanding 1,780,254 shares at June 30, 1998,
December 31, 1997 and 1996 ........................................ 6,230,889 6,230,889 6,230,889
Capital surplus ..................................................... 3,200,000 3,200,000 3,200,000
Retained earnings ................................................... 6,877,531 5,975,624 4,717,766
Unrealized gain on available-for-sale securities, net ............... 371,005 306,780 100,891
------------ ------------ ------------
Total shareholders' equity ........................................ 16,679,425 15,713,293 14,249,546
============ ============ ============
Commitments and contingencies (note 12)
$199,110,035 $188,227,722 $167,217,594
============ ============ ============
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-3
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
(UNAUDITED)
--------------------------------
1998 1997
---------------- ---------------
<S> <C> <C>
Interest income:
Interest and fees on loans .................................. $ 5,819,440 $ 5,336,974
Interest on investment securities:
Interest exempt from federal income taxes .................. 361,933 228,337
Taxable interest income .................................... 900,724 845,587
Interest on federal funds sold .............................. 83,027 187,639
------------ -----------
Total interest income ................................... 7,165,124 6,598,537
------------ -----------
Interest expense: ............................................
Deposits (note 9): ..........................................
Demand accounts ............................................ 313,841 347,918
Savings .................................................... 144,501 151,035
Time ....................................................... 2,206,847 2,130,914
Other ....................................................... 7,637 786
------------ -----------
Total interest expense .................................. 2,672,826 2,630,653
------------ -----------
Net interest income ..................................... 4,492,298 3,967,884
Provision for possible loan losses (note 4) .................. 120,000 210,000
------------ -----------
Net interest income after provision for possible
loan losses ............................................ 4,372,298 3,757,884
------------ -----------
Non-interest income: .........................................
Service charges on deposit accounts ......................... 659,564 675,668
Other service charges and fees .............................. 262,432 225,506
Net gain (loss) on sale of securities ....................... -- --
Net gain on sale of real estate acquired in settlement of
loans and real estate held for sale ........................ 6,476 --
Other ....................................................... 13,059 18,095
------------ -----------
Total non-interest income ............................... 941,531 919,269
------------ -----------
Non-interest expense:
Salaries .................................................... 1,566,250 1,442,548
Retirement and other employee benefits (note 7) ............. 482,093 442,191
Occupancy ................................................... 347,768 294,152
Equipment ................................................... 417,114 338,450
Deposit insurance premiums .................................. 10,158 14,147
Professional fees ........................................... 178,699 66,219
Supplies .................................................... 121,522 106,527
Telephone ................................................... 137,350 96,636
Postage ..................................................... 84,557 74,682
Other ....................................................... 796,411 577,322
------------ -----------
Total non-interest expense .............................. 4,141,922 3,452,874
------------ -----------
Income before income taxes and cumulative effect
of a change in accounting for postretirement
benefits ............................................... 1,171,907 1,224,279
Income taxes (note 6) ........................................ 270,000 355,000
------------ -----------
Income before cumulative effect of a change in
accounting for postretirement benefits ................. 901,907 869,279
Cumulative effect for years prior to January 1, 1995 of a
change in accounting for postretirement benefits, net of
income taxes (note 7) ....................................... -- --
------------ -----------
Net income .............................................. $ 901,907 $ 869,279
============ ===========
Net income per share (basic and diluted):
Income before cumulative effect of a change in
accounting for postretirement benefits ................... $ 0.51 $ 0.49
Cumulative effect for years prior to January 1, 1995 of
a change in accounting for postretirement benefits ....... -- --
------------ -----------
Net income ................................................. $ 0.51 $ 0.49
============ ===========

<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
---------------- --------------- -------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans .................................. $ 10,887,327 $ 9,521,265 $ 8,754,549
Interest on investment securities:
Interest exempt from federal income taxes .................. 511,653 472,206 469,306
Taxable interest income .................................... 1,749,612 1,918,789 2,207,869
Interest on federal funds sold .............................. 490,623 301,265 371,806
------------ ------------ -----------
Total interest income ................................... 13,639,215 12,213,525 11,803,530
------------ ------------ -----------
Interest expense: ............................................
Deposits (note 9): ..........................................
Demand accounts ............................................ 698,635 699,138 804,115
Savings .................................................... 308,012 328,029 407,471
Time ....................................................... 4,357,110 3,804,230 3,995,593
Other ....................................................... 786 9,459 8,746
------------ ------------ -----------
Total interest expense .................................. 5,364,543 4,840,856 5,215,925
------------ ------------ -----------
Net interest income ..................................... 8,274,672 7,372,669 6,587,605
Provision for possible loan losses (note 4) .................. 353,513 496,914 515,066
------------ ------------ -----------
Net interest income after provision for possible
loan losses ............................................ 7,921,159 6,875,755 6,072,539
------------ ------------ -----------
Non-interest income: .........................................
Service charges on deposit accounts ......................... 1,391,136 1,102,866 982,601
Other service charges and fees .............................. 524,638 419,128 516,890
Net gain (loss) on sale of securities ....................... -- 5,662 (4,663)
Net gain on sale of real estate acquired in settlement of
loans and real estate held for sale ........................ -- 110,960 3,400
Other ....................................................... 30,293 79,448 171,290
------------ ------------ -----------
Total non-interest income ............................... 1,946,067 1,718,064 1,669,518
------------ ------------ -----------
Non-interest expense:
Salaries .................................................... 2,938,570 2,770,184 2,624,186
Retirement and other employee benefits (note 7) ............. 971,474 939,505 619,020
Occupancy ................................................... 623,134 549,613 478,113
Equipment ................................................... 768,244 563,478 500,123
Deposit insurance premiums .................................. 24,589 1,500 190,055
Professional fees ........................................... 209,038 198,298 271,588
Supplies .................................................... 221,978 183,942 153,933
Telephone ................................................... 216,821 176,034 193,260
Postage ..................................................... 150,311 143,458 133,325
Other ....................................................... 1,419,816 1,259,044 1,004,271
------------ ------------ -----------
Total non-interest expense .............................. 7,543,975 6,785,056 6,167,874
------------ ------------ -----------
Income before income taxes and cumulative effect
of a change in accounting for postretirement
benefits ............................................... 2,323,251 1,808,763 1,574,183
Income taxes (note 6) ........................................ 650,000 475,000 384,000
------------ ------------ -----------
Income before cumulative effect of a change in
accounting for postretirement benefits ................. 1,673,251 1,333,763 1,190,183
Cumulative effect for years prior to January 1, 1995 of a
change in accounting for postretirement benefits, net of
income taxes (note 7) ....................................... -- -- (278,555)
------------ ------------ -----------
Net income .............................................. $ 1,673,251 $ 1,333,763 $ 911,628
============ ============ ===========
Net income per share (basic and diluted):
Income before cumulative effect of a change in
accounting for postretirement benefits ................... $ 0.94 $ 0.75 $ 0.67
Cumulative effect for years prior to January 1, 1995 of
a change in accounting for postretirement benefits ....... -- -- (0.16)
------------ ------------ -----------
Net income ................................................. $ 0.94 $ 0.75 $ 0.51
============ ============ ===========
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-4
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)

<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------- UNREALIZED
NUMBER CAPITAL RETAINED GAINS
OF SHARES AMOUNT SURPLUS EARNINGS (LOSSES) TOTAL
----------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 ........... 593,418 $5,934,180 $3,000,000 $3,704,923 $ (734,929) $11,904,174
Common stock issued in 1998
three-for-one stock split (note 15).. 1,186,836 296,709 200,000 (496,709) -- --
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1994, AS
RESTATED ............................. 1,780,254 6,230,889 3,200,000 3,208,214 (734,929) 11,904,174
Change in unrealized gains (losses),
net of income tax benefit of
$498,100............................. -- -- -- -- 966,893 966,893
Net income ........................... -- -- -- 911,628 -- 911,628
Cash dividends ($.20 per share)....... -- -- -- (356,051) -- (356,051)
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 ........... 1,780,254 6,230,889 3,200,000 3,763,791 231,964 13,426,644
Change in unrealized gains (losses),
net of income taxes of $67,500....... -- -- -- -- (131,073) (131,073)
Net income ........................... -- -- -- 1,333,763 -- 1,333,763
Cash dividends ($.21 per share)....... -- -- -- (379,788) -- (379,788)
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1996 ........... 1,780,254 6,230,889 3,200,000 4,717,766 100,891 14,249,546
Change in unrealized gains (losses),
net of income taxes of $106,000...... -- -- -- -- 205,889 205,889
Net income ........................... -- -- -- 1,673,251 -- 1,673,251
Cash dividends ($.23 per share)....... -- -- -- (415,393) -- (415,393)
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1997 ........... 1,780,254 6,230,889 3,200,000 5,975,624 306,780 15,713,293
Change in unrealized gains (losses),
net of income taxes of $33,100
(Unaudited) ......................... -- -- -- -- 64,225 64,225
Net income (Unaudited) ............... -- -- -- 901,907 -- 901,907
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT JUNE 30, 1998
(Unaudited) .......................... 1,780,254 $6,230,889 $3,200,000 $6,877,531 $ 371,005 $16,679,425
========= ========== ========== ========== ========== ===========
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-5
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY

SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
(UNAUDITED)
--------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 901,907 $ 869,279
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................. 327,262 251,587
Amortization of premium on investment securities,
net .................................................... 24,040 26,914
Provision for possible loan losses ....................... 120,000 210,000
Provision for loss on real estate held for sale .......... -- --
Deferred income taxes .................................... -- --
Loss (gain) on sale of available-for-sale securities ..... -- --
Loss (gain) on sale of real estate acquired in
settlement of loans and real estate held for sale ...... (6,476) --
Loss (gain) on disposal of premises and equipment -- 7,442
Decrease (increase) in accrued interest receivable ....... (183,647) (303,746)
Decrease (increase) in other assets ...................... 19,432 (318,594)
Increase (decrease) in accrued interest payable .......... 72,006 206,311
Increase in postretirement benefit liability ............. 12,000 21,000
Increase (decrease) in other liabilities ................. (76,518) (340,302)
------------ --------------
Net cash provided by operating activities .............. 1,210,006 629,891
------------ --------------
Cash flows from investing activities:
Proceeds from sales of investment securities
classified as available-for-sale ......................... -- --
Proceeds from maturities of investment securities
classified as available-for-sale ......................... 7,479,588 10,248,033
Proceeds from maturities of investment securities
classified as held-to-maturity ........................... -- --
Purchases of investment securities classified as
available-for-sale ....................................... (4,141,425) (12,863,018)
Purchases of investment securities classified as
held-to-maturity ......................................... -- --
Purchase of Federal Home Loan Bank common stock (61,800) (503,000)
Proceeds from disposal of premises and equipment .......... 3,325 23,372
Purchases of premises and equipment ....................... (380,629) (565,147)
Proceeds from disposal of real estate acquired in
settlement of loans and real estate held for sale ........ 496,476 --
Net loan repayments (originations) ........................ (9,844,486) (9,029,442)
------------ --------------
Net cash used by investing activities .................. (6,448,951) (12,689,202)
------------ --------------
Cash flows from financing activities:
Net increase (decrease) in deposits ....................... 9,908,693 18,781,877
Dividends paid ............................................ -- --
------------ --------------
Net cash provided by financing activities .............. 9,908,693 18,781,877
------------ --------------
Increase (decrease) in cash and cash equivalents ........... 4,669,748 6,722,566
Cash and cash equivalents at beginning of year ............. 12,705,694 14,411,625
------------ --------------
Cash and cash equivalents at end of year ................... $ 17,375,442 $ 21,134,191
============ ==============
Supplemental disclosure of noncash financing and
investing activities:
Unrealized gains (losses) on available-for-sale
securities, net of deferred taxes ........................ $ 64,225 $ 21,303
============ ==============

