<PAGE>








                       COOPERATIVE
                     BANKSHARES, INC.
       Full-Service Community Banking Since 1898












                      Annual Report
                     December 31, 1998<PAGE>
<PAGE>
                  COOPERATIVE BANKSHARES, INC.

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

PROFILE        Cooperative Bankshares, Inc., is the parent
               company of Cooperative Bank For Savings, Inc.,
               SSB.  The Bank is chartered under the laws of
               the state of North Carolina to engage in general
               banking business.  Cooperative offers a wide
               range of retail and commercial banking services
               including numerous deposit services, banking
               cards and alternative investment products. 
               These funds are used for the extension of credit
               through home loans, commercial loans, consumer
               loans and other installment credit such as home
               equity, auto, boat loans and check reserve.

               Chartered in 1898, Cooperative's headquarters is
               located in Wilmington, North Carolina. 
               Cooperative operates 17 offices throughout the
               coastal and inland communities of eastern North
               Carolina from Corolla located on the Outer Banks
               of North Carolina to Tabor City located on the
               South Carolina border.

               The common stock of Cooperative Bankshares,
               Inc., is traded on the NASDAQ National Market
               under the symbol "COOP".


---------------------------------------------------------------- 
MISSION        It is the mission of Cooperative to provide the
               maximum in safety and security for our
               depositors, an equitable rate of return for our
               stockholders, and excellent service for our
               customers.  We do this while operating in a
               fiscally sound and conservative manner, with
               fair pricing of our products and services, good
               working conditions, outstanding training and
               opportunities for our staff, along with a high
               level of corporate citizenship.

---------------------------------------------------------------- 
      
TABLE OF CONTENTS   Selected Financial and Other Data . . . . .2
                    President's Message . . . . . . . . . .. 3-4
                    Management's Discussion & Analysis. . . 5-14
                    Report of Independent Accountants . . .   15
                    Consolidated Statements of Financial
                       Condition . . . . . . . . . . . . . .  16
                    Consolidated Statements of Operations. .  17
                    Consolidated Statements of Comprehensive
                       Income. . . . . . . . . . . . . . . .  18
                    Consolidated Statements of Stockholders'
                       Equity. . . . . . . . . . . . . . . .  18
                    Consolidated Statements of Cash Flows. .  19
                    Notes to Consolidated Financial 
                       Statements. . . . . . . . . . . . ..20-41
                    Directors, Officers, and Office 
                       Locations . . . . . . . . . . . . . .  42
                    Corporate Information. . . . . . . . . .  43
<PAGE>
<PAGE>

            SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>

                                               DECEMBER 31,  December 31,  December 31,  December 31, December 31,
                                                      1998          1997          1996          1995         1994
                                               ___________________________________________________________________ 
<S>                                            <C>           <C>           <C>           <C>           <C>
                                                                    Dollars in Thousands 
Selected Financial Condition Data:
  Assets. . . . . . . . . . . . . . . . . . . $   389,773      $369,121      $341,300       $311,843     $ 324,252
  Loans receivable, net . . . . . . . . . . .     321,324       286,692       263,313        234,008       240,194
  Mortgage-backed and related securities. . .      10,551        12,856        28,825         30,907        31,658
  Cash, securities and other investments. . .      45,882        61,944        40,942         35,540        40,320
  Goodwill. . . . . . . . . . . . . . . . . .          --            --            --          3,602         3,894
  Deposits. . . . . . . . . . . . . . . . . .     301,656       288,691       278,139        270,071       266,079
  Borrowed funds. . . . . . . . . . . . . . .      55,109        50,226        35,435         10,089        30,000
  Stockholders' equity. . . . . . . . . . . . $    31,613      $ 28,294      $ 25,470       $ 29,083     $  26,923
                                               ____________________________________________________________________
<CAPTION>
                                                YEAR ENDED    Year ended    Year ended    Year ended   9 Mo. ended
                                               DECEMBER 31,  December 31,  December 31,  December 31,  December 31,
                                                      1998          1997          1996          1995          1994
                                               ____________________________________________________________________
<S>                                            <C>           <C>           <C>           <C>           <C>
                                                                    Dollars in Thousands 
Selected Operations Data:
  Interest income. . . . . . . . . . . . . . . $   28,411      $   26,093   $    22,793    $   21,904   $   16,610
  Interest expense . . . . . . . . . . . . . .     17,212          15,732        13,630        13,701        8,302
  Net interest income. . . . . . . . . . . . .     11,199          10,361         9,163         8,203        8,308
  Provision for loan losses. . . . . . . . . .        330             153           156             3           --
  Non-interest income. . . . . . . . . . . . .        878             608           570           620          502
  Non-interest expenses (1). . . . . . . . . .      7,973           7,188        12,251         7,121        4,967
  Income (loss) before income taxes. . . . . .      3,774           3,628        (2,674)        1,699        3,843
  Net income (loss). . . . . . . . . . . . . .      2,385           2,234        (3,250)        1,024        2,487
____________________________________________________________________________________________________________________
Selected Financial Ratios and Other Data:
   Return on average assets (2). . . . . . . .       0.62%           0.63%        (1.01)%        0.32%        1.01%
   Return on average equity (2)  . . . . . . .       7.86%           8.26%       (11.27)%        3.62%       12.28%
   Stockholders' equity to total assets  . . .       8.11%           7.67%         7.46%         9.33%        8.30%
   Non-performing assets to total assets . . .       1.08%           0.08%         0.02%         0.25%        0.15%
   Allowance for loan losses to total loans. .       0.35%           0.28%         0.29%         0.31%        0.31%
   Per Share Data (3)
   Earnings (loss) per:
       Common share  . . . . . . . . . . . . . $     0.79      $     0.75    $    (1.09)   $     0.34   $     0.83
       Common share - assuming dilution. . . . $     0.74      $     0.70    $    (1.09)   $     0.32   $     0.78
   Tangible book value . . . . . . . . . . . . $    10.38      $     9.48    $     8.54    $     8.54   $     7.72
   Number of common shares outstanding . . . .  3,046,284       2,984,396     2,983,396     2,983,396    2,983,396

________________________________________________________________________________________________________________
<FN>
(1)  Includes one time special assessment for deposit insurance of $1.8 million and a charge-off of impaired 
     goodwill of $3.4 million for the year ended December 31, 1996.
(2)  Return on average assets and return on average equity for the nine months ended December 31, 1994 have been
     annualized for comparative purposes.
(3)  All per share amounts are adjusted for all stock dividends and splits.
</FN>
</TABLE>

                                  2<PAGE>
<PAGE>
                     PRESIDENT'S MESSAGE

TO OUR STOCKHOLDERS:

   The year 1998 was one of celebration as we observed our
centennial, having been founded in 1898.  Our official birthday
celebration was held on March 19th at the main office in
Wilmington as the Chamber of Commerce, city and state officials,
friends and family joined together to enjoy an evening of
entertainment, reminiscing and celebration of 100 years.  All
offices held a celebration for customers on March 20th with
refreshments and gifts for customers.  Throughout the year
promotions in our branches continued as we celebrated our
yearlong centennial birthday.  These promotions were
particularly helpful in generating deposit growth. 

   
   On a sad note, Frederick Willetts, Jr., Chairman of the
Board, passed away on May 27th.  Mr. Willetts, Jr. served the
Bank for over 50 years, and is greatly missed.  Frederick
Willetts, III was elected Chairman, succeeding his father.  He
continues to hold the position of President and Chief Executive
Officer of the Holding Company and the Bank.

   Net income for the year ended December 31, 1998, rose 6.78%
over the previous year to $2,385,235 or $.74 per diluted share
as compared to $2,233,738 or $.70 per diluted share for the year
ended December 31, 1997.  Despite record mortgage loan
refinancing at lower rates, the Bank's net interest margin
increased from 3.02% as of December 31, 1997 to 3.04% at
December 31, 1998.  

   During the year, 853 mortgage loans were originated totaling
$93.8 million, a 26.5% increase over the level of originations
in the previous year.  Also during the year the Retail Banking
Division originated 753 commercial and consumer loans in the
amount of $57.5 million.  Total loan originations for 1998
easily surpassed the previous high.  Despite this increase in
the overall level of loan volume, we continue to adhere to
strict underwriting criteria.

  At December 31, 1998, loans made by the Retail Banking
Division comprised 20.8% of our total loans as compared to 12.8%
at December 31, 1997.  Continued growth in our Retail Banking
operation impacts favorably our net interest income, as these
loans generally carry a higher rate of interest than one-to-four
family mortgage loans.

  The quality of our assets remains a top priority for the
Bank.  As of December 31, 1998, nonperforming loans and real
estate owned totaled 1.08% of assets.  While this figure is
higher than the same period in 1997, nonperforming loans and
real estate owned had declined to $1.1 million or .27% of assets
as of January 27, 1999, as the bulk of assets in this category
were sold.  The allowance for loan losses has been increased to
$1.2 million, and while this is considered to be adequate at the
present time to cover any potential loan loss exposure, the Bank
is continuing to add to this allowance to further protect our
investment in loans.

     On September 21, 1998 we held the grand opening of our new
building in Elizabethtown.  This new, modern structure, complete
with ATM and safe deposit boxes, brings state of the art
facilities to this market, and replaces an antiquated building,
which we had operated from since the opening of this office.  In
addition to the ATM in Elizabethtown, an ATM was also installed
at our Hanover Center office in Wilmington.  Additional ATMs are
planned for the year 1999 to provide better service for our many
checking account customers.

                           3<PAGE>
<PAGE>
     During the past year, we have completely upgraded our
computer network with state of the art computer equipment and
communications lines.  This updates old equipment and provides
us with additional opportunities for enhanced customer service. 
It also allowed us to begin preparations for the year 2000. 
After installation of our new system, we began testing for
compliance with year 2000 requirements.  Our people spent many
nights and weekends running sample transactions to help assure
compliance with the year 2000.  Testing of all our mission
critical systems has been completed, and it is our belief that
all of our systems will be compliant with the year 2000, thus
assuring uninterrupted service to our customers.  During this
year we will continue to communicate with our customers through
quarterly messages as well as in our lobbies and in our
statements.  In addition, we have communicated to all our
business customers, suggesting items that they might check as
well as giving them the opportunity to visit
us for a workshop discussing matters which we see as critical to
the operation of their business.  Additionally, our Web Page
will continue to update visitors as to our progress on this
important task.
     
     It has been another busy year at Cooperative as we
celebrated our 100th anniversary, mourned the passing of our
Chairman, installed new computer equipment, witnessed the
continued growth of our Retail Banking Division, and completed
testing for the year 2000.  With the groundwork that has been
laid, I look forward to our second century in operation, and to
the new millennium with a great deal of optimism.  Your
continued confidence and support is appreciated.

Sincerely,

/s/ Frederick Willetts, III

Frederick Willetts, III
President

                          4<PAGE>
<PAGE>
             MANAGEMENT'S DISCUSSION AND ANALYSIS

GENERAL
     Cooperative Bankshares, Inc. (the "Company") is a
registered bank holding company incorporated in North Carolina
in 1994.  The Company was formed for the purpose of serving as
the holding company of Cooperative Bank For Savings, Inc., SSB,
("Cooperative Bank" or the "Bank") a North Carolina chartered
stock savings bank.  The Company's primary activities consist of
holding the stock of Cooperative Bank and operating the business
of the Bank.  Accordingly, the information set forth in this
report, including financial statements and related data, relates
primarily to Cooperative Bank.

     Cooperative Bank is chartered under the laws of the state
of North Carolina to engage in general banking business.  The
Bank offers a wide range of retail banking services including
deposit services, banking cards and alternative investment
products.  These funds are used for the extension of credit
through home loans, commercial loans, consumer loans and other
installment credit such as home equity, auto and boat loans and
check reserve.

     The Company conducts its operations through its main office
in Wilmington, North Carolina and 16 offices throughout eastern
North Carolina.  The Company considers its primary market for
savings and lending activities to be the communities of eastern
North Carolina extending from the Virginia to the South Carolina
borders.

     The following management's discussion and analysis is
presented to assist in understanding the Company's financial
condition and results of operations.  This discussion should be
read in conjunction with the consolidated financial statements 
and accompanying notes presented in this report.

MANAGEMENT STRATEGY
     It is the mission of the Company to provide the maximum in
safety and security for our depositors, an equitable rate of
return for our stockholders, excellent service for our
customers, and to do so while operating in a fiscally sound and
conservative manner, with fair pricing of our products and
services, good working conditions, outstanding training and
opportunities for our staff, along with a high level of
corporate citizenship.

     Cooperative Bank's lending activities are concentrated on
the origination of conventional mortgage loans for the purpose
of constructing, financing or refinancing residential
properties.  As of December 31, 1998, $302.8 million, or 88.7%,
of the Bank's loan portfolio consisted of loans secured by
residential properties.  To a lesser extent, the Bank originates
nonresidential real estate loans, home equity line of credit
loans, secured and unsecured consumer and business loans.  While
continuing to place primary emphasis on residential mortgage
loans, the Bank is taking a more aggressive position in pursuing
business lending, and nonresidential real estate lending
involving loans secured by small commercial properties with
balances generally ranging from $100,000 to $1,000,000.  The
Bank's primary emphasis is to originate adjustable rate loans
with the fixed rate loan as an option.  As of December 31, 1998,
adjustable rate loans totaled 60.6%, and fixed rate loans
totaled 39.4% of the Bank's total loan portfolio.

