ECB BANCORP INC, SB-2, 1998-08-19

ECB BANCORP INC
SB-2, 1998-08-19
STATE COMMERCIAL BANKS

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 19, 1998
REGISTRATION NO. 333- *
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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)
---------------
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
---------------
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. [ ]
---------------
CALCULATION OF REGISTRATION FEE
================================================================================

<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO BE OFFERING PRICE PER AGGREGATE REGISTRATION
BE REGISTERED REGISTERED(1) SHARE/UNIT(2) OFFERING PRICE(1)(2) FEE(1)(3)
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Common Stock, $3.50 Par Value .. 300,000 shares $ 16.00 $4,800,000 $1,416
======================================================================================================================
</TABLE>

================================================================================
(1) Based on the maximum number of shares of Common Stock being offered for
sale.
(2) Estimated pursuant to Rule 457(a) of the Securities Act of 1933 solely for
the purpose of computing the registration fee.
(3) The registration fee is calculated in accordance with Section 6 of the
Securities Act of 1933, as amended.

---------------
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.
================================================================================
<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 * , 1998
SUBJECT TO COMPLETION

PROSPECTUS

COMMON STOCK

(ECB logo appears here)

ECB BANCORP, INC.
MINIMUM SHARES -- 250,000 / MAXIMUM SHARES -- 300,000
ECB Bancorp, Inc. (the "Company") hereby offers for sale a minimum of
250,000 shares and a maximum of 300,000 shares of its common stock, $3.50 par
value (the "Common Stock"), at a price of $ * per share. The Common Stock
currently is traded on the Nasdaq Over-the-Counter Bulletin Board under the
symbol "ECBE," and an application is being made to list the Common Stock on the
Nasdaq Small Cap Market. The last reported sale price of the Common Stock as
reported on the Nasdaq Bulletin Board on August * , 1998, was $ * .

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.
---------------
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.
---------------
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.
---------------
===============================================================================-

<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSION(1) ISSUER(2)
<S> <C> <C> <C>
- -------------------------------------------------------------------------------
Total minimum(3) ......... $ * $ * $ *
- -------------------------------------------------------------------------------
Total maximum(3) ......... $ * $ * $ *
</TABLE>

================================================================================
(1) Pursuant to a Sales Agency Agreement between the Company and the Sales
Agent, the Company has agreed to pay selling commissions to the Sales
Agent equal to 7.0% of the total dollar amount of Common Stock sold in the
Offering, and to pay all NASD and "blue sky" filing fees and the Sales
Agent's expenses, including reasonable attorneys' fees, related thereto.
The Company also has agreed to indemnify the Sales Agent against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Plan of Distribution."
(2) Before deducting Offering expenses estimated at $225,000, all of which are
payable by the Company. See "Use of Proceeds."
(3) Based on the sale of the minimum of 250,000 and maximum of 300,000 shares
being offered for sale. The Offering is being made by the Sales Agent on a
"reasonable efforts" basis. Unless orders and full payment in collected
funds for at least 250,000 shares of Common Stock have been received and
accepted by 5:00 p.m., local time, on October 30, 1998 (or a later date
agreed upon by the Company and the Sales Agent, which date may be no later
than November 30, 1998), the Offering will terminate, all orders will
become void, and no Common Stock will be issued. The Company and the Sales
Agent have reserved the right to modify the terms of the Offering without
notice. See "Plan of Distribution."

The shares of Common Stock are offered by the Company and Sales Agent,
subject to prior sale, receipt and acceptance by them, and subject to the right
of the Company and the Sales Agent to reject any order in whole or in part and
certain other conditions.

INTERSTATE/JOHNSON LANE

CORPORATION

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

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.

(map appears here with plot points to be provided by customer)

REGIONS
WESTERN CENTRAL EASTERN
- -------- ------- --------
Greenville (3) Engelhard * Avon
Columbia Barco
Creswell Hatteras
Fairfield Manteo
Swan Quarter Nags Head
Washington Ocracoke
So. Shores

*CORPORATE HEADQUARTERS

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 SALES AGENT 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 "PLAN OF DISTRIBUTION."

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 Nasdaq's Over-the-Counter 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 small-
and medium-sized businesses and individuals 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.

3
<PAGE>

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," "Incorporation of Certain Documents by Reference," "Index to
Consolidated Financial Statements," "ECB Bancorp, Inc. and Subsidiary
Supplemental Consolidated Financial Statements" and "The East Carolina Bank and
Subsidiaries Consolidated Financial Statements."

THE OFFERING

<TABLE>
<S> <C>
Common Stock ................ The Company is offering a minimum of 250,000 and a maximum of 300,000 shares of
Common Stock at a price per share of $ *. See "Description of Capital Stock."
Market for Common Stock ..... The Common Stock is currently traded on the Nasdaq Over-the-Counter Bulletin Board
under the symbol "ECBE," and an application is being made to list the Common Stock on
the Nasdaq Small Cap Market. See "Market Price of Common Stock."
Common Stock Outstanding
after the Offering ......... 2,030,254 shares if the minimum number of shares offered hereby are sold, and 2,080,254
shares if the maximum number of shares are sold. The shares sold in the Offering will be
approximately 12.3% or 14.4% of the Company's total outstanding shares if the minimum
or maximum number of shares, respectively, are sold.
Terms of the Offering ....... Unless orders and full payment in collected funds for at least 250,000 shares of Common
Stock have been received and accepted by 5:00 p.m., local time, on October 30, 1998 (or a
later date agreed upon by the Company and the Sales Agent, which date may be no later
than November 30, 1998), the Offering will terminate, all orders will become void and no
Common Stock will be issued. The Company and the Sales Agent have reserved the right to
modify the terms of the Offering without notice. See "Plan of Distribution." Orders for
Common Stock will be accepted for no fewer than 100 shares and for no more than 5.0% of
the total number of shares sold in the Offering.
Use of Proceeds ............. Substantially all of the net proceeds received by the Company from the Offering will likely
be transferred by the Company to the Bank in the form of contributions of additional capital
or loans and will be used by the Bank for general corporate purposes, including without
limitation (i) funding for its internal growth of earning assets and deposits, (ii) 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 (iii) the continued expansion and
upgrade of the Bank's products, systems and operations. See "Use of Proceeds."
Orders for Common Stock ..... Prospective investors who desire to purchase Common Stock should follow the procedures
described in this Prospectus under the caption "Plan of Distribution."
</TABLE>

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."
---------------
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
------------- -------------
(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 ............. 2,691 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:
Return on average assets .............. 0.96% 1.03%
Return on average equity .............. 11.16 11.87
Net interest margin (taxable
equivalent) .......................... 5.42 5.04
Dividend payout ....................... -- --
Efficiency(4) ......................... 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 ............. 252.20 130.63
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:
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 .............................. 170,909 151,336 150,411 141,044 141,137
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:
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 ....................... 24.82 28.44 29.85 26.67 34.87
Efficiency(4) ......................... 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>

- ---------
(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) 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 42% and 50%, 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.

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 45% 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 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."

7
<PAGE>

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."

POSSIBLE NEED FOR ADDITIONAL CAPITAL

Management of the Company believes that the sale of the minimum number of
shares of Common Stock will provide adequate additional capital to fund
anticipated growth and sustain the Company's and the Bank's operations for the
foreseeable future. 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.

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
Over-the-Counter Bulletin Board, and an application is being made to list the
Common Stock on the Nasdaq Small Cap Market. 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. 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. The presence

8
<PAGE>

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."

DEVELOPMENTS IN TECHNOLOGY

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. Financial
services institutions 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, 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 it has developed and currently is implementing a program to make
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 experienced by these
or other third parties.

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 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."

9
<PAGE>

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."

DETERMINATION OF OFFERING PRICE

The $ * offering price was established by the Company's Board of
Directors, in consultation with the Sales Agent, based primarily on recent
prices at which the Common Stock had been bought and sold in trading on the
Nasdaq Over-the-Counter Bulletin Board. However, since there is not an active
trading market for the Common Stock, recent trade prices may not be reflective
of the intrinsic value of the stock or the price at which it can be resold at a
later date. Therefore, 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.

PURCHASES AND RESALES OF STOCK BY INSIDERS

The Company's officers and directors may purchase shares of the Common
Stock in the Offering for their own investment purposes. Such purchases will be
counted in determining whether the minimum number of shares has been sold and
could permit the Company to complete the Offering without purchases by
nonaffiliated persons for the minimum number of shares. The Company's directors
and executive officers have agreed with the Sales Agent that, for a period of
90 days following consummation of the Offering, they will not sell any shares
of Common Stock owned by them. However, following the end of that period, there
will be no significant restrictions on the resale of any of the shares of the
Company's Common Stock that will be outstanding following the Offering. Resales
of shares of Common Stock following the Offering, including sales by persons
affiliated with the Company, could have an adverse affect on the price at which
an investor could resell the shares he or she purchases in the Offering. See
"Plan of Distribution."

10
<PAGE>

USE OF PROCEEDS

The net proceeds from the Offering (after deductions for the Sales Agent's
commissions and fees and for estimated Offering expenses) are expected to be
from a minimum of approximately $ * to a maximum of approximately $ *
(based on the sale of the minimum and maximum numbers of shares being offered,
respectively). 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.

Substantially all of the net proceeds received by the Company from the
Offering will likely be transferred by the Company to the Bank in the form of
contributions of additional capital or loans and will be used by the Bank for
general corporate purposes, including without limitation (i) funding for its
internal growth of earning assets and deposits, (ii) 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 (iii) the continued expansion and upgrade of the Bank's products,
systems and operations.

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 Over-the-Counter Bulletin
Board (under the trading symbol "ECBE"), and an application is being made to
list the Common Stock on the Nasdaq Small Cap Market. Interstate/Johnson Lane
Corporation is currently listed as a "market maker" for the stock. 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
Over-the-Counter Bulletin Board at prices ranging from $13.67 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 Over-the-Counter 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 Over-the-Counter 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 July 31, 1998, there were approximately 664 holders of record of the
Company's Common Stock.

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 ............ $ .21
1997 ............ $ .23
1998(3) ......... $ --
</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) Through August 15, 1998.

11
<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 minimum and maximum numbers of 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," "Incorporation of Certain Documents by Reference," "Index to
Consolidated Financial Statements," and "ECB Bancorp, Inc. and Subsidiary
Supplemental Consolidated Financial Statements."

<TABLE>
<CAPTION>
AT JUNE 30, 1998(1)(2)
-----------------------------------------------
MINIMUM MAXIMUM
STOCKHOLDERS' EQUITY ACTUAL PURCHASE(3) PURCHASE(3)
- ----------------------------------------------------------------------- ---------------- --------------- --------------
<S> <C> <C> <C>
Common stock, $3.50 par value; 10,000,000 shares authorized, 1,780,254
shares outstanding at June 30, 1998; 2,030,254 shares outstanding if
minimum number of shares are sold, and 2,080,254 shares outstanding if
maximum number of shares are sold .................................... $ 6,230,889 $ 7,105,889 $ 7,280,889
Surplus ............................................................... 3,200,000 * *
Undivided profits ..................................................... 6,877,531 6,877,531 6,877,531
Offering expenses(4) .................................................. -- (225,000) (225,000)
------------ ----------- -----------
Total shareholders' equity ........................................... $ 16,679,425 $ * $ *
============ ============ ============
Book value per share .................................................. $ 9.37 $ * $ *
------------ ------------ ------------
</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 minimum of 250,000 and
maximum of 300,000 shares of Common Stock in the Offering.
(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," "Incorporation of Certain Documents by Reference," "Index to
Consolidated Financial Statements," "ECB Bancorp, Inc. and Subsidiary
Supplemental Consolidated Financial Statements" and "The East Carolina Bank and
Subsidiaries Consolidated Financial Statements."

12
<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 ............. 2,691 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:
Return on average assets .............. 0.96% 1.03%
Return on average equity .............. 11.16 11.87
Net interest margin (taxable
equivalent) .......................... 5.42 5.04
Dividend payout ....................... -- --
Efficiency(4) ......................... 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 ............. 252.20 130.63
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 ....................... $ 13,637 $ 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 .............................. 170,909 151,336 150,411 141,044 141,137
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:
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 ....................... 24.82 28.44 29.85 26.67 34.87
Efficiency(4) ......................... 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>

13
<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 5.51% compared to 5.12% in 1997. This improvement in the Company's
net interest margin is attributable to loans representing a larger portion of
the Company's total earning assets.

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 $89,000,
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 $164,000 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 $41,000 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 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

14
<PAGE>

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 $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 $119,000 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 $174,000 in the form of incentive pay awards. Retirement and other
employee benefit expense also increased $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.

15
<PAGE>

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% $ 5,364 $123,986 3.90% $ 4,831
Borrowed funds .................... -- -- -- 188 5.32% 10
-------- ---- ------- -------- ---- -------
Total interest-bearing
liabilities ...................... 135,789 3.95% 5,364 124,174 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% $ 8,276 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 $903,000 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 $810,000 while the effect of changes in interest
rates was less dramatic, increasing net interest income by only $93,000.

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.

16
<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 ......... 463 70 533 10 (386) (376)
Borrowed funds .................... (5) (5) (10) 2 (1) 1
-------- ------ ------ ------- -------- ------
Interest expense .................. 458 65 523 12 (387) (375)
------- ----- ------ ------- ------- ------
Net interest income ............... $ 810 $93 $ 903 $ 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%.

17
<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 37,126
--------- ---------
Total interest-bearing liabilities ......................... $ 89,548 $ 44,286
========= =========
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 4,571 63,540
--------- --------- ---------
Total interest-bearing liabilities ......................... $ 133,834 $ 5,178 $ 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>

Deregulation of interest rate and short-term, interest bearing deposits,
which are more volatile, have created a need for shorter maturities of earning
assets. As a result, an increasing percentage of commercial, installment and
mortgage loans are being made with variable rates or shorter maturities to
increase liquidity and interest rate sensitivity.

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).

18
<PAGE>

As of December 31, 1997, the Company had a negative one year cumulative
gap of 30.5%. The Company has 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 the 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. If this change
were made, the Company's rate sensitive liabilities would be more closely
matched at the end of the one year period.

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 (%) ............. 9.10% 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 4 -- -- --
Average rate (%) ............. 3.34% 3.34% -- -- --
<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 ................ -- 300 300
Average rate (%) ............. -- 3.34%
</TABLE>

19
<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 $119,000 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>

20
<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 at December 31, 1997. Asset growth
was funded primarily by increased non-interest-bearing demand deposits of $9.6
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 $7.5 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.

21
<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.

22
<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.

23
<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 19,484 17,642 4,571 63,540
------- ------- ------- ------ -------
Total time deposits ............................. $33,579 $22,986 $21,300 $5,178 $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 ........................................ 24.82% 28.44% 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.

24
<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,
-------------------
1997 1996
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Non-accrual loans .................................. $1,463 $1,017
Loans past due 90 or more days still accruing ...... -- 35
Restructured loans ................................. 522 350
Foreclosed properties .............................. 340 --
------ ------
Total .............................................. $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.

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

ALLOCATION OF ALLOWANCE FOR POSSIBLE LOAN LOSSES

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1997 1996
------------------------- ------------------------
PERCENT OF PERCENT OF
TOTAL LOANS IN TOTAL LOANS IN
AMOUNT EACH CATEGORY AMOUNT EACH CATEGORY
-------- ---------------- -------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Real estate ............................ $1,690 52.2% $1,398 57.9%
Installment loans ...................... 389 21.0% 218 16.4%
Credit cards and related plans ......... 390 2.8% 137 2.8%
Commercial and all other loans ......... 149 24.0% 367 22.9%
------ ----- ------ -----
Total allocated ........................ 2,618 100.0% 2,120 100.0%
Unallocated ............................ 42 280
------ ------
Total .................................. $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.

25
<PAGE>

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

26
<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 24.8% and represented an
increase of 9.4% 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.

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.
27
<PAGE>

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.

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.

28
<PAGE>

In 1997, the Company developed a plan to deal with the Year 2000 issue and
contracted with an industry consultant to assist management in reviewing its
overall exposure to the Year 2000 issue. The Year 2000 issue relates to
computer programs written using two digits rather than four to define the
applicable year. Management has reviewed the results of the consultant's
analysis of the Company's data processing Year 2000 exposure and has committed
the human resources and the financial resources for the Company to complete its
resolution of the Year 2000 issue in 1998. The total cost of the Year 2000
conversion project for the Company is estimated to be $200,000 and is being
funded through operating cash flows. The Company is expensing all costs
associated with the required systems changes as the costs are incurred. As of
June 30, 1998, $23,000 had been expensed. Systems are being remediated,
replaced or retired as part of the Company's Year 2000 compliance program. The
Company is closely monitoring the progress of the Year 2000 plan and does not
expect significant increases in future data processing costs relating to Year
2000 compliance.

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.

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<PAGE>

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 Nasdaq's Over-the-Counter 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

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 described below.

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 small- and medium-sized
businesses and individuals 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
expansions 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 dollar transactions and less personal 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

30
<PAGE>

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). At June 30, 1998, approximately 36%
and 37%, 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
$20,699.

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

31
<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 $23,090.

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
50% and 42%, 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 $20,125.

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 45% 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.

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.

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 22% of these agricultural loans are secured by
first or junior liens on real estate and, thus, are included in

32
<PAGE>

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.

Certain statistical information regarding the Bank's loan portfolio at
December 31, 1997, and June 30, 1998, is contained 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. 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 which advises the Bank with respect to its credit policies
and procedures and provides 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 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 252.20% of its non-performing loans.

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<PAGE>

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. The Bank's investment portfolio consists 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.

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

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<PAGE>

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.

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,"
"Incorporation of Certain Documents by Reference," "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

36
<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.

37
<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
under-capitalized, 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.

38
<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

39
<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.

40
<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 sales
(64) 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 Director 1974 / 2001 Retired farmer, Scranton, NC
(75)
R. S. Spencer, Jr. 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.

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.

41
<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 July 31, 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 ................................. 10,008 .56%
All current directors and executive officers
as a group (15 persons) .......................615,423 (2) 34.57%
</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.

42
<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

43
<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
awarded to certain officers of the Bank options to purchase an aggregate of
9,516 shares of the Bank's common stock 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 July 31, 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 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

44
<PAGE>

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.

PLAN OF DISTRIBUTION

A minimum of 250,000 shares and a maximum of 300,000 shares of Common
Stock are being offered by the Company at a price of $ * per share.

The Company and the Sales Agent have entered into a Sales Agency Agreement
pursuant to which the Sales Agent will act as the Company's agent on a
"reasonable efforts" basis and solicit orders for the Common Stock. The Sales
Agent may form a selling group of one or more other selected broker-dealers who
also will solicit orders for the Common Stock. While the Sales Agent will serve
as the Company's non-exclusive agent, it will be entitled to approve the
Company's engagement of any other selling agents and may require that any such
other selling agents conduct their sales efforts in a manner consistent with
the procedures described in this Prospectus. The Sales Agent will direct its
selling efforts in the Company's primary geographic market in particular and in
eastern North Carolina in general. However, the Sales Agent likely will sell
shares of the Common Stock to investors elsewhere in North Carolina and in
other states where the Common Stock can lawfully be offered and sold.

Unless extended as provided below, the Offering will terminate on the
earlier of October 30, 1998, or the date on which the maximum number of shares
have been sold, and may be terminated at any time on or after the date on which
the minimum number of shares have been sold. If orders and full payment in
collected funds for the minimum of 250,000 shares have not been placed with the
Sales Agent and any other selected broker-dealers as described below by October
30, 1998, the Offering will terminate and no shares will be sold; provided,
however, that such termination date and the Offering period may be extended by
the Company and the Sales Agent until no later than November 30, 1998, without
notice. Also, the Company and the Sales Agent reserve the right to otherwise
terminate or withdraw the Offering at any time without notice. If the Offering
is terminated or withdrawn, all orders will be canceled and no shares of Common
Stock will be issued.
45
<PAGE>

Each order for the purchase of Common Stock will be held until it is
accepted, rejected, or accepted in part and rejected in part. Assuming orders
for at least the minimum number of shares have been received, after completion
of the Offering a closing will be held whereby the Sales Agent and any other
selected broker-dealers will debit the accounts of prospective investors that
have placed orders with them for the purchase price of Common Stock (as
described below), and certificates for shares sold will be delivered promptly
thereafter to the purchasers of those shares.

