SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                             -----------------------

                                    FORM 10-K
                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

For the Fiscal Year Ended December 31, 2000

[ ]  TRANSITIONAL  REPORT  PURSUANT  TO  SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934

For the Transition Period from _________________ to ________________

                         Commission File Number: 0-24626
                                                 -------

                          COOPERATIVE BANKSHARES, INC.
             -------------------------------------------------------
             (Exact name of registrant as specified in its charter)

              North Carolina                                    56-1886527
---------------------------------------------                ------------------
(State or other jurisdiction of incorporation                  (I.R.S. Employer
or organization)                                             Identification No.)

201 Market Street, Wilmington, North Carolina                      28401
---------------------------------------------                    ----------
(Address of principal executive offices)                         (Zip Code)

       Registrant's telephone number, including area code: (910) 343-0181
                                                           --------------

        Securities registered pursuant to Section 12(b) of the Act: None

           Securities registered pursuant to Section 12(g) of the Act:

                     Common Stock, par value $1.00 per share
                     ---------------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by  Section 13 of the  Securities  Exchange  Act of 1934  during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.
YES   X     NO
    -----      -----

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of February 15, 2001, the aggregate  market value of the voting stock held by
non-affiliates  of the  registrant,  based  on the  closing  sales  price of the
registrant's  common stock as quoted on the NASDAQ Stock Market was  $36,513,380
(2,394,320  shares at $15.25  per  share).  For  purposes  of this  calculation,
directors,  executive  officers  and  beneficial  owners of more than 10% of the
registrant's outstanding voting stock are treated as affiliates.

As of February 15, 2001 there were issued and  outstanding  2,736,304  shares of
the registrant's common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of Annual  Report  to  Stockholders  for the  Fiscal  Year  Ended
     December 31, 2000. (Parts I and II)
2.   Portions of Proxy  Statement for the 2001 Annual  Meeting of  Stockholders.
     (Part III)


<PAGE>

                                     PART I

ITEM 1.  BUSINESS
-----------------

GENERAL

         THE  COMPANY.   Cooperative  Bankshares,  Inc.  (the  "Company")  is  a
registered savings bank holding company  incorporated in North Carolina in 1994.
The Company  was formed for the  purpose of serving as the  holding  company for
Cooperative Bank for Savings,  Inc., SSB ("Cooperative  Bank" or the "Bank"),  a
North Carolina  chartered 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. Chartered in 1898, the Bank's headquarters is located
in  Wilmington,  North  Carolina.  Cooperative  operates  16  financial  centers
throughout the coastal and inland  communities of eastern North Carolina.  These
centers extend from Corolla,  located on the Outer Banks of North  Carolina,  to
Tabor City,  located on the South Carolina  border.  The Bank's deposit accounts
are insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC").  At December  31,  2000,  Cooperative  Bank had total assets of $414.7
million, deposits of $327.3 million and stockholders' equity of $30.8 million.

         Through  its  financial  centers,  the bank  provides  a wide  range of
banking products,  including interest bearing and non-interest  bearing checking
accounts, certificates of deposit and individual retirements accounts. It offers
an  array  of  loan  products:  overdraft  protection,   commercial,   consumer,
agricultural,  real estate,  residential  mortgage and home equity  loans.  Also
offered are safe deposit boxes and automated  banking  services through ATMs and
Access24 Phone Banking.  In addition,  the Bank also offers  discount  brokerage
services,  annuity sales and mutual funds through a third party arrangement with
UVEST Investment Services.

         The Bank has  chosen  to sell a larger  percentage  of its  fixed  rate
mortgage loan originations through broker dealer arrangements.  This enables the
Bank to invest its funds in higher yielding  commercial loans,  while increasing
fee income.  This is part of the continuing  effort to  restructure  the balance
sheet and operations to be more reflective of a commercial bank.

         The Bank has received  permission  from  regulators to open a branch in
Whiteville, North Carolina, which is located in Columbus County. The branch will
be a full-service  facility,  including an ATM, with two full-time employees and
one part-time employee.