INTEREST RATE SENSITIVITY ANALYSIS
     Interest rate sensitivity refers to the change in interest
spread resulting from changes in interest rates.  To the extent
that interest income and interest expense do not respond equally
to changes in interest rates, or that all rates do not change
uniformly, earnings will be affected.  Interest rate
sensitivity, at a point in time, can be analyzed using a static
gap analysis that measures the match in balances subject to
repricing between interest-earning assets and interest-bearing
liabilities. Gap is considered positive when the amount of
interest rate sensitive assets exceed the amount of interest
rate sensitive liabilities. 
                          5<PAGE>
<PAGE>
             MANAGEMENT'S DISCUSSION AND ANALYSIS

Gap is considered negative when the amount of interest rate
sensitive liabilities exceed the amount of interest rate
sensitive assets.  At December 31, 1998, Cooperative had a
one-year negative gap position of 11.7%.  During a period of
rising interest rates, a negative gap would tend to adversely
affect net interest income, while a positive gap would tend to
result in an increase in net interest income.  During a period
of falling interest rates, a negative gap would tend to result
in an increase in net interest income while a positive gap would
tend to adversely affect net interest income.  It is important
to note that certain shortcomings are inherent in static gap
analysis.  Although certain assets and liabilities may have
similar maturities or periods of repricing, they may react in
different degrees to changes in market interest rates.  For
example, a large part of the Company's adjustable-rate mortgage
loans are indexed to the National Monthly Median Cost of Funds
to SAIF-insured institutions.  This index is considered a
lagging index that may lag behind changes in market rates. The
one-year or less interest-bearing liabilities also include
checking, savings, and money market deposit accounts. 
Experience has shown that the Company sees relatively modest
repricing of these transaction accounts.  Management takes this
into consideration in determining acceptable levels of interest
rate risk.

The following table indicates the time periods in which
interest-earning assets and interest-bearing liabilities will
mature or reprice in accordance with their contractual terms. 
The table assumes prepayments and scheduled principal
amortization of fixed-rate loans and mortgage-backed securities,
and assumes that adjustable rate loans will reprice at
contractual repricing intervals.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS            Over One   Over Five
                                    One Year   Through   Through   Over Ten
December 31, 1998                   or Less  Five Years  Ten Years   Years    Total
____________________________________________________________________________________
                                                (Dollars in thousands)
<S>                                 <C>       <C>        <C>       <C>      <C>
Interest-earning assets:
  Securities and other 
    interest-earning assets. . . .  $ 17,571  $ 22,035   $  5,000  $   163 $ 44,769
  Mortgage-backed and related  
    securities . . . . . . . . . .     7,704     2,469        268      110   10,551
  Loan portfolio . . . . . . . . .   164,394   116,521     26,852   13,557  321,324 
                                    -----------------------------------------------
        Total. . . . . . . . . . .  $189,669  $141,025   $ 32,120  $13,830 $376,644
                                    ===============================================

Interest-bearing liabilities:
    Deposits (1) . . . . . . . . .  $220,420  $ 71,078   $ 10,158  $     - $301,656
    Borrowed funds . . . . . . . .    15,002    40,012         18       77   55,109 
                                    -----------------------------------------------
        Total. . . . . . . . . . .  $235,422  $111,090   $ 10,176  $    77 $356,765
                                    ===============================================

Interest rate sensitivity gap. . .  $(45,753) $ 29,935   $ 21,944  $13,753 $ 19,879 
                                    ===============================================

Cumulative interest rate 
  sensitivity gap. . . . . . . . .  $(45,753) $(15,818)  $  6,126  $19,879
                                    ======================================
Cumulative ratio of interest-
  earning assets to interest-
  bearing liabilities. . . . . . .      80.6%     95.4%     101.7%   105.6%
                                    ======================================
Ratio of cumulative gap to 
  total assets . . . . . . . . . .     (11.7%)    (4.1%)     1.6%      5.1%
                                    ======================================
<FN>
___________
(1) Includes noninterest bearing checking accounts of $7,878,000
</FN>
</TABLE>                           
                             6<PAGE>
<PAGE>
                  MANAGEMENT'S DISCUSSION AND ANALYSIS
MARKET RISK

     The Company's primary market risk is interest rate risk. 
Interest rate risk is the result of differing maturities or
repricing intervals of interest earning assets and interest
bearing liabilities and the fact that rates on these financial
instruments do not change uniformly.  These conditions may
impact the earnings generated by the Company's interest bearing
assets or the cost of its interest bearing liabilities, thus
directly impacting the Company's overall earnings.  The
Company's management actively monitors and manages interest rate
risk.  One way this is accomplished is through the development
of and adherence to the Company's asset/liability policy.  This
policy sets forth management's strategy for matching the risk
characteristics of the Company's interest bearing assets and
liabilities so as to mitigate the effect of changes in the rate
environment.

     One way to measure the Company's potential exposure to
interest rate risk is to estimate the effect of a change in
rates on the Company's Economic Value of Equity ("EVE").  The
following table sets forth information relating to the Company's
EVE and the estimated changes under various interest rate change
scenarios. 

<TABLE>
<CAPTION>
   Change in                       Economic           Estimated     Estimated
  Interest Rates                Value of Equity       $ Change      % Change 
-----------------------------------------------------------------------------
<S>                               <C>                 <C>            <C>
400 basis point rise              $14,414,000         (17,825,000)   -55%
300 basis point rise               19,233,000         (13,006,000)   -40%
200 basis point rise               24,395,000          (7,844,000)   -24%
100 basis point rise               28,214,000          (4,025,000)   -12%
Base Scenario                      32,239,000                  --
100 basis point decline            34,269,000           2,030,000      6%
200 basis point decline            36,734,000           4,495,000     14%
300 basis point decline            38,315,000           6,076,000     19%
400 basis point decline            41,059,000           8,820,000     27%

</TABLE>
LIQUIDITY
    The Company's goal is to maintain adequate liquidity to meet
potential funding needs of loan and deposit customers, pay
operating expenses, and meet regulatory liquidity requirements. 
Maturing securities, principal repayments of loans and
securities, deposits, income from operations and borrowings are
the main sources of liquidity. Scheduled loan repayments are a
relatively predictable source of funds, unlike deposits and loan
prepayments that are significantly influenced by general
interest rates, economic conditions and competition.

    At December 31, 1998, the estimated market value of liquid
assets (cash, cash equivalents, and marketable securities) was
approximately $56.2 million, which represents 15.7% of deposits
and borrowed funds as compared to $74.1 million or 21.9% of
deposits and borrowed funds at December 31, 1997.  The decrease
in liquid assets was primarily due to the funding of new loans.

    The Company's security portfolio consists of U.S. Government
agency, mortgage-backed and other permissible securities.  The
mortgage-backed securities are guaranteed by the following
agencies: Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association  ("FNMA"), and the
Government National Mortgage Association ("GNMA"). Mortgage-
backed securities entitle the Company to receive a pro rata
portion of the cash flows from an identified pool of mortgages. 
Although mortgage-backed securities generally offer lesser
yields than the loans for which they are exchanged, they present
substantially lower credit risk by virtue of the guarantees that
back them.  Mortgage-backed securities are more liquid than
individual mortgage loans, and may be used to collateralize
borrowings or other obligations of the Company.

                           7<PAGE>
<PAGE>
                  MANAGEMENT'S DISCUSSION AND ANALYSIS

     The Company's investment in U. S. Government agency bonds
includes $5 million in Federal Home Loan Banks' Dual Indexed
Consolidated Bonds maturing August 4, 2003.  These bonds had an
8% interest rate from August 4, 1993, through August 3, 1995, at
which time the rate was adjusted to 3.485% based on an indexing
formula.  Subsequent interest rates will also be based on an
indexing formula and will adjust annually on February 4 and
August 4.  The indexing formula states that the interest rate
per annum will be equal to a rate determined by the 10-Year CMT
less the 6 month LIBOR plus a margin of 2.9% for August 4, 1995,
increasing 30 basis points annually to 5.0% for August 4, 2002.

     The mortgage-backed and related securities owned by the
Company are subject to repayment by the mortgagors of the
underlying collateral at any time.  These repayments may be
affected by a rising or declining interest rate environment. 
During a rising or declining interest rate environment,
repayments and the interest rate caps may subject the Company's
mortgage-backed and related securities to yield and/or price
volatility.  

     The Company's primary uses of liquidity are to fund loans
and to make investments.  At December 31, 1998, outstanding
off-balance sheet commitments to extend credit totaled $19.3
million, and the undisbursed portion of construction loans was
$17.5 million.  Management considers current liquidity levels
adequate to meet the Company's cash flow requirements.

CAPITAL
     Stockholders' equity at December 31, 1998, was $31.6
million, up 11.7% from $28.3 million at December 31, 1997.  The
total at December 31, 1998 and December 31, 1997, includes
unrealized gains of $154 thousand and unrealized losses of $7
thousand, respectively, net of tax, on securities available for
sale marked to estimated fair market value under Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities  ("SFAS 115").

     Under the capital regulations of the FDIC, the Bank must
satisfy minimum leverage ratio requirements and risk-based
capital requirements.  Banks supervised by the FDIC must
maintain a minimum leverage ratio of core (Tier I) capital to
average adjusted assets ranging from 3% to 5%.  At December 31,
1998, the Bank's ratio of Tier I capital was 8.1%.  The FDIC's
risk-based capital rules require banks supervised by the FDIC to
maintain risk-based capital to risk-weighted assets of at least
8.00%.  Risk-based capital for the Bank is defined as Tier I
capital plus the balance of allowance for loan losses.  At
December 31, 1998, the Bank had a ratio of qualifying total
capital to risk-weighted assets of 14.3%.

     The Company, as a bank holding company, is also subject, on
a consolidated basis, to the capital adequacy guidelines of the
Board of Governors of the Federal Reserve (the "Federal Reserve
Board").  The capital requirements of  the Federal Reserve Board
are similar to those of the FDIC governing the Bank.

     The Company currently exceeds all of its capital
requirements.  Management expects the Company to continue to
exceed these capital requirements without altering current
operations or strategies. For further information, see Note 9 of
Notes to Consolidated Financial Statements.

     On September 17, 1998, the Company' Board of Directors
approved a Stock Repurchase Program.  The Stock Repurchase
Program authorized the Company to repurchase up to 150,000
shares, or approximately 5% of the currently outstanding shares
of common stock.  The first purchase was made February 5, 1999,
and was substantially completed by February 26, 1999.

                           8<PAGE>
<PAGE>
               MANAGEMENT'S DISCUSSION AND ANALYSIS

YEAR 2000 READINESS DISCLOSURE 
     The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the
applicable year.  Any of the Company's computer programs that
have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000.  This could result in a
system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar
normal business activities.

     Based on a recent assessment, the Company has developed a
plan to address the year 2000 issue.  With respect to the
Company's teller/platform system, the Company has installed a
new system that is Year 2000 compliant and fully tested. 
Installation has been completed and the new system is currently
in use.  Since the installation of the new system was not a
result of the Year 2000 issue, the costs of such system,
approximately $1.0 million, have been capitalized.  The Company
expects that testing of the remaining hardware and software will
be completed by March 1, 1999. The Company presently believes
that the remaining hardware and software will be made in
compliance at what we believe will be a minimal cost to the
Company.  Although the precise cost to bring the Company's
software in compliance cannot be determined at this time, it is
not expected to be material.  The Company has developed a
contingency plan to deal with any possible risk that such
changes to its hardware and software are not fully successful as
well as the risk to the Company from the failure of third
parties with which the Company does business to make all
necessary corrections.

     Computer problems experienced by its borrowers could have
an adverse effect on its business operations and their ability
to repay their loans when due.  The Company has evaluated its
major borrowers and does not anticipate that any problems will
be material to its operations.

                           9<PAGE>
<PAGE>
               MANAGEMENT'S DISCUSSION AND ANALYSIS
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS 
        AT DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997

FINANCIAL CONDITION
     The Company's total assets increased 5.6% to $389.8 million
at December 31, 1998, as compared to $369.1 million at December
31, 1997.  The major changes in the assets are as follows: a
decrease of $8.4 million (48.5%) in cash, a decrease of $8.0
million (38.1%) in held to maturity securities, an increase of
$34.6 million (12.1%) in loans receivable, an increase in
foreclosed real estate to $2.4 million from $251 thousand at
December 31, 1997, and an increase of $1.5 million (30.8%) in
premises and equipment. Borrowed funds, retail deposits and
available liquid assets funded the increase in assets during the
current period.  Due to a high loan demand, the Bank sold $14
million in fixed rate loans during the year ended December 31,
1998 and used the funds to reinvest in new loans.  Although the
Company concentrates its lending activities on the origination
of conventional mortgage loans for the purpose of the
construction, financing or refinancing of residential
properties, it is becoming more active in the origination of
small loans secured by commercial properties.  At December 31,
1998, approximately 11.3% of the Company's loan portfolio were
loans other than residential properties.  With a $13 million
(4.5%) increase in retail deposits, an additional $5 million
borrowed funds from the Federal Home Loan Bank ("FHLB"), and
the sale of $14 million in loans, the Bank had adequate funds to
meet its loan demand.  Borrowed funds, collateralized through an
agreement with the FHLB for advances, are secured by the Bank's
investment in FHLB stock and qualifying first mortgage loans. 
At December 31, 1998, $15.0 million in borrowed funds mature in
1 year and the remaining amount of funds mature in 2 to 5 years.
For further information, see Note 8 of Notes to Consolidated
Financial Statements.