<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 1,673,251 $ 1,333,763 $ 911,628
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................. 545,852 445,314 377,844
Amortization of premium on investment securities,
net .................................................... 51,838 9,870 2,165
Provision for possible loan losses ....................... 353,513 496,914 515,066
Provision for loss on real estate held for sale .......... 50,000 53,800 23,800
Deferred income taxes .................................... (33,700) (128,500) (187,000)
Loss (gain) on sale of available-for-sale securities ..... 25,818 (5,662) 4,663
Loss (gain) on sale of real estate acquired in
settlement of loans and real estate held for sale ...... 95 (110,960) (3,400)
Loss (gain) on disposal of premises and equipment 7,242 8,384 (122,583)
Decrease (increase) in accrued interest receivable ....... (403,494) (74,499) 4,678
Decrease (increase) in other assets ...................... (914) (8,989) 8,158
Increase (decrease) in accrued interest payable .......... 115,265 (72,264) 300,240
Increase in postretirement benefit liability ............. 42,000 28,000 445,640
Increase (decrease) in other liabilities ................. (184,183) 106,518 195,173
-------------- -------------- ------------
Net cash provided by operating activities .............. 2,242,583 2,081,689 2,476,072
-------------- -------------- ------------
Cash flows from investing activities:
Proceeds from sales of investment securities
classified as available-for-sale ......................... 3,015,439 513,924 3,486,953
Proceeds from maturities of investment securities
classified as available-for-sale ......................... 13,349,710 21,500,092 14,361,272
Proceeds from maturities of investment securities
classified as held-to-maturity ........................... -- -- 1,301,500
Purchases of investment securities classified as
available-for-sale ....................................... (28,662,322) (9,033,608) (5,296,508)
Purchases of investment securities classified as
held-to-maturity ......................................... -- -- (9,006,181)
Purchase of Federal Home Loan Bank common stock (503,000) -- --
Proceeds from disposal of premises and equipment .......... 23,665 21,842 217,744
Purchases of premises and equipment ....................... (1,304,813) (592,433) (796,094)
Proceeds from disposal of real estate acquired in
settlement of loans and real estate held for sale ........ 50,263 406,653 68,316
Net loan repayments (originations) ........................ (9,075,362) (18,146,433) (9,046,448)
-------------- -------------- ------------
Net cash used by investing activities .................. (23,106,420) (5,329,963) (4,709,446)
-------------- -------------- ------------
Cash flows from financing activities:
Net increase (decrease) in deposits ....................... 19,573,299 924,642 9,391,452
Dividends paid ............................................ (415,393) (379,788) (356,051)
-------------- -------------- ------------
Net cash provided by financing activities .............. 19,157,906 544,854 9,035,401
-------------- -------------- ------------
Increase (decrease) in cash and cash equivalents ........... (1,705,931) (2,703,420) 6,802,027
Cash and cash equivalents at beginning of year ............. 14,411,625 17,115,045 10,313,018
-------------- -------------- ------------
Cash and cash equivalents at end of year ................... $ 12,705,694 $ 14,411,625 $ 17,115,045
============== ============== ============
Supplemental disclosure of noncash financing and
investing activities:
Unrealized gains (losses) on available-for-sale
securities, net of deferred taxes ........................ $ 205,889 $ (131,073) $ 966,893
============== ============== ============
</TABLE>

See accompanying notes to supplemental consolidated financial statements.

F-6
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY

NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

(A) CONSOLIDATION

The supplemental consolidated financial statements include the accounts of
ECB Bancorp, Inc. ("Bancorp") (see note 15) and its wholly-owned subsidiary,
The East Carolina Bank (the "Bank") (collectively referred to hereafter as the
"Company"). The Bank has two wholly-owned subsidiaries, Carolina Financial
Realty, Inc. and Carolina Financial Courier, Inc. Significant intercompany
accounts and transactions have been eliminated in consolidation. All
adjustments considered necessary for a fair presentation of the results for
interim periods presented have been made (such adjustments are normal and
recurring in nature).

Operating results for the six-month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.

(B) BASIS OF FINANCIAL STATEMENT PRESENTATION

The preparation of financial statements in conformity with generally
accepted accounting principles 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.
In connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties held as
collateral for loans.

Bancorp is a bank holding company incorporated in North Carolina. 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.

(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

Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation at each
reporting date. Securities are classified as held-to-maturity ("HTM") when the
Company has both the positive intent and ability to hold the securities to
maturity. HTM securities are stated at amortized cost. Securities not
classified as HTM are classified as available-for-sale ("AFS"). AFS securities
are stated at fair value as determined by reference to published sources, with
the unrealized gains and losses, net of income taxes, reported as a separate
component of shareholders' equity. The Company has no trading securities.

The amortized cost of securities classified as HTM or AFS is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income from investments. Realized gains
and losses, and declines in value judged to be other-than-temporary are
included in net securities gains (losses). The cost of securities sold is based
on the specific identification method.

(F) LOANS RECEIVABLE

Loans are generally stated at their outstanding unpaid principal balances
net of 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.

F-7
<PAGE>
ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued)

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 judgement, the collection of interest income appears doubtful
or the loan is past due 90 days or more. 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

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 potential future losses existing in the loan portfolio.
Management believes that the AFLL is adequate. 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 risk
composition 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 additions 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 additions 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
in accordance with the standard 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.

(H) REAL ESTATE 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
and loans classified as in-substance foreclosure. In accordance with SFAS No.
114, a loan is classified as in-substance foreclosure when the Company has
taken possession of the collateral regardless of whether formal foreclosure
proceedings have taken place. Real estate acquired in settlement of loans is
recorded initially at the lower of the loan balance plus unpaid accrued
interest or 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 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. Loans
with outstanding principal balances totalling $390,358, $-0- and $89,600 were
foreclosed on during the years ended December 31, 1997, 1996 and 1995,
respectively.

(I) MEMBERSHIP/INVESTMENT IN FEDERAL HOME LOAN BANK STOCK

In 1997, the Company became a member of the Federal Home Loan Bank of
Atlanta ("FHLB"). Membership, along with a signed blanket collateral agreement,
provides the Company with the ability to draw $13 million of advances from the
FHLB. No advances were drawn by the Company in 1997.

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, 1997,
the Company owned 5,030 shares of the FHLB's $100 par value capital stock. No
ready market exists for such stock, which is carried at cost.

F-8
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued)

(J) PREMISES AND EQUIPMENT

Premises 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) 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 using enacted tax rates expected to be in effect when such amounts
are realized or settled.

(L) EMPLOYEE BENEFIT PLANS

The Company has in place a postretirement benefit plan covering certain
retirees and a defined contribution 401(k) plan that covers all eligible
employees. The Company had a noncontributory defined benefit retirement plan
that covered substantially all employees which was terminated in 1995 with
final pay-out of accrued benefits occurring in 1996 (see note 7).

(M) NET INCOME/DIVIDENDS PER SHARE

The Company adopted SFAS No. 128, "Earnings Per Share", in 1997, which
requires net income per share to be calculated on both a basic and diluted
basis. Net income per share is computed based on the weighted averatge number
of common shares outstanding during the year and represents basic and diluted
net income per share for 1997, 1996 and 1995. Because the Company has no
potentially dilutive securities, restatement of 1996 and 1995 net income per
share amounts was not necessary. Dividends per share are based on the shares
outstanding at the time of dividend declaration. All shares and per share
amounts have been restated to give effect to the three-for-one stock split on
July 22, 1998 (see note 15).

(N) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT

(O) RECLASSIFICATIONS

Certain 1995 and 1996 amounts have been reclassified in the financial
statements to conform with the 1997 presentation. The reclassifications had no
effect on previously reported net income or retained earnings.

F-9
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) INVESTMENT SECURITIES
The following is a summary of the securities portfolios by major
classification:

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury obligations .................................... $25,072,694 $156,543 $ (1,087) $25,228,150
Securities of other U.S. government agencies and corporations 7,821,384 15,710 (2,427) 7,834,667
Obligations of states and political subdivisions ............. 13,761,077 300,592 (4,513) 14,057,156
----------- -------- -------- -----------
Total ...................................................... $46,655,155 $472,845 $ (8,027) $47,119,973
=========== ======== ======== ===========
</TABLE>

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury obligations .................................... $15,983,515 $ 23,180 $ (12,086) $15,994,609
Securities of other U.S. government agencies and corporations 9,357,841 3,430 (21,514) 9,339,757
Obligations of states and political subdivisions ............. 9,094,282 205,266 (45,409) 9,254,139
----------- -------- --------- -----------
Total ...................................................... $34,435,638 $231,876 $ (79,009) $34,588,505
=========== ======== ========= ===========
</TABLE>

Gross realized gains and losses on sales of securities for the years ended
December 31, 1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------ --------- -----------
<S> <C> <C> <C>
Gross realized gains .................. $ -- $5,662 $ 1,500
Gross realized losses ................. (25,818) -- (6,163)
--------- ------ --------
Net realized gains (losses) .......... $ (25,818) $5,662 $ (4,663)
========= ====== ========
</TABLE>

The aggregate amortized cost and approximate market value of the
available-for-sale securities portfolio at December 31, 1997, by remaining
contractual maturity are as follows:

<TABLE>
<CAPTION>
APPROXIMATE
AMORTIZED MARKET
COST VALUE
-------------- --------------
<S> <C> <C>
U.S. Treasury obligations:
Due in one year or less ..................................... $ 5,995,765 $ 5,997,500
Due in one year through five years .......................... 19,076,929 19,230,650
Securities of other U.S. government agencies and corporations:
Due in one year or less ..................................... 3,296,330 3,295,163
Due in one year through five years .......................... 3,745,042 3,756,291
Due after ten years ......................................... 780,012 783,213
Obligations of states and political subdivisions:
Due in one year or less ..................................... 190,035 190,353
Due in one year through five years .......................... 5,489,847 5,611,142
Due after five through ten years ............................ 3,659,958 3,780,614
Due after ten years ......................................... 4,421,237 4,475,047
----------- -----------
Total securities .......................................... $46,655,155 $47,119,973
=========== ===========
</TABLE>

Securities with a principal amount of approximately $18,272,000 at
December 31, 1997 are pledged as collateral for deposits.