The Company's existing shareholders do not have preemptive rights to
acquire additional shares of Common Stock issued by the Company. However, if
orders are received for an aggregate of more than the maximum number of shares
being offered, then orders received prior to termination of the Offering from
persons who are shareholders of record as of commencement of the Offering will
be given priority.

In order to purchase Common Stock, each prospective investor must be a
customer of or otherwise have an account with the Sales Agent or any other
selected broker-dealer and must place his or her order and make payment for
Common Stock through the Sales Agent or such other selected broker-dealer in
accordance with the following procedures:

o Prospective investors should contact the Bank at (252) 925-9411 for
information regarding establishing an account with the Sales Agent.

o The Sales Agent and other selected broker-dealers will obtain
"indications of interest" from prospective investors who desire to
purchase Common Stock, together with authorizations to debit those
investors' customer securities accounts held by the Sales Agent or other
selected broker-dealers, and each such investor will be instructed to
deposit funds in the investor's securities brokerage account equal to the
purchase price of shares being ordered.

o Once the Sales Agent has determined that the total of the "indications of
interest" received by it and any other selected broker-dealers exceeds the
minimum number of shares, that funds are available in each prospective
investor's securities brokerage accounts equal to the purchase price of
shares ordered, and that the closing of the Offering is imminent, the
Sales Agent will so notify any other selected broker-dealers and the Sales
Agent and each such other selected broker-dealer will send confirmations
to its customers who have given "indications of interest" to purchase
Common Stock which have not been withdrawn (with the date such
confirmations are sent being the "Order Date").

o Not later than the next business day after the Order Date, the Sales
Agent and each other selected broker-dealer will notify the Company that
the Sales Agent and the other selected broker-dealers have received orders
for shares of Common Stock in excess of the minimum number of shares to be
sold in the Offering.

o On the date three business days after the Order Date (the "Settlement
Date"), the Sales Agent and each other selected broker-dealer will debit
the accounts of each prospective investor for the purchase price of Common
Stock for which they have received orders. Investors whose brokerage
accounts are to be debited in this manner must have funds in their
accounts on the Settlement Date for the purchase price of Common Stock to
be purchased.

o On the Settlement Date, the Sales Agent and each other selected
broker-dealer will transmit all such debited funds, less the amount of the
Sales Agent's commission, to the Company.

The terms of the Offering have been set by the Company and the Sales Agent
as a matter of general policy only and may be modified by them at any time
without notice. Any order for the purchase of Common Stock may be accepted or
rejected or may be accepted for a lesser amount than ordered, and, if the
Offering is oversubscribed, the Company and the Sales Agent reserve the right
to allocate shares among prospective purchasers in such manner as they, in
their sole discretion, shall consider appropriate.

The Sales Agent has agreed that it will not sell more than five percent of
the aggregate number of shares of Common Stock sold in the Offering (12,500
shares if the minimum number of shares is sold, and 15,000 if the maximum
number of shares is sold) to any person or to any group of persons acting in
concert without the prior written consent of the Company, and the Company
reserves the right to otherwise restrict the number of shares of Common Stock
that may be purchased by any such person or group. The minimum order for Common
Stock that will be accepted is 100 shares.

For its services, the Company has agreed to pay the Sales Agent
commissions calculated at 7.0% of the aggregate total dollar amount of Common
Stock sold in the Offering. If the Sales Agent forms a selling group of
selected broker-dealers, it will reallow or pay to those broker-dealers a
portion (up to 60%) of its 7.0% commissions for Common Stock sold by them.
Certain officers, directors and employees of the Company also may participate
in the offering, but such persons will not be compensated, directly or
indirectly, for their participation.

46
<PAGE>

Whether or not any Common Stock is sold, 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 of the Sales Agent's legal counsel
related thereto, and, if the Offering is terminated with no shares of Common
Stock being sold, the Company will reimburse the Sales Agent for its actual,
accountable out-of-pocket expenses related to the Offering. The Company also
will 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 $ * and will be paid by the Company from
the sales proceeds. If the Offering is terminated or withdrawn or no shares of
the Common Stock are sold, Offering expenses will be charged against the
Company's earnings.

The Company's directors and executive officers have agreed with the Sales
Agent that, for a period of 90 days following consummation of the Offering,
they will not sell any shares of Common Stock owned by them.

The Company has agreed to indemnify the Sales Agent against certain
liabilities and expenses (including legal fees) incurred in connection with
certain claims or litigation arising out of or based upon untrue statements or
omissions contained in the Offering materials for the Common Stock.

During and after the Offering, the Sales Agent may purchase and sell
Common Stock in the open market. These transactions may include stablizing
transactions, "passive" market making (see below) and purchases to cover
syndicate short positions created in connection with the Offering. The Sales
Agent also may impose a penalty bid, whereby selling concessions allowed to
syndicate members or other broker-dealers in respect of the Common Stock sold
in the Offering for their account may be reclaimed by the syndicate if such
securities are repurchased by the syndicate in stablizing or covering
transactions. These activities may stablize, 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 Small Cap Market 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, the Sales
Agent or selected broker-dealers that are market makers in the Common Stock may
make bids for or purchases of Common Stock in the Nasdaq Small Cap Market until
such time, if any, when a stablizing 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
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.

47
<PAGE>

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 Sales Agent
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 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

48
<PAGE>

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.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following document, which has been filed by the Company with the
Commission pursuant to the Exchange Act, is incorporated by reference in this
Prospectus: the Company's Current Report on Form 8-K dated July 22, 1998.

All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of any offering of securities hereunder shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated by reference or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for all purposes of the
Registration Statement and this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that is also
incorporated or deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement or this Prospectus. As used herein, the terms
"Prospectus" and "herein" mean this Prospectus, including the documents
incorporated or deemed to be incorporated herein by reference, as the same may
be amended, supplemented or otherwise modified from time to time. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to herein do not purport to be complete, and where reference
is made to the particular provisions of such contract or other document, such
provisions are qualified in all respects by reference to all of the provisions
of such contract or other document.

49
<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
and 1996 ............................................................................... F-19
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) 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.

(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-9
<PAGE>

ECB BANCORP, INC. AND SUBSIDIARY
NOTES TO SUPPLEMENTAL 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-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 years ended
December 31, 1997, 1996 and 1995 follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Beginning balance ........................... $2,400,000 $1,950,000 $1,900,000
Provision for possible loan losses .......... 353,513 496,914 515,066
Recoveries .................................. 100,838 218,843 83,433
Loans charged off ........................... (194,351) (265,757) (548,499)
---------- ---------- ----------
Ending balance .............................. $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) 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>

<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>

F-25
<PAGE>

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

(2) INVESTMENT SECURITIES -- (Continued)

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.

(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

F-26
<PAGE>

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

(3) LOANS -- (Continued)

$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.

(4) ALLOWANCE FOR POSSIBLE LOAN LOSSES

An analysis of the allowance for possible loan losses for the years ended
December 31, 1997, 1996 and 1995 follows:

<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Beginning balance ........................... $2,400,000 1,950,000 1,900,000
Provision for possible loan losses .......... 353,513 496,914 515,066
Recoveries .................................. 100,838 218,843 83,433
Loans charged off ........................... (194,351) (265,757) (548,499)
---------- --------- ---------
Ending balance .............................. $2,660,000 2,400,000 1,950,000
========== ========= =========
</TABLE>

F-27
<PAGE>

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

(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>

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>

F-28
<PAGE>

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

(6) INCOME TAXES -- (Continued)

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.

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.

F-29
<PAGE>

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

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

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.

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.

F-30
<PAGE>

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

(10) LEASES -- (Continued)

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 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.

F-31
<PAGE>

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

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

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.

F-32
<PAGE>

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.

UNTIL * , 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.

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

<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Summary ................................................... 3
Risk Factors .............................................. 6
Use of Proceeds ........................................... 11
Market Price of Common Stock .............................. 11
Dividends ................................................. 11
Capitalization ............................................ 12
Selected Consolidated Financial Data and Other
Information ............................................ 12
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 14
Business .................................................. 30
Supervision, Regulation and Other Matters ................. 36
Management ................................................ 41
Beneficial Ownership of Common Stock ...................... 42
Management Compensation ................................... 43
Certain Relationships and Related Transactions ............ 44
Description of Capital Stock .............................. 44
Plan of Distribution ...................................... 45
Indemnification ........................................... 47
Legal Matters ............................................. 48
Experts ................................................... 48
Available Information ..................................... 49
Incorporation of Certain Documents by
Reference .............................................. 49
Index to Consolidated Financial Statements ................ F-1
ECB Bancorp, Inc. and Subsidiary Supplemental
Consolidated Financial Statements ...................... F-7
The East Carolina Bank and Subsidiaries
Consolidated Financial Statements ...................... F-23
</TABLE>
================================================================================

================================================================================

$ *

(ECB logo appears here)

ECB BANCORP, INC.

COMMON STOCK

---------------------------------------
PROSPECTUS
---------------------------------------
[GRAPHIC OMITTED]

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 $1,416 and
NASD filing fee of $980.

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>

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 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 August 19, 1998.

ECB BANCORP, INC.

By: /s/ ARTHUR H. KEENEY, III
-------------------------------------

ARTHUR H. KEENEY, III
PRESIDENT AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form SB-2 has been signed by the following persons in
the capacity and on the dates indicated.

Each of the undersigned directors and officers of Registrant, by his
execution hereof, hereby constitutes and appoints ARTHUR H. KEENEY, III and
GARY M. ADAMS, and each of them, as his true and lawful attorneys-in-fact and
agents, for him or her, and in his or her name, place and stead, to execute and
sign any and all pre-effective and post-effective amendments to such
Registration Statement, and file the same, together with all exhibits and
schedules thereto and all other documents in connection therewith, with the
Commission and with such state securities authorities as may be appropriate,
granting unto said attorneys-in-fact, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully and to all intents and
purposes as the undersigned might or could do in person, and hereby ratifying
and confirming all the acts of said attorneys-in-fact and agents , or any of
them, which they may lawfully do in the premises or cause to be done by virtue
hereof.

<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------ --------------------------------------- ----------------
<S> <C> <C>
/s/ ARTHUR H. KEENEY, III President, Chief Executive Officer August 19, 1998
-------------------------------
ARTHUR H. KEENEY, III Director (principal executive officer)
/s/ GARY M. ADAMS Vice President and Chief August 19, 1998
-------------------------------
GARY M. ADAMS Financial Officer (principal financial
and accounting officer)
/s/ R.S. SPENCER, JR. Chairman August 19, 1998
-------------------------------
R.S. SPENCER, JR.

/s/ GEORGE T. DAVIS, JR. Vice Chairman August 19, 1998
-------------------------------
GEORGE T. DAVIS, JR.

/s/ C. GILBERT GIBBS Director August 19, 1998
-------------------------------
C. GILBERT GIBBS

/s/ GREGORY C. GIBBS Director August 19, 1998
-------------------------------
GREGORY C. GIBBS

/s/ JOHN F. HUGHES, JR. Director August 19, 1998
-------------------------------
JOHN F. HUGHES, JR.

/s/ J. BRYANT KITTRELL, III Director August 19, 1998
-------------------------------
J. BRYANT KITTRELL, III
</TABLE>

II-3
<PAGE>

<TABLE>
<CAPTION>
NAME TITLE DATE
- ---------------------------------- ---------- ----------------
<S> <C> <C>
/s/ JOSEPH T. LAMB, JR. Director August 19, 1998
-------------------------------
JOSEPH T. LAMB, JR.

/s/ B. MARTELLE MARSHALL Director August 19, 1998
-------------------------------
B. MARTELLE MARSHALL

/s/ ROBERT L. MITCHELL Director August 19, 1998
-------------------------------
ROBERT L. MITCHELL

/s/ RAY M. SPENCER Director August 19, 1998
-------------------------------
RAY M. SPENCER
</TABLE>

II-4
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE NO.
- ------------- ------------------------------------------------------------------ ---------
<S> <C> <C> <C>
1.1 * Sales Agency 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>

- ---------
* To be filed by amendment.

II-5

EXHIBIT 3.1

ARTICLES OF INCORPORATION
OF
ECB BANCORP, INC.

The undersigned entity hereby makes and acknowledges these Articles
of Incorporation for the purpose of forming a business corporation under and by
virtue of the laws of the State of North Carolina as contained in Chapter 55 of
the General Statutes of North Carolina and the several amendments thereto, and
to that end hereby does set forth that:

1. The name of the corporation is ECB BANCORP, INC.

2. The corporation shall have authority to issue 10,000,000 shares
of stock, all of one class and having a par value of $3.50 per share.

3. The street and mailing address of the initial registered office
of the corporation is Highway 264, Post Office Box 337, Engelhard, North
Carolina 27824, and the name of the initial registered agent at such address is
Arthur H. Keeney, III.

4. To the fullest extent permitted by the North Carolina Business
Corporation Act as it exists or may hereafter be amended, no person who is
serving or who has served as a director of the corporation shall be personally
liable to the corporation or any of its shareholders or otherwise for monetary
damages for breach of any duty as a director. No amendment or repeal of this
article, nor the adoption of any provision to these Articles of Incorporation
inconsistent with this article, shall eliminate or reduce the protection granted
herein with respect to any matter that occurred prior to such amendment, repeal,
or adoption.

5. The name of the incorporator is The East Carolina Bank and the
address of the incorporator is Post Office Box 337, Engelhard, North Carolina
27824.

IN TESTIMONY WHEREOF, the undersigned has caused this instrument
properly to be executed in its name, this the 30th day of January, 1998.

THE EAST CAROLINA BANK

By:/s/ Arthur H. Keeney, III
--------------------------
Arthur H. Keeney, III
President

EXHIBIT 3.2
BYLAWS
OF
ECB BANCORP, INC.

INDEX

ARTICLE I

OFFICES
SECTION 1. Principal Office
SECTION 2. Registered Office
SECTION 3. Other Offices
ARTICLE II

MEETINGS OF SHAREHOLDERS
SECTION 1. Place of Meetings
SECTION 2. Annual Meetings
SECTION 3. Substitute Annual Meeting
SECTION 4. Special Meetings
SECTION 5. Notice of Meetings
SECTION 6. Waiver of Notice
SECTION 7. Voting Lists
SECTION 8. Voting Group
SECTION 9. Quorum
SECTION 10. Proxies
SECTION 11. Voting of Shares
SECTION 12. Informal Action By Shareholders

ARTICLE III

DIRECTORS
SECTION 1. General Powers
SECTION 2. Number and Qualifications
SECTION 3. Classification of Directors
SECTION 4. Election of Directors
SECTION 5. Nominations
SECTION 6. Terms of Directors
SECTION 7. Removal
SECTION 8. Vacancies
SECTION 9. Chairman of the Board
SECTION 10. Compensation
<PAGE>
ARTICLE IV

MEETINGS OF DIRECTORS
SECTION 1. Regular Meetings
SECTION 2. Special Meetings
SECTION 3. Notice of Meetings
SECTION 4. Waiver of Notice
SECTION 5. Quorum
SECTION 6. Manner of Acting
SECTION 7. Presumption of Assent
SECTION 8. Informal Action by Directors

ARTICLE V

COMMITTEES OF THE BOARD
SECTION 1. General
SECTION 2. Executive Committee
SECTION 3. Audit Committee

ARTICLE VI

OFFICERS
SECTION 1. Number
SECTION 2. Election and Term
SECTION 3. Removal and Resignation
SECTION 4. Compensation
SECTION 5. President
SECTION 6. Vice Presidents
SECTION 7. Secretary
SECTION 8. Assistant Secretaries
SECTION 9. Treasurer
SECTION 10. Assistant Treasurers

ARTICLE VII

CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. Contracts
SECTION 2. Loans
SECTION 3. Checks and Drafts
SECTION 4. Deposits
<PAGE>
ARTICLE VIII

CERTIFICATES FOR SHARES AND THEIR TRANSFER
SECTION 1. Certificates for Shares
SECTION 2. Transfer of Shares
SECTION 3. Fixing Record Date
SECTION 4. Lost Certificates
SECTION 5. Holder of Record
SECTION 6. Reacquired Shares
SECTION 7. Shares held by Nominees

ARTICLE IX

GENERAL PROVISIONS
SECTION 1. Distributions
SECTION 2. Seal
SECTION 3. Fiscal Year
SECTION 4. Amendments
SECTION 5. Definitions
SECTION 6. Indemnification
<PAGE>
BYLAWS
OF
ECB BANCORP, INC.

ARTICLE I

OFFICES

SECTION 1. PRINCIPAL OFFICE. The principal office of the corporation shall
be located at such place as the Board of Directors may fix from time to time.

SECTION 2. REGISTERED OFFICE. The registered office of the corporation
required by law to be maintained in the State of North Carolina may be, but need
not be, identical with the principal office.

SECTION 3. OTHER OFFICES. The corporation may have offices at such other
places, either within or without the State of North Carolina, as the Board of
Directors from time to time may determine, or as the affairs of the corporation
from time to time may require.
ARTICLE II

MEETINGS OF SHAREHOLDERS

SECTION 1. PLACE OF MEETINGS. All meetings of shareholders shall be held
at the principal office of the corporation or at such other place, either within
or without the State of North Carolina, as shall, in each case, be (I) fixed by
the President or the Board of Directors and designated in the notice of the
meeting, or (II) agreed upon by a majority of the shareholders entitled to vote
at the meeting.

SECTION 2. ANNUAL MEETINGS. The annual meeting of shareholders shall be
held during the first six months following the corporation's immediately
preceding fiscal year end and on a date and at a time determined by the
corporation's Board of Directors for the purpose of electing directors of the
corporation and for the transaction of such other business as properly may be
brought before the meeting.

SECTION 3. SUBSTITUTE ANNUAL MEETING. If the annual meeting shall not be
held on the day designated by these Bylaws, a substitute annual meeting may be
called in accordance with the provisions of Section 4 of this Article. A meeting
so called shall be designated and treated for all purposes as the annual
meeting.
<PAGE>
SECTION 4. SPECIAL MEETINGS. Special meetings of the shareholders may be
called at any time (I) by or at the direction of the Chairman of the Board or
the Chief Executive Officer, or (II) by resolution duly adopted by the Board of
Directors of the corporation.

SECTION 5. NOTICE OF MEETINGS. Written or printed notice stating the time,
place and date of the meeting shall be delivered not less than ten (10) nor more
than sixty (60) days before the date of any shareholders' meeting, either by
personal delivery, by mail or private carrier, by facsimile transmission or by
telegraph, teletype or other form or wire or wireless communication, by or at
the direction of the Board of Directors, the President, the Chairman or the
Secretary or other person calling the meeting, to each shareholder entitled to
vote at such meeting; provided, that such notice shall be given to all
shareholders where required by applicable law. If mailed, such notice shall be
deemed to be effective when deposited in the United States mail, correctly
addressed to the shareholder at the shareholder's address as it appears on the
current record of shareholders of the corporation, with postage thereon prepaid.

In the case of a special meeting, the notice of meeting shall include a
description of the purpose of purposes for which the meeting is called. In the
case of an annual or substitute annual meeting, the notice of meeting need not
include a description of the purpose or purposes for which the meeting is called
or the business to be transacted at such meeting unless such a description
expressly is required by the provisions of applicable law.

If any meeting of shareholders is adjourned to a different date, time, or
place, notice need not be given of the new date, time, or place if the new date,
time, or place is announced at the meeting before adjournment and if a new
record date is not fixed for the adjourned meeting. If a new record date for the
adjourned meeting is fixed for the adjourned meeting (which must be done if the
new date is more than 120 days after the date of the original meeting), notice
of the adjourned meeting must be given as provided in this Section to persons
who are shareholders as of the new record date.

SECTION 6. WAIVER OF NOTICE. Any shareholder may waive notice of any
meeting before or after the meeting. The waiver must be in writing, signed by
the shareholder, and delivered to the corporation for inclusion in the minutes
or filing with the corporate records. A shareholder's attendance, in person or
by proxy, at a meeting (i) waives objection to lack of notice or defective
notice of the meeting, unless the shareholder or the shareholder's proxy at the
beginning of the meeting objects to holding the meeting or transacting business
at the meeting, and (II) waives objection to consideration of a particular
matter at the meeting that is not within the purpose or purposes described in
the meeting notice, unless the shareholder or the shareholder's proxy objects to
considering the matter before it is voted upon.