     The Company's non-performing assets (loans 90 days or more
delinquent and foreclosed real estate) were $4.2 million, or
1.08% of assets, at December 31, 1998, compared to $608
thousand, or 0.16% of assets, at December 31, 1997.  Three
residential lot development loans totaling approximately $3.1
million was the major factor for the increase in non-performing
assets.  Subsequent to the year-end these three properties were
sold and financed by the Bank which reduced non-performing
assets (loans 90 days or more delinquent and foreclosed real
estate) to 0.27% of assets.  The Company assumes an aggressive
position in collecting delinquent loans and disposing of
foreclosed assets to minimize balances of non-performing assets
and continues to evaluate the loan and real estate portfolios to
provide loss reserves as considered necessary.  While there can
be no guarantee, in the opinion of management, the allowance for
loan losses of $1.2 million at December 31, 1998 is adequate to
cover potential losses.  In addition to the above, premises and
equipment increased 30.8%.  The increase is due to two major
projects.  The Bank completed the installation of a new
teller/platform system during the third quarter of 1998.  The
Bank also completed a replacement office in Elizabethtown, North
Carolina, during the third quarter of 1998.  

<PAGE>
RESULTS OF OPERATIONS
     The net income of the Company depends primarily upon net
interest income.  Net interest income is the difference between
the interest earned on loans and securities portfolios and the
cost of funds, consisting principally of the interest paid on
deposits and borrowings.  The Company's operations are
materially affected by general economic conditions, the monetary
and fiscal policies of the Federal government, and the policies
of regulatory authorities.

NET INCOME 
     Net income for the year ended December 31, 1998, increased
6.8% over the previous year to $2.4 million as compared to the
previous year of $2.2 million.  The increase in net income can
be attributed to an 8.1% increase in net interest income and a
44.5% increase in noninterest income, offset in part by 115.7%
increase in provision for loan losses and a 10.9% increase in
other operating expenses.

                           10<PAGE>
<PAGE>
               MANAGEMENT'S DISCUSSION AND ANALYSIS

INTEREST INCOME
     Interest income increased 8.9% for the year ended December
31, 1998, as compared to the same period a year ago.  The
increase in income can be principally attributed to an increase
in yield and the average balance of the loan portfolio as
compared to the same period last year.  This was partially
offset by decreases in the average volume of mortgage-backed and
related securities.  Overall, the yield on average  interest-
earning assets increased to 7.71% as compared to 7.60% for the
same period a year ago, and the average balance of
interest-earning assets increased 7.4%. 

INTEREST EXPENSE
     Interest expense increased 9.4% for the year ended December
31, 1998, as compared to the year ended December 31, 1997.  The
7% increase in the average balance of interest-bearing
liabilities and the related increase in cost of funds
principally contributed to this increase in interest expense. 
The cost of interest-bearing liabilities increased 11 basis
points to 5.03% as compared to 4.92% for the same period last
year.

NET INTEREST INCOME
     Net interest income for the year ended December 31, 1998,
as compared to the same period a year ago, increased 8.1%.
During the year ended December 31, 1998, the yield on average
interest-earning assets increased 11 basis points, while the
cost of average interest-bearing liabilities increased 11 basis
points as compared to the same period a year ago.  The increase
in net interest income is primarily due to the higher volume of
earning assets.  Interest-earning assets increased 7.4% while
interest-bearing liabilities increased 7.0%.  The percentage of
average interest-earning assets to average interest-bearing
liabilities increased to 107.6% for the year ended December 31,
1998, as compared to 107.3% for the same period in 1997.

                           11<PAGE>
<PAGE>
               MANAGEMENT'S DISCUSSION AND ANALYSIS
                   AVERAGE YIELD/COST ANALYSIS

The following table contains information relating to the
Company's average balance sheet and reflects the average yield
on assets and average cost of liabilities for the periods
indicated.  Such annualized yields and costs are derived by
dividing income or expense by the average balances of assets or
liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
                                                For The Year Ended
                             ------------------------------------------------------------
                                  DECEMBER 31, 1998                 December 31, 1997
                             ------------------------------  ----------------------------
(DOLLARS IN THOUSANDS)                             AVERAGE                       Average
                               AVERAGE              YIELD/   Average              Yield/
                               BALANCE   INTEREST    COST    Balance   Interest    Cost
                              ---------  --------  --------  --------  --------  --------
<S>                            <C>       <C>       <C>       <C>       <C>       <C>
Interest-earning assets:
  Securities and other
   interest-earning assets . .$ 55,344   $ 3,107    5.61%   $ 36,586   $ 2,102    5.75%
Mortgage-backed and related 
  securities . . . . . . . . .  11,725       738    6.29%     25,954     1,771    6.82%
Loan portfolio . . . . . . . . 301,412    24,566    8.15%    280,684    22,220    7.92%
                              ------------------            ------------------
  Total interest-earning 
    assets . . . . . . . . . . 368,481    28,411    7.71%    343,224    26,093    7.60%
                                         -------                       -------
Non-interest earning assets. .  13,370                        10,599
                              --------                      --------
Total assets . . . . . . . . .$381,851                      $353,823
                              ========                      ========
Interest-bearing liabilities:
   Deposits. . . . . . . . . .$290,851    13,891    4.78%   $280,152    13,148   4.69%
   Borrowed funds. . . . . . .  51,506     3,321    6.45%     39,797     2,584   6.49%
                              ------------------            ------------------
    Total interest-bearing 
      liabilities. . . . . . . 342,357    17,212    5.03%    319,949    15,732   4.92%
                                         -------                       -------
Non-interest bearing 
  liabilities. . . . . . . . .   9,149                         6,882
                              --------                      --------
    Total liabilities. . . . . 351,506                       326,831
    Stockholders' equity . . .  30,345                        26,992
                              --------                      --------
Total liabilities and 
  stockholders' equity . . . .$381,851                      $353,823
                              ========                      ========
Net interest income. . . . . .           $11,199                       $10,361
                                         =======                       =======
Interest rate spread . . . . .                      2.68%                        2.68%
                                                    ====                         ====
Net yield on interest-earning 
  assets . . . . . . . . . . .                      3.04%                        3.02%

Percentage of average 
  interest-earning assets 
  to average interest-
  bearing liabilities. . . . .                     107.6%                       107.3%
                                                   =====                        =====
/TABLE
<PAGE>
<TABLE>
<CAPTION>
                                 For The Year Ended
                             ------------------------------
                                  December 31, 1996         
                             ------------------------------
(DOLLARS IN THOUSDANDS)                            Average
                               Average              Yield/ 
                               Balance   Interest    Cost  
                              ---------  --------  --------
<S>                            <C>       <C>       <C>     
Interest-earning assets:
  Securities and other
    interest-earning assets. .$ 32,511   $ 1,819    5.60%
Mortgage-backed and related 
  securities . . . . . . . . .  30,397     2,048    6.74%  
Loan portfolio . . . . . . . . 246,038    18,927    7.69%  
                              ------------------           
  Total interest-earning 
    assets . . . . . . . . . . 308,946    22,794    7.38%  
                                         -------           
Non-interest earning assets. .  11,956                     
                              --------                     
Total assets . . . . . . . . .$320,902                     
                              ========                     

Interest-bearing liabilities:
   Deposits. . . . . . . . . .$271,156    12,670    4.67%  
   Borrowed funds. . . . . . .  14,839       960    6.47%  
                              ------------------           
    Total interest-bearing 
      liabilities. . . . . . . 285,995    13,630    4.77%  
                                         -------           
Non-interest bearing 
  liabilities. . . . . . . . .   6,389                     
                              --------                     
    Total liabilities. . . . . 292,384
    Stockholders' equity . . .  28,518
                              --------                     
Total liabilities and 
  stockholders' equity . . . .$320,902                     
                              ========                     
Net interest income. . . . . .           $ 9,164           
                                         =======           
Interest rate spread . . . . .                      2.61%  
                                                    ====   
Net yield on interest-earning 
  assets . . . . . . . . . . .                      2.97%  

Percentage of average 
  interest-earning assets 
  to average interest-
  bearing liabilities. . . . .                     108.0%  
                                                   =====   
</TABLE>
                                12<PAGE>
<PAGE>
              MANAGEMENT'S DISCUSSION & ANALYSIS
                    RATE/VOLUME ANALYSIS

The table below provides information regarding changes in
interest income and interest expense for the period indicated. 
For each category of interest-earning assets and interest-
bearing liabilities, information is provided on changes
attributable to (i) changes in volume (changes in volume
multiplied by old rate) and (ii) changes in rates (change in
rate multiplied by old volume).  The change attributable to
changes in rate-volume have been allocated to the other
categories based on absolute values.


<TABLE>
<CAPTION>
                        DECEMBER 31, 1997 VS. DECEMBER 31, 1998  December 31, 1996 vs. December 31, 1997
                                      INCREASE (DECREASE)              Increase (Decrease)
                                             DUE TO                           Due to
                        ______________________________________   _______________________________________
(DOLLARS IN THOUSANDS)  
                         VOLUME         RATE          TOTAL       Volume          Rate         Total
                        ______________________________________   _______________________________________
<S>                      <C>            <C>           <C>         <C>             <C>          <C>  
Interest income:
  Securities and other
   interest-earning 
   assets . . . . . . . .$1,054         $ (49)        $ 1,005     $  233          $ 50         $  283
Mortgage-backed and 
 related securities . . .  (905)         (128)         (1,033)      (303)           26           (277)
Loan portfolio. . . . . . 1,675           671           2,346      2,730           563          3,293
                         -------------------------------------    ------------------------------------
    Total interest-
      earning assets. . . 1,824           494           2,318      2,660           639          3,299
                         -------------------------------------    ------------------------------------

Interest expense:
  Deposits. . . . . . . .   508           235             743        422            56            478
  Borrowed funds. . . . .   755           (18)            737      1,621             3          1,624
                         -------------------------------------    ------------------------------------
    Total interest-bearing
     liabilities . . . .  1,263           217           1,480      2,043            59          2,102
                         -------------------------------------    ------------------------------------
Net interest income. . . $  561         $ 277          $  838     $  617          $580         $1,197
                         =====================================    ====================================
</TABLE>

RESERVE FOR LOAN LOSSES
     The reserve for loan losses increased to $1.2 million as
of December 31, 1998, as compared to $874 thousand for the same
period a year ago.  The Company added $330 thousand to the
reserve and had net charge-offs of $26 thousand for the year
ended December 31, 1998.  The increase in the reserve was
necessary due to the 12.1% increase in net loans receivable.  At
December 31, 1998, the loan loss reserve was 0.37% of net loans
as compared to 0.30% for the same period a year ago.  Management
considers this level to be appropriate based on lending volume,
the current level of delinquencies and other non-performing
assets, overall economic conditions and other factors.  Future
increases to the allowance may be necessary, however, due to
changes in loan composition or loan volume, changes in economic
or market area conditions and other factors.

NONINTEREST INCOME
     During the year ended December 31, 1998, the Bank sold $14
million in fixed rate mortgage loans at a gain of $270,000 as
compared to the sale of $14 million at a gain of $51,000 for the
same period a year ago.  The funds from the loan sales were used
in the operation of the Bank to extend credit to home and
commercial loan customers.  The balance in real estate owned
expense represents operating expense and further reduction of
the carrying amount of foreclosed real estate owned.  For the
years 1998 and 1997 the Bank aggressively pursued disposal of
the foreclosed real estate owned, thereby incurring various
charges in the sales of these properties.  Loan fees for the
year ended December 31, 1998 as compared to last year increased
18.2% due to an increase in the volume of loans serviced.  For
the same period, fee income from deposit operations increased
25.0% due to an increase in the volume of checking accounts.

                                13<PAGE>
<PAGE>
              MANAGEMENT'S DISCUSSION & ANALYSIS

NONINTEREST EXPENSE
     For the year ended December 31, 1998, noninterest expense
increased 10.9% as compared to the same period last year. 
Compensation and related costs increased 9.4% due to normal
increases in salaries and benefits, and additional employees
needed to handle the 5.6% growth in assets.  Occupancy and
equipment expense increased 13.8%.  This increase can be
attributed to additional maintenance necessary to keep the
buildings in good repair, depreciation on the new
teller/platform system, and depreciation on the new
Elizabethtown office.  The decrease of 18.8% in Federal
insurance premium can be attributed to a reduction
in the premium.  Other operating expense increased 25.2% as
compared to the same period a year ago.  This increase can be
accounted for as follows: paper and printing 11.5%, postage and
freight 103.4%, professional services 9.4%, and telephone and
data communications 38.7%.  The remaining increase was due to
normal increases in other expense items. 