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


MARKET AREA

     Cooperative Bank considers its primary market area to be the communities of
eastern  North  Carolina  extending  from the  Virginia  to the  South  Carolina
borders.  The market is generally segmented into the coastal communities and the
inland areas.  The economies of the coastal  communities  (concentrated in Dare,
Carteret,  Currituck,  Onslow,  Pender, New Hanover and Brunswick  Counties) are
seasonal and largely  dependent on the summer tourism  industry.  The economy of
Wilmington  (the largest  city in the market  area),  a historic  seaport with a
population of  approximately  92,100 is also reliant upon summer  tourism but is
diversified into the chemicals,  shipping,  aircraft  engines,  and fiber optics
industries.  Wilmington  also  serves as a regional  retail  center,  a regional
medical  center and is home of the  University of North  Carolina at Wilmington.
The inland communities  served by the Bank  (concentrated in Bladen,  Brunswick,
Columbus,  Duplin, Hyde, Beaufort and Pender Counties) are largely service areas
for the agricultural activities in eastern North Carolina.

                                       2
<PAGE>

LENDING ACTIVITIES

     GENERAL.  Cooperative  Bank's lending  activities have  concentrated on the
origination of loans for the purpose of  constructing,  financing or refinancing
residential properties.  As of December 31, 2000, approximately $291 million, or
83%, 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, and secured and unsecured  consumer and
business  loans.  While  continuing to place  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  originates  adjustable  rate and fixed rate loans.  As of
December 31, 2000,  adjustable  rate and fixed rate loans totaled  approximately
62% and 38%, respectively, of the Bank's total loan portfolio.



                                       3
<PAGE>

     ANALYSIS OF LOAN  PORTFOLIO.  Set forth below is selected  data relating to
the  composition  of the  Bank's  loan  portfolio  by type of loan  and  type of
collateral on the dates indicated.  Other than as set forth below, there were no
concentrations of loans which exceeded 10% of total loans at December 31, 2000.
<TABLE>
<CAPTION>
                                                                           At December 31,
                                         2000               1999                1998                   1997             1996
                                                                         (Dollars in thousands)
                                  Amount         %    Amount         %    Amount        %      Amount       %     Amount        %
<S>                               <C>         <C>     <C>          <C>    <C>          <C>     <C>                <C>
Real estate:
   Construction and land
     development                  $ 37,542     10.80% $  1,497     0.45%  $  1,376     0.43%   $    --      -- %  $     --      --%
   Mortgage:
      1-4 family residential       234,383     67.44   253,857    75.83    265,172    82.52    252,645    88.12    241,118   91.57
      Multi-family residential      17,081      4.92    17,166     5.13     12,941     4.03      9,209     3.21      7,272    2.76
      Commercial                    31,300      9.01    38,765    11.58     26,296     8.18     11,715     4.09      6,030    2.29
      Equity line                   11,954      3.44     9,772     2.92      8,811     2.74      8,074     2.82      6,315    2.40
      Other                            174      0.05        78     0.02         52     0.02         89     0.03         68    0.03
                                  --------    ------  --------   ------   --------   ------   --------   ------   --------  ------
        Total real estate loans    332,434     95.66   321,135    95.93    314,648    97.92    281,732    98.27    260,803   99.05

Commercial, industrial and
   agricultural                     10,970      3.16    10,653     3.18      3,997     1.24      2,752     0.96      1,035    0.39
Consumer                             7,236      2.08     5,443     1.63      5,073     1.59      4,356     1.52      3,564    1.35
                                  --------    ------  --------   ------   --------   ------   --------   ------   --------  ------
        Total gross loans          350,640    100.90   337,231   100.74    323,718   100.75    288,840   100.75    265,402  100.79
                                  --------    ------  --------   ------   --------   ------   --------   ------   --------  ------
Less:
Unearned discounts and net
  deferred fees                        977      0.28     1,182     0.35      1,216     0.38      1,274     0.44      1,281    0.49
Allowance for loan losses            2,160      0.62     1,306     0.39      1,178     0.37        874     0.31        808    0.30
                                  --------    ------  --------   ------   --------   ------   --------   ------   --------  ------
        Net loans                 $347,503    100.00% $334,743   100.00%  $321,324   100.00%  $286,692   100.00%  $263,313  100.00%
                                  ========    ======  ========   ======   ========   ======   ========   ======   ========  ======