SECTION 7. VOTING LISTS. Before each meeting of shareholders, the
Secretary of the corporation shall prepare an alphabetical list of the
shareholders entitled to notice of such meeting. The list shall be arranged by
voting group (and within each voting group by class

2
<PAGE>
or series of shares) and show the address of and the number of shares held by
each shareholder. The list shall be kept on file at the principal office of the
corporation for the period beginning two business days after notice of the
meeting is given and continuing through the meeting, and shall be available for
inspection by any shareholder or shareholder's agent or attorney at any time
prior to the meeting during regular business hours and at any time during the
meeting or any adjournment thereof.

SECTION 8. VOTING GROUP. All shares of one or more classes or series that
under the corporation's articles of incorporation or North Carolina law are
entitled to vote and be counted together collectively on a matter at a meeting
of shareholders constitute a voting group. All shares entitled by the
corporation's articles of incorporation or North Carolina law to vote generally
on a matter are for that purpose a single voting group. Classes or series of
shares shall not be entitled to vote separately by voting group unless expressly
authorized by the corporation's articles of incorporation or specifically
required by law.

SECTION 9. QUORUM. Shares entitled to vote as a separate voting group may
take action on a matter at a meeting of shareholders only if a quorum of those
shares is present at the meeting. A majority of the votes entitled to be cast on
the matter by the voting group shall constitute a quorum of that voting group
for action on that matter.

Once a share is represented for any purpose at a meeting, it is deemed
present for quorum purposes for the remainder of the meeting and for any
adjournment of that meeting unless a new record date is or must be set for that
adjourned meeting.

In the absence of a quorum at the opening of any meeting of shareholders,
such meeting may be adjourned from time to time by a vote of the majority of the
votes cast on the motion to adjourn; and, subject to the provisions of Section 5
of this Article II, at any adjourned meeting any business may be transacted
which might have been transacted at the original meeting if a quorum exists with
respect to the matter proposed.

SECTION 10. PROXIES. Shares may be voted either in person or by one or
more proxies authorized by a written appointment of proxy signed by the
shareholder or by the shareholder's duly authorized attorney-in-fact. An
appointment of proxy is valid for eleven months from the date of its execution,
unless a different period is expressly provided in the appointment form.

SECTION 11. VOTING OF SHARES. Subject to the provisions of the
corporation's articles of incorporation, each outstanding share shall be
entitled to one vote on each matter voted on at a meeting of shareholders.

Except in the election of directors as provided in Section 4 of Article
III, if a quorum exists, action on a matter by a voting group at a meeting of
shareholders is approved if the votes cast within the voting group favoring the
action exceed the votes cast opposing the

3
<PAGE>
action, unless a greater vote is required by law or by the corporation's
articles of incorporation or these Bylaws.

Absent special circumstances, shares of the corporation are not entitled
to vote if they are owned, directly or indirectly, by another corporation in
which the corporation owns, directly or indirectly, a majority of the shares
entitled to vote for directors of the second corporation; provided that this
provision does not limit the power of the corporation to vote its own shares
held by it in a fiduciary capacity.

SECTION 12. INFORMAL ACTION BY SHAREHOLDERS. Any action that is required
or permitted to be taken at a meeting of shareholders may be taken without a
meeting if one or more written consents, describing the action so taken, shall
be signed by all of the shareholders who would be entitled to vote upon such
action at a meeting, and delivered to the Secretary of the corporation for
inclusion in the minutes or filing with the corporate records.

If the corporation is required by law to give notice to nonvoting
shareholders of action to be taken by unanimous written consent of the voting
shareholders, then the corporation shall give the nonvoting shareholders, if
any, written notice of the proposed action at least ten days before the action
is taken.
ARTICLE III

DIRECTORS

SECTION 1. GENERAL POWERS. The business and affairs of the corporation
shall be directed by the Board of Directors or, to the extent provided herein
and permitted by applicable law, by such Executive Committee or other committees
as the Board of Directors may establish pursuant to these Bylaws.

SECTION 2. NUMBER AND QUALIFICATIONS. The number of directors constituting
the Board of Directors of the corporation shall be not less than nine (9) nor
more than fifteen (15) as may be fixed or changed from time to time, within the
above minimum and maximum numbers, by the Board of Directors.

SECTION 3. CLASSIFICATION OF DIRECTORS. The directors shall be divided
into three classes, as nearly equal in number as may be. At the first election
of directors following the adoption of this Section 3 by the corporation's
shareholders, directors in all three classes shall be elected, with the members
of such classes to serve for terms of one, two and three years, respectively.
Thereafter, as the terms of directors in each class expire, their successors
shall be elected for terms of three years. In the event of any increase or
decrease in the number of directors, the additional or eliminated directorships
shall be so classified or chosen that all classes of directors shall remain or
become as nearly equal in number as may be.

4
<PAGE>
SECTION 4. ELECTION OF DIRECTORS. Except as provided herein or in Section
8 of this Article III, the directors shall be elected at the annual meeting of
shareholders. Those persons who receive the highest number of votes at a meeting
at which a quorum is present shall be deemed to have been elected. Directors
need not be residents of the State of North Carolina, but must satisfy all
qualifications required by applicable law for directors of North Carolina
corporations and of bank holding companies.

SECTION 5. NOMINATIONS. Only persons who are nominated in
accordance with the provisions of these bylaws shall be eligible to be
elected as directors at an annual or special meeting of shareholders.

Nominations for election to the Board of Directors shall be made by the
Board of Directors at any meeting of shareholders at which directors are to be
elected. Nomination for election of any person to the Board of Directors also
may be made at any meeting of shareholders at which directors are to be elected
by a shareholder of record entitled to vote at that meeting if written notice of
such person's nomination shall have been delivered to the Secretary of the
corporation at its principal office not later than the close of business on the
fifth business day following the date on which notice is first given to
shareholders of the meeting at which such election is to be held. Each such
notice shall set forth: (I) the name and address of the shareholder who intends
to make the nomination and of the person or persons to be nominated; (II) a
representation that the shareholder is a holder of record of shares of the
corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting to nominate the person or persons specified in the
notice; (III) a description of all arrangements or understandings between the
shareholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the shareholder; (IV) such other information regarding each nominee proposed by
such shareholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the Securities and Exchange Commission if the
nominee had been nominated by the Board of Directors; and (V) the written
consent of each nominee to serve as a director of the corporation if so elected.
The chairman of the meeting may refuse to acknowledge the nomination of any
person not made in compliance with the foregoing procedure.

SECTION 6. TERMS OF DIRECTORS. The term of each director shall be for the
number of years for which he is elected as set forth in Section 3 of this
Article III, or until such director's death, resignation, retirement, removal or
disqualification. The term of a director elected to fill a vacancy expires at
the next shareholders' meeting at which directors are elected, at which time
such director or any other person may be nominated for election for a term (a
"Special Term") equal to the remainder, if any, of the unexpired term which such
director was initially elected to fill. A decrease in the number of directors
does not shorten an incumbent director's term. Despite the expiration of a
director's term, such director shall continue to serve until a successor shall
be elected and qualifies or until there is a decrease in the number of
directors.
5
<PAGE>
SECTION 7. REMOVAL. Any director may be removed from office at any time
with or without cause by a vote of shareholders whenever the number of votes
cast in favor of removal of the director exceeds the number of votes cast
against such removal. If a director is elected by a voting group of
shareholders, only the shareholders of that voting group may participate in the
vote to remove such director. A director may not be removed by the shareholders
at a meeting unless the notice of the meeting states that the purpose, or one of
the purposes, of the meeting is removal of the director. If any directors are so
removed, new directors may be elected at the same meeting.

SECTION 8. VACANCIES. Any vacancy occurring in the Board of Directors,
including without limitation a vacancy resulting from an increase in the number
of directors or from the failure by the shareholders to elect the full
authorized number of directors, may be filled by the shareholders or by the
Board of Directors, whichever group shall act first. If the directors remaining
in office do not constitute a quorum of the Board of Directors, the directors
may fill the vacancy by the affirmative vote of a majority of the remaining
directors, or by the sole remaining director, as the case may be. If the vacant
directorship was held by a director elected by a voting group, only the
remaining directors or director elected by that voting group or the holders of
shares of that voting group are entitled to fill the vacancy.

SECTION 9. CHAIRMAN OF THE BOARD. There may be a Chairman of the Board of
Directors elected by the directors from their number at any meeting of the
Board. The Chairman shall serve in such position at the pleasure of the Board of
Directors and shall preside at all meetings of the Board of Directors and
perform such other duties as may be directed by the Board.

In like fashion, the directors may elect from their number a Vice Chairman
of the Board of Directors who shall preside at meetings of the directors in the
absence of the Chairman and shall perform such other duties as may from time to
time be directed by the Board.

In the absence of the Chairman and any Vice Chairman, the Chief Executive
Officer shall preside at meetings of directors.

SECTION 10. COMPENSATION. The Board of Directors may provide for the
compensation of directors for their services as such and for the payment or
reimbursement of any and all expenses incurred by directors in attending
meetings of the Board or otherwise in connection with such services.

6
<PAGE>
ARTICLE IV

MEETINGS OF DIRECTORS

SECTION 1. REGULAR MEETINGS. A regular meeting of the Board of Directors
shall be held immediately after, and at the same place as, the annual meeting of
shareholders. In addition, the Board of Directors may provide, by resolution or
otherwise, the time and place, either within or without the State of North
Carolina, for the holding of additional regular meetings.

SECTION 2. SPECIAL MEETINGS. Special meetings of the Board of Directors
may be called by or at the direction of the Chairman of the Board, the Chief
Executive Officer, or any two directors. Such meetings may be held either within
or without the State of North Carolina.

SECTION 3. NOTICE OF MEETINGS. Regular meetings of the Board of Directors
may be held without notice. The person or persons calling a special meeting of
the Board of Directors, at least two days before the meeting, shall give notice
thereof by any usual means of communication. Such notice need not specify the
purpose for which the meeting is called. Any duly convened regular or special
meeting may be adjourned by the directors to a later time without further
notice.

SECTION 4. WAIVER OF NOTICE. Any director may waive notice of any meeting
before or after the meeting. The waiver must be in writing, signed by the
director entitled to the notice, and delivered to the corporation for inclusion
in the minutes or filing with the corporate records. The attendance by a
director at, or the participation of a director in, a meeting shall constitute a
waiver of any required notice of such meeting, unless the director, at the
beginning of the meeting (or promptly upon the director's arrival thereat),
objects to holding the meeting or to transacting any business at the meeting and
does not thereafter vote for or assent to action taken at the meeting.

SECTION 5. QUORUM. Unless the corporation's articles of incorporation
provide otherwise, a majority of the number of directors fixed by or pursuant to
these Bylaws shall constitute a quorum for the transaction of business at any
meeting of the Board of Directors.

SECTION 6. MANNER OF ACTING. Except as otherwise provided in the
corporation's articles of incorporation or these Bylaws or by applicable law,
the act of the majority of the directors present at a meeting at which a quorum
is present shall be the act of the Board of Directors.

SECTION 7. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the Board of Directors or at a meeting of any committee
of the Board of Directors at which action on any corporate matter is taken shall
be presumed to have assented
7
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to the action taken unless (I) such director objects at the beginning of the
meeting (or promptly upon the director's arrival thereat) to holding the meeting
or to transacting any business at the meeting, or (II) such director's contrary
vote is recorded or such director's dissent or abstention from the action taken
otherwise is entered in the minutes of the meeting, or (III) such director files
written notice of dissent or abstention to such action with the person presiding
at the meeting before the adjournment thereof or forwards such notice by
registered mail to the Secretary of the corporation immediately after the
adjournment of the meeting. Such right of dissent or abstention is not available
to a director who voted in favor of the action taken.

SECTION 8. INFORMAL ACTION BY DIRECTORS. Action required or permitted to
be taken at a meeting of the Board of Directors may be taken without a meeting
if the action is taken by all members of the Board and evidenced by one or more
written consents signed by each director before or after such action, describing
the action taken, and delivered to the Secretary of the corporation for
inclusion in the minutes or filing with the corporate records.

ARTICLE V

COMMITTEES OF THE BOARD

SECTION 1. GENERAL. The Board of Directors may create such committees of
the Board, and appoint members to serve on such committees, as from time to time
it shall consider appropriate. The creation of a committee of the Board and
appointment of its members must be approved by the greater of (I) a majority of
the number of directors in office when the action is taken or (II) the number of
directors required to take action pursuant to Section 6 of Article IV. Each
committee of the Board must have two or more members and, to the extent
authorized by law, shall have such duties and authority as may be described in
these Bylaws or otherwise specified by the Board of Directors. Each committee
member shall serve at the pleasure of the Board of Directors. The provisions in
these Bylaws governing meetings, actions without meetings, notice and waiver of
notice, and quorum and voting requirements of the Board of Directors shall also
apply to any committees of the Board established pursuant to these Bylaws.

SECTION 2. EXECUTIVE COMMITTEE. There may be a standing committee of the
Board of Directors to be known as the Executive Committee and consisting of the
Chairman of the Board, the Chief Executive Officer, and not fewer than two other
directors. The Chief Executive Officer shall act as chairman of the Executive
Committee. Except as limited by this Article V or otherwise limited by law, the
Executive Committee is empowered to act for and on behalf of the Board of
Directors in any and all matters in the interim between meetings of the Board.
Without limiting its powers herein conferred, the Executive Committee may act as
a nominating committee by recommending to the Board of Directors nominees for
election as directors by shareholders at meetings of shareholders or for
election as directors by the Board of Directors to fill vacancies on the Board.
Within the powers
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conferred upon it, action by the Executive Committee shall be as binding upon
the corporation as if performed by the full Board. Such actions shall be
reported to the Board for review at its next meeting following such action. The
committee shall meet as often as it considers necessary or advisable.

SECTION 3. AUDIT COMMITTEE. There may be a standing committee of the Board
of Directors to be known as the Audit Committee and consisting of not fewer than
three directors. The Audit Committee shall superintend examinations of the
assets and the liabilities and the internal audit program of the corporation and
its subsidiaries, cause outside audits to be performed on the financial
statements of the corporation, and shall make periodic reports to the Board.

ARTICLE VI

OFFICERS

SECTION 1. NUMBER. The officers of the corporation shall consist of a
President, one or more Vice Presidents (any of whom may be designated by the
Board of Directors as a Vice President, Senior Vice President or Executive Vice
President), a Secretary, and such Assistant Secretaries, Treasurers and other
officers as the Board of Directors from time to time may elect. Any two (2) or
more offices may be held by the same person, except that no officer may act in
more than one capacity where action of two (2) or more officers is required.

SECTION 2. ELECTION AND TERM. The officers of the corporation shall be
elected by the Board of Directors. Such elections may be held at any regular or
special meeting of the Board. Each officer shall hold office until such
officer's death, resignation, retirement, removal or disqualification, or until
the election and qualification of such officer's successor.

SECTION 3. REMOVAL AND RESIGNATION. Any officer or agent elected or
appointed by the Board of Directors may be removed by the Board with or without
cause, but such removal shall be without prejudice to the contract rights, if
any, of the person so removed.

An officer may resign at any time by notifying the corporation, orally or
in writing, of such resignation. A resignation shall be effective upon receipt
by the corporation unless it specifies in writing a later effective date. In the
event a resignation so specifies a later effective date, the Board of Directors
may fill the pending vacancy prior to such date; however, the successor to the
resigning officer may not take office until the effective date. An officer's
resignation does not affect the corporation's contract rights, if any, with such
officer.
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SECTION 4. COMPENSATION. The compensation of all officers of
the corporation shall be fixed by the Board of Directors. The election
of an officer does not of itself create any contract rights.

SECTION 5. PRESIDENT. The President shall be and may be designated as the
Chief Executive Officer of the corporation and, subject to the control of the
Board of Directors, shall supervise and control the management of the
corporation in accordance with these Bylaws.

The President, when present, shall preside at all meetings of
shareholders. The President, with any other proper officer, may sign
certificates for shares of the corporation and any deeds, leases, mortgages,
bonds, contracts or other instruments which lawfully may be executed on behalf
of the corporation, except where required or permitted by law otherwise to be
signed and executed and except where the signing and execution thereof shall be
delegated by the Board of Directors to some other officer or agent. In general,
the President shall perform all duties incident to the office of President and
such other duties as from time to time may be assigned by the Board of
Directors.

SECTION 6. VICE PRESIDENTS. In the absence of the President or in the
event of the President's death, inability or refusal to act, the Vice Presidents
in the order of their length of service as Vice Presidents, unless otherwise
determined by the Board of Directors, shall perform the duties of the President,
and when so acting shall have all the powers of and be subject to all the
restrictions upon the President. Any Vice President, with any other proper
officer, may sign certificates for shares of the corporation and shall perform
such other duties as from time to time may be assigned by the President or by
the Board of Directors.

SECTION 7. SECRETARY. The Secretary shall keep accurate records of the
acts and proceedings of all meetings of shareholders and directors. The
Secretary shall give all notices required by law and by these Bylaws. The
Secretary shall have general charge of the corporate books and records and of
the corporate seal, and shall affix the corporate seal to any lawfully executed
instrument requiring it. The Secretary shall keep all records required by law at
the principal office of the corporation. The Secretary shall have general charge
of the stock transfer books of the corporation and shall keep, at the registered
or principal office of the corporation, a record of shareholders showing the
name and address of each shareholder and the number and class of the shares held
by each. The Secretary, with any other proper officer, may sign certificates for
shares of the corporation and shall sign such instruments as may require the
Secretary's signature. In general, the Secretary shall perform all duties
incident to the office of Secretary and such other duties as from time to time
may be assigned by the President or by the Board of Directors.

SECTION 8. ASSISTANT SECRETARIES. In the absence of the Secretary or in
the event of the Secretary's death, inability or refusal to act, the Assistant
Secretaries in the order of their length of service as Assistant Secretaries,
unless otherwise determined by the Board of

10
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Directors, shall perform the duties of the Secretary, and when so acting shall
have all the powers of and be subject to all the restrictions upon the
Secretary. They shall perform such other duties as from time to time may be
assigned by the Secretary, by the President, or by the Board of Directors. Any
Assistant Secretary, with any other proper officer, may sign certificates for
shares of the corporation.

SECTION 9. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall have
custody of all funds and securities belonging to the corporation and shall
receive, deposit or disburse the same under the direction of the Board of
Directors. The Chief Financial Officer shall maintain appropriate accounting
records as required by law and shall prepare, or cause to be prepared, annual
financial statements of the corporation that include a balance sheet as of the
end of the fiscal year and an income and cash flow statement for that year. The
Chief Financial Officer, with any other proper officer, may sign certificates
for shares of the corporation and, in general, shall perform all duties incident
to the office of Chief Financial Officer and such other duties as from time to
time may be assigned by the President or by the Board of Directors.

ARTICLE VII

CONTRACTS, LOANS, CHECKS AND DEPOSITS

SECTION 1. CONTRACTS. The Board of Directors may authorize any officer or
officers, or any agent or agents, to enter into any contract or to execute and
deliver any instrument in the name of and on behalf of the corporation, and such
authority may be general or confined to specific instances.

SECTION 2. LOANS. No loans shall be contracted on behalf of the
corporation (as borrower) and no evidences of indebtedness shall be issued in
its name unless authorized by a resolution of the Board of Directors. Such
authority may be general or specific in nature and scope.

SECTION 3. CHECKS AND DRAFTS. All checks, drafts or other orders for the
payment of money issued in the name of the corporation shall be signed by such
officer or officers, or such agent or agents, of the corporation and in such
manner as from time to time shall be determined by the Board of Directors.

SECTION 4. DEPOSITS. All funds of the corporation not otherwise employed
from time to time shall be deposited to the credit of the corporation in such
depositories as may be selected by or under the authority of the Board of
Directors.
11
<PAGE>
ARTICLE VIII

CERTIFICATES FOR SHARES AND THEIR TRANSFER

SECTION 1. CERTIFICATES FOR SHARES. The Board of Directors may authorize
the issuance of some or all of the shares of the corporation's classes or series
without issuing certificates to represent such shares.