F-10
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) LOANS
Loans at December 31, 1997 and 1996 classified by type, are as follows:

<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Commercial, financial and agricultural .......... $ 26,074,410 $ 22,906,424
Real estate loans:
Construction ................................... 1,490,215 972,127
Mortgage, commercial and residential ........... 64,943,072 67,278,983
Installment ..................................... 28,845,615 21,670,249
------------ ------------
121,353,312 112,827,783
============ ============
Less deferred fees and costs, net .............. 144,502 171,802
------------ ------------
$121,208,810 $112,655,981
============ ============
Included in the above:
Nonaccrual loans ............................... $ 1,462,831 $ 1,017,453
============ ============
Restructured loans ............................. $ 522,352 $ 350,024
============ ============
</TABLE>

At December 31, 1997, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $797,000 (all on a non-accrual basis).
Included in this amount is $112,000 of impaired loans for which the related
AFLL is $112,000 and $685,000 of impaired loans that as a result of write-downs
and collateral values do not have an AFLL. The average recorded investment in
impaired loans during the year ended December 31, 1997 was approximately
$810,000. For the year ended December 31, 1997, the Company recognized interest
income on those impaired loans of $26,000, all of which was recognized using
the cash basis method of income recognition.

At December 31, 1996, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $919,000 (all on a non-accrual basis).
Included in this amount is $53,000 of impaired loans for which the related AFLL
is $53,000 and $866,000 of impaired loans that as a result of write-downs and
collateral values do not have an AFLL. The average recorded investment in
impaired loans during the year ended December 31, 1996 was approximately
$1,016,000. For the year ended December 31, 1996, the Company recognized
interest income on those impaired loans of $18,000, all of which was recognized
using the cash basis method of income recognition.

Interest income that would have been recorded on nonaccrual loans for the
years ended December 31, 1997, 1996 and 1995 had they performed in accordance
with the original terms throughout each of the periods amounted to
approximately $161,000, $119,000 and $62,000, respectively. Actual interest
income recorded on nonaccrual loans for the years ended December 31, 1997, 1996
and 1995 was $25,000, $23,000 and $41,000, respectively. Interest income on
restructured loans included in the results of operations for each of the years
amounted to approximately $53,000, $41,000 and $119,000, respectively.

Loans at December 31, 1997 and 1996 include loans to officers and
directors and their associates totaling approximately $1,103,000 and
$1,801,000, respectively. During 1997, $787,000 in loans were disbursed to
officers, directors and their associates and principal repayments of $1,485,000
were received on such loans.

The Company, through its normal lending activity, originates and maintains
loans receivable which 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 Bank and such changes could be significant.

At December 31, 1997, $66,433,287, or 54.81%, of the Company's loan
portfolio was composed of loans principally collateralized by liens on real
estate. Of that amount, approximately $23,963,000, or 19.77%, represents loans
collateralized by owner-occupied residential real estate.

F-11
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES
An analysis of the allowance for possible loan losses for the six months
ended June 30, 1998 and 1997 (unaudited) and the years ended December 31, 1997,
1996 and 1995 follows:

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------------- -----------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Beginning balance ................. $2,660,000 $2,400,000 $2,400,000 $1,950,000 $1,900,000
Provision for possible loan losses 120,000 210,000 353,513 496,914 515,066
Recoveries ........................ 40,269 39,774 100,838 218,843 83,433
Loans charged off ................. (129,795) (104,019) (194,351) (265,757) (548,499)
---------- ---------- ---------- ---------- ----------
Ending balance .................... $2,690,474 $2,545,755 $2,660,000 $2,400,000 $1,950,000
========== ========== ========== ========== ==========
</TABLE>

(5) PREMISES AND EQUIPMENT

An analysis of premises and equipment at December 31, 1997 and 1996
follows:

<TABLE>
<CAPTION>
ACCUMULATED UNDEPRECIATED
COST DEPRECIATION COST
-------------- -------------- --------------
<S> <C> <C> <C>
December 31, 1997:
Land ............................ $ 1,177,138 $ -- $1,177,138
Land improvements ............... 243,541 161,959 81,582
Buildings ....................... 5,270,762 1,535,891 3,734,871
Furniture and equipment ......... 4,201,127 2,928,435 1,272,692
----------- ---------- ----------
Total ......................... $10,892,568 $4,626,285 $6,266,283
=========== ========== ==========
December 31, 1996:
Land ............................ $ 1,177,138 $ -- $1,177,138
Land improvements ............... 220,103 198,869 21,234
Buildings ....................... 4,936,591 1,322,548 3,614,043
Furniture and equipment ......... 3,530,902 2,805,088 725,814
----------- ---------- ----------
Total ......................... $ 9,864,734 $4,326,505 $5,538,229
=========== ========== ==========
</TABLE>

(6) INCOME TAXES

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

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ------------- -----------
<S> <C> <C> <C>
Year ended December 31, 1997:
Federal .................... $660,700 $ (33,700) $627,000
State ...................... 23,000 -- 23,000
-------- ---------- --------
$683,700 $ (33,700) $650,000
======== ========== ========
Year ended December 31, 1996:
Federal .................... $599,500 $ (128,500) $471,000
State ...................... 4,000 -- 4,000
-------- ---------- --------
$603,500 $ (128,500) $475,000
======== ========== ========
Year ended December 31, 1995:
Federal .................... $420,000 $ (43,000) $377,000
State ...................... 7,000 -- 7,000
-------- ---------- --------
$427,000 $ (43,000) $384,000
======== ========== ========
</TABLE>

F-12
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) INCOME TAXES -- (Continued)

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:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Income taxes at statutory rate .................. $ 790,000 $ 615,000 $ 535,000
Increase (decrease) resulting from:
Effect of non-taxable interest income ......... (187,000) (179,000) (163,000)
Other, net .................................... 47,000 39,000 12,000
---------- ---------- ----------
Applicable income taxes ......................... $ 650,000 $ 475,000 $ 384,000
========== ========== ==========
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses ......... $680,000 $591,600
Writedown of other real estate ............. 78,000 60,400
Postretirement benefits .................... 175,300 161,000
Other ...................................... 3,200 43,400
-------- --------
Total gross deferred tax assets ........... $936,500 $856,400
======== ========
</TABLE>

<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Bank premises and equipment, principally due to differences in depreciation $245,400 $196,500
Unrealized holding gains on securities available for sale .................. 158,000 52,000
Other ...................................................................... 22,000 24,500
-------- --------
Total gross deferred tax liabilities ...................................... 425,400 273,000
-------- --------
Net deferred tax asset .................................................... $511,100 $583,400
======== ========
</TABLE>

The Company has no valuation allowance at December 31, 1997 or 1996,
because management has determined that it has sufficient taxable income in the
carryback period to support the realizability of the net deferred tax asset.

Income taxes paid during each of the three years ended December 31, 1997,
1996 and 1995 were $749,400, $534,100 and $382,300, respectively.

(7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS

Net periodic pension cost for 1996 and 1995 for the Company's defined
benefit pension plan consists of the following components:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Service cost-benefits earned during the period .......... $ -- $ --
Interest cost on projected benefit obligation ........... 69,647 102,175
Actual return on plan assets ............................ (19,084) (90,250)
Net amortization and deferral ........................... 629 63,075
Effect of change in PBGC rate ........................... 53,808 --
--------- ---------
Net periodic pension expense .......................... $ 105,000 $ 75,000
========= =========
</TABLE>

F-13
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (Continued)

In 1994, the Plan benefits were frozen in anticipation of a complete plan
termination. The Company approved termination of the Plan in 1995. The Plan
termination was approved by the Internal Revenue Service in 1996 and all Plan
benefits were paid to participants.

On June 1, 1994, the Company implemented 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 $117,355, $100,588 and $100,993 in 1997, 1996 and
1995, 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. The Company adopted SFAS No. 106,
"Employer's Accounting for Postretirement Benefits Other Than Pensions", as of
January 1, 1995. The cumulative effect of this change in accounting for the
Company's liability for postretirement benefits of $422,555 was determined as
of January 1, 1995, and is reported separately in the 1995 statement of income,
net of a deferred income tax benefit of $144,000.

Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes
the following components:

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Service cost ...................................... $ 6,478 $ 4,832 $ 4,516
Interest cost ..................................... 35,522 31,966 29,578
------- ------- -------
Net periodic postretirement benefit cost .......... $42,000 $36,798 $34,094
======= ======= =======
</TABLE>

The following table presents the plan's funded status at December 31, 1997
and 1996:

<TABLE>
<CAPTION>
1997 1996
-------------- --------------
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO"):
Retirees .................................................. $ (304,323) $ (235,252)
Other fully eligible active employees ..................... -- (70,362)
Other active participants ................................. (145,172) (158,910)
---------- ----------
Total accumulated benefit obligation .................... (449,495) (464,524)
Unrecognized gain on changes in acturarial assumptions ..... (66,145) (9,116)
---------- ----------
Plan assets at fair value .................................. -- --
---------- ----------
Accrued postretirement benefit cost ........................ $ (515,640) $ (473,640)
========== ==========
Weighted average discount rate in determining APBO ......... 7.0% 7.0%
Annual health care cost trend rate ......................... 9.0 9.0
Ultimate medical trend rate ................................ 8.0 8.0
Medical trend rate period (in years) ....................... 5 5
Effect of 1% increase in assumed health care cost on:
Service and interest cost ................................. 16.4% 17.3%
APBO ...................................................... 15.0 15.7
</TABLE>

(8) RELATED PARTY TRANSACTIONS

The Company has banking transactions in the ordinary course of business
with several of its directors and officers, and their associates. Such
transactions are on the same terms as those prevailing at the time for
comparable transactions with others. In the opinion of management, loans made
to directors, officers and their associates do not involve more than the normal
risk of collectibility or present any other unfavorable features (see note 3).

(9) DEPOSITS

At December 31, 1997 and 1996, certificates of deposit of $100,000 or more
amounted to approximately $19,503,067 and $17,835,000, respectively.

F-14
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) DEPOSITS -- (Continued)

For the years ended December 31, 1997, 1996 and 1995, interest expense on
certificates of deposit of $100,000 or more amounted to approximately
$1,057,000, $1,038,000 and $1,236,000, respectively.

The Company made interest payments of $5,249,278, $4,903,660 and
$4,906,909 during the years ended December 31, 1997, 1996 and 1995,
respectively.