INCOME TAXES
     The effective tax rates for the years ended December 31,
1998 and 1997 approximate the statutory rate after giving effect
to nontaxable interest, other permanent tax differences, and
adjustments to certain deferred tax liabilities.


                              14<PAGE>
<PAGE>

January 22, 1999
            
The Board of Directors and Stockholders
Cooperative Bankshares, Inc.
Wilmington, North Carolina
            
     In our opinion, the accompanying consolidated statements of
financial condition and the related consolidated statements of
operations, comprehensive income, stockholders' equity and cash
flows present fairly, in all material respects, the financial
position of Cooperative Bankshares, Inc. and its subsidiary at
December 31, 1998 and 1997 and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted
accounting principles.  These financial statements are the
responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements based on
our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatements.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed
above.

                              15<PAGE>
<PAGE>
          CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
               December 31, 1998 and 1997

<TABLE>
<CAPTION>
                                                           1998            1997
                                                        ------------   ------------
<S>                                                     <C>            <C>
                               ASSETS
Cash and cash equivalents                               $  8,856,389  $ 17,207,777 
Securities:
  Available for sale                                      21,163,133    21,004,067
  Held to maturity (estimated market value, 
    1998 - $12,779,690; 1997 - $20,348,130)               13,034,264    21,043,946
Mortgage-backed and related securities available 
  for sale                                                10,550,692    12,856,337
Other investments                                          2,828,000     2,688,200
Loans receivable, net                                    321,324,146   286,691,769
Other real estate owned                                    2,439,158       251,141
Accrued interest receivable                                2,286,657     2,172,335
Premises and equipment, net                                6,372,456     4,872,202
Prepaid expenses and other assets                            918,311       333,316
                                                        ------------  ------------ 
                                                        $389,773,206  $369,121,090
                                                        ============  ============

           LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                $301,656,204  $288,690,634
Borrowed funds                                            55,109,439    50,141,002
ESOP note payable                                                 --        84,824
Escrow deposits                                              337,474       427,983
Accrued interest payable on deposits                          79,263       126,155
Deferred income taxes, net                                   738,623     1,051,800
Accrued expenses and other liabilities                       239,053       305,123 
                                                        ------------  ------------ 
       Total liabilities                                 358,160,056   340,827,521 
                                                        ------------  ------------ 

Commitments and contingencies (Notes 5, 9 and 17)

Stockholders' equity:
  Preferred stock, $1 par value, 3,000,000 shares 
    authorized, none issued and outstanding                       --            --
  Common stock, $1 par value, 7,000,000 shares 
    authorized, 3,046,284 and 2,984,396  
    issued and outstanding                                 3,046,284     2,984,396
  Additional paid-in capital                               6,649,374     6,022,454
  Unearned ESOP shares                                            --       (84,824)
  Accumulated other comprehensive income                     154,051        (6,663)
  Retained earnings                                       21,763,441    19,378,206 
                                                        ------------  ------------ 
       Total stockholders' equity                         31,613,150    28,293,569
                                                        ------------  ------------ 
                                                        $389,773,206  $369,121,090
                                                        ============  ============ 
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.

                              16<PAGE>
<PAGE>
                CONSOLIDATED STATEMENTS OF OPERATIONS
        for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                  1998         1997        1996
                                             ------------  -----------  -----------
<S>                                            <C>           <C>        <C>
Interest income:
  Loans receivable                           $24,566,039   $22,220,197  $18,926,560 
  Mortgage-backed and related securities         737,697     1,771,023    2,048,268
  Securities                                   3,106,807     2,102,462    1,818,629
                                             -----------   -----------  -----------
       Total interest income                  28,410,543    26,093,682   22,793,457 
                                             -----------   -----------  -----------
Interest expense:
  Deposits                                    13,891,244    13,148,297   12,669,984
  Borrowed funds                               3,320,583     2,584,143      960,408
                                             -----------   -----------  -----------
       Total interest expense                 17,211,827    15,732,440   13,630,392 
                                             -----------   -----------  -----------
Net interest income                           11,198,716    10,361,242    9,163,065
Provision for loan losses                        330,000       153,000      155,809
                                             -----------   -----------  -----------
       Net interest income after provision 
         for loan losses                      10,868,716    10,208,242    9,007,256
                                             -----------   -----------  -----------
Noninterest income:
  Net gains on sale of loans and mortgage-
    backed and related securities                269,666        51,026           --
  Real estate owned expenses and losses          (79,729)      (18,154)     (39,833)
  Loan fees                                      312,582       264,404      295,625
  Deposit and related fees                       388,851       311,047      257,011
  Net gains on sale of securities                     --            --       52,496
  Other income, net                              (12,883)         (256)       4,217
                                             -----------   -----------  -----------
       Total noninterest income                  878,487       608,067      569,516
                                             -----------   -----------  -----------
Other operating expenses:
  Compensation and fringe benefits             4,327,317     3,957,154    3,638,832
  Occupancy and equipment                      1,626,064     1,428,944    1,257,639
  Federal insurance premiums                     177,588       218,811      543,526
  Advertising                                    403,582       434,454      348,356
  Amortization of goodwill                            --            --      242,398
  Other                                        1,438,712     1,149,278    1,077,727
  SAIF assessment                                     --            --    1,782,810
  Goodwill impairment                                 --            --    3,359,791
                                             -----------   -----------  -----------
       Total other operating expenses          7,973,263     7,188,641   12,251,079 
                                             -----------   -----------  -----------
Income (loss) before income taxes              3,773,940     3,627,668   (2,674,307)
Income tax expense                             1,388,705     1,393,930      575,546
                                             -----------   -----------  -----------
Net income (loss)                            $ 2,385,235   $ 2,233,738  $(3,249,853)
                                             ===========   ===========  ===========
Net income (loss) per share:
  Basic                                      $       .79   $       .75  $     (1.09)
                                             ===========   ===========  ===========
  Diluted                                    $       .74   $       .70  $     (1.09)
                                             ===========   ===========  ===========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
                           17<PAGE>
<PAGE>
          CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
        for the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                  1998       1997        1996
                                               ------------------------------------
<S>                                            <C>          <C>         <C>
Net income                                     $2,385,235   $2,233,738  $(3,249,853)

Unrealized gain (loss) on available for
  sale securities                                 264,006      627,620     (146,645)
Income tax (expense) benefit relating to
  unrealized gain (loss) on available for
  sale securities                                (103,292)    (262,018)      72,318
                                               ----------   ----------  -----------
Other comprehensive income                        160,714      365,602      (74,327)
                                               ----------   ----------  -----------
Comprehensive income                           $2,545,949   $2,599,340  $(3,324,180)
                                               ==========   ==========  ===========
</TABLE>


          CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
        for the years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                      ACCUMULATED
                                           ADDITIONAL   UNEARNED         OTHER                       TOTAL
                                 COMMON     PAID-IN       ESOP       COMPREHENSIVE     RETAINED   STOCKHOLDERS'
                                  STOCK     CAPITAL      SHARES          INCOME        EARNINGS      EQUITY
                                --------  -----------   --------      ------------     --------   -----------
<S>                             <C>         <C>         <C>           <C>            <C>           <C>
Balance, December 31, 1995      $1,491,698  $6,003,111    $      -      $(297,938)   $21,886,019   $29,082,890

  Change in unrealized loss 
    on securities available
    for sale, net of taxes               -           -           -        (74,327)             -       (74,327)

  Guaranty of ESOP borrowing             -           -    (800,000)             -              -      (800,000)

  Release of ESOP shares                 -           -     510,840              -              -       510,840

  Net loss for year                      -           -           -              -     (3,249,853)   (3,249,853)
                                ----------  ----------   ---------      ---------    -----------   -----------
Balance, December 31,1996        1,491,698   6,003,111    (289,160)      (372,265)    18,636,166    25,469,550 

  Two for one stock split, 
    effected in the form of a 
    stock dividend               1,491,698           -           -              -     (1,491,698)            -

  Exercise of stock options          1,000       7,679           -              -              -         8,679 

  Change in unrealized loss 
    on securities available
    for sale, net of taxes               -           -           -        365,602              -       365,602 

  Release of ESOP shares                 -      11,664     204,336              -              -       216,000 

  Net income for year                    -           -           -              -      2,233,738     2,233,738 
                                ----------  ----------   ---------      ---------    -----------   -----------
Balance, December 31, 1997       2,984,396   6,022,454     (84,824)        (6,663)    19,378,206    28,293,569
  Exercise of stock options         61,888     501,540           -              -              -       563,428
  Change in unrealized loss
    on securities available
    for sale, net of taxes               -           -           -        160,714              -       160,714
  Release of ESOP shares                 -     125,380      84,824              -              -       210,204
  Net income for year                    -           -           -              -      2,385,235     2,385,235
                                ----------  ----------   ---------      ---------    -----------   -----------
Balance, December 31, 1998      $3,046,284  $6,649,374   $       -      $ 154,051    $21,763,441   $31,613,150
                                ==========  ==========   =========      =========    ===========   ===========


</TABLE>

The accompanying notes are an integral part of the consolidated
financial statements.

                            18<PAGE>
<PAGE>
              CONSOLIDATED STATEMENTS OF CASH FLOWS

      For the years ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
                                                     1998       1997          1996
                                                 ---------- ------------   ----------
<S>                                              <C>         <C>           <C>
Operating activities:
  Net income (loss)                              $2,385,235 $  2,233,738   $ (3,249,853)
  Adjustments to reconcile net income 
   (loss) to net cash provided by 
   (used in) operating activities:
    Net accretion, amortization, and 
      depreciation                                  705,478      591,844        801,129
    Net gain on sale of loans and securities       (269,666)     (51,026)       (52,496)
    Provision (benefit) for deferred income 
      taxes                                        (416,469)    (286,101)       290,700 
    Goodwill impairment                                  --           --      3,359,791
    Release of ESOP shares                          125,380       11,664             --
    Loss (gain) on sales of premises and 
      equipment                                       7,483       (3,345)         1,000
    Loss on sales of foreclosed real estate           2,498          725         13,266
    Valuation losses on foreclosed real 
     estate                                          62,300       10,653         76,566
    Provision for loan losses                       330,000      153,000        155,809
    Changes in assets and liabilities:
        Accrued interest receivable                (114,322)    (254,888)      (174,858)
        Prepaid expenses and other assets          (584,995)   1,109,408       (992,802)
        Accrued interest payable on deposits        (46,892)    (225,140)      (511,082)
        Accrued expenses and other liabilities      223,135       96,233       (319,256)
                                                -----------  -----------    ----------- 
          Net cash provided by (used in) 
           operating activities                   2,409,165    3,386,765       (602,086)
                                                -----------  -----------    ----------- 
Investing activities:
  Purchase of securities available for sale     (15,000,000) (17,000,000)    (9,997,883)
  Proceeds from maturity of securities available 
    for sale                                     15,000,000    2,000,000      4,000,000
  Proceeds from sale of mortgage-backed and 
    related securities available for sale                --   15,038,128             --
  Proceeds from maturities of securities
    held to maturity                              8,000,000           --             --
  Proceeds from principal repayments of 
    mortgage-backed and related securities 
    available for sale                            2,327,315    1,429,317      1,906,819 
  Proceeds from sales of loans                   13,998,895   14,028,855             --
  Loan originations, net of principal 
    repayments                                  (51,092,429) (38,117,697)   (29,661,834)
  Proceeds from disposals of foreclosed real 
    estate                                          258,147      387,456        605,626
  Purchases of premises and equipment            (2,120,263)    (562,349)      (225,036)
  Net expenditures on foreclosed real estate       (110,139)          --             --
  Sales (purchases) of other investments           (139,800)    (253,200)       199,471
                                                -----------  -----------    ----------- 
          Net cash(used in)investing
            activities                          (28,878,274) (23,049,490)   (33,172,837)
                                                -----------  -----------    ----------- 
Financing activities:
  Net increase in deposits                       12,965,570   10,551,725      8,068,248
  Proceeds from borrowed funds                   15,000,000   25,000,000     25,056,345
  Principal payments on borrowed funds          (10,031,563) (10,004,360)            --
  Proceeds from issuance of common stock            274,223        8,679             --
  Net change in escrow deposits                     (90,509)    (192,825)       268,140
                                                -----------  -----------    ----------- 
          Net cash provided by 
            financing activities                 18,117,721   25,363,219     33,392,733
                                                -----------  -----------    ----------- 

Increase (decrease) in cash and cash 
  equivalents                                    (8,351,388)   5,700,494       (382,190)
Cash and cash equivalents:
  Beginning of year                              17,207,777   11,507,283     11,889,473
                                                -----------  -----------    ----------- 
  End of year                                   $ 8,856,389  $17,207,777    $11,507,283
                                                ===========  ===========    =========== 
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
                             19<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

     Basis of Presentation - The consolidated financial
     statements include the accounts and transactions of
     Cooperative Bankshares, Inc. (the "Company"), a bank
     holding company incorporated under the laws of the State
     of North Carolina, and its wholly-owned subsidiary
     Cooperative Bank for Savings, Inc., SSB, (the "Bank) and
     its wholly-owned subsidiary CS&L Services, Inc.  All
     significant intercompany transactions have been
     eliminated.