If shares are represented by certificates, the corporation shall issue and
deliver to each shareholder to whom such shares have been issued or transferred
certificates representing the shares owned by him. The certificates shall be in
such form as required by law and as determined by the Board of Directors.
Certificates shall be signed, either manually or by facsimile, by the President
or a Vice President and by the Secretary, the Chief Financial Officer or an
Assistant Secretary. All certificates for shares shall be numbered consecutively
or otherwise identified and shall be entered on the stock transfer books of the
corporation with the name and address of the persons to whom they are issued,
the number of shares and the date of issue.

If shares are not represented by certificates, then within a reasonable
time after issuance or transfer of such shares, the corporation shall send to
the shareholder to whom such shares have been issued or transferred a written
statement of the information required by law to be on certificates.

SECTION 2. TRANSFER OF SHARES. The corporation shall keep or cause to be
kept a book or set of books, to be known as the stock transfer books of the
corporation, containing the name of each shareholder of record, together with
such shareholder's address and the number and class or series of shares held by
him. Transfers of shares of the corporation shall be made only on the stock
transfer books of the corporation by the holder of record thereof or by his
legal representative (who shall furnish proper evidence of authority to
transfer) or by his attorney authorized to effect such transfer by power of
attorney duly executed and filed with the Secretary, and, if the shares are
represented by certificates, only upon surrender for cancellation of the
certificates for the shares sought to be transferred. Certificates surrendered
for transfer shall be canceled before new certificates for the transferred
shares shall be issued.

SECTION 3. FIXING RECORD DATE. The Board of Directors of the corporation
may fix a future date as the record date for one or more voting groups in order
to determine the shareholders entitled (I) to notice of a shareholders' meeting,
(II) to demand a special meeting, (III) to vote, or (IV) to take any other
action. A record date fixed under this Section may not be more than seventy days
before the meeting or action requiring a determination of shareholders.

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<PAGE>
A determination of shareholders entitled to notice of or to vote at a
shareholders' meeting is effective for any adjournment of the meeting unless the
Board of Directors fixes a new record date for the adjourned meeting, which it
must do if the meeting is adjourned to a date more than 120 days after the date
fixed for the original meeting.

If no record date is fixed by the Board of Directors for the determination
of shareholders entitled to notice of or to vote at a shareholders' meeting, the
close of business on the day before the first notice of the meeting is delivered
to shareholders shall be the record date for such determination of shareholders.

The Board of Directors may fix a date as the record date for determining
shareholders entitled to a distribution or share dividend. If no record date is
fixed by the Board of Directors for such determination, it is the date the Board
of Directors authorized the distribution or share dividend.

SECTION 4. LOST CERTIFICATES. The Board of Directors may direct a new
certificate to be issued in place of any certificate theretofore issued by the
corporation claimed to have been lost or destroyed, upon receipt of an affidavit
of such fact from the person claiming the certificate to have been lost or
destroyed. When authorizing such issuance of a new certificate, the Board shall
require the owner of such lost or destroyed certificate, or his legal
representative, to give the corporation a bond in such sum and with such surety
or other security as the Board may direct as indemnity against any claim that
may be made against the corporation with respect to the certificate claimed to
have been lost or destroyed, except where the Board by resolution finds that in
the judgment of the directors the circumstances justify omission of a bond.

SECTION 5. HOLDER OF RECORD. Except as otherwise required by law, the
corporation may treat the person in whose name shares stand of record on its
books as the absolute owner of those shares and the person exclusively entitled
to receive notification and distributions, to vote, and otherwise to exercise
the rights, powers and privileges of ownership of such shares.

SECTION 6. REACQUIRED SHARES. Shares of the corporation that
have been issued and thereafter reacquired by the corporation shall
constitute authorized but unissued shares.

SECTION 7. SHARES HELD BY NOMINEES. The corporation shall recognize the
beneficial owner of shares registered in the name of a nominee as the owner and
shareholder of such shares for certain purposes if the nominee in whose name
such shares are registered files with the Secretary a written certificate in a
form prescribed by the corporation, signed by the nominee, indicating the
following: (I) the name, address, and taxpayer identification number of the
nominee; (II) the name, address and taxpayer identification number of the
beneficial owner; (III) the number and class or series of shares registered in
the name of the nominee as to which the beneficial owner shall be recognized as
the shareholder; and (IV) the purposes for which the beneficial owner shall be
recognized as the shareholder.
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<PAGE>
The purposes for which the corporation shall recognize the beneficial
owner as the shareholder may include the following: (I) receiving notice of,
voting at, and otherwise participating in shareholders' meetings; (II) executing
consents with respect to the shares; (III) exercising dissenters' rights under
Article 13 of the North Carolina Business Corporation Act; (IV) receiving
distributions and share dividends with respect to the shares; (V) exercising
inspection rights; (VI) receiving reports, financial statements, proxy
statements, and other communications from the corporation; (VII) exercising any
other rights or receiving any other benefits of a shareholder with respect to
the shares.

The certificate shall be effective ten business days after its receipt by
the corporation and until it is changed by the nominee, unless the certificate
specifies a later effective time or an earlier termination date.

If the certificate affects less than all of the shares registered in the
name of the nominee, the corporation may require the shares affected by the
certificate to be registered separately on the books of the corporation and be
represented by a share certificate that bears a conspicuous legend stating that
there is a nominee certificate in effect with respect to the shares represented
by that share certificate.
ARTICLE IX

GENERAL PROVISIONS

SECTION 1. DISTRIBUTIONS. The Board of Directors from time to time may
authorize, and the corporation may grant, distributions and share dividends to
the corporation's shareholders subject to and upon the terms and conditions
provided by applicable law and the corporation's articles of incorporation.

SECTION 2. SEAL. The corporate seal of the corporation shall consist of
two concentric circles between which is the name of the corporation and in the
center of which is inscribed SEAL; and such seal, in the form approved and
adopted by the Board of Directors, shall be the corporate seal of the
corporation.

SECTION 3. FISCAL YEAR. The fiscal year of the corporation shall be fixed
by the Board of Directors.

SECTION 4. AMENDMENTS. Except to the extent otherwise provided in the
corporation's articles of incorporation or by law, these Bylaws may be amended
or repealed and new bylaws may be adopted by the Board of Directors. No bylaw
adopted, amended or repealed by the shareholders shall be readopted, amended or
repealed by the Board of Directors unless the corporation's articles of
incorporation or a bylaw adopted by the shareholders authorizes the Board of
Directors to adopt, amend or repeal that particular bylaw or the Bylaws
generally.
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<PAGE>
SECTION 5. DEFINITIONS. Unless the context otherwise requires, terms used
in these Bylaws shall have the meanings assigned to them in the North Carolina
Business Corporation Act to the extent defined therein.

SECTION 6. INDEMNIFICATION. The corporation shall indemnify any person who
is or was a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding (and any appeal therein), whether civil,
criminal, administrative, arbitrative or investigative and whether or not
brought by or on behalf of the corporation, by reason of the fact that such
party is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise or as a trustee or administrator under an
employee benefit plan, or arising out of such party's activities in any of the
foregoing capacities, against all liability and litigation expense, including
reasonable attorneys' fees; PROVIDED, however, that the corporation shall not
indemnify any such person against liability or expense incurred on account of
such person's activities which were at the time taken known or believed by such
person to be clearly in conflict with the best interests of the corporation. The
corporation likewise shall indemnify any such person for all reasonable costs
and expenses (including attorneys' fees) incurred by such person in connection
with the enforcement of such person's right to indemnification granted herein.
The corporation shall pay all expenses incurred by any director, officer,
employee or agent in defending a civil or criminal action, suit or proceeding in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director, officer, employee or agent
to repay such amount unless it ultimately shall be determined that such party is
entitled to be indemnified by the corporation against such expenses.

The Board of Directors of the corporation shall take all such action as
may be necessary and appropriate to authorize the corporation to pay the
indemnification required by this bylaw, including without limitation a
determination by a majority vote of disinterested directors that the activities
giving rise to the liability or expense for which indemnification is requested
were not, at the time taken, known or believed by the person requesting
indemnification to be clearly in conflict with the best interests of the
corporation.

Any person who at any time after the adoption of this bylaw serves or has
served in any of the aforesaid capacities for or on behalf of the corporation
shall be deemed to be doing or to have done so in reliance upon, and as
consideration for, the right of indemnification provided herein. Such right
shall inure to the benefit of the legal representatives of any such person and
shall not be exclusive of, but shall be in addition to, any rights to which such
person may be entitled apart from the provision of this bylaw.

EXHIBIT 5.1

WARD AND SMITH, P.A.
ATTORNEYS AT LAW

1001 COLLEGE COURT
POST OFFICE BOX 867
NEW BERN, N.C.
28563-0867
TELEPHONE (252)
633-1000
FACSIMILE (252)
636-2121 SUITE 2400
TWO HANNOVER SQUARE 120 WEST FIRE
UNIVERSITY CORPORATE FAYETTEVILLE STREET MALL TOWER ROAD
CENTER POST OFFICE BOX 2091 POST OFFICE BOX
127 RACINE DRIVE RALEIGH, N.C. 27602-2091 8088
POST OFFICE BOX 7068 GREENVILLE, N.C.
WILMINGTON, N.C. 27835-8088
28406-7068 TELEPHONE (919) 836-1800
TELEPHONE (910) FACSIMILE (919) 836-1507 TELEPHONE (252)
392-5100 355-3030
FACSIMILE (910) FACSIMILE (252)
392-2333 WEB SITE www.wardandsmith.com 756-3689

August 18, 1998

ECB Bancorp, Inc.
Post Office Box 337
Engelhard, North Carolina 27824

RE: Our File 78-0376(AK)

Gentlemen:

We have acted as counsel to ECB Bancorp, Inc. ("Bancorp") in connection with its
proposed offer and sale, through Interstate/Johnson Lane Corporation acting as
Bancorp's "sales agent" on a "reasonable efforts" basis pursuant to a Sales
Agency Agreement (the "Offering"), of a minimum of 250,000 and a maximum of
300,000 shares of Bancorp's $3.50 par value common stock (the "Common Stock").
In connection with the Offering, Registrant is filing with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form SB-2
(the "Registration Statement") for purposes of registering under the Securities
Act of 1933, as amended (the "Act") its offer and sale of the Common Stock. The
Offering will be made pursuant to the final form of Prospectus contained in the
Registration Statement at the time it is declared effective by the Commission.

In connection with rendering the opinions set forth in this letter, we have
examined or relied upon copies of the Registration Statement as it is initially
being filed with the Commission, including the form of Prospectus contained
therein, Bancorp's Articles of Incorporation and bylaws, minutes of proceedings
of Bancorp's Board of Directors, and such other records, certificates and
instruments as we have deemed necessary. For purposes of the opinions expressed
herein, we have assumed (i) the authenticity of all documents submitted to us as
originals and the conformity to the original or certified copies of all
documents submitted to us as conformed or reproduction copies, (ii) that the
minutes of proceedings of Bancorp's Board of Directors are accurate and complete
and contain minutes of all actions pertaining to the Offering, and (iii) that
the Offering will be conducted and the Common Stock will be issued and sold on
the terms and in the manner described in the Registration Statement and
Prospectus.

Based upon and subject to the foregoing, as well as the qualifications set forth
in subsequent portions of this letter, we
<PAGE>

WARD AND SMITH, P.A.

ECB Bancorp, Inc.
August 18, 1998
Page 2

are of the opinion as of this date that, when the Registration Statement
has become effective and the Common Stock is issued and sold in the manner
described therein, and the purchase price thereof has been received by Bancorp,
and upon compliance with the pertinent provisions of the Act and the securities
or "blue sky" laws of various jurisdictions in which the Common Stock will be
offered or sold, then the shares of Common Stock will be legally issued, fully
paid and non-assessable.

In rendering the opinions set forth above, we have assumed, without
independent verification, that

a. No event will take place subsequent to the date hereof that would cause
any action taken in connection with the Offering to fail to comply with
any law, rule, regulation, order, judgment, decree or duty, or that would
permit any party to cancel, rescind, or otherwise avoid any act; and

b. All certificates of public officials have been properly given and are
accurate and complete;

In addition, all opinions and statements set forth in this letter are expressly
limited and qualified as follows:

a. The opinions expressed herein are limited to matters of North Carolina law
and the federal laws of the United States of America;

b. Our opinions are limited to the matters expressly stated herein, and no
opinion may be inferred or implied beyond the matters expressly stated;
and,

c. Except as otherwise expressly specified herein, the opinions herein are
limited to matters in existence as of the date hereof, and we undertake no
responsibility to revise or supplement this letter or the opinions herein
to reflect any change in the law or facts.

We consent to the filing of this opinion as an exhibit to the Registration
Statement. We also consent to the reference to Ward and Smith, P.A. under the
caption "Legal Matters" in the Registration Statement.

Yours truly,

/s/ Ward and Smith, P.A.
------------------------------------
WARD AND SMITH, P.A.

EXHIBIT 10.1
STATE OF NORTH CAROLINA
COUNTY OF HYDE

THIS AGREEMENT, made as of the 1st day of January, 1998, by and
between The East Carolina Bank, a North Carolina corporation ("ECB") and Arthur
H. Keeney, III, a resident of Hyde County, North Carolina (the "Officer"),

W I T N E S S E T H:

WHEREAS, the Officer and ECB have previously agreed that the Officer
shall be an employee of ECB under the terms of an agreement which became
effective on September 11, 1995; and,

WHEREAS, the parties have agreed to certain modifications thereof
and have agreed to restate their agreement as modified; and,

WHEREAS, the document fully supercedes the said September 1, 1995,
agreement between the parties; and,

WHEREAS, the Board of Directors of ECB, acting through its executive
committee, exclusive of the Officer, has determined that the continued retention
of the services of the Officer on a long term basis as described herein is in
the best interest of ECB in that (a) such action promotes the stability of the
management of ECB, (b ) such action enables ECB to retain the services of a
well-qualified employee with extensive contacts in the financial services
community, and (c) it secures the continued services of the Officer
notwithstanding any change of control of ECB; and,

WHEREAS, the services of the Officer, his experience and knowledge
of the affairs of ECB, and his reputation and contacts in ECB's industry are
extremely valuable to ECB; and,

WHEREAS, ECB considers the establishment and maintenance of a sound
and vital management to be a part of its overall corporate strategy and to be
essential to protecting and enhancing the best interests of ECB and its
stockholders; and,

WHEREAS, the parties desire to enter into this Agreement in order to
clearly set fourth the terms and conditions of the Officer's employment
relationship with ECB;

NOW, THEREFORE, in consideration of the premises and mutual
covenants herein contained, the parties hereby agree as follows:

1. ECB hereby engages the employment of the Officer and the Officer
hereby accepts such engagement of employment upon the terms and conditions
stated herein. The Officer shall render such administrative and management
services to ECB as are customarily performed by persons situated in a similar
capacity and as directed by the Board of Directors.

The Officer shall promote the business of ECB and perform such other
duties as shall from time to time be reasonably prescribed by the Board of
Directors.

<PAGE>

2. ECB shall pay to the Officer during the term of this Agreement as
compensation for all services rendered by him to ECB a base salary in such
amounts and at such intervals as shall be commensurate with his duties and
responsibilities hereunder and as determined by the Board of Directors. The
Officer's initial base salary under this agreement is $112,000.00 per annum. The
Officer's base salary may be modified from time to time to reflect the duties
required of the Officer. In reviewing the Officer's base salary the Board of
Directors of ECB shall consider the overall performance of the Officer and the
service of the Officer rendered to ECB and its subsidiaries, as well as
increases in the cost of living and may also provide for performance or merit
increases. The Officer's performance shall be reviewed annually. Participation
in ECB's cash incentive, deferred compensation, stock option, stock purchase,
discretionary bonus, pension, life insurance, and other employee benefit plans
and participation in any fringe benefits shall not cause a reduction in the base
salary payable to the Officer; provided however, that the enumeration of the
programs herein described are no representation that ECB has or will have any of
such programs. The Officer will be entitled to such customary fringe benefits,
vacation and sick leave as are consistent with the normal practices and
established policies of ECB.

3. During the term of this Agreement, the Officer shall be entitled,
in an equitable manner based on the terms of any bonus and incentive plans that
have been approved, or may from time to time be approved, by the Board of
Directors, with all other key management personnel of ECB, to such incentives
and discretionary bonuses as may be authorized, declared and paid by the Board
of Directors to ECB's key management employee's. No other compensation provided
for in this Agreement shall be deemed a substitute for the Officer's right to
such incentives and discretionary bonuses when, if, and as declared by the Board
of Director's. Provided that ECB shall have the right to terminate any existing
bonus or incentive plans now existing or hereafter initiated so long as such
termination is of general applicability and not specifically limited to the
Officer.

4. The Officer shall be entitled to participate in any plan relating
to incentive and deferred compensation, stock options, stock purchase, pension,
thrift, profit sharing, group life insurance, medical coverage, disability
coverage, education, or other retirement or employee benefits that ECB has
adopted, or may from time to time adopt, for the benefit of its executive
employees and for employees generally, subject to the eligibility rules of such
plans. Provided that ECB shall have the right to terminate any existing or
future benefits so long as such termination is of general applicability and not
specifically limited to the Officer.

The Officer shall also be entitled to participate in any other
fringe benefits which are now or may be or may become applicable to ECB's
executive employees, including the payment of reasonable expenses for attending
annual and periodic meetings of trade associations, and any other benefits which
are commensurate with the duties and responsibilities to be performed by the
Officer under this Agreement. Additionally, the Officer shall be entitled to
such vacation and sick leave as shall be established under uniform employee
policies promulgated by the Board of Directors. ECB shall reimburse the Officer
for all out-of-pocket reasonable and necessary business expenses which the
Officer may incur in connection with his service on behalf of ECB, subject to
the reimbursement policy of ECB as adopted and modified by the Board of
Directors from time to time. Also, the Officer shall be entitled to undertake
and be reimbursed for the reasonable cost of a complete physical examination
each year.

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<PAGE>

5. (a) The initial term of employment under this Agreement commenced
on January 1, 1998 (the Commencement Date) and shall continue until the third
(3rd) anniversary of the Commencement Date. The initial term of employment under
this Agreement shall terminate at the close of the business day on December 31,
2000 (the Initial Termination Date.) On January 1 of each year, beginning on
January 1, 1999, this Agreement will be extended for an additional year, unless
either party to the Agreement notifies the other in writing within 90 (ninety)
days prior to an Anniversary Date of a desire to seek a final termination or
amendment of the Agreement. Following such duly executed notice, this Agreement
will cease to be extended automatically, and shall end automatically at the then
expiration date which shall be no less than two years and 90 (ninety) days from
the said notice.

(b) The Officer's employment under this Agreement shall be
terminated upon the death of the Officer prior to the Termination Date, in which
event the Officer's estate shall be entitled to receive the compensation due the
Officer through the last day of the calendar month in which the Officer's death
shall have occurred. The Officer's employment under this Agreement shall be
terminated upon the total permanent disability of the Officer during the term of
this Agreement in which event the Officer shall receive all compensation,
including incentives and bonuses, through the date of determination of such
disability and for a period of 90 days thereafter. For purposes of this Section,
the Officer shall be deemed to have suffered total permanent disability upon the
determination of such status by the United States Social Security
Administration, or upon such certification as may be required by any insurance
policy carried by ECB insuring against such disability (or in the absence of
such a policy, a certificate to such effect by the Officer's regular physician).

(c) The Officer's employment under this Agreement may be
terminated at any time prior to the Termination Date by the Officer upon ninety
(90) days prior written notice to ECB. Upon such termination, the Officer shall
be entitled to receive the compensation and benefits payable to the Officer
under this Agreement through the effective date of such termination.

(d) The Board may terminate the Officer's employment at any time
prior to the Termination Date for "cause", in which event the Officer shall have
no right to receive compensation or other benefits hereunder for any period
after such termination for "cause". Termination for "cause" shall mean
termination of employment because of the Officer's personal dishonesty,
incompetence, willful material misconduct, breach of fiduciary duty involving
personal profit, intentional failure to perform stated duties, willful material
violation of any law, rule, or regulation (other than minor traffic infractions
or other similar misdemeanor offenses) or final cease-and-desist order, or a
material breach of any provision of this Agreement.