Time deposit accounts as of December 31, 1997, mature in the following
years and amounts: 1998 -- $77,864,727; 1999 -- $4,094,535; and 2000 --
$1,083,366.

(10) LEASES

The Company also has several noncancellable operating leases for three
branch locations. These leases generally contain renewal options for periods
ranging from three to five years and require the Company to pay all executory
costs such as maintenance and insurance. Rental expense for operating leases
during 1997 and 1996 was $69,758 and $25,000, respectively.

Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1997
are as follows:

<TABLE>
<S> <C>
Year ending December 31,
1998 ................................... $ 65,797
1999 ................................... 65,797
2000 ................................... 61,147
2001 ................................... 35,887
2002 ................................... 9,879
Thereafter ............................. --
--------
Total minimum lease payments ......... $238,507
========
</TABLE>

(11) RESERVE REQUIREMENTS

The aggregate net reserve balances maintained under the requirements of
the Federal Reserve, which are noninterest bearing, were approximately
$2,032,000 at December 31, 1997.

(12) 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 $16,316,000 and standby letters of credit of
$223,000, at December 31, 1997.

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 their funding from normal
operations.

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS

F-15
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)

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.

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, 1997 and 1996:

<TABLE>
<CAPTION>
1997 1996
----------------------------- -----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Financial assets:
Non-interest bearing deposits and cash $ 8,185,000 $ 8,185,000 $ 7,862,000 $ 7,862,000
Federal funds sold .................... 4,425,000 4,425,000 6,550,000 6,550,000
Investment securities ................. 47,120,000 47,120,000 34,589,000 34,589,000
FHLB common stock ..................... 503,000 503,000 -- --
Net loans ............................. 118,549,000 119,094,000 110,256,000 109,408,000
Financial liabilities:
Deposits .............................. 170,909,000 171,137,000 151,336,000 151,426,000
</TABLE>

The estimated fair values of net loans and deposits at December 31 are
based on cash flows discounted at market interest rates. The carrying values of
other financial instruments, including various receivables and payables,
approximate fair value.

(14) REGULATORY MATTERS

The Company is 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 financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance sheet items as
calculated under regulatory accounting practices. The Company's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.

The Bank, as a North Carolina chartered bank, may pay dividends only out
of undivided profits 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 the financial soundness of the Bank.

Quantitative measures established by regulation to ensure capital adequacy
require 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, 1997, that the Bank meets all
capital adequacy requirments to which it is subject.

As of December 31, 1997, the most recent notification from the Federal
Deposit Insurance Corporation ("FDIC") categorized the Bank as 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. There are no
conditions or events since that notification that management believes have
changed the Bank's category.

F-16
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) REGULATORY MATTERS -- (Continued)

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

<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------------------------ ------------------- ------------------
AMOUNT RATIO RATIO RATIO
---------- ----------- ------------------- ------------------
<S> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) ......... $16,973 13.66% =>8.0% =>10.00%
Tier I Capital
(to Risk Weighted Assets) ......... $15,406 12.40% =>4.0% =>6.00%
Tier I Capital
(to Average Assets) ............... $15,406 8.53% =>4.0% =>5.00%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) ......... $15,577 13.75% =>8.0% =>10.00%
Tier I Capital
(to Risk Weighted Assets) ......... $14,149 12.49% =>4.0% =>6.0%
Tier I Capital
(to Average Assets) ............... $14,149 8.53% =>4.0% =>5.00%
</TABLE>

In May 1995, the Bank Insurance Fund ("BIF") of the FDIC reached its
designated ratio of reserves to insured deposits (i.e., 1.25%). For this
reason, the FDIC reduced the assessment rate applicable to BIF deposits in two
stages, so that, beginning in 1996, the deposit insurance premiums for 92% of
all BIF members in the highest capital and supervisory categories were set at
$1,500 per year, regardless of deposit size. Beginning in 1997, BIF members
were required to begin paying FICO-bond assessments in addition to the $1,500
annual assessment. The FICO bond assessment was $23,089 for the Company in
1997.

(15) SUBSEQUENT EVENTS

On July 22, 1998, and pursuant to a charter amendment, the Bank effected a
three-for-one stock split of the Bank's common stock increasing the number of
shares of common stock from 593,418 to 1,780,254. Additionally, by way of the
same charter amendment, the Bank increased the post-split par value of the
common stock from $3.33 per share to $3.50 per share. In connection with the
stock split and increase in par value, the Bank increased the capital surplus
account in accordance with North Carolina General Statutes Section 53-88. All
references to the number of common shares and per share amounts in the
financial statements have been restated as appropriate to reflect the effect of
the split, for all periods presented. Additionally, common stock, capital
surplus, and retained earnings have been restated for all periods presented as
appropriate to reflect the stock split, the increase in par value, and the
increase in the capital surplus account.

On July 22, 1998, the Bank was acquired by Bancorp which was newly-formed
on March 4, 1998, for purposes of such transaction. Each outstanding share of
the Bank's common stock was exchanged for one share of Bancorp's common stock
with the Bank becoming a wholly-owned subsidiary of Bancorp. Bancorp's primary
purpose is to serve as the parent of the Bank. This transaction was accounted
for in a manner similar to a pooling-of-interests whereby the historical book
values of the Bank's accounts were combined with Bancorp's accounts on the date
of the merger.

F-17
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
The East Carolina Bank:

We have audited the accompanying consolidated balance sheets of The East
Carolina Bank and subsidiaries as of December 31, 1997 and 1996, 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, 1997. These
consolidated financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The East Carolina
Bank and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.

As discussed in note 7 to the consolidated financial statements, on January 1,
1995, the Bank adopted the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 106, EMPLOYER'S
ACCOUNTING FOR POSTRETIREMENT BENIFITS OTHER THAN PENSIONS.

/s/ KPMG PEAT MARWICK LLP

Raleigh, North Carolina
February 4, 1998, except
note 15 which is as of July 22, 1998

F-18
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, 1998 -----------------------------
(UNAUDITED) 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
ASSETS
Non-interest bearing deposits and cash (note 11) .......................... $ 15,525,442 8,280,694 7,861,625
Federal funds sold ........................................................ 1,850,000 4,425,000 6,550,000
------------ --------- ---------
Total cash and cash equivalents ........................................ 17,375,442 12,705,694 14,411,625
------------ ---------- ----------
Investment securities (note 2):
Available-for-sale (cost: $43,292,953, $46,655,155 and $34,435,638,
respectively) .......................................................... 43,855,081 47,119,973 34,588,505
Loans (note 3) ............................................................ 130,963,770 121,208,810 112,655,981
Allowance for possible loan losses (note 4) ............................... (2,690,474) (2,660,000) (2,400,000)
------------ ----------- -----------
Loans, net ............................................................. 128,273,296 118,548,810 110,255,981
------------ ----------- -----------
Real estate acquired in settlement of loans, net .......................... -- 340,000 --
Real estate held for sale, net ............................................ -- 150,000 200,000
Federal Home Loan Bank common stock, at cost .............................. 564,800 503,000 --
Bank premises and equipment, net (note 5) ................................. 6,316,325 6,266,283 5,538,229
Accrued interest receivable ............................................... 2,106,461 1,922,814 1,519,320
Other assets (note 6) ..................................................... 618,630 671,148 703,934
------------ ----------- -----------
$199,110,035 188,227,722 167,217,594
============ =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits (note 9):
Demand, noninterest bearing .............................................. 41,488,495 31,897,001 27,211,047
Demand, interest bearing ................................................. 41,426,399 41,256,397 39,052,101
Savings .................................................................. 14,509,606 14,712,835 15,153,369
Time ..................................................................... 83,393,054 83,042,628 69,919,045
------------ ----------- -----------
Total deposits ......................................................... 180,817,554 170,908,861 151,335,562
------------ ----------- -----------
Accrued interest payable .................................................. 771,003 698,997 583,732
Postretirement benefit liability (note 7) ................................. 527,640 515,640 473,640
Other liabilities (note 7) ................................................ 314,413 390,931 575,114
------------ ----------- -----------
Total liabilities ...................................................... 182,430,610 172,514,429 152,968,048
------------ ----------- -----------
Shareholders' equity (notes 14 and 15):
Common stock, par value $3.50 per share; authorized 10,000,000 shares;
issued and outstanding 1,780,254 shares at June 30, 1998,
December 31, 1997 and 1996 ............................................. 6,230,889 6,230,889 6,230,889
Capital surplus .......................................................... 3,200,000 3,200,000 3,200,000
Retained earnings ........................................................ 6,877,531 5,975,624 4,717,766
Unrealized gain on available-for-sale securities, net .................... 371,005 306,780 100,891
------------ ----------- -----------
Total shareholders' equity ............................................. 16,679,425 15,713,293 14,249,546
============ =========== ===========
Commitments and contingencies (note 12)
$199,110,035 188,227,722 167,217,594
============ =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-19
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
(UNAUDITED)
------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Interest income:
Interest and fees on loans ........................................ $ 5,819,440 5,336,974
Interest on investment securities:
Interest exempt from federal income taxes ........................ 361,933 228,337
Taxable interest income .......................................... 900,724 845,587
Interest on federal funds sold .................................... 83,027 187,639
----------- ---------
Total interest income .......................................... 7,165,124 6,598,537
----------- ---------
Interest expense:
Deposits (note 9):
Demand accounts .................................................. 313,841 347,918
Savings .......................................................... 144,501 151,035
Time ............................................................. 2,206,847 2,130,914
Other ............................................................. 7,637 786
----------- ---------
Total interest expense ......................................... 2,672,826 2,630,653
Net interest income ............................................ 4,492,298 3,967,884
Provision for possible loan losses (note 4) ........................ 120,000 210,000
----------- ---------
Net interest income after provision for possible
loan losses ................................................... 4,372,298 3,757,884
----------- ---------
Non-interest income:
Service charges on deposit accounts ............................... 659,564 675,668
Other service charges and fees .................................... 262,432 225,506
Net gain (loss) on sale of securities ............................. -- --
Net gain on sale of real estate acquired in settlement of loans
and real estate held for sale .................................... 6,476 --
Other ............................................................. 13,059 18,095
----------- ---------
Total non-interest income ...................................... 941,531 919,269
----------- ---------
Non-interest expense:
Salaries .......................................................... 1,566,250 1,442,548
Retirement and other employee benefits (note 7) ................... 482,093 442,191
Occupancy ......................................................... 347,768 294,152
Equipment ......................................................... 417,114 338,450
Deposit insurance premiums ........................................ 10,158 14,147
Professional fees ................................................. 178,699 66,219
Supplies .......................................................... 121,522 106,527
Telephone ......................................................... 137,350 96,636
Postage ........................................................... 84,557 74,682
Other ............................................................. 796,411 577,322
----------- ---------
Total non-interest expense ..................................... 4,141,922 3,452,874
----------- ---------
Income before income taxes and cumulative effect of a
change in accounting for postretirement benefits .............. 1,171,907 1,224,279
Income taxes (note 6) .............................................. 270,000 355,000
----------- ---------
Income before cumulative effect of a change in accounting
for postretirement benefits ................................... 901,907 869,279
Cumulative effect for years prior to January 1, 1995 of a change
in accounting for postretirement benefits, net of income taxes
(note 7) .......................................................... -- --
----------- ---------
Net income ..................................................... $ 901,907 869,279
=========== =========
Net income per share (basic and diluted):
Income before cumulative effect of a change in accounting for
postretirement benefits .......................................... $ 0.51 0.49
Cumulative effect for years prior to January 1, 1995 of a
change in accounting for postretirement benefits ................. -- --
----------- ----------
Net income ........................................................ $ 0.51 0.49
=========== ==========