     Nature of Operations - The Company operates 17 offices
     (including 16 full service branches) in Eastern North
     Carolina and offers a wide range of banking services
     including deposits, bank cards, and alternative investment
     products.  The funds are used for the extension of credit
     through home loans, commercial loans, consumer loans, and
     other installment credit such as home equity loans, auto
     and boat loans, and check reserves.  The Company's primary
     sources of revenue are its loan and securities portfolios.

     Use of Estimates in the Preparation of Financial
     Statements - 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 in the
     financial statements and accompanying notes.    Actual
     results could differ from those estimates.

     Significant Accounting Policies - The significant
     accounting policies of the Company are summarized below:

a.   Cash and Cash Equivalents - Cash and cash equivalents
     include demand and time deposits (with original maturities
     of ninety days or less) at other institutions.  Interest-
     bearing deposits aggregated $7,904,166 and $12,311,582 at
     December  31, 1998 and 1997, respectively.

     Federal regulations require institutions to set aside
     specified amounts of cash as reserves against transaction
     and time deposits.  As of December 31, 1998, the daily
     average gross reserve requirement was $391,000.

b.   Securities and Mortgage-Backed and Related Securities -
     Investments in certain securities are classified into
     three categories and accounted for as follows: (1) debt
     securities that the entity has the positive intent and the
     ability to hold to maturity are classified as held to
     maturity and reported at amortized cost; (2) debt and
     equity securities that are bought and held principally for
     the purpose of selling them in the near term are
     classified as trading securities and reported at fair
     value, with unrealized gains and losses included in
     earnings; (3) debt and equity securities not classified as
     either held to maturity securities or trading securities
     are classified as available for sale securities and
     reported at fair value, with unrealized gains and losses
     excluded from net income and reported as other
     comprehensive income and included in a separate component
     of stockholders' equity.

     Other investments are carried at cost, which approximates
     market value. Premiums are amortized and discounts are
     accreted using the effective interest method over the
     remaining terms of the related securities.  Gains and
     losses on the sales of securities are determined using the
     specific-identification method and are included in
     noninterest income at the time of sale. 

                          20<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

c.   Loans Receivable and Allowance for Loan Losses - Loans
     receivable are stated at the amount of unpaid principal,
     reduced by an allowance for  loan losses, unearned
     discounts and net deferred loan origination fees and
     costs.  Interest income on loans is recorded on the
     accrual basis based upon the principal amount outstanding. 
     Deferred loan fees and costs and unearned discounts are
     amortized to interest income over the contractual life of
     the loan using the interest method.

     The Company evaluates its loan portfolio in accordance
     with 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 Disclosure".  Under these standards, a loan is
     considered impaired, based on current information and
     events, if it is probable that the Company will be unable
     to collect the scheduled payments of principal and
     interest when due according to the contractual terms of
     the loan agreement.  Uncollateralized loans are measured
     for impairment based on the present value of expected
     future cash flows discounted at the original contractual
     interest rate, while all collateral-dependent loans are
     measured for impairment based on the fair value of the
     collateral.  As permitted by the statement, smaller-
     balance homogeneous loans which consist primarily of
     residential mortgages and consumer loans are evaluated
     collectively and reserves are established based on
     historical loss experience.

     The Company uses several factors in determining if a loan
     is impaired.  The internal asset classification procedures
     include a thorough review of significant loans and lending
     relationships and the accumulation of related data.  This
     data includes loan payment status, borrowers' financial
     data and borrowers' operating factors such as cash flows
     and operating income or loss.

     The allowance for loan losses is established through a
     provision charged to income. The allowance is an amount
     that management believes will be adequate to absorb
     possible losses on existing loans that may become
     uncollectible, based on the evaluations of the
     collectibility of loans and prior loan loss experience. 
     The evaluations take into consideration such factors as
     changes in the nature and volume of the loan portfolio
     quality, review of specific problem loans, and current
     economic conditions and trends that may affect the
     borrowers' ability to pay.  It is possible that such
     factors in management's evaluations of the adequacy of the
     allowance for loan losses will change.

d.   Income Recognition on Impaired and Nonaccrual Loans -
     Loans, including impaired loans, are generally classified
     as nonaccrual if they are past due for a payment of
     principal or interest for a period of more than 90 days,
     unless such loans are well-secured and in the process of
     collection.  If a loan or a portion of a loan is
     classified as doubtful or is partially charged off, the
     loan is generally classified as nonaccrual.  Loans that
     are on a current payment status or past due less than 90
     days may also be classified as nonaccrual if repayment in
     full of principal and/or interest is in doubt.

     Loans may be returned to accrual status when all principal
     and interest amounts contractually due (including
     arrearages) are reasonably assured of repayment within an
     acceptable period of time, and there is a sustained period
     of repayment performance (generally a minimum of six
     months) by the borrower, in accordance with the
     contractual terms of interest and principal.
     
                          21<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     While a loan is classified as nonaccrual and the future
     collectibility of the recorded loan balance is doubtful,
     collections of interest and principal are generally
     applied as a reduction to the principal outstanding,
     except in the case of loans with scheduled amortization
     where the payment is generally applied to the oldest
     payment due.  When the future collectibility of the
     recorded loan balance is expected, interest income may be
     recognized on a cash basis.  In the case where a
     nonaccrual loan had been partially charged-off,
     recognition of interest on a cash basis is limited to that
     which would have been recognized on the recorded loan
     balance at the contractual interest rate.  Receipts in
     excess of that amount are recorded as recoveries to the
     allowance for loan losses until prior charge-offs have
     been fully recovered.

e.   Transfers and Servicing of Financial Assets -  On
     January  1, 1997 the Company adopted SFAS No. 125,
     "Accounting for Transfers and Servicing of Financial
     Assets and Extinguishments of Liabilities".  This
     statement requires that enterprises recognize as separate
     assets rights to service mortgage loans for others,
     however those rights are acquired.  There were no
     purchases of servicing rights during 1998 or 1997, nor
     were there any loan sales in 1996.  Fees on loans sold in
     1998 and 1997 are considered to adequately compensate the
     Company, therefore no servicing assets were recorded on
     those sales.

f.   Other Real Estate Owned - Other real estate owned is
     recorded initially at the lower of the loan balance or
     estimated fair value of the property less estimated costs
     to sell at the date of foreclosure and subsequently
     reduced by additional allowances which are charged to
     earnings if the estimated fair value declines below its
     initial value plus any capitalized costs.  Costs related
     to the improvement of the property are capitalized,
     whereas those related to holding the property are
     expensed.

g.   Premises and Equipment - Premises and equipment are
     carried at cost less accumulated depreciation and
     amortization.  The provision for depreciation is computed
     using the straight-line method over the estimated useful
     lives of the various classes of assets.  Useful lives
     range from 15 to 40 years for buildings and 5 to 10 years
     for furniture and equipment.  The cost of leasehold
     improvements is amortized on the straight-line method over
     the lesser of the lives of the improvements or the terms
     of the leases.  Repairs and maintenance are charged to
     expense as incurred.

h.   Income Taxes - Deferred tax asset and liability balances
     are determined by application to temporary differences of
     the tax rate expected to be in effect when taxes become
     payable or receivable.  Temporary differences are
     differences between the tax basis of assets and
     liabilities and their reported amounts in the consolidated
     financial statements that will result in taxable or
     deductible amounts in future years. 

i.   Goodwill - Goodwill is amortized using the straight-line
     method over 25 years.  The Company evaluates intangible
     assets for potential impairment by analyzing the operating
     results, trends and prospects for the Company, as well as
     by comparing them to their competitors.  The Company also
     takes into consideration recent acquisition patterns
     within the banking industry and any other events or
     circumstances which might indicate potential impairment. 
     During fiscal year 1996, it was determined that the
     recorded investment in goodwill was impaired. 
     Accordingly, the carrying value was written down to net
     realizable value through a charge to earnings of
     $3,359,791.
                          22<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

j.   Comprehensive Income - The Company adopted SFAS No. 130,
     "Reporting Comprehensive Income" on January  1, 1998. 
     SFAS No. 130 establishes standards for reporting and
     displaying comprehensive income and its components
     (revenues, expenses, gains, and losses) in general-purpose
     financial statements.

k.   Segment Information - During the year ended December 31,
     1998, the Company adopted the provisions of Statement of
     Financial Standards (SFAS) No. 131 "Disclosures about
     Segments of and Enterprise and Related Information."  The
     Statement requires that public business enterprises report
     certain information about operating segments in their
     annual financial statements and in condensed financial
     statements of interim periods issued to shareholders.  It
     also requires that the public business enterprises report
     related disclosures and descriptive information about
     products and services provided by significant segments,
     geographic areas, and major customers, differences between
     the measurements used in reporting segment information and
     those used in the enterprise's general-purpose financial
     statements, and changes in the measurement of segment
     amounts from period to period.

     Operating segments are components of an enterprise about
     which separate financial information is available that is
     evaluated regularly by the chief operating decision maker
     in deciding how to allocate resources and in assessing
     performance.  The Company has determined that is has one
     significant operating segment, the providing of general
     commercial financial services to customers located in the
     single geographic area of Eastern North Carolina.  The
     various products are those generally offered by community
     banks, and the allocation of resources is based on the
     overall performance of the institution, versus the
     individual branches or products.

     There are no differences between the measurements used in
     reporting segment information and those used in the
     enterprise's general-purpose financial statements, and the
     measurement of segment amounts has not changed for 1998
     from prior years.

l.   Employers Disclosures about Pensions and Other
     Postretirement Benefits - The Company has adopted the
     provisions of SFAS No. 132, "Employers Disclosures about
     Pensions and Other Postretirement benefits", effective for
     fiscal years beginning after December 15, 1997.  This
     Statement revises employers' disclosures about pension and
     other postretirement benefit plans.  It does not change
     the measurement or recognition of those plans.  The
     adoption of SFAS No. 132 did not have a material effect on
     the Company's consolidated financial statements.

m.   New Accounting Pronouncements - The Company will adopt the
     provisions of SFAS No. 133 "Accounting for Derivative
     Instruments and Hedging Activities" effective with the
     fiscal quarter beginning January 1, 2000.  This statement
     establishes accounting and reporting standards for
     derivative instruments and for hedging activities.  It
     requires that derivatives be recognized as either assets
     or liabilities in the statement of financial position and
     be measured at fair value.  The accounting for changes in
     the fair value of a derivative depends on the intended use
     of the derivative and whether or not the derivative is
     designated as a hedging instrument.  SFAS No. 133 is not
     expected to have a material effect on the Company's
     consolidated financial statements.

     SFAS No. 134, "Accounting for Mortgage-Backed Securities
     Retained after the Securitization of Mortgage Loans Held
     for Sale by a Mortgage Banking Enterprise", was issued in
     October 1998.  This Statement amends existing
     classification and accounting treatment of mortgage-backed
     securities, retained after mortgage loans held for sale
     are securitized, for entities engaged in mortgage banking
     activities.  These securities previously were classified
     and accounted for as trading and now may be classified as
     held-to-maturity or available-for-sale, also.  This
     Statement 
                          23<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     is effective for the first fiscal quarter beginning after
     December 15, 1998.  SFAS No.134 is not expected to have
     material effect on the Company's consolidated financial
     statements.

2.   SECURITIES
     
     Securities at December 31, 1998 and 1997 are summarized as
     follows:

<TABLE>
<CAPTION>
                                                      GROSS      GROSS    ESTIMATED
                                        AMORTIZED   UNREALIZED  UNREALIZED  MARKET
                                          COST        GAINS       LOSSES     VALUE
                                        ---------   ----------  ---------- ---------
<S>                                    <C>          <C>         <C>        <C>
1998:
U.S. Government and agency securities:
     Held to maturity                  $13,034,264  $     --    $254,574 $12,779,690
     Available for sale                 21,002,205   174,988      14,060  21,163,133
                                       -----------  --------    --------------------
                                       $34,036,469  $174,988    $268,634 $33,942,823
                                       ===========  ========    ====================
1997
U.S. Government and agency securities:
     Held to maturity                  $21,043,946  $     -     $695,816 $20,348,130
     Available for sale                 21,002,969   18,283       17,185  21,004,067
                                       -----------  --------    --------------------
                                       $42,046,915  $18,283     $713,001 $41,352,197
                                       ===========  ========    ====================
</TABLE>
     
     The maturities of securities at December 31, 1998 are
summarized as follows:
<TABLE>
<CAPTION>
                                                      ESTIMATED
                                        AMORTIZED       MARKET 
                                          COST          VALUE
                                        ------------------------
<S>                                     <C>          <C>
Held to maturity:
     After 3 years through 5 years      $ 8,034,264  $ 7,824,375
     After 5 years through 10 years       5,000,000    4,955,315
                                        -----------  -----------
                     Total              $13,034,264  $12,779,690
                                        ===========  ===========
Available for sale:
     Within 1 year                      $ 2,000,000  $ 2,010,626
     After 1 year through 5 years        19,002,205   19,152,507
                                        -----------  -----------
                                        $21,002,205  $21,163,133
                                        ===========  ===========
</TABLE>
     For the years ended December  31, 1998, 1997 and 1996, the
     Company had gross realized gains on sale of securities of
     $52,496 in 1996, and no losses in any period.
                           24<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.   MORTGAGE-BACKED AND RELATED SECURITIES

     
     Mortgage-backed and related securities available for sale
     at December 31, 1998 and 1997 are summarized as follows:
<TABLE>
<CAPTION>
                                                   GROSS      GROSS    ESTIMATED
                                    AMORTIZED   UNREALIZED  UNREALIZED  MARKET
                                       COST       GAINS       LOSSES     VALUE
                                    ---------   ----------  ---------- ---------
<S>                                 <C>          <C>        <C>        <C>
1998:
   GNMA certificates                $ 4,936,517  $134,587  $     --    $ 5,071,104
   FNMA certificates                  4,224,080     5,572    57,204      4,172,448
   FHLMC certificates                 1,298,481     8,659        --      1,307,140
                                    -----------  --------  --------    -----------
            Total                   $10,459,078  $148,818  $ 57,204    $10,550,692
                                    ===========  ========  ========    ===========
1997:
   GNMA certificates                $ 5,010,422  $ 72,544  $      -    $ 5,082,966
   FNMA certificates                  5,715,904    21,272   117,044      5,620,132
   FHLMC certificates                 2,142,572    10,667         -      2,153,239
                                    -----------  --------  --------    -----------
            Total                   $12,868,898  $104,483  $117,044    $12,856,337
                                    ===========  ========  ========    ===========
</TABLE>
     
     The Company realized gross gains of $0 and $9,375 and gross
     losses of $0 and $9,387 on sales of mortgage backed and
     related securities for the years ended December  31, 1998
     and 1997, respectively.  There were no sales of mortgage
     backed and related securities in 1996. 