</TABLE>

                                       4
<PAGE>

     The  following  table sets forth certain  information  regarding the dollar
amount of loans maturing in the Bank's loan portfolio based on their contractual
terms to maturity and/or repricing period.
<TABLE>
<CAPTION>
                                                                     AT DECEMBER 31, 2000
                                                                        (IN THOUSANDS)
                                            DUE WITHIN             DUE AFTER            DUE AFTER
                                             ONE YEAR          1 THROUGH 5 YEARS         5 YEARS             TOTAL
<S>                                         <C>                      <C>                 <C>              <C>
Real Estate
      Construction and land
          development                       $ 30,466                 $ 7,076             $  ---           $  37,542
      Mortgage
          1-4 family residential              80,040                  76,595             77,748             234,383
          Multi-family residential             9,706                   5,779              1,596              17,081
          Commercial                          15,557                  12,284              3,459              31,300
          Equity line                         11,954                     ---                ---              11,954
          Other                                   14                     126                 34                 174
Commercial, Industrial &                       7,922                   2,823                225              10,970
    Agricultural
Consumer                                       3,157                   3,803                276               7,236
                                            --------                --------           --------            --------
          Total gross loans                 $158,816                $108,486           $ 83,338            $350,640
                                            ========                ========           ========            ========
</TABLE>

     The next table shows at December  31,  2000,  the dollar  amount of all the
Bank's loans  maturing  and/or  repricing  after one year from December 31, 2000
which have fixed interest rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                                                         DECEMBER 31, 2000
                                                                           (IN THOUSANDS)
                                                 ONE TO FIVE                  AFTER
                                                    YEARS                  FIVE YEARS                 TOTAL
<S>                                              <C>                       <C>                      <C>

Loans maturing and/or repricing
 after one year with:
   Fixed interest rates                          $  36,456                 $ 83,338                 $ 119,794
   Floating or adjustable rates                     72,030                       --                    72,030
                                                 ---------                 --------                 ---------
Total                                            $ 108,486                 $ 83,338                 $ 191,824
                                                 =========                 ========                 =========
</TABLE>

     Residential  Real Estate  Loans.  The Bank  originates  one-to  four-family
residential  mortgage  loans  collateralized  by property  located in its market
area.  While  a  majority  of the  Bank's  residential  real  estate  loans  are
collateralized by owner-occupied  primary residences,  the Bank's portfolio also
includes  some second home and  investor  properties.  The Bank also  originates
residential  lot  loans  collateralized  by  vacant  lots  located  in  approved
subdivisions.

     The Bank's loan  originations  are  generally for a term of 15 to 30 years,
amortized  on a monthly  basis,  with  principal  and  interest  due each month.
Residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms. Borrowers may refinance or prepay loans at
their option.

     The Bank has offered adjustable rate mortgage loans ("ARMs") since 1979 and
presently offers one year ARMs with rate adjustments tied to prime or the weekly
average yield on U.S. Treasury Securities adjusted to a constant maturity of one
year.  The  Bank  offers  introductory  interest  rates  on ARMs  which  are not
generally fully indexed.  The interest rates on these loans generally  include a
cap of 2%  per  adjustment  and 6%  over  the  life  of  the  loan.  The  Bank's
underwriting policies require that the borrower qualify for an 1 year ARM at the
fully  indexed


                                       5
<PAGE>

rate. While the proportion of fixed and adjustable rate loan originations in the
Bank's  portfolio  largely depends on the level of interest rates,  the Bank has
strongly  emphasized ARMs in recent years and has been relatively  successful in
maintaining  the level of ARM  originations  even  during  periods of  declining
interest rates. In addition to the one year ARM, the Bank offers 3/1 and 5/1 ARM
products.  These loans adjust  annually after the end of the first three or five
year period. A "Low Doc" program is available for the non-conforming loans.

     Cooperative Bank also originates 15 to 30 year fixed rate mortgage loans on
one- to four-family  units. The Bank generally charges a higher interest rate on
such loans if the  property is not  owner-occupied.  The  majority of fixed rate
loans are  underwritten  according  to Federal  Home Loan  Mortgage  Corporation
("FHLMC") or Federal National Mortgage Association ("FNMA") guidelines,  so that
the loans qualify for sale in the secondary market. The Bank has sold fixed rate
loans in the secondary  market from time to time when such sales were consistent
with the Bank's liquidity and asset/liability goals.

     The Bank actively lends on the security of properties  located in the Outer
Banks region of North  Carolina.  This  region's  economic  base is seasonal and
driven by beach  tourism,  and a large  number of the loans  made by the Bank in
this area are secured by vacation rental properties.  These loans are inherently
more risky than loans secured by the borrower's permanent  residence,  since the
borrower  is  typically  dependent  upon  rental  income  to meet  debt  service
requirements,  and repayment is therefore subject to a greater extent to adverse
economic,  weather and other conditions  affecting vacation rentals.  Management
seeks to minimize  these risks by employing  what it believes  are  conservative
underwriting criteria.

