ECB Bancorp (ECBE)

Income taxes

Income tax expense for the three months ended March 31, 2009 and 2008 was $500 thousand and $335 thousand, respectively, resulting in effective tax rates of 28.5% and 24.3%, respectively. The lower effective tax rate in 2008 was due to the recognition of a tax benefit associated with the reduction of the valuation allowance on a deferred tax asset. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

Income Taxes

For the year-ended December 31, 2008, we recorded income tax expense of $580 thousand, compared to $1.7 million and $2.4 million for the year-ended December 31, 2007 and 2006, respectively. Our effective tax rate for the years ended December 31, 2008, 2007 and 2006 was 14.5%, 25.8% and 30.2%, respectively.

Our effective tax rate for 2008 was lower due to the recognition of a tax benefit associated with the reduction of the valuation allowance on a deferred tax asset and a higher ratio of tax-exempt to taxable income compared to 2007 and 2006. The valuation allowance for deferred tax assets was $105 thousand for December 31, 2008, $335 thousand for December 31, 2007 and $499 for December 31, 2006. The valuation allowance was for certain capital losses related to perpetual preferred stock issued by FNMA and FHLMC. These losses are capital in character and we may not have current capital gain capacity to offset these losses. The effective tax rate in 2008, 2007 and 2006 also differs from the federal statutory rate of 34.0% primarily due to tax-exempt interest income we earned on tax-exempt securities in our investment portfolio. For more information see disclosure on income taxes in note 6.

Income Taxes

For the year-ended December 31, 2008, we recorded income tax expense of $580 thousand, compared to $1.7 million and $2.4 million for the year-ended December 31, 2007 and 2006, respectively. Our effective tax rate for the years ended December 31, 2008, 2007 and 2006 was 14.5%, 25.8% and 30.2%, respectively.

Our effective tax rate for 2008 was lower due to the recognition of a tax benefit associated with the reduction of the valuation allowance on a deferred tax asset and a higher ratio of tax-exempt to taxable income compared to 2007 and 2006. The valuation allowance for deferred tax assets was $105 thousand for December 31, 2008, $335 thousand for December 31, 2007 and $499 for December 31, 2006. The valuation allowance was for certain capital losses related to perpetual preferred stock issued by FNMA and FHLMC. These losses are capital in character and we may not have current capital gain capacity to offset these losses. The effective tax rate in 2008, 2007 and 2006 also differs from the federal statutory rate of 34.0% primarily due to tax-exempt interest income we earned on tax-exempt securities in our investment portfolio. For more information see disclosure on income taxes in note 6.

(M)    Income Taxes

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

Tax positions are analyzed in accordance with Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an Interpretation of SFAS No. 109” and discussed in Note 6. Interest recognized in accordance with FIN 48 would be classified as interest expense. Penalties would be classified as noninterest expense.

(M)    Income Taxes

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

Tax positions are analyzed in accordance with Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes—an Interpretation of SFAS No. 109” and discussed in Note 6. Interest recognized in accordance with FIN 48 would be classified as interest expense. Penalties would be classified as noninterest expense.

(M)    Income Taxes

(M)    Income Taxes

Income taxes

Income tax expense for the three months ended September 30, 2008 and 2007 was $240 thousand and $282 thousand, respectively, resulting in effective tax rates of 19.2% and 17.4%, respectively. For the nine-month period ending September 30, 2008, tax expense was $869 thousand compared to $1.2 million for the same period of 2007, which resulted in effective tax rates of 21.6% and 24.6%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

Income Taxes

Income tax expense for the three months ended June 30, 2008 and 2007 was $294 thousand and $542 thousand, respectively, resulting in effective tax rates of 21.1% and 30.1%, respectively. The effective tax rate for the quarter ended June 30, 2008 decreased significantly principally due to the recognition of a tax benefit associated with the reduction of the valuation allowance on a deferred tax asset of $129 thousand. For the six-month period ending June 30, 2008, tax expense was $629 thousand compared to $873 thousand for the same period of 2007, which resulted in effective tax rates of 22.7% and 28.3%, respectively. The decreased effective tax rate in 2008 is due to the aforementioned recognition of a tax benefit associated with the reduction of the valuation allowance on a deferred tax asset. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

Income taxes

Income tax expense for the three months ended March 31, 2008 and 2007 was $335 thousand and $331 thousand, respectively, resulting in effective tax rates of 24.3% and 25.8%, respectively. The decreased effective tax rate in 2008 is due to a higher ratio of tax-exempt to taxable income compared to 2007. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

(M)    Income Taxes

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

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

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ECB BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

DECEMBER 31, 2007 and 2006

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

Income taxes

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

Income taxes

Income tax expense for the three months ended June 30, 2007 and 2006 was $542 thousand and $690 thousand, respectively, resulting in effective tax rates of 30.1% and 32.8%, respectively. For the six-month period ending June 30, 2007, tax expense was $0.9 million compared to $1.2 million for the same period of 2006, which resulted in effective tax rates of 28.3% and 31.8%, respectively. The decreased effective tax rate in 2007 is due to a higher ratio of tax-exempt to taxable income compared to 2006. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

Income taxes

Income tax expense for the three months ended March 31, 2007 and 2006 was $331 thousand and $482 thousand, respectively, resulting in effective tax rates of 25.8% and 30.5%, respectively. The decreased effective tax rate in 2007 is due to a higher ratio of tax-exempt to taxable income compared to 2006. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

(M)    Income Taxes

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

Income Taxes

Income tax expense for the three months ended September 30, 2006 and 2005 was $822 thousand and $632 thousand, respectively, resulting in effective tax rates of 32.7% and 31.6%, respectively. For the nine-month period ending September 30, 2006 and 2005, tax expense was $2.0 million compared to $1.5 million for the same period of 2005 which resulted in effective tax rates of 32.2% and 29.7%, respectively. The increased effective tax rate in 2006 is due to a decline in the ratio of tax-exempt to taxable investment income compared to 2005. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

Income taxes

Income tax expense for the three months ended June 30, 2006 and 2005 was $690 and $519, respectively, resulting in effective tax rates of 32.8% and 29.1%, respectively. For the six-month period ending June 30, 2006 and 2005, tax expense was $1.2 million compared to $882 for the same period of 2005 which resulted in effective tax rates of 31.8% and 28.5%, respectively. The increased effective tax rate in 2006 is due to a decline in the ratio of tax-exempt to taxable investment income compared to 2005. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

Income taxes

Income tax expense for the three months ended March 31, 2006 and 2005 was $482 thousand and $363 thousand, respectively, resulting in effective tax rates of 30.5% and 27.6%, respectively. The increased effective tax rate in 2006 is due to a decline in the ratio of tax-exempt to taxable investment income compared to 2005. The effective tax rates in both years differ from the federal statutory rate of 34.0% primarily due to tax-exempt interest income.

(M)    Income Taxes

The Company records income taxes using the asset and liability method. Under this method, deferred income taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect when such amounts are realized or settled.

Income taxes

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

Income taxes

Income tax expense for the three months ended March 31, 2005 and 2004 was $363,758 and $400,000, respectively, resulting in effective tax rates of 27.76% and 29.11%, respectively. The effective tax rates in both years differ from the federal statutory rate of 34.00% primarily due to tax-exempt interest income.

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