<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
--------------- --------------- --------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans ........................................ 10,887,327 9,521,265 8,754,549
Interest on investment securities:
Interest exempt from federal income taxes ........................ 511,653 472,206 469,306
Taxable interest income .......................................... 1,749,612 1,918,789 2,207,869
Interest on federal funds sold .................................... 490,623 301,265 371,806
---------- --------- ---------
Total interest income .......................................... 13,639,215 12,213,525 11,803,530
---------- ---------- ----------
Interest expense:
Deposits (note 9):
Demand accounts .................................................. 698,635 699,138 804,115
Savings .......................................................... 308,012 328,029 407,471
Time ............................................................. 4,357,110 3,804,230 3,995,593
Other ............................................................. 786 9,459 8,746
---------- ---------- ----------
Total interest expense ......................................... 5,364,543 4,840,856 5,215,925
Net interest income ............................................ 8,274,672 7,372,669 6,587,605
Provision for possible loan losses (note 4) ........................ 353,513 496,914 515,066
---------- ---------- ----------
Net interest income after provision for possible
loan losses ................................................... 7,921,159 6,875,755 6,072,539
---------- ---------- ----------
Non-interest income:
Service charges on deposit accounts ............................... 1,391,136 1,102,866 982,601
Other service charges and fees .................................... 524,638 419,128 516,890
Net gain (loss) on sale of securities ............................. -- 5,662 (4,663)
Net gain on sale of real estate acquired in settlement of loans
and real estate held for sale .................................... -- 110,960 3,400
Other ............................................................. 30,293 79,448 171,290
---------- ---------- ----------
Total non-interest income ...................................... 1,946,067 1,718,064 1,669,518
---------- ---------- ----------
Non-interest expense:
Salaries .......................................................... 2,938,570 2,770,184 2,624,186
Retirement and other employee benefits (note 7) ................... 971,474 939,505 619,020
Occupancy ......................................................... 623,134 549,613 478,113
Equipment ......................................................... 768,244 563,478 500,123
Deposit insurance premiums ........................................ 24,589 1,500 190,055
Professional fees ................................................. 209,038 198,298 271,588
Supplies .......................................................... 221,978 183,942 153,933
Telephone ......................................................... 216,821 176,034 193,260
Postage ........................................................... 150,311 143,458 133,325
Other ............................................................. 1,419,816 1,259,044 1,004,271
---------- ---------- ----------
Total non-interest expense ..................................... 7,543,975 6,785,056 6,167,874
---------- ---------- ----------
Income before income taxes and cumulative effect of a
change in accounting for postretirement benefits .............. 2,323,251 1,808,763 1,574,183
Income taxes (note 6) .............................................. 650,000 475,000 384,000
---------- ---------- ----------
Income before cumulative effect of a change in accounting
for postretirement benefits ................................... 1,673,251 1,333,763 1,190,183
Cumulative effect for years prior to January 1, 1995 of a change
in accounting for postretirement benefits, net of income taxes
(note 7) .......................................................... -- -- (278,555)
---------- ---------- ----------
Net income ..................................................... 1,673,251 1,333,763 911,628
========== ========== ==========
Net income per share (basic and diluted):
Income before cumulative effect of a change in accounting for
postretirement benefits .......................................... 0.94 0.75 0.67
Cumulative effect for years prior to January 1, 1995 of a
change in accounting for postretirement benefits ................. -- -- (0.16)
----------- ----------- -----------
Net income ........................................................ 0.94 0.75 0.51
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-20
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 AND
SIX MONTHS ENDED JUNE 30, 1998 (UNAUDITED)

<TABLE>
<CAPTION>
COMMON STOCK
---------------------------------------
UNREALIZED
NUMBER CAPITAL RETAINED GAINS
OF SHARES AMOUNT SURPLUS EARNINGS (LOSSES) TOTAL
----------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 ............ 593,418 $5,934,180 $3,000,000 $3,704,923 $ (734,929) $11,904,174
Common stock issued in 1998
three-for-one stock split (note 15) .. 1,186,836 296,709 200,000 (496,709) -- --
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1994, AS
RESTATED .............................. 1,780,254 6,230,889 3,200,000 3,208,214 (734,929) 11,904,174
Change in unrealized gains (losses),
net of income tax benefit of
$498,100 ............................. -- -- -- -- 966,893 966,893
Net income ............................ -- -- -- 911,628 -- 911,628
Cash dividends ($.20 per share) ....... -- -- -- (356,051) -- (356,051)
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1995 ............ 1,780,254 6,230,889 3,200,000 3,763,791 231,964 13,426,644
Change in unrealized gains (losses),
net of income taxes of $67,500 ....... -- -- -- -- (131,073) (131,073)
Net income ............................ -- -- -- 1,333,763 -- 1,333,763
Cash dividends ($.21 per share) ....... -- -- -- (379,788) -- (379,788)
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1996 ............ 1,780,254 6,230,889 3,200,000 4,717,766 100,891 14,249,546
Change in unrealized gains (losses),
net of income taxes of $106,000 ...... -- -- -- -- 205,889 205,889
Net income ............................ -- -- -- 1,673,251 -- 1,673,251
Cash dividends ($.23 per share) ....... -- -- -- (415,393) -- (415,393)
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT DECEMBER 31, 1997 ............ 1,780,254 6,230,889 3,200,000 5,975,624 306,780 15,713,293
Change in unrealized gains (losses),
net of income taxes of $33,100
(Unaudited) .......................... -- -- -- -- 64,225 64,225
Net income (Unaudited) ................ -- -- -- 901,907 -- 901,907
--------- ---------- ---------- ---------- ---------- -----------
BALANCE AT JUNE 30, 1998
(Unaudited) ........................... 1,780,254 $6,230,889 $3,200,000 $6,877,531 $ 371,005 $16,679,425
========= ========== ========== ========== ========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

F-21
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
(UNAUDITED)
--------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................... $ 901,907 869,279
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ................................................. 327,262 251,587
Amortization of premium on investment securities, net ........ 24,040 26,914
Provision for possible loan losses ........................... 120,000 210,000
Provision for loss on real estate held for sale .............. -- --
Deferred income taxes ........................................ -- --
Loss (gain) on sale of available-for- sale securities ........ -- --
Loss (gain) on sale of real estate acquired in settlement
of loans and real estate held for sale ..................... (6,476) --
Loss (gain) on disposal of premises and equipment ............ -- 7,442
Decrease (increase) in accrued interest receivable ........... (183,647) (303,746)
Decrease (increase) in other assets .......................... 19,432 (318,594)
Increase (decrease) in accrued interest payable .............. 72,006 206,311
Increase in postretirement benefit liability ................. 12,000 21,000
Increase (decrease) in other liabilities ..................... (76,518) (340,302)
------------ --------
Net cash provided by operating activities .................. 1,210,006 629,891
------------ --------
Cash flows from investing activities:
Proceeds from sales of investment securities classified as
available-for-sale ........................................... -- --
Proceeds from maturities of investment securities classified
as available-for-sale ........................................ 7,479,588 10,248,033
Proceeds from maturities of investment securities classified
as held-to-maturity .......................................... -- --
Purchases of investment securities classified as
available-for-sale ........................................... (4,141,425) (12,863,018)
Purchases of investment securities classified as
held-to-maturity ............................................. -- --
Purchase of Federal Home Loan Bank common stock ............... (61,800) (503,000)
Proceeds from disposal of premises and equipment .............. 3,325 23,372
Purchases of premises and equipment ........................... (380,629) (565,147)
Proceeds from disposal of real estate acquired in
settlement of loans and real estate held for sale ............ 496,476 --
Net loan repayments (originations) ............................ (9,844,486) (9,029,442)
------------ -----------
Net cash used by investing activities ...................... (6,448,951) (12,689,202)
------------ -----------
Cash flows from financing activities:
Net increase (decrease) in deposits ........................... 9,908,693 18,781,877
Dividends paid ................................................ -- --
------------ -----------
Net cash provided by financing activities .................. 9,908,693 18,781,877
------------ -----------
Increase (decrease) in cash and cash equivalents .............. 4,669,748 6,722,566
Cash and cash equivalents at beginning of year ................ 12,705,694 14,411,625
------------ -----------
Cash and cash equivalents at end of year ...................... $ 17,375,442 21,134,191
------------ -----------
Supplemental disclosure of noncash financing and
investing activities:
Unrealized gains (losses) on available-for-sale securities,
net of deferred taxes ...................................... $ 64,225 21,303
============ ===========