     Expected maturities for mortgage-backed and related
     securities will differ from contractual maturities because
     borrowers have the right to call or prepay obligations with
     or without call or prepayment penalties.

4.   OTHER INVESTMENTS

     Other investments at December 31, 1998 and 1997 consist of
     Federal Home Loan Bank of Atlanta ("FHLB") stock.  The cost
     and estimated market value of the FHLB stock was $2,828,000
     and $2,688,200 at December  31, 1998 and 1997,
     respectively.

     The Company, as member of the Federal Home Loan Bank
     System, is required to maintain an investment in capital
     stock of the FHLB in an amount equal to the greater of 1%
     of its outstanding home loans or 5% of its outstanding FHLB
     advances.  No ready market exists for FHLB stock, and it
     has no quoted market value.

                           25<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.   LOANS RECEIVABLE

     Loans receivable at December 31, 1998 and 1997 are
     summarized as follows (in thousands):

<TABLE>
<CAPTION>
                                                          1998            1997
                                                      ----------       ---------   
<S>                                                    <C>             <C>
Mortgage loans collateralized by real estate:
     1-4 family residential properties                 $235,644        $232,977
     Multi-family residential properties                  5,575           4,835
     Nonresidential properties                            3,697           4,891
     1-4 family residential properties under
         construction                                    25,244          24,908
     Nonresidential properties under construction            --             469
Installment loans collateralized by real estate:
     1-4 family residential properties                   18,737          12,134
     Multi-family residential properties                  7,649           1,442
     Nonresidential properties                           12,940           4,526
     Multi-family residential properties under 
       construction                                       1,128           2,996
     1-4 family residential properties under 
       construction                                       8,810           2,327
     Nonresidential properties under construction        11,735           7,868
Consumer loans                                            5,073           4,397
Business loans                                            4,021           2,586
Consumer and business construction loans                    964           1,213
                                                      ---------        ---------   
                    Total loans                         341,217         307,569
Less:
     Undisbursed portion of construction loans           17,499          18,729
     Unearned discounts and net deferred fees             1,216           1,274
     Loan loss reserve                                    1,178             874
                                                       --------        --------
                    Net loans                          $321,324        $286,692
                                                       ========        ========
</TABLE>


                           26<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In the normal course of business, the Company originates
     loans to related parties.  Related parties include
     directors, executive officers, principal shareholders of
     equity securities, or any associate of such persons.  The
     activity with respect to related party loans is summarized
     below:
    
     Balance at beginning of year                   $  754,697
     New loans                                       2,188,000
     Repayments                                        481,460
                                                    ----------
     Balance at end of year                         $2,461,237
                                                    ==========

     Activity in the allowance for loan losses for the years
     ended December  31, 1998, 1997 and 1996 is summarized as
     follows:
     

<TABLE>
<CAPTION>
                                          1998          1997          1996
                                      ----------      --------      --------
<S>                                   <C>            <C>           <C>
Balance at beginning of year            $873,802      $807,539      $737,000
Provision for loan losses                330,000       153,000       155,809
Loans charged-off                        (28,330)      (86,737)      (85,270)
Recoveries                                 2,770            --            --
                                      ----------      --------      --------
Balance at end of year                $1,178,242      $873,802      $807,539
                                      ==========      ========      ========
</TABLE>

     The following is a summary of nonperforming assets at
     December  31, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
                                                        1998              1997
                                                      -------           -------
<S>                                                    <C>               <C>
Loans 90 days past due and still accruing interest     $1,765             $357
Nonaccrual loans                                           --               --
Other real estate owned                                 2,439              251
                                                       ------             ----
      Total                                            $4,204             $608
                                                       ======             ====
</TABLE>

     At December 31, 1998 and 1997, the recorded investment in
     loans considered impaired in accordance with SFAS No. 114
     totaled $0 and $454,176, respectively, with corresponding
     valuation allowances of $0 and $0, respectively.  For the
     years ended December 31, 1998, 1997, and 1996, the average
     recorded investment in impaired loans was approximately
     $580,000, $654,000, and $485,000, respectively.  The amount
     of interest recognized on impaired loans during the portion
     of the year that they were impaired was immaterial.

                         27<PAGE>
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     In the normal course of business, the Company enters into
     off-balance sheet commitments to extend credit.  The
     Company maintains the same credit policies in making
     off-balance sheet commitments as it does for its on-balance
     sheet instruments.  Commitments to extend credit are
     agreements to lend which generally have fixed expiration
     dates or other termination clauses and may require 
     a fee.  

     The following table summarizes the Company's outstanding
     off-balance sheet commitments to extend credit at December
     31, 1998 and 1997 (in thousands):

<TABLE>
<CAPTION>
                                                         1998             1997
                                                       --------          ------- 
<S>                                                    <C>               <C>
Undisbursed portion of home equity lines of credit
  collateralized primarily by junior liens on 1-4
  family properties                                    $ 7,332           $ 6,374
Other commitments and credit lines                       4,577             3,318
Fixed-rate mortgage loan commitments                     4,257             2,571
Adjustable-rate mortgage loan commitments                3,149             2,408
                                                       -------           -------
     Total                                             $19,315           $14,671
                                                       =======           =======
</TABLE>
     
     As commitments may expire unused, the total commitment
     amount does not necessarily represent future cash
     requirements.

     The Company, through its normal lending activity,
     originates and maintains loans which are substantially
     concentrated in Eastern 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
     originations.  Such collateral or other form of repayment
     assurance is subject to changes in economic value due to
     various factors beyond the control of the Company and such
     changes could be significant.

     The Company originates both adjustable and fixed interest
     rate loans.  The adjustable-rate loans have interest rate
     adjustment limitations and are indexed to various 
     nationally recognized indexes or financial instruments. 
     Future market factors may affect the correlation of the
     interest rate adjustment with rates the Company pays on the
     short term deposits that have been primarily utilized to
     fund these loans.

     Mortgage loans serviced for others (previously sold without
     recourse) approximated $58,674,064, $65,061,001 and
     $62,753,000 at December 31, 1998, 1997 and 1996,
     respectively.
<PAGE>
     Servicing loans for others generally consists of collecting
     mortgage payments, maintaining escrow accounts, disbursing
     payments to investors and foreclosure processing.  Loan
     servicing income is recorded on the cash basis and includes
     servicing fees from investors and certain charges collected
     from borrowers, such as late payment fees.

                         28<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.   PREMISES AND EQUIPMENT

     Premises and equipment at December 31, 1998 and 1997 are
     summarized as follows:
<TABLE>
<CAPTION>
                                                         1998               1997
                                                      -----------       -----------
<S>                                                   <C>               <C>
Land                                                  $ 1,677,245       $ 1,626,553
Buildngs                                                5,488,561         4,796,885
Leasehold improvements                                    307,994           438,739
Furniture and equipment                                 4,572,363         3,711,528
                                                      -----------       -----------
                                                       12,046,163        10,573,705
Less accumulated depreciation and amortization         (5,673,707)       (5,701,503)
                                                      -----------       -----------
     Premises and equipment, net                      $ 6,372,456       $ 4,872,202
                                                      ===========       ===========
</TABLE>
7.   DEPOSITS
     Time deposits of $100,000 or more at December  31, 1998 and
     1997, are summarized by maturity as follows (in thousands):

<TABLE>
<CAPTION>
                                                         1998             1997
                                                      ---------         ---------
<S>                                                   <C>               <C>
3 months or less                                      $  10,486         $  13,957
Over 3 through 6 months                                  12,238             8,708
Over 6 through 12 months                                 16,994            21,591
Over 12 months                                            9,367             6,180
                                                      ---------         ---------
           Total                                      $  49,085         $  50,436
                                                      =========         =========
</TABLE>
     The average balance of, and weighed average rates ("WAR")
     paid on, deposits for the years ended December  31, 1998,
     1997 and 1996 (in thousands) are summarized as follows:
<TABLE>
<CAPTION>
                                 1998               1997              1996  
                          -----------------------------------------------------
                          Average             Average            Average
                          Balance     WAR     Balance    WAR     Balance    WAR
                          -------     ----    --------   ---     -------    ---
<S>                       <C>         <C>     <C>        <C>     <C>       <C>
NOW accounts              $ 14,117    0.85%   $ 12,208   0.92%   $ 11,513  1.00%
Money market                11,978    3.60%      7,472   2.83%      7,866  2.10%
Savings                     28,714    1.74%     34,050   1.94%     35,881  2.00%
Certificates of deposit    236,042    5.44%    226,422   5.37%    215,896  5.41%
                          --------    ----    --------   ----    --------  -----
   Total                  $290,851    4.78%   $280,152   4.69%   $271,156  4.67%
                          ========    ====    ========   ====    ========  =====
</TABLE>
     Non-interest bearing deposits totaled $7,877,568 and
     $4,204,000 at December  31, 1998 and 1997, respectively.

                           29<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


8.   BORROWED FUNDS
     Borrowed funds and the corresponding weighted average rates
     ("WAR") at December  31, 1998 and 1997 are summarized as
     follows:

<TABLE>
<CAPTION>
                              1998     WAR     1997       WAR
                          -----------  ---   -----------  ---   
<S>                       <C>          <C>     <C>         <C>
Advances from FHLB        $55,000,000  6.33% $50,000,000  6.48%
Affordable Housing
  Program advances from 
  FHLB                        109,439  3.50%     141,002  3.50%
                          -----------  ----  -----------  ---- 
           Total          $55,109,439  6.33% $50,141,002  6.47%
                          ===========  ====  ===========  ==== 
</TABLE>
     Pursuant to a collateral agreement with the FHLB, advances
     are collateralized by all the Company's FHLB stock and
     qualifying first mortgage loans.  This agreement provides
     for a $92 million line of credit with the FHLB.  The 
     maximum month end balances were $55 million, $50 million,
     and $35 million during the years ended December  31, 1998,
     1997 and 1996.  Annual principal maturities of Federal Home
     Bank advances for each of the five years subsequent to
     December  31, 1998 are as follows:

     1999                                         $ 15,000,000
     2000                                           10,000,000
     2001                                           15,000,000
     2002                                           10,000,000
     2003                                            5,000,000
                                                   -----------
              Total                                $55,000,000
                                                   ===========
     
     The Affordable Housing Program advances are funds advanced
     by the FHLB for the Company to lend to borrowers who might
     not otherwise qualify for a home mortgage.  These advances
     have an interest rate of 3.5% and mature at various times
     between November 2015 and January 2016. 

     Interest expense on borrowed funds is summarized as
     follows:
<TABLE>
<CAPTION>
                                         1998           1997         1996
                                      -----------    ----------    ---------- 
<S>                                   <C>            <C>           <C>
Advances from FHLB                    $ 3,320,483    $2,575,273    $  960,408
ESOP loan                                     100         8,870             -
                                      -----------    ----------    ----------
      Total                           $ 3,320,583    $2,584,143    $  960,408
                                      ===========    ==========    ==========
</TABLE>
9.   REGULATORY MATTERS AND CAPITAL REQUIREMENTS

     The Company is subject to various regulatory capital
     requirements administered by federal and state 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
     consolidated financial statements.  Quantitative measures
     established by regulation to ensure capital adequacy
     require the Company to maintain

                              30
<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     minimum amounts and ratios, as set forth in the table
     below.  Management believes, as of December 31, 1998,
     that the Company meets all capital adequacy requirements to
     which it is subject.  The Company's only significant asset
     is its investment in Cooperative Bank for Savings, Inc.
     SSB.  Consequently, the information concerning capital
     ratios is essentially the same for the Company and the
     Bank.

     As of December 31, 1998, the most recent notification from
     the FDIC categorized the Company as well capitalized under
     the regulatory framework for prompt corrective action.  To
     be categorized as well capitalized the Company must 
     maintain minimum amounts and ratios, as set forth in the
     table below.  There are no conditions or events since that
     notification that management believes have changed the
     Company's category.