     The Bank's lending policies generally limit the maximum loan-to-value ratio
on conventional residential mortgage loans to 95% of the lesser of the appraised
value or purchase price,  with the condition that private mortgage  insurance is
required on loans with loan-to-value ratios in excess of 80%.

     Cooperative Bank also originates loans secured by multi-family  properties.
At December 31,  2000,  the Bank had $17.1  million of such loans,  representing
4.9% of its total loan portfolio. These loans are primarily secured by apartment
buildings located in the Bank's market area.

     CONSTRUCTION  LOANS.  The Bank originates loans to finance the construction
of one-to four- and multi-family  dwellings,  housing  developments,  commercial
projects and condominiums.  Construction  loans amounted to approximately  $37.5
million,  or 10.7%,  of the Bank's total loan portfolio at December 31, 2000. In
recent years,  the Bank has emphasized the origination of construction  loans in
response  to the  significant  demand  for such  loans by  borrowers  engaged in
building and  development  activities in the growing  communities  of its market
area.  In  addition,  construction  loans  afford  the Bank the  opportunity  to
increase the interest rate sensitivity of its loan portfolio.

     Many of the Bank's  construction loans are converted to permanent loans. At
the time the loan is converted to a permanent  loan , the Bank  underwrites  the
creditworthiness  of the purchaser prior to approving the  assumption,  at which
time the original  borrower is released from  liability.  Construction/permanent
loans have either  fixed or  adjustable  rates and have terms of up to 30 years.
The Bank also will make short term construction loans which have fixed rates and
terms of up to 12 months. These loans are generally made in amounts up to 80% of
appraised  value.  Loan  proceeds  generally  are  disbursed  in  increments  as
construction progresses and as inspections warrant.

     The Bank's risk of loss on a  construction  loan is largely  dependent upon
the accuracy of the initial  estimate of the  property's  value at completion of
construction  and the bid price  (including  interest) of  construction.  If the
estimate of construction costs proves to be inaccurate, the Bank may be required
to advance funds beyond the amount originally  committed to permit completion of
the project. If the estimate of the value proves to be inaccurate,  the Bank may
be  confronted,  at or prior to the maturity of the loan,  with a project  whose
value is  insufficient  to assure full  repayment.  When lending to  speculation
builders, the cost of construction breakdown is provided by the builder, as well
as supported by the appraisal.


                                       6
<PAGE>
     The Bank's underwriting  criteria are designed to evaluate and minimize the
risks of each  construction  loan.  Among other things,  the Bank  considers the
reputation  of the borrower  and the  contractor,  the amount of the  borrower's
equity in the project,  independent  valuations  and reviews of cost  estimates,
pre-construction sale and leasing information,  and cash flow projections of the
borrower. In addition, the Bank reviews the builder's current financial reports,
tax returns, credit reports and, if the builder has not previously borrowed from
Cooperative  Bank, credit  references.  The Bank only makes  construction  loans
within its primary market area.

     The  Bank  has in  the  past  originated  loans  for  the  acquisition  and
development of unimproved  property to be used for  residential  purposes.  Land
development lending is generally  considered to involve a higher level of credit
risk than one- to four-family  residential  lending due to the  concentration of
principal in a limited  number of loans and borrowers and the effects of general
economic conditions on development projects.

     The following table sets forth certain  information as of December 31, 2000
regarding  the dollar  amount of  construction  loans secured by real estate and
real  estate  mortgage  loans  maturing in the Bank's  portfolio  based on their
contractual  terms to  maturity.  A portion  of these  loans has  provisions  to
convert  to  permanent  loans  upon  completion  of  construction.  For  further
information,  see Note 3 of Notes to Consolidated  Financial Statements included
in the  Company's  Annual  Report to  Stockholders  for the  Fiscal  Year  Ended
December 31, 2000 (the "Annual Report").
                                                                 DECEMBER 31,
                                                                      2000
                                                                --------------
                                                                (IN THOUSANDS)
Real estate - construction
    1-4 residential                                              $    16,962
    Multi-family residential                                          10,294
    Commercial                                                        10,286
                                                                 -----------
    Total                                                        $    37,542
                                                                 ===========