<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................................... 1,673,251 1,333,763 911,628
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation ................................................. 545,852 445,314 377,844
Amortization of premium on investment securities, net ........ 51,838 9,870 2,165
Provision for possible loan losses ........................... 353,513 496,914 515,066
Provision for loss on real estate held for sale .............. 50,000 53,800 23,800
Deferred income taxes ........................................ (33,700) (128,500) (187,000)
Loss (gain) on sale of available-for- sale securities ........ 25,818 (5,662) 4,663
Loss (gain) on sale of real estate acquired in settlement
of loans and real estate held for sale ..................... 95 (110,960) (3,400)
Loss (gain) on disposal of premises and equipment ............ 7,242 8,384 (122,583)
Decrease (increase) in accrued interest receivable ........... (403,494) (74,499) 4,678
Decrease (increase) in other assets .......................... (914) (8,989) 8,158
Increase (decrease) in accrued interest payable .............. 115,265 (72,264) 300,240
Increase in postretirement benefit liability ................. 42,000 28,000 445,640
Increase (decrease) in other liabilities ..................... (184,183) 106,518 195,173
--------- --------- --------
Net cash provided by operating activities .................. 2,242,583 2,081,689 2,476,072
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of investment securities classified as
available-for-sale ........................................... 3,015,439 513,924 3,486,953
Proceeds from maturities of investment securities classified
as available-for-sale ........................................ 13,349,710 21,500,092 14,361,272
Proceeds from maturities of investment securities classified
as held-to-maturity .......................................... -- -- 1,301,500
Purchases of investment securities classified as
available-for-sale ........................................... (28,662,322) (9,033,608) (5,296,508)
Purchases of investment securities classified as
held-to-maturity ............................................. -- -- (9,006,181)
Purchase of Federal Home Loan Bank common stock ............... (503,000) -- --
Proceeds from disposal of premises and equipment .............. 23,665 21,842 217,744
Purchases of premises and equipment ........................... (1,304,813) (592,433) (796,094)
Proceeds from disposal of real estate acquired in
settlement of loans and real estate held for sale ............ 50,263 406,653 68,316
Net loan repayments (originations) ............................ (9,075,362) (18,146,433) (9,046,448)
----------- ----------- ----------
Net cash used by investing activities ...................... (23,106,420) (5,329,963) (4,709,446)
----------- ----------- ----------
Cash flows from financing activities:
Net increase (decrease) in deposits ........................... 19,573,299 924,642 9,391,452
Dividends paid ................................................ (415,393) (379,788) (356,051)
----------- ----------- ----------
Net cash provided by financing activities .................. 19,157,906 544,854 9,035,401
----------- ----------- ----------
Increase (decrease) in cash and cash equivalents .............. (1,705,931) (2,703,420) 6,802,027
Cash and cash equivalents at beginning of year ................ 14,411,625 17,115,045 10,313,018
----------- ----------- ----------
Cash and cash equivalents at end of year ...................... 12,705,694 14,411,625 17,115,045
----------- ----------- ----------
Supplemental disclosure of noncash financing and
investing activities:
Unrealized gains (losses) on available-for-sale securities,
net of deferred taxes ...................................... 205,889 (131,073) 966,893
=========== =========== ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-22
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES

(A) CONSOLIDATION

The consolidated financial statements include the accounts of The East
Carolina Bank (the "Bank") and its wholly-owned subsidiaries, Carolina
Financial Realty, Inc. and Carolina Financial Courier, Inc. Significant
intercompany accounts and transactions have been eliminated in consolidation.
All adjustments considered necessary for a fair presentation of the results for
interim periods presented have been made (such adjustments are normal and
recurring in nature).

Operating results for the six-month period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1998.

(B) BASIS OF FINANCIAL STATEMENT PRESENTATION

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.

(D) CASH AND CASH EQUIVALENTS

(E) INVESTMENT SECURITIES

Management determines the appropriate classification of investment
securities at the time of purchase and reevaluates such designation at each
reporting date. Securities are classified as held-to-maturity ("HTM") when the
Bank has both the positive intent and ability to hold the securities to
maturity. HTM securities are stated at amortized cost. Securities not
classified as HTM are classified as available-for-sale ("AFS"). AFS securities
are stated at fair value as determined by reference to published sources, with
the unrealized gains and losses, net of income taxes, reported as a separate
component of shareholders' equity. The Bank has no trading securities.

(F) LOANS RECEIVABLE

Interest on loans is recorded based on the principal amount outstanding.
The Bank ceases accruing interest on loans (including impaired loans) when, in
management's judgement, the collection of interest income appears doubtful or
the loan is past due 90 days or more. Management may return a loan classified
as nonaccrual to accrual status when the obligation

F-23
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued)

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

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 potential future losses existing in the loan portfolio.
Management believes that the AFLL is adequate. Management's periodic evaluation
of the adequacy of the allowance is based on individual loan reviews, past loan
loss experience, economic conditions in the Bank's market areas, the fair value
and adequacy of underlying collateral, and the growth and risk composition 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 additions 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 Bank's AFLL. Such agencies may require the Bank to
recognize additions 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
in accordance with the standard 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.

(H) REAL ESTATE 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
and loans classified as in-substance foreclosure. In accordance with SFAS No.
114, a loan is classified as in-substance foreclosure when the Bank has taken
possession of the collateral regardless of whether formal foreclosure
proceedings have taken place. Real estate acquired in settlement of loans is
recorded initially at the lower of the loan balance plus unpaid accrued
interest or 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 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. Loans
with outstanding principal balances totalling $390,358, $-0- and $89,600 were
foreclosed on during the years ended December 31, 1997, 1996 and 1995,
respectively.

(I) MEMBERSHIP/INVESTMENT IN FEDERAL HOME LOAN BANK STOCK

In 1997, the Bank became a member of the Federal Home Loan Bank of Atlanta
("FHLB"). Membership, along with a signed blanket collateral agreement,
provides the Bank with the ability to draw $13 million of advances from the
FHLB. No advances were drawn by the Bank in 1997.

As a requirement for membership, the Bank 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 Bank. At December 31, 1997, the
Bank owned 5,030 shares of the FHLB's $100 par value capital stock. No ready
market exists for such stock, which is carried at cost.

(J) BANK PREMISES AND EQUIPMENT

Bank premises 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.

F-24
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES -- (Continued)

(K) INCOME TAXES

The Bank 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 using enacted tax rates expected to be in effect when such amounts
are realized or settled.

(L) EMPLOYEE BENEFIT PLANS

The Bank has in place a postretirement benefit plan covering certain
retirees and a defined contribution 401(k) plan that covers all eligible
employees. The Bank had a noncontributory defined benefit retirement plan that
covered substantially all employees which was terminated in 1995 with final
pay-out of accrued benefits occurring in 1996 (see note 7).

(M) NET INCOME/DIVIDENDS PER SHARE

The Bank adopted SFAS No. 128, "Earnings Per Share", in 1997, which
requires net income per share to be calculated on both a basic and diluted
basis. Net income per share is computed based on the weighted average number of
common shares outstanding during the year and represents basic and diluted net
income per share for 1997, 1996 and 1995. Because the Bank has no potentially
dilutive securities, restatement of 1996 and 1995 net income per share amounts
was not necessary. Dividends per share are based on the shares outstanding at
the time of dividend declaration. All share and per share amounts have been
restated to give effect to the three-for-one stock split on July 22, 1998 (see
note 15).

(N) ADOPTION OF NEW ACCOUNTING PRONOUNCEMENT

On January 1, 1998, the Bank adopted SFAS No. 130, "Reporting
Comprehensive Income." This statement establishes standards for reporting and
display of comprehensive income and its components in a full set of financial
statements. 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. This statement does not change or modify the reporting or display in
the income statement. For the six months ended June 30, 1998 and 1997, the
Bank's total comprehensive income, consisting of net income and changes in
unrealized securities gains and losses, net of tax effects, was $966,000
(unaudited) and $890,000 (unaudited), respectively.

(O) RECLASSIFICATIONS

(2) INVESTMENT SECURITIES

The following is a summary of the securities portfolios by major
classification:

<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury obligations .................................... $25,072,694 156,543 (1,087) 25,228,150
Securities of other U.S. government agencies and corporations 7,821,384 15,710 (2,427) 7,834,667
Obligations of states and political subdivisions ............. 13,761,077 300,592 (4,513) 14,057,156
----------- ------- ------ ----------
Total ...................................................... $46,655,155 472,845 (8,027) 47,119,973
=========== ======= ====== ==========
</TABLE>

F-25
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) INVESTMENT SECURITIES -- (Continued)

<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------------------
GROSS GROSS APPROXIMATE
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Treasury obligations .................................... $15,983,515 23,180 (12,086) 15,994,609
Securities of other U.S. government agencies and corporations 9,357,841 3,430 (21,514) 9,339,757
Obligations of states and political subdivisions ............. 9,094,282 205,266 (45,409) 9,254,139
----------- ------- ------- ----------
Total ...................................................... $34,435,638 231,876 (79,009) 34,588,505
=========== ======= ======= ==========
</TABLE>

Gross realized gains and losses on sales of securities for the years ended
December 31, 1997, 1996 and 1995 were as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------ ------- -----------
<S> <C> <C> <C>
Gross realized gains .................. $ -- 5,662 1,500
Gross realized losses ................. (25,818) -- (6,163)
--------- ----- ------
Net realized gains (losses) .......... $ (25,818) 5,662 (4,663)
========= ===== ======
</TABLE>

The aggregate amortized cost and approximate market value of the
available-for-sale securities portfolio at December 31, 1997, by remaining
contractual maturity are as follows:

<TABLE>
<CAPTION>
APPROXIMATE
AMORTIZED MARKET
COST VALUE
------------- ------------
<S> <C> <C>
U.S. Treasury obligations:
Due in one year or less ..................................... $ 5,995,765 5,997,500
Due in one year through five years .......................... 19,076,929 19,230,650
Securities of other U.S. government agencies and corporations:
Due in one year or less ..................................... 3,296,330 3,295,163
Due in one year through five years .......................... 3,745,042 3,756,291
Due after ten years ......................................... 780,012 783,213
Obligations of states and political subdivisions:
Due in one year or less ..................................... 190,035 190,353
Due in one year through five years .......................... 5,489,847 5,611,142
Due after five through ten years ............................ 3,659,958 3,780,614
Due after ten years ......................................... 4,421,237 4,475,047
----------- ----------
Total securities .......................................... $46,655,155 47,119,973
=========== ==========
</TABLE>

Securities with a principal amount of approximately $18,272,000 at
December 31, 1997 are pledged as collateral for deposits.

F-26
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(3) LOANS
Loans at December 31, 1997 and 1996 classified by type, are as follows:

<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Commercial, financial and agricultural .......... $ 26,074,410 22,906,424
Real estate loans:
Construction ................................... 1,490,215 972,127
Mortgage, commercial and residential ........... 64,943,072 67,278,983
Installment ..................................... 28,845,615 21,670,249
------------ ----------
121,353,312 112,827,783
Less deferred fees and costs, net .............. 144,502 171,802
------------ -----------
$121,208,810 112,655,981
============ ===========
Included in the above:
Nonaccrual loans ............................... $ 1,462,831 1,017,453
============ ===========
Restructured loans ............................. $ 522,352 350,024
============ ===========
</TABLE>

At December 31, 1997, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $797,000 (all on a non-accrual basis).
Included in this amount is $112,000 of impaired loans for which the related
AFLL is $112,000 and $685,000 of impaired loans that as a result of write-downs
and collateral values do not have an AFLL. The average recorded investment in
impaired loans during the year ended December 31, 1997 was approximately
$810,000. For the year ended December 31, 1997, the Bank recognized interest
income on those impaired loans of $26,000, all of which was recognized using
the cash basis method of income recognition.

At December 31, 1996, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $919,000 (all on a non-accrual basis).
Included in this amount is $53,000 of impaired loans for which the related AFLL
is $53,000 and $866,000 of impaired loans that as a result of write-downs and
collateral values do not have an AFLL. The average recorded investment in
impaired loans during the year ended December 31, 1996 was approximately
$1,016,000. For the year ended December 31, 1996, the Bank recognized interest
income on those impaired loans of $18,000, all of which was recognized using
the cash basis method of income recognition.