(e) Notwithstanding the foregoing provisions of this Section 5,
ECB may terminate the employment of the Officer hereunder without cause at any
time during the term of this agreement upon ninety (90) days prior written
notice to the Officer provided, however, that in the event of involuntary
termination of the Officer's employment without cause under this Agreement the
Officer shall be entitled to receive the remaining monthly sums due throughout
the remaining life of the contract and ECB shall carry the Officer's medical and
disability insurance for a like period.

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(f) In the event of involuntary termination of the Officer's
employment in connection with or within 3 months after any change in control of
ECB, or, in the event of a voluntary termination of the Officer's employment in
connection with or within 3 months of any change of control of ECB under which
the Officer shall have incurred a reduction of compensation or a reduction of
responsibilities (irrespective of title) or shall have been required to change
his workplace to a location greater than 75 miles from Engelhard, North
Carolina, then, the Officer shall be entitled to receive the greater of (i) the
severance payment offered by the Corporation in such notice of termination, or,
(ii) the following sums:

A. A lump sum equal to 2.99 times the average annual salary paid to
the Officer over the three prior 12 month periods, plus

B. A lump sum equal to 2.99 times the average annual cash bonuses
and incentives paid to the Officer over the three prior 12 month
periods, plus

C. The Officer shall be carried on the medical and disability
programs of the Corporation for the remaining period of the
contract from the date of termination.

6. (a) The Officer shall devote his full efforts and entire business
time to the performance of the Officer's duties and responsibilities under this
Agreement.

(b) In consideration of employment of the Officer by ECB
hereunder during the term of this Agreement, the Officer agrees that in the
event of an involuntary termination of his employment, he will not, for a period
equal to the time compensation will be paid to the Officer under the provisions
of this or any termination agreement, within the borders of any county
contiguous to or in any county in which ECB, any financial institution
subsidiary of ECB, or any subsidiary of any such financial institution
subsidiary maintain offices, or directly or indirectly own, manage, operate,
join, control, or participate in the management, operation, or control of or be
employed by or connected in any manner with, any business which competes with
ECB or any of the other subsidiaries of ECB, without the prior written consent
of ECB. By example, direct competition does not include employment by a North
Carolina financial institution not headquartered in the counties in which ECB is
located but which may operate branches there, provided that the Officer shall
not live or work in the area above delineated and shall not have managerial
input or control of activities in that area. Notwithstanding the foregoing, the
Officer shall be free, without such consent, to purchase or hold as an
investment or otherwise up to five percent (5%) of the outstanding stock or
other securities of any corporation which has its securities publicly traded on
the New York Stock Exchange, the American Stock Exchange, or through the NASDAQ
exchange.

(c) In consideration of employment of the Officer by ECB
hereunder during the term of this Agreement, the Officer agrees that in the
event of an voluntary termination of his employment, he will not, for a period
of three (3) years, within the borders of any county contiguous to or in any
county in which ECB, any financial institution subsidiary of ECB, or any
subsidiary of any such financial institution subsidiary maintain offices, or
directly or indirectly own, manage, operate, join, control, or participate in
the management, operation, or control of or be

<PAGE>

employed by or connected in any manner with, any business which competes with
ECB or any of the other subsidiaries of ECB, without the prior written consent
of ECB. By example, direct competition does not include employment by a North
Carolina financial institution not headquartered in the counties in which ECB is
located but which may operate branches there, provided that the Officer shall
not live or work in the area above delineated and shall not have managerial
input or control of activities in that area. Notwithstanding the foregoing, the
Officer shall be free, without such consent, to purchase or hold as an
investment or otherwise up to five percent (5%) of the outstanding stock or
other securities of any corporation which has its securities publicly traded on
the New York Stock Exchange, the American Stock Exchange, or through the NASDAQ
exchange.

(d) The Officer will hold in strict confidence, during the term
of this Agreement and at all times thereafter, all knowledge or information of a
confidential nature with respect to the business of ECB and all subsidiaries of
ECB received by the Officer during the term of this Agreement and will not
disclose or make use of such information without the prior written consent of
the ECB.

The Officer acknowledges that it would be difficult or impossible
to ascertain the amount of monetary damages in the event of a breach by the
Officer under the provisions of this Section 6. The Officer agrees that, in the
event of a breach of this Section, injunctive relief enforcing the terms of this
Section is an appropriate remedy.

7. (a) The Officer shall perform his duties and responsibilities
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and the Bank's
policies and procedures, and as may be established from time to time by the
Board of Directors of ECB.

(b) The Officer represents that he has acquired and at all times
during the term of this agreement, including all extensions and renewals hereof,
will hold unencumbered stock of ECB in such amount as may be required by N. C.
G. S. Sec. 53-80, as amended from time to time.

8. (a) This Agreement shall inure to the benefit of, and be binding
upon, any corporate or other successor of ECB which shall acquire, directly or
indirectly by merger, share exchange, consolidation, purchase or otherwise, all
or substantially all of the assets of ECB.

(b) Because ECB is contracting for the unique and personal skills
of the Officer, the officer shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of ECB.

9. No provision of this Agreement may be modified, waived, or
discharged unless such waiver, modification, or discharge agreed to in writing,
signed by the Officer and on behalf of the ECB by such Officer as may be
specifically designated by the Board of Directors. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No amendments or additions to
this Agreement shall be binding unless in writing

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<PAGE>

and signed by both parties, except as herein otherwise provided. All prior
negotiations, discussions, and agreements between the parties are merged herein.

10. This agreement shall be governed in all respects whether as to
validity, construction, capacity, performance or otherwise, by the laws of the
State of North Carolina and any action relating to or arising from this
agreement shall be litigated only in the North Carolina General Court of
Justice.

11. The provisions of this Agreement shall be deemed severable and
the invalidity or unenforceability of any provision shall not affect the
validity or enforceability of the other provisions hereof.

IN TESTIMONY WHEREOF the parties hereto have executed this Agreement
in duplicate originals, one of which is to be retained by each of the parties,
to be effective as of the day and year first hereinabove written.

THE EAST CAROLINA BANK

By: /s/ R. S. Spencer, Jr.
_________________________________
Chairman of the Board of Directors
of The East Carolina Bank

/s/ Arthur H. Keeney, III
_____________________________________(SEAL)
Arthur H. Keeney, III

EXHIBIT 10.2
THE EAST CAROLINA BANK

OMNIBUS STOCK OWNERSHIP AND
LONG TERM INCENTIVE PLAN

THIS IS THE OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN ("Plan")
of THE EAST CAROLINA BANK (the "Corporation"), a North Carolina banking
corporation with its principal office in Englehard, Hyde County, North Carolina,
under which Incentive Stock Options and Non-Qualified Options to acquire shares
of the Stock, Restricted Stock, Performance Units and/or Stock Appreciation
Rights may be granted from time to time to Eligible Employees of the Bank and of
any of its Subsidiaries (the "Subsidiaries"), subject to the following
provisions:
ARTICLE I
DEFINITIONS

The following terms shall have the meanings set forth below. Additional
terms defined in this Plan shall have the meanings ascribed to them when first
used herein.

BOARD. The Board of Directors of the Corporation.

CHANGE IN CONTROL TRANSACTION. The dissolution or liquidation of the
Corporation; a reorganization, merger or consolidation of the Corporation as a
result of which the outstanding securities of the class then subject to Rights
hereunder are changed into or exchanged for cash or property or securities not
of the Corporation's issue; or a sale of all or substantially all of the assets
of the Corporation to, or the acquisition of stock representing more than
twenty-five percent (25%) of the voting power of the capital stock of the
Corporation then outstanding by another corporation or person.

CODE. The Internal Revenue Code of 1986, as amended.

COMMITTEE. The Incentive Committee of the Board, which shall be composed
of no less than three outside directors which shall include the Chairman and
Vice Chairman of the Board, none of which may be employees of the Corporation.

COMMON STOCK. The Common Stock, $10 par value per share, of the
Corporation.

DEATH. The date and time of death of an Eligible Employee, who has
received Rights as an Optionee, a Holder, and/or a Unit Recipient, as
established by the relevant death certificate.

DISABILITY. The date on which an Eligible Employee who has received Rights
becomes totally and permanently disabled as determined (i) by the Corporation's
disability insurance carrier (if the Eligible Employee is covered by a
Corporation-owned disability policy) or by his or her disability insurance
carrier (if the eligible Employee is not covered by a Corporation-owned
disability policy), or (ii) under federal Social Security laws and regulations,
or (iii) by a physician acceptable to the Corporation.

EFFECTIVE DATE. The date as of which this Plan is effective (subject to
approval by the Corporation's shareholders) shall be January 21, 1998, which is
the date it has been adopted by the Board.

ELIGIBLE EMPLOYEES. Those individuals who meet the following
eligibility requirements:
<PAGE>
(i) Such individual must be a full time employee of the Corporation
or a Subsidiary. For this purpose, an individual shall be considered to be an
"employee" only if there exists between the Corporation or a Subsidiary and the
individual the legal and bona fide relationship of employer and employee. In
determining whether such relationship exists, the regulations of the United
States Treasury Department relating to the determination of such relationship
for the purpose of collection of income tax at the source on wages shall be
applied.

(ii) Such individual falls within such job grade classifications as
may be specified by the Board, at its option, from time to time by the Board,
and which job grade classifications so specified may be amended, expanded,
restricted or otherwise modified by the Committee, subject to ratification of
such action by the Board.

(iii) If the Registration shall not have occurred, such individual
must have such knowledge and experience in financial and business matters that
he or she is capable of evaluating the merits and risks of the investment
involved in the receipt and/or exercise of a Right.

(iv) Such individual, being otherwise an Eligible Employee under the
foregoing items, shall have been selected by the Committee as a person to whom a
Right or Rights shall be granted under the Plan.

FAIR MARKET VALUE. With respect to the Corporation's Common Stock, the
market price per share of such Common Stock determined by the Committee,
consistent with the requirements of Section 422 of the Code and to the extent
consistent therewith, as follows, as of the date specified in the context within
which such term is used:

(i) if the Common Stock was traded on a stock exchange on the date
in question, then the Fair Market Value will be equal to the closing price
reported by the applicable composite-transactions report for such date;

(ii) if the Common Stock was traded over-the-counter on the date in
question and was classified as a national market issue, then the Fair Market
Value will be equal to the last transaction price quoted by the National
Association of Securities Dealers Automated Quotation System
("NASDAQ"), National Market System ("NMS");

(iii) if the Common Stock was traded over-the-counter on the date in
question but was not classified as a national market issue, then the Fair Market
Value will be equal to the average of the last reported representative bid and
asked prices quoted by the NASDAQ for such date; and

(iv) if none of the foregoing provisions is applicable, then the
Fair Market Value will be determined by the Committee in good faith on such
basis as it deems appropriate. The Committee shall maintain a written record of
its method of determining Fair Market Value.

ISO. An "incentive stock option" as defined in Section 422 of the
Code.

JUST CAUSE TERMINATION. A termination by the Corporation or a Subsidiary
of an Eligible Employee's employment by the Corporation or the Subsidiary in
connection with the good faith determination of the Board or the Board of
Directors of the Subsidiary, as applicable, that the Eligible Employee (I) has
failed or neglected in any material respect to perform or discharge his duties
or responsibilities of employment, (II) has engaged in any acts or conduct
involving wilful misconduct, dishonesty, breach of trust or moral turpitude,
that materially and adversely affect the business, affairs or reputation of the
Corporation or the Subsidiary, or that disqualifies the Eligible Employee under
applicable
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<PAGE>
law from serving as an employee of the Corporation, or (III) has become excluded
from coverage under the Corporation's then current "blanket bond" or other
fidelity bond by the carrier or underwriter thereof.

NON-QUALIFIED OPTION. Any Option granted under Article III whether
designated by the Committee as a Non-Qualified Option or otherwise, other than
an Option designated by the Committee as an ISO, or any Option so designated but
which, for any reason, fails to qualify as an ISO pursuant to Section 422 of the
Code and the rules and regulations thereunder.

OPTION AGREEMENT. The agreement between the Corporation and an Optionee
with respect to Options granted to such Optionee, including such terms and
provisions as are necessary or appropriate under Article III.

OPTIONS. ISOs and Non-Qualified Options are collectively referred to
herein as "Options;" provided, however, whenever reference is specifically made
only to ISOs or Non-Qualified Options, such reference shall be deemed to be made
to the exclusion of the other.

PLAN POOL. A total of 53,000 shares of authorized, but unissued, Common
Stock, as adjusted pursuant to Section 2.3(b), which shall be available as Stock
under this Plan. In no event may the Plan Pool exceed 10% of the authorized but
unissued shares of Common Stock of the Corporation.

REGISTRATION. The registration by the Corporation under the 1933 Act and
applicable state "Blue Sky" and securities laws of this Plan, the offering of
Rights under this Plan, the offering of Stock under this Plan, and/or the Stock
acquirable under this Plan.

RESTRICTED STOCK. The Stock which a Holder shall be awarded with
restrictions when, as, in the amounts and with the restrictions described in
Article IV.

RESTRICTED STOCK PURCHASE AGREEMENT. The agreement between the Corporation
and a Holder with respect to Rights to Restricted Stock, including such terms
and provisions as are necessary or appropriate under Article IV.

RETIREMENT. "Retirement" shall mean:

(i) the termination of an Eligible Employee's employment under
conditions which would constitute "normal retirement" or "early retirement"
under any tax qualified retirement plan maintained by the Corporation or a
Subsidiary, or

(ii) termination of employment after attaining age 65.

RIGHTS. The rights to exercise, purchase or receive the Options,
Restricted Stock, Performance Units and SARs described herein.

RIGHTS AGREEMENT. An Option Agreement, a Restricted Stock Grant
Agreement, a Unit Agreement or an SAR Agreement.

SAR. The Right of an SAR Recipient to receive cash when, as and in the
amounts described in VI.

SAR AGREEMENT. The agreement between the Corporation and an SAR Recipient
with respect to the SAR awarded to the SAR Recipient, including such terms and
conditions as are necessary or appropriate under VI.

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<PAGE>
SEC. The Securities and Exchange Commission.

STOCK. The shares of Common Stock in the Plan Pool available for issuance
pursuant to the valid exercise of a Right or on which the cash value of a Right
is to be based.

TAX WITHHOLDING LIABILITY. All federal and state income taxes, social
security tax, and any other taxes applicable to the compensation income arising
from the transaction required by applicable law to be withheld by the
Corporation.

TRANSFER. The sale, assignment, transfer, conveyance, pledge,
hypothecation, encumbrance, loan, gift, attachment, levy upon, assignment for
the benefit of creditors, by operation of law (by will or descent and
distribution), transfer by a qualified domestic relations order, a property
settlement or maintenance agreement, transfer by result of the bankruptcy laws
or otherwise of a share of Stock or of a Right.

UNITS. The Right of a Unit Recipient to receive a combination of cash
and Stock when, as and in the amounts described in Article V.

UNIT AGREEMENT. The agreement between the Corporation and Unit Recipient
with respect to the award of Units to the Unit Recipient, including such terms
and conditions as are necessary or appropriate under Article V.

1933 ACT. The Securities Act of 1933, as amended.

1934 ACT. The Securities Exchange Act of 1934, as amended.

ARTICLE II
GENERAL

SECTION 2.1. PURPOSE. The purposes of this Plan are to encourage and
motivate employees within specified job grade classifications to contribute to
the successful performance of the Corporation and its Subsidiaries and the
growth of the market value of the Corporation's Common Stock; to achieve a unity
of purpose between such employees and shareholders by providing ownership
opportunities, and, when viewed in conjunction with benefit plans for members of
the Board and the Boards of Directors of certain Subsidiaries, to achieve a
unity of purpose between such employees and directors in the achievement of the
Corporation's primary long term performance objectives; and to retain such
employees by rewarding them with potentially tax-advantageous future
compensation. These objectives will be promoted through the granting of Rights
to designated Eligible Employees pursuant to the terms of this Plan.

SECTION 2.2. ADMINISTRATION.

(a) The Plan shall be administered by the Committee. The Committee
may designate any officers or employees of the Corporation or any Subsidiary to
assist in the administration of the Plan, to execute documents on behalf of the
Committee and to perform such other ministerial duties as may be delegated to
them by the Committee.

(b) Subject to the provisions of the Plan, the determinations and
the interpretation and construction of any provision of the Plan by the
Committee shall be final and conclusive upon persons affected thereby. By way of
illustration and not of limitation, the Committee shall have the discretion:

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<PAGE>
(i) to construe and interpret the Plan and all Rights granted
hereunder and to determine the terms and provisions (and amendments thereof) of
the Rights granted under the Plan (which need not be identical);

(ii) to define the terms used in the Plan and in the Rights
granted hereunder;

(iii) to prescribe, amend and rescind the rules and
regulations relating to the Plan;

(iv) to determine the Eligible Employees to whom and the time
or times at which such Rights shall be granted, the number of shares of Stock,
as and when applicable, to be subject to each Right, but in no event shall the
total of all rights granted to any individual exceed 40% of outstanding Common
Stock of the Corporation;

(v) to determine the exercise price or, other relevant
purchase price or value pertaining to a Right;

(vi) to determine any leaves of absence which may be granted
to Eligible Employees without constituting a termination of their employment for
the purposes of the Plan; and

(vii) to make all other determinations and interpretations
necessary or advisable for the administration of the Plan.

(c) Notwithstanding the foregoing, or any other provision of this
Plan, the Committee will have no authority to grant Rights to any of its
members, whether or not approved by the Board.

(d) It shall be in the discretion of the Committee to grant Options
to purchase shares of Stock which qualify as ISOs under the Code or which will
be given tax treatment as Non-Qualified Options. Any Options granted which fail
to satisfy the requirements for ISOs shall become Non-Qualified Options.

(e) The intent of the Corporation is to effect the Registration. In
such event, the Corporation shall make available to Eligible Employees receiving
Rights and/or shares of Stock in connection therewith all disclosure documents
required under such federal and state laws. If such Registration shall not
occur, the Committee shall be responsible for supplying the recipient of a Right
and/or shares of Stock in connection therewith with such information about the
Corporation as is contemplated by the federal and state securities laws in
connection with exemptions from the registration requirements of such laws, as
well as providing the recipient of a Right with the opportunity to ask questions
and receive answers concerning the Corporation and the terms and conditions of
the Rights granted under this Plan. In addition, if such Registration shall not
occur, the Committee shall be responsible for determining the maximum number of
Eligible Employees and the suitability of particular persons to be Eligible
Employees in order to comply with applicable federal and state securities
statutes and regulations governing such exemptions.

(f) In determining the Eligible Employees to whom Rights may be
granted and the number of shares of Stock to be covered by each Right, the
Committee shall take into account the nature of the services rendered by such
Eligible Employees, their present and potential contributions to the success of
the Corporation and/or a Subsidiary and such other factors as the Committee
shall deem relevant. An Eligible Employee who has been granted a Right under
this Plan may be granted an additional Right or Rights under this Plan if the
Committee shall so determine. If, pursuant to the terms of this Plan, or
otherwise in connection with this Plan, it is necessary that the percentage of
stock ownership of an Eligible Employee be determined, the ownership attribution
provisions set forth in Section 424(d) of the Code shall be controlling.

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<PAGE>
(g) The granting of Rights pursuant to this Plan is in the exclusive
discretion of the Committee, and until the Committee acts, no individual shall
have any rights under this Plan. The terms of this Plan shall be interpreted in
accordance with this intent.

SECTION 2.3. STOCK AVAILABLE FOR RIGHTS.

(a) Shares of the Stock shall be subject to, or underlying, grants
of Options, Restricted Stock, Stock Appreciation Rights and Performance Units
under this Plan. The total number of shares of Stock for which, or with respect
to which, Rights may be granted (including the number of shares of Stock in
respect of which Performance Units may be granted) under this Plan shall be
those designated in the Plan Pool, but in no event shall the Rights to shares
granted under the Plan exceed 10% of the outstanding Common Stock of the
Corporation. In the event that a Right granted under this Plan to any Eligible
Employee expires or is terminated unexercised as to any shares of Stock covered
thereby, such shares thereafter shall be deemed available in the Plan Pool for
the granting of Rights under this Plan; provided, however, if the expiration or
termination date of a Right is beyond the term of existence of this Plan as
described in Section 6.3, then any shares of Stock covered by unexercised or
terminated Rights shall not reactivate the existence of this Plan and therefore
shall not be available for additional grants of Rights under this Plan.