     LOANS   SECURED  BY   NONRESIDENTIAL   REAL   ESTATE.   Loans   secured  by
nonresidential real estate constituted  approximately $41.8 million, or 11.9% of
the Bank's  total  loans at  December  31,  2000.  The Bank is  emphasizing  the
origination of these loans because of their profitability,  since they generally
carry a higher interest rate than single family residential  mortgage loans. The
Bank originates both  construction  loans and permanent loans on  nonresidential
properties. Nonresidential real estate loans are generally made in amounts up to
80% of the lesser of appraised  value or purchase price of the property and have
generally  been  made in  amounts  under  $2.0  million.  The  Bank's  permanent
nonresidential real estate loans are secured by improved property such as office
buildings,  retail centers,  warehouses, and other types of buildings located in
the Bank's  primary  market  area.  Nonresidential  real estate loans are either
fixed or variable  rate.  The variable  rate loans have  interest  rates tied to
prime or the weekly  average  yield on U.S.  Treasury  Securities  adjusted to a
constant maturity of one year.

     Loans secured by nonresidential properties are generally larger and involve
greater risks than residential mortgage loans. Because payments on loans secured
by  nonresidential  properties  are often  dependent on successful  operation or
management  of the  properties,  repayment  of such  loans may be  subject  to a
greater  extent to adverse  conditions in the real estate market or the economy.
The Bank seeks to minimize these risks in a variety of ways,  including limiting
the size of its  nonresidential  real estate loans,  generally  restricting such
loans  to  its  primary  market  area  and  attempting  to  employ  conservative
underwriting criteria.

     CONSUMER LENDING.  At December 31, 2000, the Bank's consumer loan portfolio
totaled approximately $7.2 million,  representing 2.1% of the Bank's total loans
receivable.  The Bank also offers home equity loans, which are made for terms of
up to 15 years at adjustable interest rates. As of December 31, 2000, the Bank's
home equity loan portfolio  totaled  approximately  $12.0 million,  representing
3.4% of its total loans receivable.


                                       7
<PAGE>

     Consumer  loans entail  greater risk than do  residential  mortgage  loans,
particularly in the case of consumer loans which are unsecured or collateralized
by  rapidly  depreciable  assets  such  as  automobiles.   In  such  cases,  any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the  outstanding  loan balance as a result of the greater
likelihood of damage, loss or depreciation.  The remaining deficiency often does
not warrant further  substantial  collection  efforts  against the borrower.  In
addition,  consumer loan collections are dependent on the borrower's  continuing
financial  stability,  and thus are more likely to be adversely  affected by job
loss, divorce, illness or personal bankruptcy.  Furthermore,  the application of
various  federal and state laws,  including  federal  and state  bankruptcy  and
insolvency laws, may limit the amount which can be recovered on such loans. Such
loans may also give rise to claims  and  defenses  by a consumer  loan  borrower
against an assignee of such loans such as the Bank,  and a borrower  may be able
to assert  against such  assignee  claims and defenses  which it has against the
seller of the underlying collateral.

     NON-REAL  ESTATE  BUSINESS  LENDING.  In late 1996,  the Bank  initiated  a
program for  originating  loans to small  businesses  in the Bank's market area,
which  are  secured  by  various  forms of  non-real  estate  collateral  or are
unsecured.  At December  31,  2000,  these  loans  totaled  approximately  $11.0
million. Management of Cooperative Bank believes that these loans are attractive
to the Bank in light of the typically  higher  interest  rate yields  associated
with  them  and  the   opportunity   they  present  for   expanding  the  Bank's
relationships with existing customers and developing broader  relationships with
new  customers.  Accordingly,  the Bank plans to  actively  pursue  this type of
lending in the future in an effort to maintain a profitable  spread  between the
Bank's average loan yield and its cost of funds.

     Unlike residential mortgage loans, which generally are made on the basis of
the  borrower's  ability to make  repayment from his or her employment and other
income and which are  collateralized  by real  property  whose value tends to be
more  easily  ascertainable,  commercial  business  loans are of higher risk and
typically are made on the basis of the borrower's ability to make repayment from
the cash flow of the borrower's business. As a result, the availability of funds
for the repayment of commercial business loans may be substantially dependent on
the success of the business itself.  Further,  the collateral securing the loans
may  depreciate  over time,  may be difficult  to appraise and may  fluctuate in
value based on the success of the business.  The management of Cooperative  Bank
seeks to minimize these risks as the Bank's  commercial  business loan portfolio
grows by attempting to employ conservative underwriting criteria.