The Bank, through its normal lending activity, originates and maintains
loans receivable which are substantially concentrated in the Eastern region of
North Carolina, where its offices are located. The Bank'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 Bank and such changes could be significant.

At December 31, 1997, $66,433,287, or 54.81%, of the Bank's loan portfolio
was composed of loans principally collateralized by liens on real estate. Of
that amount, approximately $23,963,000, or 19.77%, represents loans
collateralized by owner-occupied residential real estate.

F-27
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------------- -----------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Beginning balance ................. $2,660,000 2,400,000 2,400,000 1,950,000 1,900,000
Provision for possible loan losses 120,000 210,000 353,513 496,914 515,066
Recoveries ........................ 40,269 39,774 100,838 218,843 83,433
Loans charged off ................. (129,795) (104,019) (194,351) (265,757) (548,499)
---------- --------- --------- --------- ---------
Ending balance .................... $2,690,474 2,545,755 2,660,000 2,400,000 1,950,000
========== ========= ========= ========= =========
</TABLE>

(5) BANK PREMISES AND EQUIPMENT

An analysis of premises and equipment at December 31, 1997 and 1996
follows:

<TABLE>
<CAPTION>
ACCUMULATED UNDEPRECIATED
COST DEPRECIATION COST
------------- -------------- --------------
<S> <C> <C> <C>
December 31, 1997:
Land ............................ $ 1,177,138 -- 1,177,138
Land improvements ............... 243,541 161,959 81,582
Buildings ....................... 5,270,762 1,535,891 3,734,871
Furniture and equipment ......... 4,201,127 2,928,435 1,272,692
----------- --------- ---------
Total ......................... $10,892,568 4,626,285 6,266,283
=========== ========= =========
December 31, 1996:
Land ............................ $ 1,177,138 -- 1,177,138
Land improvements ............... 220,103 198,869 21,234
Buildings ....................... 4,936,591 1,322,548 3,614,043
Furniture and equipment ......... 3,530,902 2,805,088 725,814
----------- --------- ---------
Total ......................... $ 9,864,734 4,326,505 5,538,229
=========== ========= =========
</TABLE>

(6) INCOME TAXES

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

<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
----------- ------------ ----------
<S> <C> <C> <C>
Year ended December 31, 1997:
Federal .................... $660,700 (33,700) 627,000
State ...................... 23,000 -- 23,000
-------- ------- -------
$683,700 (33,700) 650,000
======== ======= =======
Year ended December 31, 1996:
Federal .................... $599,500 (128,500) 471,000
State ...................... 4,000 -- 4,000
-------- -------- -------
$603,500 (128,500) 475,000
======== ======== =======
Year ended December 31, 1995:
Federal .................... $420,000 (43,000) 377,000
State ...................... 7,000 -- 7,000
-------- -------- -------
$427,000 (43,000) 384,000
======== ======== =======
</TABLE>

F-28
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(6) INCOME TAXES -- (Continued)

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:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Income taxes at statutory rate .................. $ 790,000 615,000 535,000
Increase (decrease) resulting from:
Effect of non-taxable interest income ......... (187,000) (179,000) (163,000)
Other, net .................................... 47,000 39,000 12,000
Applicable income taxes ......................... $ 650,000 475,000 384,000
========== ======== ========
</TABLE>

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 1997 and 1996 are presented below:

<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for possible loan losses ......................................... $680,000 591,600
Writedown of other real estate ............................................. 78,000 60,400
Postretirement benefits .................................................... 175,300 161,000
Other ...................................................................... 3,200 43,400
-------- -------
Total gross deferred tax assets .......................................... 936,500 856,400
-------- -------
Deferred tax liabilities:
Bank premises and equipment, principally due to differences in depreciation $245,400 196,500
Unrealized holding gains on securities available for sale .................. 158,000 52,000
Other ...................................................................... 22,000 24,500
-------- -------
Total gross deferred tax liabilities ..................................... 425,400 273,000
-------- -------
Net deferred tax asset ................................................... $511,100 583,400
======== =======
</TABLE>

The Bank has no valuation allowance at December 31, 1997 or 1996, because
management has determined that it has sufficient taxable income in the
carryback period to support the realizability of the net deferred tax asset.

Income taxes paid during each of the three years ended December 31, 1997,
1996 and 1995 were $749,400, $534,100 and $382,300, respectively.

(7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS

Net periodic pension cost for 1996 and 1995 for the Bank's defined benefit
pension plan consists of the following components:

<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Service cost-benefits earned during the period .......... $ -- --
Interest cost on projected benefit obligation ........... 69,647 102,175
Actual return on plan assets ............................ (19,084) (90,250)
Net amortization and deferral ........................... 629 63,075
Effect of change in PBGC rate ........................... 53,808 --
--------- -------
Net periodic pension expense ........................... $ 105,000 75,000
========= =======
</TABLE>

In 1994, the Plan benefits were frozen in anticipation of a complete plan
termination. The Bank approved termination of the Plan in 1995. The Plan
termination was approved by the Internal Revenue Service in 1996 and all Plan
benefits were paid to participants.

F-29
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(7) RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS -- (Continued)

On June 1, 1994, the Bank implemented a defined contribution 401(k) plan
that covers all eligible employees. The Bank matches employee contributions up
to certain amounts as defined in the plan. Total expense related to this plan
was $117,355, $100,588 and $100,993 in 1997, 1996 and 1995, respectively.

The Bank also has a postretirement benefit plan whereby the Bank pays
postretirement health care benefits for certain of its retirees that have met
minimum age and service requirements. The Bank adopted SFAS No. 106,
"Employer's Accounting for Postretirement Benefits Other Than Pensions", as of
January 1, 1995. The cumulative effect of this change in accounting for the
Bank's liability for postretirement benefits of $422,555 was determined as of
January 1, 1995, and is reported separately in the 1995 statement of income,
net of a deferred income tax benefit of $144,000.

Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes
the following components:

<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
Service cost ...................................... $ 6,478 4,832 4,516
Interest cost ..................................... 35,522 31,966 29,578
------- ------ ------
Net periodic postretirement benefit cost .......... $42,000 36,798 34,094
======= ====== ======
</TABLE>

The following table presents the plan's funded status at December 31, 1997
and 1996:

<TABLE>
<CAPTION>
1997 1996
-------------- -------------
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO"):
Retirees ................................................. $ (304,323) (235,252)
Other fully eligible active employees .................... -- (70,362)
Other active participants ................................ (145,172) (158,910)
Total accumulated benefit obligation .................... (449,495) (464,524)
Unrecognized gain on changes in acturarial assumptions ..... (66,145) (9,116)
---------- --------
Plan assets at fair value .................................. -- --
---------- --------
Accrued postretirement benefit cost ........................ $ (515,640) (473,640)
========== ========
Weighted average discount rate in determining APBO ......... 7.0% 7.0%
Annual health care cost trend rate ......................... 9.0 9.0
Ultimate medical trend rate ................................ 8.0 8.0
Medical trend rate period (in years) ....................... 5 5
Effect of 1% increase in assumed health care cost on:
Service and interest cost ................................ 16.4% 17.3%
APBO ..................................................... 15.0 15.7
</TABLE>

(8) RELATED PARTY TRANSACTIONS

The Bank has banking transactions in the ordinary course of business with
several of its directors and officers, and their associates. Such transactions
are on the same terms as those prevailing at the time for comparable
transactions with others. In the opinion of management, loans made to
directors, officers and their associates do not involve more than the normal
risk of collectibility or present any other unfavorable features (see note 3).

(9) DEPOSITS

At December 31, 1997 and 1996, certificates of deposit of $100,000 or more
amounted to approximately $19,503,067 and $17,835,000, respectively.

For the years ended December 31, 1997, 1996 and 1995, interest expense on
certificates of deposit of $100,000 or more amounted to approximately
$1,057,000, $1,038,000 and $1,236,000, respectively.

F-30
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(9) DEPOSITS -- (Continued)

The Bank made interest payments of $5,249,278, $4,903,660 and $4,906,909
during the years ended December 31, 1997, 1996 and 1995, respectively.

Time deposit accounts as of December 31, 1997, mature in the following
years and amounts: 1998 -- $77,864,727; 1999 -- $4,094,535; and 2000 --
$1,083,366.

(10) LEASES

The Bank also has several noncancellable operating leases for three branch
locations. These leases generally contain renewal options for periods ranging
from three to five years and require the Bank to pay all executory costs such
as maintenance and insurance. Rental expense for operating leases during 1997
and 1996 was $69,758 and $25,000, respectively.

Future minimum lease payments under noncancellable operating leases (with
initial or remaining lease terms in excess of one year) as of December 31, 1997
are as follows:

<TABLE>
<S> <C>
Year ending December 31,
1998 .................................. $ 65,797
1999 .................................. 65,797
2000 .................................. 61,147
2001 .................................. 35,887
2002 .................................. 9,879
Thereafter ............................ --
--------
Total minimum lease payments ......... $238,507
========
</TABLE>

(11) RESERVE REQUIREMENTS

The aggregate net reserve balances maintained under the requirements of
the Federal Reserve, which are noninterest bearing, were approximately
$2,032,000 at December 31, 1997.

(12) COMMITMENTS AND CONTINGENCIES

The Bank 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 $16,316,000 and standby letters of credit of
$223,000, at December 31, 1997.

The Bank's exposure to credit loss for commitments to extend credit and
standby letters of credit is the contractual amount of those financial
instruments. The Bank 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 their funding from normal
operations.

(13) 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 Bank'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

F-31
<PAGE>

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS -- (Continued)

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.

The following table presents the carrying values and estimated fair values
of the Bank's financial instruments at December 31, 1997 and 1996:

<TABLE>
<CAPTION>
1997 1996
----------------------------- ----------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
VALUE FAIR VALUE VALUE FAIR VALUE
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Non-interest bearing deposits and cash $ 8,185,000 8,185,000 7,862,000 7,862,000
Federal funds sold .................... 4,425,000 4,425,000 6,550,000 6,550,000
Investment securities ................. 47,120,000 47,120,000 34,589,000 34,589,000
FHLB common stock ..................... 503,000 503,000 -- --
Net loans ............................. 118,549,000 119,094,000 110,256,000 109,408,000
Financial liabilities:
Deposits .............................. 170,909,000 171,137,000 151,336,000 151,426,000
</TABLE>

(14) REGULATORY MATTERS

The Bank is 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 Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.