(b) In the event the outstanding shares of Common Stock are
increased, decreased, changed into or exchanged for a different number or kind
of securities as a result of a stock split, reverse stock split, stock dividend,
recapitalization, merger, share exchange acquisition, combination or
reclassification, appropriate proportionate adjustments will be made in:

(i) the aggregate number and/or kind of shares of Stock in the
Plan Pool that may be issued pursuant to the exercise of, or that are
underlying, Rights granted hereunder;

(ii) the exercise or other purchase price or value pertaining
to, and the number and/or kind of shares of Stock called for with respect to, or
underlying, each outstanding Right granted hereunder; and

(iii) other rights and matters determined on a per share basis
under this Plan or any Rights Agreement. Any such adjustments will be made only
by the Committee, subject to ratification by the Board, and when so made will be
effective, conclusive and binding for all purposes with respect to this Plan and
all Rights then outstanding. No such adjustments will be required by reason of
(1) the issuance or sale by the Corporation for cash of additional shares of its
Common Stock or securities convertible into or exchangeable for shares of its
Common Stock, or (2) the issuance of shares of Common Stock in exchange for
shares of the capital stock of any corporation, financial institution or other
organization acquired by the Corporation or any Subsidiary in connection
therewith.

(c) The grant of a Right pursuant to this Plan shall not affect in
any way the right or power of the Corporation to make adjustments,
reclassification, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.

(d) No fractional shares of Stock shall be issued under this Plan
for any adjustment under Section 2.3(b).

SECTION 2.4. SEVERABLE PROVISIONS. The Corporation intends that the
provisions of each of Articles III, IV, V and VI, in each case together with
Articles I, II and VII, shall each be deemed to be effective on an independent
basis, and that if one or more of such Articles, or the operative provisions
thereof, shall be deemed invalid, void or voidable, the remainder of such
Articles shall continue in full force and effect.

6
<PAGE>
ARTICLE III
OPTIONS

SECTION 3.1. GRANT OF OPTIONS.

(a) The Corporation may grant Options to Eligible Employees as
provided in this Article III. Options will be deemed granted pursuant to this
Article III only upon authorization by the Committee, effective on even date
thereon, and shall require the immediate execution and delivery of an Option
Agreement by the Eligible Employee Optionee ("the "Optionee") and a duly
authorized officer of the Corporation. Options will not be deemed granted
hereunder merely upon authorization of such grant by the Committee. The
aggregate number of shares of Stock potentially acquirable under all Options
granted shall not exceed the total number of shares of Stock in the Plan Pool,
less all shares of Stock potentially acquired under, or underlying, all other
Rights outstanding under this Plan.

(b) The Committee shall designate Options at the time a grant is
authorized as either ISOs or Non-Qualified Options. The aggregate Fair Market
Value (determined as of the date an ISO is granted) of the shares of Stock as to
which an ISO may first become exercisable by an Optionee in a particular
calendar year (pursuant to Article III and all other plans of the Company and/or
its Subsidiaries) may not exceed $100,000 (the "$100,000 Limitation"). If an
Optionee is granted Options in excess of the $100,000 Limitation, or if such
Options otherwise become exercisable with respect to the number of shares of
Stock which would exceed the $100,000 limitation, such excess Options shall be
Non-Qualified Options.

SECTION 3.2 EXERCISE PRICE.

(a) The initial exercise price of each Option granted under this
Plan (the "Exercise Price") shall be not less than one hundred percent (100%) of
the Fair Market Value of the Common Stock on the date of grant of the Option. In
the case of ISOs granted to a shareholder who owns capital stock of the
Corporation possessing more than ten percent (10%) of the total combined voting
power of all classes of the capital stock of the Corporation (a "10%
Shareholder"), the Exercise Price of each Option granted under the Plan to such
10% Shareholder shall not be less than one hundred and ten percent (110%) of the
Fair Market Value of the Common Stock on the date of grant of the Option.

(b) In its discretion and subject to the provisions of Section
3.2(a) (as to the establishment of the Exercise Price of an Option on the date
of grant), the Committee may establish that the Exercise Price of an Option
shall be adjusted upward or downward, on a quarterly basis, based upon the
market value performance of the Common Stock in comparison with the aggregate
market value performance of one or more indices composed of publicly-traded
financial institutions and financial institution holding companies deemed by the
Committee to be similar (in terms of asset size, capitalization, trading volumes
and other factors deemed relevant by the Committee) to the Company (an "Index"
and the "Indices"); provided, however, that the Exercise Price of an ISO shall
not be adjustable if, under the Code, such adjustable Exercise Price would
disqualify the ISO as an ISO. The Committee may utilize Indices published by
third parties and/or may construct one or more Indices meeting the
characteristics described above. The Indices utilized will be recalculated
quarterly, including in such quarterly recalculation such adjustments for stock
splits, reverse stock splits and stock dividends of the companies in the indices
and of the Company as are appropriate. Each such Index shall include no fewer
than fifteen (15) publicly-traded financial institutions and financial
institution holding companies. If more than one Index is utilized by the
Committee, it may give such weighting to each Index utilized as the Committee
may determine in its sole discretion, consistent with the provisions of this
Article III.
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SECTION 3.3. TERMS AND CONDITIONS OF OPTIONS.

(a) All Options must be granted within ten (10) years of the
Effective Date.

(b) The Committee may grant ISOs and Non-Qualified Options, either
separately or jointly, to an Eligible Employee.

(c) Each grant of Options shall be evidenced by an Option Agreement
in form and substance satisfactory to the Committee in its discretion,
consistent with the provisions of this Article III.

(d) At the discretion of the Committee, an Optionee, as a condition
to the granting of an Option, must execute and deliver to the Company a
confidential information agreement approved by the Committee.

(e) Nothing contained in Article III, any Option Agreement or in any
other agreement executed in connection with the granting of an Option under this
Article III will confer upon any Optionee any right with respect to the
continuation of his or her status as an employee of, consultant or independent
contractor to, or director of the Company or any of its Subsidiaries.

(f) Except as otherwise provided herein, each Option Agreement may
specify the period or periods of time within which each Option or portion
thereof will first become exercisable (the "Vesting Period") with respect to the
total number of shares of Stock acquirable thereunder. Such Vesting Periods will
be fixed by the Committee in its discretion, and may be accelerated or shortened
by the Committee in its discretion; provided, however, that the Vesting Period
For each ISO shall be at least two years (2) from the date such Option was
granted.

(g) Not less than one hundred (100) shares of Stock may be purchased
at any one time through the exercise of an Option unless the number purchased is
the total number at that time purchasable under all Options granted to the
Optionee.

(h) An Optionee shall have no rights as a shareholder of the Company
with respect to any shares of Stock covered by Options granted to the Optionee
until payment in full of the Exercise Price by such Optionee for the shares
being purchased. No adjustment shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property) or distributions
or other rights for which the record date is prior to the date such Stock is
fully paid for, except as provided in Sections 2.3(b) and 3.2(b).

(i) All shares of Stock obtained pursuant to an Option which
qualifies as an ISO shall be held in escrow for a period which ends on the later
of (i) two (2) years from the date of the granting of the ISO or (ii) one (1)
year after the issuance of such shares pursuant to the exercise of the ISO. Such
shares of Stock shall be held by the Corporation or its designee. The Optionee
who has exercised the ISO shall have all rights of a shareholder, including, but
not limited to, the rights to vote, receive dividends and sell such shares. The
sole purpose of the escrow is to inform the Corporation of a disqualifying
disposition of the shares of Stock acquired within the meaning of Section 422 of
the Code, and it shall be administered solely for this purpose.

(j) Additionally, and notwithstanding any other provisions of this
Article III, no shares of Stock obtained pursuant to an Option may be
Transferred until at least six (6) months and one (1) day shall have elapsed
since the date such Option was granted.

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SECTION 3.4. EXERCISE OF OPTIONS.

(a) An Optionee must be an Eligible Employee at all times from the
date of grant until the exercise of the Options granted, except as provided in
Section 3.5(b).

(b) An Option may be exercised to the extent exercisable (i) by
giving written notice of exercise to the Corporation, specifying the number of
full shares of Stock to be purchased and, if applicable, accompanied by full
payment of the Exercise Price thereof and the amount of the Tax Withholding
Liability pursuant to Section 3.4(c) below; and (ii) by giving assurances
satisfactory to the Corporation that the shares of Stock to be purchased upon
such exercise are being purchased for investment and not with a view to resale
in connection with any distribution of such shares in violation of the 1933 Act;
provided, however, that in the event the prior occurrence of the Registration or
in the event resale of such Stock without such Registration would otherwise be
permissible, this second condition will be inoperative if, in the opinion of
counsel for the Corporation, such condition is not required under the 1933 Act
or any other applicable law, regulation or rule of any governmental agency.

(c) As a condition to the issuance of the shares of Stock upon full
or partial exercise of a Non-Qualified Option, the Optionee will pay to the
Corporation in cash, or in such other form as the Committee may determine in its
discretion, the amount of the Corporation's Tax Withholding Liability required
in connection with such exercise.

(d) The Exercise Price of an Option shall be payable to the
Corporation either (i) in United States dollars, in cash or by check,
corporation draft or money order payable to the order of the Corporation, or
(ii) at the discretion of the Committee, through the delivery of outstanding
shares of the Common Stock owned by the Optionee with a Fair Market Value as of
the date of delivery equal to the Exercise Price, or (iii) at the discretion of
the Committee, by a combination of (i) and (ii) above. No shares of Stock shall
be delivered until full payment has been made. Except as provided in Section
2.3(b), the Committee may not approve a reduction of the Exercise Price of any
such Option, or the cancellation of any such Option and the regranting thereof
to the same Optionee at a lower Exercise Price, at a time when the Fair Market
Value of the Common Stock is lower than it was when such Option was granted.

SECTION 3.5. TERM AND TERMINATION OF OPTION.

(a) The Committee shall determine, and each Option Agreement shall
state, the expiration date or dates of each Option, but such expiration date
shall be not later than ten (10) years after the date such Option was granted
(the "Option Period"). In the event an ISO is granted to a 10% Shareholder, the
expiration date or dates of each Option Period shall be not later than five (5)
years after the date such Option is granted. The Committee, in its discretion,
may extend the expiration date or dates of an Option Period after such date was
originally set; provided, however such expiration date may not exceed the
maximum expiration date described in this Section 3.5(a).

(b) To the extent not previously exercised, each Option will
terminate upon the expiration of the Option Period specified in the Option
Agreement; provided, however, that, subject to the provisions of Section 3.5(a),
each such Option will terminate upon the earlier of: (i) ninety (90) days after
the date that the Optionee ceases to be an Eligible Employee for any reason,
other than by reason of Death, Disability, Retirement or a Just Cause
Termination; (ii) twelve (12) months after the date that the Optionee ceases to
be an Eligible Employee by reason of Death, Disability or Retirement; or (iii)
immediately as of the date that the Optionee ceases to be an Eligible
Participant by reason of a Just Cause Termination. Any portions of Options not
exercised within the foregoing periods shall terminate. The Committee may, in
its discretion, specify other events that will result in the termination of an
ISO (including, without limitation, termination of employment by reason of
Death). In the case of Non-Qualified Options, the Committee shall

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have full discretion to specify what, if any, events will terminate the Option
prior to the expiration of the Option Period.

SECTION 3.6. CHANGE IN CONTROL TRANSACTION. At any time prior to the date
or consummation of a Change in Control Transaction, the Committee may, in its
absolute discretion, determine that all or any part of the Options theretofore
granted under this Article III shall become immediately exercisable in full and
may thereafter be exercised at any time before the date of consummation of the
Change in Control Transaction (except as otherwise provided in Article II
hereof, and except to the extent that such acceleration of exercisability would
result in an "excess parachute payment" within the meaning of Section 280G of
the Code). Any Option that has not been fully exercised before the date of
consummation of the Change in Control Transaction shall terminate on such date,
unless a provision has been made in writing in connection with such transaction
for the assumption of all Options theretofore granted, or the substitution for
such Options of options to acquire the voting stock of a successor employer
corporation, or a parent or a subsidiary thereof, with appropriate adjustments
as to the number and kind of shares and prices, in which event the Options
theretofore granted shall continue in the manner and under the terms so
provided.

SECTION 3.7. RESTRICTIONS ON TRANSFER. An Option granted under Article III
may not be Transferred except by will or the laws of descent and distribution
and, during the lifetime of the Optionee to whom it was granted, may be
exercised only by such Optionee.

SECTION 3.8. STOCK CERTIFICATES. Certificates representing the Stock
issued pursuant to the exercise of Options will bear all legends required by law
and necessary to effectuate the provisions hereof. The Corporation may place a
"stop transfer" order against such shares of Stock until all restrictions and
conditions set forth in this Article III, the applicable Option Agreement, and
in the legends referred to in this Section have been complied with.

SECTION 3.9. AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or
discontinue the provisions of this Article III at any time or from time to time;
provided that no action of the Board will cause ISOs granted under this Plan not
to comply with Section 422 of the Code unless the Board specifically declares
such action to be made for that purpose; and, provided, further, that no such
action may, without the approval of the shareholders of the Corporation,
materially increase (other than by reason of an adjustment pursuant to Section
2.3(b) hereof) the maximum aggregate number of shares of Stock in the Plan Pool,
materially increase the benefits accruing to Eligible Employees under this
Article III, or materially modify eligibility requirements for participation
under this Article III. Moreover, no such action may alter or impair any Option
previously granted under this Article III without the consent of the applicable
Optionee.

SECTION 3.10. COMPLIANCE WITH RULE 16B-3. With respect to persons subject
to Section 16 of the 1934 Act, transactions under this Article III are intended
to comply with all applicable conditions of Rule 16b-3 or its successors under
the 1934 Act. To the extent any provision of this Article III or action by the
Board or the Committee fails so to comply, it shall be deemed null and void, to
the extent permitted by law and deemed advisable by the Committee.

ARTICLE IV
RESTRICTED STOCK GRANTS

SECTION 4.1 GRANTS OF RESTRICTED STOCK.

(a) The Corporation may issue Restricted Stock to Eligible Employees
as provided in this Article IV. Restricted Stock will be deemed issued only upon
(i) authorization by the Committee and (ii) the execution and delivery of a
Restricted Stock Grant Agreement by the Eligible Employee to whom such

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Restricted Stock is to be issued (the "Holder") and a duly authorized officer of
the Corporation. Restricted Stock will not be deemed to have been issued merely
upon authorization by the Committee.

(b) Each issuance of Restricted Stock pursuant to this Article IV
will be evidenced by a Restricted Stock Grant Agreement between the Corporation
and the Holder in form and substance satisfactory to the Committee in its sole
discretion, consistent with this Article IV. Each Restricted Stock Grant
Agreement will specify the purchase price per share, if any, paid by the Holder
for the Restricted Stock, such amount to be fixed by the Committee in its
discretion.

(c) Without limiting the foregoing, each Restricted Stock Grant
Agreement shall set forth the terms and conditions of any forfeiture provisions
regarding the Restricted Stock, (including any provisions for accelerated
vesting in the event of a change in Control Transaction) as determined by the
Committee in its discretion.

(d) At the discretion of the Committee, the Holder, as a condition
to such issuance, may be required (i) to execute and deliver to the Corporation
a confidential information agreement approved by the Committee, and/or (ii) to
pay to the Corporation in cash, or in such other form as the Committee may
determine in its discretion, the amount of the Corporation's Tax Withholding
Liability required in connection with such issuance.

(e) Nothing contained in this Article IV, any Restricted Stock Grant
Agreement or in any other agreement executed in connection with the issuance of
Restricted Stock under this Article IV will confer upon any holder any right
with respect to the continuation of his or her status as an employee of the
Corporation or any of its Subsidiaries.

SECTION 4.2. RESTRICTIONS ON TRANSFER OF RESTRICTED STOCK.

(a) Shares of restricted Stock acquired by a Holder may be
transferred only in accordance with the specific limitations on the transfer of
restricted Stock imposed by applicable state or federal securities laws or set
forth below, and subject to certain undertakings of the transferee set forth in
Section 4.2(c). All Transfers of Restricted Stock not meeting the conditions set
forth in this Section 4.2(a) are expressly prohibited. Except as otherwise set
forth in this Article IV, as of the date of a grant of Restricted Stock (the
"Grant Date), all of the shares of Restricted Stock to be issued pursuant to the
Restricted Stock Grant Agreement (the "Total Award Shares") will be deemed not
available for transfer or sale by the Holder and will become available for
transfer or sale by the Holder) according to the schedule set forth in the
appropriate Restricted Stock Grant Agreement.

(b) Any prohibited Transfer of Restricted Stock is void and of no
effect. Should such a Transfer purport to occur, the Corporation may refuse to
carry out the Transfer on its books, attempt to set aside the Transfer, enforce
any undertaking or right under this Section 4.2(b), and/or exercise any other
legal or equitable remedy.

(c) Any Transfer of Restricted Stock that would otherwise be
permitted under the terms of this Plan is prohibited unless the transferee
executes such documents as the Corporation may reasonably require to ensure the
Company's rights under a Restricted Stock Grant Agreement and this Article IV
are adequately protected with respect to the Restricted Stock so Transferred.
Such documents may include, without limitation, an agreement by the transferee
to be bound by all of the terms of this Plan applicable to Restricted Stock and
of the applicable Restricted Stock Grant Agreement, as if the transferee were
the original Holder of such Restricted Stock.

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(d) To facilitate the enforcement of the restrictions on Transfer
set forth in this Article IV, the Committee may, at its discretion, require the
Holder of shares of Restricted Stock to deliver the certificate(s) for such
shares with a stock power executed in blank by the Holder and the Holder's
spouse, to the Secretary of the Corporation or his or her designee, and the
Company may hold said certificate(s) and stock power(s) in escrow and take all
such actions as are necessary to insure that all Transfers and/or releases are
made in accordance with the terms of this Plan. The certificates may be held in
escrow so long as the shares of Restricted Stock whose ownership they evidence
are subject to any restriction on Transfer under this Article IV or under a
Restricted Stock Grant Agreement. Each Holder acknowledges that the Secretary of
the Corporation (or his or her designee) is so appointed as the escrow holder
with the foregoing authorities as a material inducement to the issuance of
shares of Restricted Stock under this Article IV, that the appointment is
coupled with an interest, and that it accordingly will be irrevocable. The
escrow holder will not be liable to any party to a Restricted Stock Grant
Agreement (or to any other party) for any actions or omissions unless the escrow
holder is grossly negligent relative thereto. The escrow holder may rely upon
any letter, notice or other document executed by any signature purported to be
genuine.

SECTION 4.3. COMPLIANCE WITH LAW. Notwithstanding any other provision of
this Article IV, Restricted Stock may be issued pursuant to this Article IV only
after there has been compliance with all applicable federal and state securities
laws, and such issuance will be subject to this overriding condition. The
Company may include shares of Restricted Stock in a Registration, but will not
be required to register or qualify Restricted Stock with the SEC or any state
agency, except that the Corporation will register with, or as required by local
law, file for and secure an exemption from such registration requirements from,
the applicable securities administrator and other officials of each jurisdiction
in which an Eligible Employee would be issued Restricted Stock hereunder prior
to such issuance.

SECTION 4.4. STOCK CERTIFICATES. Certificates representing the Restricted
Stock issued pursuant to this Article IV will bear all legends required by law
and necessary to effectuate the provisions hereof. The Corporation may place a
"stop transfer" order against shares of Restricted Stock until all restrictions
and conditions set forth in this Article IV have been complied with.

SECTION 4.5. MARKET STANDOFF. To the extent requested by the Corporation
and any underwriter of securities of the Corporation in connection with a firm
commitment underwriting, no Holder of any shares of Restricted Stock will
Transfer any such shares not included in such underwriting, or not previously
registered in a Registration, during the one hundred twenty (120) day period
following the effective date of the registration statement filed with the SEC
under the 1933 Act in connection with such offering.