     The Company's actual capital amounts and ratios are also
     presented in the table below (dollars in thousands):
<TABLE>
<CAPTION>
                                                                    TO BE WELL
                                                                    CAPITALIZED
                                                                   UNDER PROMPT
                                                 FOR CAPITAL        CORRECTIVE
                                ACTUAL        ADEQUACY PURPOSES  ACTION PROVISIONS
                          ----------------    -----------------  ----------------- 
                          AMOUNT     RATIO    AMOUNT     RATIO    AMOUNT     RATIO
                          ------     -----    ------     -----    ------     ----- 
<S>                       <C>         <C>     <C>        <C>     <C>       <C>
As of December 31, 1998:
-----------------------
Total Capital (to Risk 
  Weighted Assets)        $32,637     14.3%    $18,290   8.0%     $22,863   10.0%
Tier I Capital (to Risk 
  Weighted Assets)         31,459     13.8%      9,145   4.0%      13,718    6.0%
Tier I Capital (to 
  Average Assets)          31,459      8.1%     15,528   4.0%      19,410    5.0%
Total Tangible Capital 
  (to Total Tangible 
  Assets)                  31,613      8.1%     19,489   5.0%      19,489    5.0%

As of December 31, 1997:
-----------------------
Total Capital (to Risk 
  Weighted Assets)        $29,174     14.9%    $15,623   8.0%     $19,529   10.0%
Tier I Capital (to Risk 
  Weighted Assets)         28,300     14.5%      7,812   4.0%      11,717    6.0%
Tier I Capital (to 
  Average Assets)          28,300      7.8%     14,153   4.0%      17,691    5.0%

</TABLE>
     A liquidation account was established at the time of
     conversion to a stock institution in an amount equal to the
     total net worth of the Bank as of March  31, 1991.  Each
     eligible deposit account holder is entitled to a 
     proportionate share of this account in the event of a
     complete liquidation of the Bank, and only in such an
     event.  This share will be reduced if the account holder's 
     eligible deposits fall below the amount on the date of
     record and will cease to exist if the account is closed. 
     The liquidation account will never be increased despite any
     increase after the conversion in the related eligible
     deposit of an account holder.  The liquidation account was
     approximately $3,571,000 at December  31, 1998. 

     The Company may not declare or pay a cash dividend, or
     repurchase any of its capital stock, if the effect would
     cause the regulatory net worth of the Company to fall below
     the amount required 

                         31<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     for the liquidation account established in connection with
     the conversion, or to an amount which is less than the
     minimum required by the FDIC and the North Carolina Savings
     Institutions Administrator ("N.C. Administrator").

     On September 30, 1996, Congress passed into law a
     recapitalization plan for the Savings Association Insurance
     Fund (the "SAIF"), the insurance fund covering deposits of
     savings institutions.  The approved plan provided for a
     special assessment of 0.66% on certain deposits as of March
     31, 1996.  The Company's assessment amounted to
     approximately $1,783,000.

9.   BENEFIT PLANS
     The Company has a qualified, noncontributory defined-
     benefit retirement plan (the "Plan") covering substantially
     all of its employees.  The benefits are based on each
     employee's years of service and the employee's compensation
     during the last ten years of employment.

     On October  25, 1996 the Plan was amended to change the
     Plan from a single employer plan to a multi-employer plan. 
     The effective date of the amendment is January  1, 1996. 
     All other provisions of the Plan remain substantially the
     same, with the exception of Plan funding.  Under the
     multi-employer plan, the Company is required to contribute
     its share of the Plan's total pension liability as
     determined by the plan administrator.  There were no
     contributions required or made to the Plan during 1998,
     1997 and 1996.

     Until January  1, 1997, the Company maintained an Employee
     Stock Ownership Plan (the "ESOP") for the exclusive benefit
     of participating employees with the Company.  Participating
     employees were full-time employees age 21 or older who
     had completed one year of service.  The Company's
     contributions to the ESOP were allocated among participants
     on the basis of total compensation paid each plan year and
     were determined solely at the discretion of the Board of 
     Directors.

     On December  23, 1996 the ESOP borrowed $800,000 from
     another financial institution and purchased 84,374 shares
     of the Company's common stock from the defined benefit plan
     at $9.46 per share.  These shares served as collateral for 
     the loan and the loan was guaranteed by the Company. 
     Accordingly, the loan was recorded by the Company as a
     liability and the shares recorded as a separate component
     of stockholders' equity. 

     On January  1, 1997 the ESOP was merged into a combined
     ESOP and 401(k) Plan (the "KSOP").  The employees' ESOP
     accounts were transferred to their KSOP accounts on that
     date.  Employees are able to contribute up to 15% of their 
     eligible annual compensation to the KSOP subject to
     Internal Revenue Service limitations.  The Company matches
     employee contributions up to a limit determined annually by
     the Board of Directors.  The match was established by the
     Board as 6% for 1998 and 1997.

     During the years ended December  31, 1998 and 1997, the
     Company matched employee contributions by contributing
     $85,000 and $204,000 to the KSOP to repay a portion of the
     note.  This released 8,774 and 21,600 shares from serving
     as collateral for the loan.  These shares were allocated to
     the participants according to the plan specifications on
     December  31, 1998 and 1997.  At December  31, 1998 and
     1997 there were 0 and 8,774 unearned ESOP shares, with an
     estimated market value of approximately $0 and $228,124, 
     held in suspense.

     The compensation expense incurred by the Company for these 
     benefit plans, including the effect of the change in the
     defined benefit plan noted earlier, was $366,939, $232,164,
     and $209,216 for the years ended December  31, 1998, 1997,
     and 1996, respectively.

                           32<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.  EARNINGS PER SHARE
     On August 25, 1997 the Company declared a 100% stock split
     effected in the form of a stock dividend.  This split
     increased the number of common shares outstanding to
     2,983,396.  All prior period share and per share data have
     been adjusted for the split.

     The Company adopted SFAS No. 128 "Earnings Per Share" on
     December 31, 1997.  As required, all prior period earnings
     per share have been restated to conform with the provisions
     of the statement.  There are no material differences
     between earnings per share reported under SFAS No. 128 and
     the previously reported amounts for the years ended
     December  31, 1997 and 1996.

     The following table provides a reconciliation of income
     available to common stockholders and the average number of
     shares outstanding (less unearned ESOP shares) for the
     years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
                                         1998           1997           1996
                                      ----------     -----------   -----------
<S>                                   <C>            <C>           <C>
Net income (loss) (numerator)         $2,385,235     $ 2,233,738   $(3,249,853)
                                      ==========     ===========   ===========
Shares for basic EPS (denominator)     3,019,413       2,972,686     2,981,954
Dilutive effect of stock options         186,979         211,611            --
                                      ----------     -----------   ----------- 
Adjusted shares for diluted EPS        3,206,392       3,184,297     2,981,954
                                      ==========     ===========   ===========
</TABLE>

     For the year ended December 31, 1996, there were 276,802
     options outstanding that were antidilutive due to the net
     loss for the year.  These common stock equivalents have
     been omitted from the 1996 calculation of diluted earnings
     per share.

                           33<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.  INCOME TAXES
     Income tax expense consists of the following components for
     the years ended December  31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
                                         1998            1997        1996
                                      ----------     -----------   --------
<S>                                   <C>            <C>           <C>
Current tax provision                 $1,805,174     $1,680,031    $284,846
Deferred tax provision (benefit)        (416,469)      (286,101)    290,700
                                      ----------     ----------    --------
     Total                            $1,388,705     $1,393,930    $575,546
                                      ==========     ==========    ========
</TABLE>

     The components of the net deferred tax liability at
     December  31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>

                                                       1998         1997
                                                   ----------   ----------
<S>                                                 <C>          <C>
Deferred tax assets:
  Unrealized loss on securities 
    available for sale                             $       --   $    4,800
  Allowance for loan losses                            36,744           --
                                                   ----------   ----------
      Total                                            36,744        4,800
                                                   ----------   ----------
Deferred tax liabilities:
  Deferred loan fees                                  360,378      482,731
  Allowance for loan losses                                --      225,559
  FHLB stock                                          209,692      231,784
  Excess of book over tax basis of equipment          106,805      116,526
  Unrealized gain on securities available
    for sale                                           98,492           --
                                                   ----------   ----------
       Total                                          775,397    1,056,600
                                                   ----------   ----------
       Net deferred tax liability                  $  738,623   $1,051,800
                                                   ==========   ==========
</TABLE>

                           34<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    Reconciliations of income taxes computed at the statutory
    federal income tax rate (34%) to the provisions for income
    tax for the years ended December  31, 1998, 1997 and 1996
    are as follows:
<TABLE>
<CAPTION>
                                         1998           1997           1996
                                      ----------     -----------   -----------
<S>                                   <C>            <C>          <C>
Income taxes at federal tax rate      $1,283,140    $ 1,233,407    $(909,265)
Increase (decrease) resulting from:
   Amortization and impairment of 
     goodwill                                 --             --    1,216,807      
   State income taxes, net of 
     federal income tax benefit           84,619        152,196       59,071
   Other                                  20,946          8,327      208,933 
                                      ----------    -----------   ----------
       Total                          $1,388,705    $ 1,393,930   $  575,546  
                                      ==========    ===========   ==========
</TABLE>
     As of December  31, 1998, the Bank's bad debt reserve for
     federal tax purposes was approximately $5,169,000 which
     represents the base year amount.  A deferred tax liability 
     has not been recognized for the base year amount.  If the
     Bank uses the base year reserve for any reason other than
     to absorb loan losses, a tax liability could be incurred. 
     It is not anticipated that the reserve will be used for any
     other purpose.

13.  STOCK OPTION PLAN

     The Company has a  Stock Option Plan (the "Option Plan")
     for selected employees of the Company and for nonemployee
     directors.  The purpose of the Option Plan is to attract
     and retain the best available personnel for positions of 
     substantial responsibility and to provide additional
     incentive to key employees and directors by facilitating
     their purchase of a stock interest in the Company.

     The Option Plan provides for a term of ten years, after
     which no awards may be made, unless earlier terminated by
     the Board of Directors pursuant to the Option Plan.  The
     option exercise price is the market price of the common
     stock on the date the option is granted.  Options are fully
     vested upon being granted. 

                                35<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     No options were granted during the years ended December 31, 
     1998 and 1996.  During the year ended December  31, 1997,
     11,628 options were granted at market value on the date of
     award.  The weighted average grant price was $13.75.  Also
     during 1998 and 1997, 61,888 and 1,000 options were
     exercised at a weighted average exercise price of $4.43 and
     $1.78 per share, respectively.  No options expired or were
     forfeited during the years ended December  31, 1998, 1997
     and 1996.  Stock options, after giving retroactive effect
     to stock dividends and splits, are summarized as follows:
<TABLE>
<CAPTION>
                                                    ALL DIRECTORS
                                                     WHO ARE NOT
                                                      EXECUTIVE
                                     ALL OFFICERS     OFFICERS                RESERVED
                                      AS A GROUP     AS A GROUP              FOR FUTURE
                                     (6 PERSONS)    (8 PERSONS)    TOTAL      ISSUANCE 
                                     -----------    -----------    ------    -----------
<S>                                  <C>             <C>           <C>        <C>
Balance, December 31, 1998           187,438         38,104        225,542         --
                                     =======         ======        =======     ======
Balance, December 31, 1997           230,726         56,704        287,430         --
                                     =======         ======        =======     ======
Balance, December 31, 1996           226,520         50,282        276,802     11,628
                                     =======         ======        =======     ======
</TABLE>

     The weighted average exercise price of these options for
     all periods is $3.28. 

     On January  1, 1996 the Company adopted SFAS No. 123,
     "Accounting for Stock Based Compensation".  As permitted by
     SFAS No. 123, the Company     has chosen to continue to
     apply APB Opinion No. 25, "Accounting for Stock Issued to
     Employees" and related interpretations.  Accordingly, no
     compensation cost has been recognized for options granted
     under the Option Plan.  Had compensation cost for the
     Company's Option Plan been determined based on the fair
     value at the grant dates for awards under the Option Plan
     consistent with the method of SFAS No. 123, the Company's
     net income and net income per share would have been reduced
     to the pro forma amounts indicated below.  The Company did
     not grant any options during the years ended December 31,
     1998 and 1996, therefore, there are no pro forma amounts
     for those periods.
<TABLE>
<CAPTION>
                                                 1997
                                         ---------------------
                                             AS
                                          REPORTED   PRO FORMA
                                         ---------   ---------
<S>                                      <C>         <C>
Net income                               $2,233,738  $2,213,554
Earnings per common share                      0.75        0.74
Earnings per common share - assuming 
  dilution                                     0.70        0.70
</TABLE>
                                36<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The fair value of each option grant is estimated on the
     date of grant using the Black-Scholes option-pricing model
     with the following weighted-average assumptions used for
     grants in 1997:  dividend yield of  0%, as there has been
     no regular dividend payment history; expected volatility of
     7.7%; risk-free interest rates of 5.5%; and expected lives
     of 4.38 years.  The weighted average fair value of options
     granted in 1997 was $3.87. 