THE EAST CAROLINA BANK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) REGULATORY MATTERS -- (Continued)

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

<TABLE>
<CAPTION>
TO BE WELL
CAPITALIZED
UNDER PROMPT
FOR CAPITAL CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
---------------------- ------------------- ------------------
AMOUNT RATIO RATIO RATIO
---------- ----------- ------------------- ------------------
<S> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital
(to Risk Weighted Assets) ......... $ 16,973 13.66% =>8.0% =>10.00%
Tier I Capital
(to Risk Weighted Assets) ......... $ 15,406 12.40% =>4.0% =>6.00%
Tier I Capital
(to Average Assets) ............... $ 15,406 8.53% =>4.0% =>5.00%
As of December 31, 1996:
Total Capital
(to Risk Weighted Assets) ......... $ 15,577 13.75% =>8.0% =>10.00%
Tier I Capital
(to Risk Weighted Assets) ......... $ 14,149 12.49% =>4.0% =>6.0%
Tier I Capital
(to Average Assets) ............... $ 14,149 8.53% =>4.0% =>5.00%
</TABLE>

(15) SUBSEQUENT EVENTS

On July 22, 1998, the Bank was acquired by ECB Bancorp, Inc. ("Bancorp"),
which was newly-formed by the Bank on March 4, 1998, for the purpose of
becoming the Bank's parent holding company. Each outstanding share of the
Bank's common stock was exchanged for one share of Bancorp's common stock with
the Bank becoming a wholly-owned subsidiary of Bancorp. Bancorp's primary
purpose is to serve as the parent of the Bank.

F-33
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF BANCORP SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.

--------------------------------
TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Summary ................................................... 3
Risk Factors .............................................. 6
Use of Proceeds ........................................... 12
Market Price of Common Stock .............................. 12
Dividends ................................................. 13
Capitalization ............................................ 14
Selected Consolidated Financial Data and Other
Information ............................................ 14
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 16
Business .................................................. 34
Supervision, Regulation and Other Matters ................. 41
Management ................................................ 46
Beneficial Ownership of Common Stock ...................... 47
Management Compensation ................................... 48
Certain Relationships and Related Transactions ............ 49
Description of Capital Stock .............................. 49
Underwriting .............................................. 50
Indemnification ........................................... 51
Legal Matters ............................................. 52
Experts ................................................... 52
Available Information ..................................... 53
Index to Consolidated Financial Statements ................ F-1
ECB Bancorp, Inc. and Subsidiary Supplemental
Consolidated Financial Statements ...................... F-2
The East Carolina Bank and Subsidiaries
Consolidated Financial Statements ...................... F-18
</TABLE>

300,000 SHARES

[ECB LOGO APPEARS HERE]

ECB BANCORP, INC.

COMMON STOCK

---------------------------------------
PROSPECTUS
---------------------------------------

[INTERSTATE/JOHNSON LANE CORPORATION LOGO APPEARS HERE]

CORPORATION

, 1998

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II. INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The corporation may indemnify such person against liability expenses
incurred only where such person conducted himself or herself in good faith and
reasonably believed (I) in the case of conduct in his or her official corporate
capacity, that his or her conduct was in the corporation's best interests, and
(II) in all other cases, that his or her conduct was at least not opposed to
the corporation's best interests; and, in the case of a criminal proceeding, he
or she had no reasonable cause to believe his or her conduct was unlawful;
provided, however, that a corporation may not indemnify such person either in
connection with a proceeding by or in the right of the corporation in which
such person was adjudged liable to the corporation, or in connection with any
other proceeding charging improper personal benefit to such person (whether or
not involving action in an official capacity) in which such person was adjudged
liable on the basis that personal benefit was improperly received.

INDEMNIFICATION BY REGISTRANT. Registrant's Bylaws provide for
indemnification of its directors and officers to the fullest extent permitted
by North Carolina law, and require its Board of Directors to take all actions
necessary and appropriate to authorize such indemnification.

Under North Carolina law, a corporation also may purchase insurance on
behalf of any person who is or was a director or officer against any liability
arising out of his status as such. Registrant currently maintains a directors'
and officers' liability insurance policy.

II-1
<PAGE>

ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The estimated expenses in connection with the issuance and distribution of
the securities covered by this Registration Statement, other than underwriting
discounts and commissions, are as follows:

<TABLE>
<S> <C>
Printing fees and expenses ........... $ 25,000
Legal fees and expenses .............. 75,000
Accounting fees and expenses ......... 90,000
Blue Sky fees and expenses ........... 15,000
Other(1) ............................. 20,000
--------
Total .............................. $225,000
========
</TABLE>

- ---------
(1) Includes Securities and Exchange Commission registration fee of $1,605 and
NASD filing fee of $1,043.

ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.

Effective July 22, 1998, and in connection with the reorganization of
Registrant's current wholly-owned subsidiary, The East Carolina Bank (the
"Bank"), into a bank holding company form of ownership, Registrant (which was
newly formed by and at the direction of the Bank's board of directors for
purposes of such transaction) issued an aggregate of 1,780,254 shares of its
Common Stock, $3.50 par value, in exchange for a like number of outstanding
shares of the Bank's common stock, $3.50 par value. As a result of that
transaction, the Bank's shareholders became shareholders of Registrant (holding
the same proportional share interests in Registrant as they previously held in
the Bank) and the Bank became Registrant's wholly-owned subsidiary. In issuing
its common stock, Registrant relied upon the exemption from registration
provided by Section 3(a)(12) of the Securities Act of 1933, as amended (the
"Securities Act").

ITEM 27. EXHIBITS.

An index of exhibits appears at page II-6 of this Registration Statement
and is incorporated herein by reference.

ITEM 28. UNDERTAKINGS.

(A) The undersigned Registrant hereby undertakes:

1. to file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:

(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) to reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in "Calculation of Registration Fee" table in the effective
Registration Statement; and

(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.

2. that, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial BONA FIDE offering thereof;

3. to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of this offering.

(B) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.

II-2
<PAGE>

In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred or
paid by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the small business issuer will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.

(1) for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed
as part of this Registration Statement in reliance upon Rule 430(A)
and contained in a form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the
time it was declared effective; and,

(2) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the
undersigned Registrant certifies that it has reasonable grounds to believe that
it meets all of the requirements for filing on Form SB-2 and has duly caused
this Amendment No. 3 to Registration Statement on Form SB-2 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Engelhard,
State of North Carolina, on November 10, 1998.

ECB BANCORP, INC.

By: /s/ GARY M. ADAMS

-------------------------------

GARY M. ADAMS
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to Registration Statement on Form SB-2 has been signed by the following
persons in the capacity and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------ --------------------------------------- ------------------
<S> <C> <C>
* ARTHUR H. KEENEY, III President, Chief Executive Officer November 10, 1998
- -------------------------------- Director (principal executive officer)
ARTHUR H. KEENEY, III

/s/ GARY M. ADAMS Vice President and Chief November 10, 1998
- -------------------------------- Financial Officer (principal financial
GARY M. ADAMS and accounting officer)

* R.S. SPENCER, JR. Chairman November 10, 1998
- --------------------------------
R.S. SPENCER, JR.

* GEORGE T. DAVIS, JR. Vice Chairman November 10, 1998
- --------------------------------
GEORGE T. DAVIS, JR.

* C. GILBERT GIBBS Director November 10, 1998
- --------------------------------
C. GILBERT GIBBS

* GREGORY C. GIBBS Director November 10, 1998
- --------------------------------
GREGORY C. GIBBS

* JOHN F. HUGHES, JR. Director November 10, 1998
- --------------------------------
JOHN F. HUGHES, JR.

* J. BRYANT KITTRELL, III Director November 10, 1998
- --------------------------------
J. BRYANT KITTRELL, III

* JOSEPH T. LAMB, JR. Director November 10, 1998
- --------------------------------
JOSEPH T. LAMB, JR.
</TABLE>

II-4
<PAGE>

<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------ --------------------------------------- ------------------
<S> <C> <C>
* B. MARTELLE MARSHALL Director November 10, 1998
- --------------------------------
B. MARTELLE MARSHALL

* ROBERT L. MITCHELL Director November 10, 1998
- --------------------------------
ROBERT L. MITCHELL

* RAY M. SPENCER Director November 10, 1998
- --------------------------------
RAY M. SPENCER
</TABLE>

- ---------

* Gary M. Adams hereby signs this Amendment No. 3 to Registration Statement on
Form SB-2 on November 10, 1998, on behalf of each of the indicated persons
for whom he is attorney-in-fact pursuant to Powers of Attorney contained in
such Registration Statement.

By: /s/ GARY M. ADAMS
-----------------------------
ATTORNEY-IN-FACT

II-5
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- ---------------------------------------------------------- ---------
<S> <C> <C> <C>
1.1 * Form of Underwriting Agreement
3.1 * Registrant's Articles of Incorporation
3.2 * Registrant's Bylaws
5.1 * Opinion of Ward and Smith, P.A., as to legality
10.1 * Employment Agreement between Arthur H. Keeney, III
and the Bank
10.2 * Omnibus Stock Ownership and Long Term Incentive Plan
10.3 * Form of Employee Stock Option Agreement
21.1 * List of subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of KPMG Peat Marwick LLP
23.3 * Consent of Ward and Smith, P.A. (included in Exhibit 5.1
hereto)
24.1 * Powers of Attorney (included on signature page of
Registration Statement)
27.1 * Financial data schedule -- ECB Bancorp, Inc.
27.2 * Financial data schedule -- The East Carolina Bank
</TABLE>

- ---------
* Previously filed.

II-6

EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT

The Board of Directors
The East Carolina Bank:

We consent to the use of our reports on the consolidated financial statements of
The East Carolina Bank and subsidiaries included herein and to the reference to
our firm under the heading "Experts" in the prospectus.

Our report dated February 4, 1998, except note 15 which is as of July 22, 1998,
contains an explanatory paragraph that states that the Company adopted the
provisions of Financial Accounting Standards Board's Statement of the Financial
Accounting Standards No. 106, Employer's Accounting for Postretirement Benefits
Other Than Pensions.

/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina
November 10, 1998

EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT

The Board of Directors
ECB Bancorp, Inc.:

We consent to the use of our reports on the supplemental consolidated financial
statements of ECB Bancorp, Inc. and subsidiary included herein and to the
reference to our firm under the heading "Experts" in the prospectus.

Our report dated February 4, 1998, except note 15 which is as of July 22, 1998,
contains an explanatory paragraph that states that the supplemental consolidated
financial statements give retroactive effect to the merger of ECB Bancorp, Inc.
and The East Carolina Bank on July 22, 1998, which has been accounted for in a
manner similar to a pooling-of-interests as described in note 15 to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that do
not include the date of consumation. These consolidated financial statements do
not extend through the date of consummation. However, they will become the
historical consolidated financial statements of ECB Bancorp, Inc. and subsidiary
after financial statements covering the date of consummation of the business
combination are issued. Additionally, our report contains an explanatory
paragraph that states that the Company adopted the provisions of the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
106, Employer's Accounting for Postretirement Benefits Other Than Pensions.

/s/ KPMG Peat Marwick LLP
Raleigh, North Carolina
November 10, 1998