SECTION 4.6. AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or
discontinue this Article IV at any time or from time to time; provided, that no
such action of the Board shall alter or impair any rights previously granted to
Holders under this Article IV without the consent of such affected Holders; and
provided, further, that no such action may, without the approval of the
Corporation's shareholders, materially increase (other than by reason of an
adjustment pursuant to Section 2.3(b) hereof) the maximum aggregate number of
shares of Stock in the Plan Pool, materially increase the benefits accruing to
Eligible Employees under this Article IV, or materially modify the requirements
as to eligibility for participation under this Article IV. Moreover, no such
action may alter or impair any Restricted Stock previously granted under this
Article IV without the consent of the applicable Holder.

SECTION 4.7. COMPLIANCE WITH RULE 16B-3. With respect to persons subject
to Section 16 of the 1934 Act, transactions are intended to comply with all
applicable conditions of Rule 16b-3 or its successors under the 1934 Act. To the
extent any provision of this Article IV or action by the Board or the Committee
fails so to comply, it shall be deemed null and void, to the extent permitted by
law and deemed advisable by the Committee.

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ARTICLE V
LONG-TERM INCENTIVE COMPENSATION UNITS

SECTION 5.1. AWARDS OF UNITS.

(a) The Committee may grant awards of Units to Eligible Employees as
provided in this Article V. Units will be deemed granted only upon authorization
by the Committee, effective on even date thereon and requiring the immediate
execution and delivery of a Unit Agreement by the Eligible Employee to whom
Units are to be granted (a "Unit Recipient") and an authorized officer of the
Corporation. Units will not be deemed granted merely upon authorization by the
Committee. Units may be granted in each of the years 1998 through 2005 in such
amounts and to such Unit Recipients as the Committee may determine in its sole
discretion subject to the limitation in Section 5.2 below.

(b) Each grant of Units pursuant to this Article V will be evidenced
by a Unit Award Agreement between the Corporation and the Unit Recipient in form
and substance satisfactory to the Committee in its sole discretion, consistent
with this Article V.

(c) Except as otherwise provided herein, Units will be distributed
only after the end of a performance period of two or more years ("Performance
Period") beginning with the year in which such Units were awarded. The
Performance Period shall be set by the Committee for each year's awards.

(d) The percentage of the Units awarded under this Section 5.1 or
credited pursuant to Section 5.5 that will be distributed to Unit Recipients
shall depend on the levels of financial performance and other performance
objectives achieved during each year of the Performance Period; provided,
however, that the Committee may adopt one or more performance categories or
eliminate all performance categories other than financial performance. Financial
performance shall be based on the consolidated results of the Corporation and
its Subsidiaries prepared on the same basis as the financial statements
published for financial reporting purposes and determined in accordance with
Section 5.1(e) below. Other performance categories adopted by the Committee
shall be based on measurements of performance as the Committee shall deem
appropriate.

(e) Distributions of Units awarded will be based on the Corporations
financial performance with results from other performance categories applied as
a factor, not exceeding one (1), against financial results. The annual financial
and other performance results will be averaged over the Performance Period and
translated into percentage factors according to graduated criteria established
by the Committee for the entire Performance Period. The resulting percentage
factors shall determine the percentage of Units to be distributed. No
distributions of Units, based on financial performance and other performance,
shall be made if a minimum average percentage of the applicable measurement of
performance, to be established by the Committee, is not achieved for the
Performance Period. The performance levels achieved for each Performance Period
and percentage of Units to be distributed shall be conclusively determined by
the Committee.

(f) The percentage of Units awarded the receipt of which Unit
Recipients become entitled based on the levels of performance (including those
Units credited under Section 55) will be determined as soon as practicable after
each Performance Period and are called "Retained Units."

(g) As soon as practical after determination of the number of
Retained Units, such Retained Units shall be distributed in the form of a
combination of shares of Stock and cash, as determined under Section 5.1(e). The
percentage of Retained Units to be distributed in the form of a combination of
shares and cash in the relative percentages as between the two as determined by
the Committee in its sole discretion, however in no event shall the value of the
total distributions pursuant to this Section 5.1(g) exceed

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the total Retained Units determined under Section 5.1(e). The Units awarded but
which Unit Recipients do not become entitled to receive, shall be canceled.

(h) Notwithstanding any other provision in this Article V, the
Committee, if it determines in its sole discretion that it is necessary or
advisable under the circumstances, may adopt rules pursuant to which Eligible
Employees by virtue of hire, or promotion or upgrade to a higher job grade
classification, or special individual circumstances, may be granted the total
award of Units or any portion thereof, with respect to one or more Performance
Periods that began in prior years and at the time of the awards have not yet
been completed.

SECTION 5.2. LIMITATIONS. The aggregate number of shares of Stock
potentially distributable under all Units granted, including those Units
credited pursuant to Section 5.5, shall not exceed the total number of shares of
Stock in the Plan Pool, less all shares of Stock potentially acquirable under,
or underlying, all other Rights outstanding under this Plan.

SECTION 5.3. TERMS AND CONDITIONS.

(a) All grants of Units must be made within ten (10) years of the
Effective Date.

(b) The grant of Units shall be evidenced by a Unit Award Agreement
in form and substance satisfactory to the Committee in its discretion,
consistent with the provisions of this Article V.

(c) At the discretion of the Committee, a Unit Recipient, as a
condition to the award of Units, may be required to execute and deliver to the
Corporation a confidential information agreement approved by the Committee.

(d) Nothing contained in this Article V, any Unit Award Agreement or
in any other agreement executed in connection with the grant of Units under this
Article V will confer upon any Unit Recipient any right with respect to the
continuation of his or her status as an employee of, consultant or independent
contractor to, or director of, the Corporation or any of its Subsidiaries.

(e) A Unit Recipient shall have no rights as a shareholder of the
Corporation with respect to any Units until the distribution of shares of Stock
in connection therewith. No adjustment shall be made in the number of Units for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date such Stock is fully paid for, except as provided in Sections 2.3(b) and
5.6(a).

SECTION 5.4. SPECIAL DISTRIBUTION RULES.

(a) Except as otherwise provided in this Section 5.4., a Unit
Recipient must be an Eligible Employee from the date a Unit is granted him or
her continuously through and including the date of distribution of such Unit.

(b) In case of the Death or Disability of a Unit Recipient prior to
the end of any Performance Period, whether before or after any event set forth
in Section 5.4.(b) below, the number of Units awarded to the Unit Recipient for
such Performance Period shall be reduced pro rata based on the number of months
remaining in the Performance Period after the month of Death or Disability. The
remaining Units, reduced in the discretion of the Committee to the percentage
indicated by the levels of performance achieved prior to the date of Death or
Disability, if any, shall be distributed within a reasonable time after Death or
Disability. All other Units awarded to the Unit Recipient for such Performance
Period shall be canceled.

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(c) If a Unit Recipient enters into Retirement prior to the end of
any Performance Period, the Units awarded to such Unit Recipient under this
Article V, and not yet distributed, shall be prorated to the end of the year in
which such Retirement occurs and distributed at the end of the Performance
Period based upon the Corporation's performance for such period.

(d) In case of the termination of the Unit Recipient's status as an
Eligible Employee prior to the end of any Performance Period for any reason
other than Death, Disability or Retirement, all Units awarded to the Unit
Recipient with respect to any such Performance Period shall be immediately
forfeited and canceled.

(e) Upon a Unit Recipient's promotion to a higher job grade
classification, the Committee may award to the Unit Recipient the total Units,
or any portion thereof, which are associated with the higher job grade
classification for the current Performance Period.

(f) Notwithstanding any other provision of the Plan, the Committee
may reduce or eliminate awards to a Unit Recipient who has been demoted to a
lower job grade classification, and where circumstances warrant, may permit
continued participation, proration or early distribution, or a combination
thereof, of awards which would otherwise be canceled.

SECTION 5.5. DIVIDEND EQUIVALENT UNITS. On each record date for dividends
on the Common Stock, an amount equal to the dividend payable on one share of
Common Stock will be determined and credited (the "Dividend Equivalent Credit")
on the payment date to each Unit Recipient's account for each Unit which has
been awarded to the Unit Recipient and not distributed or canceled. Such amount
will be converted within the account to an additional number of Units equal to
the number of shares of Common Stock that could be purchased at Fair Market
Value on such dividend payment date. These Units will be treated for purposes of
this Article V in the same manner as those Units granted pursuant to Section
5.1.

SECTION 5.6. ADJUSTMENTS.

(a) In addition to the provisions of Section 2.3.(b), if an
extraordinary charge occurs during a Performance Period which significantly
alters the basis upon which the performance levels were established under
Section 5.1. for that Performance Period, to avoid distortion in the operation
of this Article V, but subject to Section 5.2., the Committee may make
adjustments in such performance levels to preserve the incentive features of
this Article V, whether before or after the end of the Performance Period, to
the extent it deems appropriate in its sole discretion, which adjustments shall
be conclusive and binding upon all parties concerned. Such changes may include,
without limitation, adoption of, or changes in, accounting practices, tax laws
and regulatory or other laws or regulations; economic changes not in the
ordinary course of business cycles; or compliance with judicial decrees or other
legal authorities.

(b) At any time prior to the date of consummation of a Change in
Control Transaction, the Committee may, in its absolute discretion, determine
that all or any part of the Units theretofore awarded under this Article V shall
become immediately distributable (reduced pro rata based on the number of months
remaining in the Performance Period after the consummation of the Change in
Control Transaction) and may thereafter be distributed at any time before the
date of consummation of the Change in Control Transaction (except as otherwise
provided in Article II hereof, and except to the extent that such acceleration
of distribution would result in an "excess parachute payment" within the meaning
of Section 280G of the Code). Any Units that have not been distributed before
the date of consummation of the Change in Control Transaction shall terminate on
such date, unless a provision has been made in writing in connection with such
transaction for the assumption of all awards of Units theretofore made, or the
substitution for such units of awards of compensation units having comparable
characteristics under a long term incentive award plan of

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a successor employer corporation or a parent or a subsidiary thereof, with
appropriate adjustments, in which event the awards of Units theretofore made
shall continue in the manner and under the terms so provided.

SECTION 5.7. OTHER CONDITIONS.

(a) No person shall have any claim to be granted an award of Units
under this Article V and there is no obligation for uniformity of treatment of
Eligible Employees or Unit Recipients under this Article V.

(b) The Corporation shall have the right to deduct from any
distribution or payment in cash under this Article V, and the Unit Recipient or
other person receiving shares of Stock under this Article V shall be required to
pay to the Corporation, any Tax Withholding Liability. The number of shares of
Stock to be distributed to any individual Unit Recipient may be reduced by the
number of shares of Stock, the Fair Market Value of which on the Distribution
Date (as defined in Section 5.7(d) below) is equivalent to the cash necessary to
pay any Tax Withholding Liability, where the cash to be distributed is not
sufficient to pay such Tax Withholding Liability, or the Unit Recipient may
deliver to the Corporation cash sufficient to pay such Tax Withholding
Liability.

(c) Any distribution of shares of Stock under this Article V may be
delayed until the requirements of any applicable laws or regulations, and any
stock exchange or NASDAQ-NMS requirements, are satisfied. The shares of Stock
distributed under this Article V shall be subject to such restrictions and
conditions on disposition as counsel for the Corporation shall determine to be
desirable or necessary under applicable law.

(d) For the purpose of distribution of Units in cash, the value of a
Unit shall be : either a fixed unit value or the Fair Market Value of the Common
Stock on the Distribution Date. Further , the number of units awarded may be
based upon performance. Except as otherwise determined by the Committee, the
"Distribution Date" shall be March 15th (or the first business day thereafter)
in the year of distribution, except that in the case of special distributions
the Distribution Date shall be the first business day of the month in which the
Committee determines the amount and form of the distribution.

(e) Notwithstanding any other provision of this Article V, no
Dividend Equivalent Credits shall be made and no distributions of Units shall be
made if at the time a Dividend Equivalent Credit or distribution would otherwise
have been made:

(i) The regular quarterly dividend on the Common Stock has
been omitted and not subsequently paid or there exists any default in payment of
dividends on any such outstanding shares of capital stock of the Corporation;

(ii) The rate of dividends on the Common Stock is lower than
at the time the Units to which the Dividend Equivalent Credit relates were
awarded, adjusted for any change of the type referred to in Section 2.3.(b);

(iii) Estimated consolidated net income of the Corporation for
the twelve month period preceding the month the Dividend Equivalent Credit or
distribution would otherwise have been made is less than the sum of the amount
of the Dividend Equivalent Credits and Units eligible for distribution under
this Article V in that month plus all dividends applicable to such period on an
accrual basis, either paid, declared or accrued at the most recently paid rate,
on all outstanding shares of Common Stock; or

(iv) The Dividend Equivalent Credit or distribution would
result in a default in any agreement by which the Corporation is bound.

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<PAGE>
(f) In the event net income available under Section 5.7(e) above for
Dividend Equivalent Credits and awards eligible for distribution under this
Article V is sufficient to cover part but not all of such amounts, the following
order shall be applied in making payments: (i) Dividend Equivalent Credits, (ii)
Units eligible for distribution under this Article V.

SECTION 5.8. DESIGNATION OF BENEFICIARIES. A Unit Recipient may designate
a beneficiary or beneficiaries to receive all or part of the Stock and/or cash
to be distributed to the Unit Recipient under this Article V in case of Death. A
designation of beneficiary may be replaced by a new designation or may be
revoked by the Unit Recipient at any time. A designation or revocation shall be
on a form to be provided for that purpose and shall be signed by the Unit
Recipient and delivered to the Corporation prior to the Unit Recipient's Death.
In case of the Unit Recipient's Death, the amounts to be distributed to the Unit
Recipient under this Article V with respect to which a designation of
beneficiary has been made (to the extent it is valid and enforceable under
applicable law) shall be distributed in accordance with this Article V to the
designated beneficiary or beneficiaries. The amount distributable to a Unit
Recipient upon Death and not subject to such a designation shall be distributed
to the Unit Recipient's estate. If there shall be any question as to the legal
right of any beneficiary to receive a distribution under this Article V, the
amount in question may be paid to the estate of the Unit Recipient, in which
event the Corporation shall have no further liability to anyone with respect to
such amount.

SECTION 5.9. RESTRICTIONS ON TRANSFER. Units granted under Article V may
not be Transferred, except as provided in Section 5.8, and, during the lifetime
of the Unit Recipient to whom it was awarded, cash and stock receivable with
respect to Units may be received only by such Unit Recipient.

SECTION 5.10. AMENDMENT AND DISCONTINUANCE. No award of Units may be
granted under this Article V after January 21, 2008. The Board may amend,
suspend or discontinue the provisions of this Article V at any time or from time
to time, provided, that no such action may, without the approval of the
shareholders of the Corporation, materially increase (other than by reason of an
adjustment pursuant to Section 2.3.(b) hereof) the maximum number of shares of
Stock in the Plan Pool, materially increase the benefits accruing to Eligible
Employees under this Article V, or materially modify the eligibility
requirements for participation under this Article V. Moreover, no such action
may alter or impair any Units previously granted under this Article V without
the consent of the applicable Holder.

SECTION 5.11. COMPLIANCE WITH RULE 16B-3. With respect to persons subject
to Section 16 of the 1934 Act, transactions under this Article V are intended to
comply with all applicable conditions of Rule 16b-3 or its successors under the
1934 Act. To the extent any provision of this Article V or action by the Board
or the Committee fails so to comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Committee.

ARTICLE VI
STOCK APPRECIATION RIGHTS

SECTION 6.1. GRANTS OF SARS.

(a) The Corporation may grant SARs under this Article VI. SARs will
be deemed granted only upon (i) authorization by the Committee and (ii) the
execution and delivery of a SAR Agreement by the Eligible Employee to whom the
SARs are to be granted (the "SAR Recipient") and a duly authorized officer of
the Corporation. SARs will not be deemed granted merely upon authorization by
the Committee. The aggregate number of shares of Stock which shall underlie SARs
granted hereunder shall not exceed the total number of shares of Stock remaining
in the Plan Pool, less all shares of Stock potentially acquirable under or
underlying all other Rights outstanding under this Plan.

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<PAGE>
(b) Each grant of SARs pursuant to this Article VI shall be
evidenced by a SAR Agreement between the Corporation and the SAR Recipient, in
form and substance satisfactory to the Committee in its sole discretion,
consistent with this Article VI.

SECTION 6.2. TERMS AND CONDITIONS OF SARS.

(a) All SARs must be granted within ten (10) years of the Effective
Date.

(b) Each SAR issued pursuant to this Article VI shall have an
initial base value (the "Base Value") equal to the Fair Market Value of a share
of Common Stock on the date of issuance of the SAR.

(c) In its discretion and subject to the provisions of Section
6.2(b) (as to the establishment of the initial Base Value of a SAR), the
Committee may establish that the Base Value of a SAR shall be adjusted, upward
or downward, on a quarterly basis, based upon the market value performance of
the Common Stock in comparison with the aggregate market value performance of
the Index or Indices utilized under Section 3.2(b).

(d) At the discretion of the Committee, a SAR Recipient, as a
condition to the granting of a SAR, must execute and deliver to the Corporation
a confidential information agreement approved by the Committee.

(e) Nothing contained in this Article VI, any SAR Agreement or in
any other agreement executed in connection with the granting of a SAR under this
Article VI will confer upon any SAR Recipient any right with respect to the
continuation of his or her status as an employee of the Corporation or any of
its Subsidiaries.

(f) Except as otherwise provided herein, each SAR Agreement may
specify the period or periods of time within which each SAR or portion thereof
will first become exercisable (the "SAR Vesting Period"). Such SAR Vesting
Periods will be fixed by the Committee in its discretion, and may be accelerated
or shortened by the Committee in its discretion.

(g) SARs relating to no less than one hundred (100) shares of Stock
may be exercised at any one time unless the number exercised is the total number
at that time exercisable under all SARs granted to the SAR Recipient.

(h) A SAR Recipient shall have no rights as a shareholder of the
Corporation with respect to any shares of Stock underlying such SAR. No
adjustment shall be made for dividends (ordinary or extraordinary, whether in
cash, securities or other property) or distributions or other rights for which
the record date is prior to the date such Stock is fully paid for, except as
provided in Sections 2.3(b) and 6.2(c).

SECTION 6.3. RESTRICTIONS ON TRANSFER OF SARS. SARs granted under this
Article VI may not be Transferred, except as provided in Section 6.7, and during
the lifetime of the SAR Recipient to whom it was granted, may be exercised only
by such SAR Recipient.

SECTION 6.4. EXERCISE OF SARS.

(a) A SAR Recipient (or his or her executors or administrators, or
heirs or legatees) shall exercise a SAR by giving written notice of such
exercise to the Corporation. SARs may be exercised only upon the completion of
the SAR Vesting Period, if any, applicable to such SAR (the date such notice is
received by the Corporation being referred to herein as the "SAR Exercise
Date").
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(b) Within ten (10) business days of the SAR Exercise Date
applicable to a SAR exercised in accordance with Section 6.4(a), the SAR
Recipient shall be paid in cash the difference between the Base Value of such
SAR (as adjusted, if applicable under Section 6.2(c), as of the most recently
preceding quarterly period) and the Fair Market Value of the Common Stock as of
the SAR Exercise Date, as such difference is reduced by the Corporation's Tax
Withholding Liability arising from such exercise.

SECTION 6.5. TERMINATION OF SARS. The Committee shall determine in its
discretion, and each SAR Agreement shall state, the expiration date or dates of
each SAR, but such expiration date shall be not later than ten (10) years after
the date such SAR is granted (the "SAR Period"). The Committee, in its
discretion, may extend the expiration date or dates of a SAR Period after such
date was originally set; provided, however, such expiration date may not exceed
the maximum expiration date described in this Section 6.5(a).