     The following table summarizes additional information about
     the Option Plan at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
                                                                1998
                                              ------------------------------------------
                                                             REMAINING
                                                NUMBER      CONTRACTUAL       NUMBER
EXERCISE PRICE                                OUTSTANDING       LIFE        EXERCISABLE
---------------------------------------------------------------------------------------
<S>                                            <C>           <C>            <C>
$1.78                                           183,234      2.75 years      183,234
$2.67                                             3,424      3.25 years        3,424
$3.20                                             5,924      3.50 years        5,924
$7.50                                            23,332      5.25 years       23,332
$10.50                                            5,424      8.25 years        5,424
$19.50                                            4,204      9.00 years        4,204 
                                               --------      ----------      -------
                                                225,542      3.28 years      225,542
                                               ========      ==========      =======

<CAPTION>
                                                                1997
                                              ------------------------------------------
                                                             REMAINING
                                                NUMBER      CONTRACTUAL       NUMBER
EXERCISE PRICE                                OUTSTANDING       LIFE        EXERCISABLE
---------------------------------------------------------------------------------------
<S>                                            <C>           <C>            <C>
$1.78                                           212,954      3.75 years      212,954
$2.67                                             7,424      4.75 years        7,424
$3.20                                             7,424      4.50 years        7,424
$7.50                                            48,000      6.25 years       48,000
$10.50                                            7,424      9.23 years        7,424
$19.50                                            4,204     10.00 years        4,204
                                               --------     -----------      -------
                                                287,430      5.67 years      287,430
                                               ========     ===========      =======
</TABLE>
                                  37<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.  PARENT COMPANY FINANCIAL INFORMATION

     Condensed financial information of Cooperative Bankshares,
     Inc., the parent company, at December  31, 1998 and 1997
     and for the years ended December  31, 1998, 1997 and 1996
     is presented below:
     
    
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                          1998       1997
                                      ----------  -----------
<S>                                   <C>         <C>
Assets:
     Cash                             $     1,624  $     4,707
     Equity investment in             
       subsidiary                      31,602,684   28,264,866
     Deferred organization costs            8,841       23,996
                                      -----------  -----------
                                      $31,613,149  $28,293,569
                                      ===========  ===========
Liabilities and stockholders' equity:
     Stockholders' equity             $31,613,149  $28,293,569
                                      ===========  ===========
</TABLE>
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                     1998         1997        1996
                                                  ----------  -----------  -----------
<S>                                               <C>          <C>         <C>
Dividends from subsidiary                         $   11,938  $    13,709  $        --
Equity in income (loss) of subsidiary              2,403,474    2,248,259   (3,222,121)
Miscellaneous expenses                                30,177       28,230       27,732
                                                  ----------  -----------  -----------
   Net income (loss)                              $2,385,235  $ 2,233,738  $(3,249,853)
                                                  ==========  ===========  ===========
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
<S>                                              <C>            <C>          <C>
Operating Activities:
  Net income (loss)                              $ 2,385,235    $ 2,233,738  $(3,249,853)
  Equity in undistributed earnings of 
    subsidiary                                    (2,403,474)    (2,248,259)   3,222,121 
  Amortization of deferred organization costs         15,156         15,156       15,155
                                                 -----------    -----------  -----------
      Cash flows provided by (used in) operating 
        activities                                    (3,083)           635      (12,577)

Cash and cash equivalents, beginning of year           4,707          4,072       16,649
                                                 -----------    -----------  -----------
Cash and cash equivalents, end of year           $     1,624    $     4,707  $     4,072
                                                 ===========    ===========  ===========
</TABLE>
                                 38<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15.  CASH FLOW SUPPLEMENTAL DISCLOSURES

     The following information is supplemental information
     regarding the cash flows for the years ended December 31,
     1998, 1997 and 1996:

<TABLE>
<CAPTION>
                                                     1998          1997          1996
                                                 ------------   ----------   ------------
<S>                                              <C>            <C>          <C>
Cash paid for: 
  Interest on deposits and borrowed funds       $ 17,258,719   $ 15,957,580  $ 14,141,474
  Income taxes                                     1,544,000      1,247,000       836,685

Summary of noncash investing and financing 
  activities:
  Transfer from loans to foreclosed real 
    estate                                         2,438,023        843,477       239,729 
  Loans to facilitate the sale of foreclosed 
    real estate                                       34,000        235,648        38,348
</TABLE>

16.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The following disclosure of the estimated fair value of
     financial instruments is made in accordance with the
     requirements of SFAS No. 107, "Disclosures About Fair Value
     of Financial Instruments".  The estimated fair value 
     amounts have been determined by the Company using the
     methods and assumptions described below.  However,
     considerable judgment is required to interpret market data
     to develop the estimates of fair value.  Accordingly, the
     estimates presented herein are not necessarily indicative
     of the amounts the Company could realize in a current
     market exchange.  The use of different market assumptions
     and/or estimation methodologies may have a material effect
     on the estimated fair value amounts. 

     The following methods and assumptions were used to estimate
     the fair value of each class of financial instruments for
     which it is practicable to estimate that value.

          Cash and Cash Equivalents
          -------------------------
          The carrying amount is a reasonable estimate of fair
          value.

          Securities, Mortgage-Backed and Related Securities,
          ---------------------------------------------------
          and Other Investments
          ---------------------

          For investments in debt securities, fair values are
          based on quoted market prices or dealer quotes.  For
          other securities, fair value equals quoted market
          price, if available.  If a quoted market price is not
          available, fair value is estimated using quoted market
          prices for similar securities. 
                                  39<PAGE>
<PAGE>
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          Loans Receivable
          ----------------
          The fair value of loans receivable is estimated by
          discounting the future cash flows using the current
          rates at which similar loans would be made to
          borrowers with similar credit ratings and for the same
          remaining maturities.

          Deposits
          --------
          The fair value of NOW, savings, and money market
          deposit accounts is the amount payable on demand at
          the reporting date.  The fair value of fixed-maturity
          certificates of deposit is estimatedusing the rates
          currently offered for deposits of similar remaining
          maturities.

          Borrowed Funds and ESOP Note Payable
          ------------------------------------
          Borrowed funds consist of FHLB borrowings with varying
          maturities.  The fair values of these liabilities and
          the ESOP note payable are estimated using the
          discounted values of the contractual cash flows.  The
          discount rate is estimated using the rates currently
          in effect for similar borrowings.

          Off-Balance Sheet Financial Instruments
          ---------------------------------------
          The fair value of off-balance sheet financial
          instruments has not been considered in determining
          on-balance sheet fair value.  As discussed in Note 5,
          these off-balance sheet financial instruments are
          commitments to extend credit and are either short term
          in nature or subject to immediate repricing.


                                  40<PAGE>
<PAGE>

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

     The carrying amounts and estimated fair values of the
     Company's financial instruments at December  31, 1998 and
     1997 are as follows (in thousands):


<TABLE>
<CAPTION>
                                                     1998                   1997
                                             ---------------------   --------------------
                                             CARRYING   ESTIMATED    CARRYING  ESTIMATED
                                              AMOUNT    FAIR VALUE    AMOUNT   FAIR VALUE
                                             --------   ----------   --------  ----------
<S>                                          <C>        <C>          <C>       <C>
Financial assets:
  Cash and cash equivalents                  $  8,856   $  8,856     $ 17,208  $ 17,208
  Securities:
    Available for sale                         21,163     21,163       21,004    21,004
    Held to maturity                           13,034     12,780       21,044    20,348
  Mortgage-backed and related securities
    available for sale:                        10,551     10,551       12,856    12,856
  Loans receivable:
    Gross loans                               322,502    322,896      287,566   289,777
    Allowance for loan losses                  (1,178)    (1,178)        (874)     (874)
                                             --------   --------     --------  --------
    Loans receivable, net                     321,324    321,718      286,692   288,903

  Other investments                             2,828      2,828        2,688     2,688
                                             --------   --------     --------  --------
          Total                              $377,756   $377,896     $361,492  $363,007
                                             ========   ========     ========  ========
Financial liabilities:
  Deposits                                   $301,656   $299,383     $288,690  $284,040
  Borrowed funds                               55,109     56,674       50,226    50,579
                                             --------   --------     --------  --------
          Total                              $356,765   $356,057     $338,916  $334,619
                                             ========   ========     ========  ========
</TABLE>
     The Company's remaining assets and liabilities are not
     considered financial instruments.

17.  STOCK REPURCHASE PLAN

     On September 17, 1998, the Company's Board of Directors
     approved a Stock Repurchase Program.  The Stock Repurchase
     Program authorizes the Company to repurchase up to 150,000
     shares, or approximately 5% of the currently outstanding
     shares of common stock.  As of December 31, 1998, no shares
     had been repurchased. On February 8, 1999, the Company
     purchased 74,000 shares under the Stock Repurchase Plan.

                         41<PAGE>
<PAGE>
              DIRECTORS, OFFICERS AND OFFICE LOCATIONS
<TABLE>
<CAPTION>
                         BOARD OF DIRECTORS

<S>                                        <C>                                  
Frederick Willetts, III, Chairman          H. T. King, III
President, Chief Executive Officer         President, Hanover Iron Works, Inc.
Cooperative Bankshares, Inc. and
Cooperative Bank For Savings, Inc. SSB

Paul G. Burton                             R. Allen Rippy
President, Burton Steel Company            Vice President, Rippy Cadillac Oldsmobile, Inc.

F. Peter Fensel, Jr.                       Dr. William H. Wagoner
President, F. P. Fensel Supply Company     Chancellor Emeritus of the University of
                                           North Carolina at Wilmington

James D. Hundley, M.D.                     O. Richard Wright, Jr.
President, Wilmington Orthopaedic          Attorney, McGougan Wright Worley & Harper
  Group P.A.

<CAPTION>
         OFFICERS OF COOPERATIVE BANK FOR SAVINGS, INC., SSB
<S>                                    <C>         
Frederick Willetts, III.....................Chairman, President & Chief Executive Officer
O.C. Burrell, Jr.......................Executive Vice President & Chief Operating Officer
Daniel W. Eller................................Senior Vice President - Corporate Secretary
Eric R. Gray.....................................Senior Vice President - Mortgage Lending
Edward E. Maready.......................................Senior Vice President - Treasurer
Sandra B. Carr..................................Vice President- Retail Banking Operations
Linda B. Garland...............................................Vice President - Marketing
Raymond A. Martin.....................................Vice President-Information Services
Carl N. Mathis................................................Vice President - Appraising
Donna H. Mitchell....................................Vice President - Mortgage Operations
Dare C.  Rhodes..........................................Vice President - Human Resources
Todd L. Sammons..................................................Vice President -Auditing
Phillip T. Whittington............................... ..Vice President-Commercial Lending

</TABLE>

                                  
                          OFFICE LOCATIONS
                 (Number of Offices in Parentheses)
                             
           Beaufort                    Morehead City
           Belhaven                    Robersonville
           Corolla                     Tabor City
           Elizabethtown               Wallace
           Jacksonville (2)            Washington (2)
           Kill Devil Hills            Wilmington (4)

                            42<PAGE>
<PAGE>
                     CORPORATE INFORMATION 

                     CORPORATE INFORMATION
                  Cooperative Bankshares, Inc.
                       201 Market Street
                          P.O. Box 600
               Wilmington, North Carolina  28402
                         (910) 343-0181
TRANSFER AGENT
First Citizens Bank
Corporate Trust Department
P.O. Box 29522
Raleigh, North Carolina  27626-0522

SPECIAL COUNSEL
Housley Kantarian & Bronstein, P.C.
Suite 700
1220 19th Street, NW
Washington, DC  20036

                       ANNUAL MEETING
The Annual Meeting of Stockholders of Cooperative Bankshares,
Inc. will be held at the Howard Johnson Plaza, 5032 Market 
Street, Wilmington, North Carolina, on April 30, 1999 at 11:00
a.m.  All stockholders are cordially invited to attend.

                         FORM 10K
Copies of Cooperative Bankshares, Inc. Form 10K may be obtained
by stockholders without charge by writing to Linda B. Garland at
the Cooperative Headquarters address.

                     ADDITIONAL INFORMATION
           For additional information, please contact
          Frederick Willetts, III, Daniel W. Eller or
               Linda B. Garland at (910) 343-0181
                       www.coop-bank.com

                        CAPITAL STOCK
Cooperative's common stock is traded on the NASDAQ National 
Market under the symbol "COOP".  As of December 31, 1998 there
were 3,046,284 shares outstanding which were held by 599
stockholders of record.  No cash dividends have been paid on the
common stock since its issuance.  Stock performance for 1998 and
1997 is given in the following table.  All prices have been
adjusted for the stock dividends as described in the notes to
the consolidated financial statements. 

                  QUARTERLY COMMON STOCK DATA
<TABLE>
<CAPTION>
                                   1998            1997
                              -----------------------------
QUARTERS ENDED                HIGH      LOW     HIGH    LOW
------------------------------------------------------------
<S>                           <C>      <C>     <C>     <C>
December                      $16.00   $10.00  $20.25  $15.50
September                      18.00    12.50   17.50   10.63
June                           20.00    17.00   11.00   10.25
March                          24.38    18.00   10.75   10.00
</TABLE>

                          43