SECTION 6.6. CHANGE IN CONTROL TRANSACTION. At any time prior to the date
or consummation of a Change in Control Transaction, the Committee may, in its
absolute discretion, determine that all or any part of the SARs theretofore
granted under this Article VI shall become immediately exercisable in full and
may thereafter be exercised at any time before the date of consummation of the
Change in Control Transaction (except as otherwise provided in Article II
hereof, and except to the extent that such acceleration of exercisability would
result in an excess parachute payment within the meaning of Section 280G of the
Code). Any SAR that has not been fully exercised before the date of consummation
of the Change in Control Transaction shall terminate on such date, unless a
provision has been made in writing in connection with such transaction for the
assumption of all SARs theretofore granted, or the substitution for such SARs of
grants of stock appreciation rights having comparable characteristics under a
stock appreciation rights plan of a successor employer corporation or
corporation, or a parent or a subsidiary thereof, with appropriate adjustments,
in which event the SARs theretofore granted shall continue in the manner and
under the terms so provided.

SECTION 6.7. DESIGNATION OF BENEFICIARIES. A SAR Recipient may designate a
beneficiary or beneficiaries to receive all or part of the cash to be paid to
the SAR Recipient under this Article VI in case of Death. A designation of
beneficiary may be replaced by a new designation or may be revoked by the SAR
Recipient at any time. A designation or revocation shall be on a form to be
provided for that purpose and shall be signed by the SAR Recipient and delivered
to the Corporation prior to the SAR Recipient's Death. In case of the SAR
Recipient's Death, the amounts to be distributed to the SAR Recipient under this
Article VI with respect to which a designation of beneficiary has been made (to
the extent it is valid and enforceable under applicable law) shall be
distributed in accordance with this Article VI to the designated beneficiary or
beneficiaries. The amount distributable to a SAR Recipient upon Death and not
subject to such a designation shall be distributed to the SAR Recipient's
estate. If there shall be any question as to the legal right of any beneficiary
to receive a distribution under this Article VI, the amount in question may be
paid to the estate of the SAR Recipient in which event the Corporation shall
have no further liability to anyone with respect to such amount.

SECTION 6.8. AMENDMENT AND DISCONTINUANCE. The Board may amend, suspend or
discontinue the provisions of this Article VI at any time or from time to time
provided that no action of the Board may, without the approval of the
shareholders of the Corporation materially increase (other than by reason of an
adjustment pursuant to Section 2.3(b) hereof) the maximum aggregate number of
shares of Stock in the Plan Pool, materially increase the benefits accruing to
Eligible Employees under this Article VI, or materially modify eligibility
requirements for participation under this Article VI. Moreover, no such action
may alter or impair any SAR previously granted under this Article VI without the
consent of the applicable SAR Recipient.

SECTION 6.9. COMPLIANCE WITH RULE 16B-3. With respect to persons subject
to Section 16 of the 1934 Act, transactions under this Article VI are intended
to comply with all applicable conditions of Rule

19
<PAGE>
16b-3 or its successors under the 1934 Act. To the extent any provision of this
Article VI or action by the Board or the Committee fails so to comply, it shall
be deemed null and void, is the extent permitted by law and deemed advisable by
the Committee.

ARTICLE VII
MISCELLANEOUS

SECTION 7.1. APPLICATION OF FUNDS. The proceeds received by the
Corporation from the sale of Stock pursuant to the exercise of Rights will be
used for general corporate purposes.

SECTION 7.2. NO OBLIGATION TO EXERCISE RIGHT. The granting of a Right
shall impose no obligation upon the recipient to exercise such Right.

SECTION 7.3. TERM OF PLAN. Except as otherwise specifically provide
herein, Rights may be granted pursuant to this Plan from time to time within ten
(10) years from the Effective Date.

SECTION 7.4. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and
paragraph headings used herein are for convenience only, do not modify or affect
the meaning of any provision herein, are not a part of, and shall not serve as a
basis for, interpretation or construction of this Plan. As used herein, the
masculine gender shall include the feminine and neuter, and the singular number
shall include the plural, and vice versa, whenever such meanings are
appropriate.

SECTION 7.5 EXPENSES OF ADMINISTRATION OF PLAN. All costs and expenses
incurred in the operation and administration of this Plan shall be borne by the
Corporation or by one or more Subsidiaries. The Corporation shall also
indemnify, defend and hold each member of the Committee harmless against all
claims, expenses and liabilities arising out of or related to the exercise of
the Committee's powers and the discharge of the Committee's duties hereunder.

SECTION 7.6 GOVERNING LAW. Without regard to the principles of conflicts
of laws the laws of the State of North Carolina shall govern and control the
validity, interpretation, performance and enforcement of this Plan.

SECTION 7.7 INSPECTION OF PLAN. A copy of this Plan, and any amendments
thereto, shall be maintained by the Secretary of the Corporation and shall be
shown to any proper person making inquiry about it.

EXHIBIT 10.3

STATE OF NORTH CAROLINA
COUNTY OF HYDE
EMPLOYEE STOCK OPTION AGREEMENT

THIS EMPLOYEE STOCK OPTION AGREEMENT (the "Agreement") is made as of
this _____ day of ____________, 19____ (the "Date of Grant"), by and between THE
EAST CAROLINA BANK, a North Carolina banking corporation (the "Bank"), and
____________________, a resident of ____________________________ County, North
Carolina (the "Optionee").

WHEREAS, on January 21, 1998, the Bank's Board of Directors adopted
the OMNIBUS STOCK OWNERSHIP AND LONG TERM INCENTIVE PLAN (the "Omnibus Plan"),
subject to the approval of the Bank's shareholders; and

WHEREAS, the Plan provides that the Incentive Committee (the
"Committee") of the Bank's Board of Directors from time to time may grant to
officers and employees of the Bank and its subsidiaries the right or option to
purchase shares of the Bank's $10.00 par value common stock ("Common Stock") on
the terms and conditions set forth in the Omnibus Plan; and

WHEREAS, the Optionee currently is a full-time employee of the Bank
and the Committee has selected the Optionee as an employee to whom it will grant
an option to purchase Common Stock under the Omnibus Plan;

NOW, THEREFORE, in consideration of the premises and the agreements
of the parties set forth herein, the Bank and the Optionee hereby agree as
follow:

1. GRANT OF OPTION. Pursuant to and subject to the terms and
conditions contained in this Agreement and Articles I, II and III of the Omnibus
Plan, the Bank hereby grants to the Optionee the right and option (the "Option")
to purchase from the Bank all or any number of an aggregate of
________________________________________________ (_____________________________)
shares of Common Stock (the "Option Stock") which may be authorized but unissued
shares or shares acquired by the Bank on the open market or in private
transactions.
The Option is intended to be (check one):

[ ] an Incentive Stock Option (an "ISO")
[ ] a Non-qualified Stock Option

as those terms are defined in the Omnibus Plan.

The Option is granted under and pursuant to the Omnibus Plan
in the form in which it has been approved by the Board of Directors (a copy of
which will be provided to the Optionee upon his or her request), and the terms
and conditions of Articles I, II and III of the Omnibus Plan are incorporated
herein by reference. Capitalized terms used in this Agreement which are defined
in the Omnibus Plan shall have the same meanings herein as are assigned to them
in the Omnibus Plan. In the event any provision of this Agreement conflicts or
is inconsistent with a term or condition of the Omnibus Plan, then the Omnibus
Plan provision shall be controlling and shall supersede the provision of this
Agreement.

2. APPROVAL BY SHAREHOLDERS. This Agreement and the Option described
herein are expressly made subject to approval of the Omnibus Plan by the Bank's
shareholders at the Bank's 1998 annual meeting of shareholders. Notwithstanding
anything contained herein to the contrary, the Option may
<PAGE>
not be exercised prior to receipt of such approval. In the event such approval
is not obtained, then this Agreement and the Option shall, without any action by
the Bank or the Optionee, become void and unenforceable and of no further force
or effect.

3. DATE OF GRANT OF OPTION. For purposes of the Omnibus Plan and
this Agreement, the effective date of the grant of the Option (the "Date of
Grant") shall be the date of this Agreement.

4. EXERCISE PRICE. The Exercise Price to be paid by the Optionee for
the purchase for the Option Stock upon exercise of the Option shall be:

_________________________________________ Dollars ($_______________) per share.

5. EXERCISE SCHEDULE. Subject to any further restrictions contained
in the Plan or this Agreement, the Optionee's right to exercise the Option,
either in whole or in part, shall be conditioned upon the Optionee's completion
of (check one):

[ ] two years
[ ] Other: _________________

of service in the employment of the Bank following the Date of Grant (the
"Vesting Period") and, following expiration of the Vesting Period, if any, the
Option will become exercisable on the following dates as to the indicated
numbers of the shares of the Option Stock:

DATE OPTION STOCK AVAILABLE FOR EXERCISE
- --------------- ------------------------------------
_______________ ................ ____________ SHARES

_______________ ................ ____________ SHARES

Notwithstanding anything contained herein to the contrary, the Option may
not be exercised at any time as to a fractional share and, in the event
adjustments in the number of Option Shares as provided in the terms of the
Omnibus Plan results in a fractional shares, the number of shares as to which
the Option may be exercised at any particular time shall be rounded down to the
next lower whole share.

6. METHOD OF EXERCISE. To exercise the Option in whole or in part,
the Optionee must deliver written notice of such exercise (a "Notice of
Exercise") to the President or Secretary of the Bank. Such written notice shall
be substantially in the form attached hereto as Exhibit A, shall specify the
number of shares of Option Stock to be purchased, and shall be accompanied by
payment in full (in the form described below) of the Exercise Price of shares to
be purchased, together with payment of the Optionee's Tax Withholding Liability
(if any). A Notice of Exercise shall not be effective (and the Bank shall have
no obligation to sell any Option Stock to the Optionee pursuant to such Notice)
unless it satisfies the terms and conditions contained in the Omnibus Plan and
this Agreement, is accompanied by such payments or other information as is
required by the Omnibus Plan or this Agreement, and actually is received by the
Bank prior to the Expiration Date or any earlier termination of the Option.

Notwithstanding anything contained herein to the contrary, the
Optionee may not exercise the Option to purchase less than one hundred (100)
shares at any one time, unless the Committee otherwise approves or unless the
partial exercise is for all remaining shares of Option Stock available under the
Option. Following receipt from the Optionee of a valid and effective Notice of
Exercise and full payment of the Exercise Price relating to a number the shares
of Option Stock being purchased, a stock certificate representing that number of
shares shall be issued and delivered by the Bank to the Optionee as soon as

2
<PAGE>
practicable; provided however that, if the Option is an ISO, then all shares of
Option Stock purchased upon the exercise of the Option shall be held by the Bank
in escrow for a period ending on the later of (I) two years from the Date of
Grant of the Option, or (II) one year after issuance of the stock upon exercise
of the Option, for the sole purpose of informing the Bank of a disqualifying
disposition within the meaning of Section 422 of the Internal Revenue Code of
1986. During any such escrow period, the Optionee shall have all rights of a
shareholder with respect to the Option Stock purchased, including but not
limited to the right to vote, receive dividends on and to sell such stock.
Additionally, notwithstanding anything contained herein to the contrary, no
shares of Option Stock purchased upon the exercise of the Option may be sold or
otherwise transferred by the Optionee until at least six months and one day have
elapsed since the Date of Grant.

7. PAYMENT. The Exercise Price of Option Stock being purchased upon
an exercise of the Option (in part or in whole) shall be paid by the Optionee in
full at the time of such exercise. Such payment shall be made in the manner
described in the Omnibus Plan and shall accompany the Notice of Exercise. The
Option shall not be considered to have been properly exercised as to any Option
Stock, and no Option Stock shall be issued or delivered, until full payment of
the Exercise Price therefor has been made.

8. EXPIRATION OR TERMINATION.

(A) EXPIRATION DATE. Notwithstanding anything contained herein
to the contrary, to the extent the Option shall not previously have been
exercised in the manner required by or otherwise terminated as provided in the
Omnibus Plan or this Agreement, it shall expire and terminate at 5:00 P.M. on
the "Expiration Date" which, for purposes of this Agreement, shall be (check
one):

[ ] __________, 20_____, which is the date 10 years following the Date
of Grant

[ ] Other: ___________________________________________________________________

(B) OTHER TERMINATION. The Option otherwise shall terminate
prior to the Expiration Date in the events and upon the occurrences described in
the Option Plan.

(C) EFFECT OF TERMINATION OR EXPIRATION OF OPTION. Upon the
expiration or termination of all or any portion of the Option, it shall, without
any further act by the Bank or the Optionee, no longer be exercisable or of any
force or effect and shall no longer confer any rights to any person to purchase
shares of Common Stock under the Omnibus Plan or this Agreement.

9. EFFECT ON EMPLOYMENT STATUS OF OPTIONEE. Neither the Omnibus
Plan, this Agreement nor the grant of the Option, is intended or shall be deemed
or interpreted to constitute an employment agreement or to confer upon the
Optionee any right of employment with the Bank, including without limitation any
right to continue in the employ of or to provide any other services to the Bank,
or to interfere with, restrict or otherwise limit in any way the right of the
Bank to discharge or terminate the employment of the Optionee at any time for
any reason whatsoever, with or without cause.

10. RIGHTS AS A SHAREHOLDER. Neither the Optionee nor any other
person shall have any rights as a stockholder with respect to any shares of
Option Stock until the Option has been validly exercised in the manner described
in the Omnibus Plan and this Agreement, full payment of the Exercise Price has
been made for such shares, and a stock certificate representing the Option Stock
purchased upon such exercise has been registered on the Bank's stock records in
the name of and delivered to the Optionee or other person entitled thereto.
Except to the extent of adjustments made as described in the Omnibus Plan, no
adjustment on behalf of the Optionee shall be made for dividends (ordinary or
extraordinary, whether in cash, securities or other property), distributions or
other rights for which the record date for determining the shareholders entitled
to receive the same is prior to the date of registration and delivery of the
stock certificate(s) representing the Option Stock.

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<PAGE>
11. PAYMENT OF TAXES. The Optionee shall be responsible for all
federal, state, local or other taxes of any nature as shall be imposed pursuant
to any law or governmental regulation or ruling on the Option or the exercise
thereof or on any income which the Optionee is deemed to recognize in connection
with the Option. If the Bank shall determine to its reasonable satisfaction that
the Bank is required to pay or withhold the whole or any part of any estate,
inheritance, income, or other tax with respect to or in connection with the
Option or the exercise thereof, then the Bank shall have the full power and
authority to withhold and pay such tax out of any shares of Option Stock being
purchased by the Optionee or from the Optionee's salary or any other funds
otherwise payable to the Optionee, or, prior to and as a condition of exercising
such Option, the Bank may require that the Optionee pay to it in cash the amount
of any such tax which it, in good faith, deems itself required to withhold.

12. LIMITS ON GRANT OF ISOS. Notwithstanding anything contained in
this Agreement to the contrary (including the number of shares of Option Stock
provided for herein), if the Option is intended to be an ISO, then the aggregate
Fair Market Value (determined as of the Date of Grant) of the Option Stock for
which the Option may be exercised for the first time in any calendar year
(including ISOs granted under all option plans of the Bank) shall not exceed
$100,000; and, if this Agreement covers a number of shares of Option Stock, or
if such Option becomes exercisable in a manner, such as would result in the
Option exceeding that limitation, then the Option shall constitute a
Non-qualified Stock Option as to all such excess shares of Option Stock.

13. NONTRANSFERABILITY. The Option shall not be assignable or
transferable except by will or by the laws of descent and distribution, and,
during the lifetime of the Optionee, may be exercised only by him or her. More
particularly, but without limiting the generality of the foregoing, the Option
may not be sold, assigned, transferred (except as noted herein), pledged or
hypothecated in any way and shall not be subject to execution, attachment or
similar process.

14. NOTICES. Except as otherwise provided herein, any notice which
the Bank or the Optionee may be required or permitted to give to the other under
the Omnibus Plan or this Agreement shall be in writing and shall be deemed duly
given when delivered personally or deposited in the United States mail, first
class postage prepaid, and properly addressed. Notice, if to the Bank, shall be
sent to its President at the address of the Bank's then current corporate
office. Any notice sent by mail by the Bank to the Optionee shall be sent to the
most current address of the Optionee as reflected on the records of the Bank or
its Subsidiaries as of the time said notice is required. If the Optionee has
died, any such notice shall be given to the Optionee's personal representative
if such representative has delivered to the Bank evidence satisfactory to the
Bank of such representative's status as such and has informed the Bank of the
address of such representative by notice pursuant to this Paragraph 14.

Notwithstanding anything contained herein to the contrary, a
Notice of Exercise shall be effective only upon actual receipt thereof by the
Bank as provided in Paragraph 6 above.

15. SEVERABILITY. Whenever possible, each provision of this
Agreement shall be interpreted in such a manner as to be valid and enforceable
under applicable law, but, in the event that any provision hereof shall be held
to be invalid or unenforceable, the remaining provisions shall continue to be in
full force and effect and this Agreement shall continue to be binding on the
parties hereto as if such invalid or unenforceable provision or part hereof had
not been included herein.

16. MODIFICATION OF AGREEMENT; WAIVER. Except as otherwise provided
herein, this Agreement may be modified, amended, suspended, or terminated, and
any terms or conditions may be waived, but only by written instrument signed by
each of the parties hereto. No waiver hereunder shall constitute a waiver with
respect to any subsequent occurrence or other transaction hereunder or of any
other provision hereof.
4
<PAGE>
17. CAPTIONS AND HEADINGS; GENDER AND NUMBER. Captions and paragraph
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part hereof, and shall not serve as a
basis for interpretation or in construction of this Agreement. As used herein,
the masculine gender shall include the feminine and neuter, the singular number
the plural, and vice versa, whenever such meanings are appropriate.

18. GOVERNING LAW; VENUE AND JURISDICTION. The validity,
interpretation and administration of this Agreement, and the rights of any and
all persons having or claiming to have any interest hereunder, shall be
determined exclusively in accordance with the laws of the State of North
Carolina. Without limiting the generality of the foregoing, the period within
which any action in connection with this Agreement must be commenced shall be
governed by the laws of the State of North Carolina, without regard to the place
where the act or omission complained of took place, the residence of any party
to such action, or the place where the action may be brought or maintained. The
parties hereto agree that any suit or action relating to this Agreement shall be
instituted and prosecuted in the courts of Hyde County, North Carolina, and each
party hereby does waive any right or defense relating to such jurisdiction and
venue.

19. BINDING EFFECT. This Agreement shall be binding upon and shall
inure to the benefit of the Bank, its successors and assigns, and shall be
binding upon and inure to the benefit of the Optionee, his heirs, legatees,
personal representatives, executors, and administrators.

20. ENTIRE AGREEMENT. This Agreement (which incorporates the terms
and conditions of Articles I, II and III of the Omnibus Plan) constitutes and
embodies the entire understanding and agreement of the parties hereto and,
except as otherwise provided hereunder, there are no other agreements or
understandings, written or oral, in effect between the parties hereto relating
to the matters addressed herein.

21. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed an
original, but all of which taken together shall constitute one and the same
instrument.

IN WITNESS WHEREOF, the Bank, has caused this instrument to be
executed in its corporate name by its President, or one of its Vice Presidents,
and attested by its Secretary or one of its Assistant Secretaries, and its
corporate seal to be hereto affixed, all by authority of its Board of Directors
first duly given, and the Optionee has hereunto set his or her hand and adopted
as his or her seal the typewritten word "SEAL" appearing beside his or her name,
all done this the day and year first above written.

THE EAST CAROLINA BANK
[CORPORATE SEAL]

ATTEST: By: _________________________________

_____________________________ _________________________________
Secretary
___________________________ , Optionee

5
<PAGE>
EXHIBIT A

NOTICE OF EXERCISE OF
EMPLOYEE STOCK OPTION

TO: The Incentive Committee of
the Board of Directors of
The East Carolina Bank

The undersigned hereby elects to purchase shares of Common Stock of The
East Carolina Bank (the "Bank") pursuant to the Option granted to the
undersigned pursuant to the Omnibus Stock Ownership and Long Term Incentive Plan
(the "Omnibus Plan") and that certain Stock Option Agreement between the Bank
and the undersigned dated ________________________, _________________.

The undersigned elects to purchase _____________________ whole shares of Common
Stock having an aggregate Exercise Price of $______________________________
which is tendered herewith.

This the _____________ day _________________ of, _________________________,____

___________________________
Optionee

EXHIBIT 21.1

LIST OF SUBSIDIARIES

The East Carolina Bank, a North Carolina state-chartered bank.

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
August 19, 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
August 19, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

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<NAME> ECB BANCORP, INC.

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