     LOAN  SOLICITATION  AND PROCESSING.  Loan  originations  are derived from a
number of  sources,  including  "walk-in"  customers  at the Bank's  offices and
solicitations by Cooperative Bank employees.

     Mortgage loan applications are accepted at all full-service  branches,  and
are  reviewed  by a loan  officer  or branch  manager.  Upon  receipt  of a loan
application,  central  processing  orders a credit report and  verifications  to
verify specific information relating to the applicant's  employment,  income and
credit standing. An appraisal of the real estate intended to secure the proposed
loan is undertaken by an internal  appraiser or an outside appraiser approved by
the Bank. In the case of "Low Doc" loans a tax evaluation is acceptable.

     Loan  authorities  and limits have been delegated by the Board of Directors
to a group of senior  officers  who function as the loan  committee,  except for
consumer loans,  which may be approved by branch loan officers.  Loans exceeding
$700,000  up to  $1,000,000  can be  approved  by  three  members  of  the  loan
committee.  Any loan  exceeding  $1,000,000  is approved by the Bank's  Board of
Directors.  Fire and  casualty  insurance  is required  on all loans  secured by
improved real estate.

     ORIGINATIONS,  PURCHASES,  AND SALES OF MORTGAGE LOANS.  The Bank's general
policy is to  originate  conventional  residential  mortgage  loans under terms,
conditions  and  documentation  which permit sale to the FHLMC,  FNMA or private
investors  in the  secondary  market.  The Bank has from time to time sold fixed
rate,  long  term  mortgage  loans in the  secondary  market  to meet  liquidity
requirements or as part of the asset/liability management program. In connection
with such sales,  the Bank  generally  retains the servicing of the loans (i.e.,
collection of principal and interest payments),  for which it generally receives
a fee  payable  monthly  of up to 1/4%


                                       8
<PAGE>


per annum of the unpaid  balance of each loan. As of December 31, 2000, the Bank
was servicing  approximately  1,400 loans for others  aggregating  approximately
$74.1 million.

     The Bank does not generally  purchase loans,  and purchased no loans during
the last three fiscal years.

     LOAN COMMITMENTS. The Bank issues loan origination commitments to qualified
borrowers  primarily  for the  construction  and  purchase of  residential  real
estate.  Such  commitments  are made on specified  terms and  conditions and are
typically  for  terms  of up to  30  days.  A  non-refundable  appraisal,  flood
certificate,  credit  report and  underwriting  fee is  collected at the time of
application.  Management  estimates  that  historically,  less  than 20% of such
commitments expire unfunded. At December 31, 2000, the Bank had outstanding loan
origination  commitments of approximately $1.3 million. For further information,
see Note 3 of Notes to Consolidated  Financial Statements included in the Annual
Report.

     LOAN  ORIGINATION AND OTHER FEES. In addition to receiving  interest at the
stated rate on loans,  the Bank receives loan  origination  fees or "points" for
originating loans.  Origination fees generally are calculated as a percentage of
the  principal  amount of the mortgage  loan and are charged to the borrower for
creation of the loan  account.  Loan  origination  fees and certain  direct loan
origination  costs are  deferred,  and the net fee or cost is  recognized  as an
adjustment to interest income over the contractual life of the related loan.

     The  Bank is  currently  approved  to  broker  loans  to  Wells  Fargo  and
InterFirst Wholesale Mortgage Lending. These are done on the wholesale side with
Cooperative  processing the loan and Wells Fargo or InterFirst  closing on their
documents.  Cooperative  receives a settlement  service fee for processing these
loans.  The Bank  would like to  originate  more loans  through  wholesalers  to
generate fee income and relieve the Bank of the interest rate risk.

     Loan  origination,  settlement  service and  commitment  fees are  volatile
sources  of  funds.  Such  fees  vary  with the  volume  and  type of loans  and
commitments made and purchased and with competitive market conditions,  which in
turn respond to the demand for and availability of money.

     The Bank also  recognizes  other fees and service  charges on loans.  Other
fees and service  charges  consist of late fees; fees collected with a change in
borrower or other loan modifications.

     DELINQUENCIES. The Bank's collection procedures provide that when a loan is
30 days past due, the borrower is contacted by mail,  and payment is  requested.
If the  delinquency  continues,  subsequent  efforts  are  made to  contact  the
borrower.  If the loan continues in a delinquent status for 60 days or more, the
Bank generally  initiates legal proceedings.  At December 31, 2000, the Bank had
accruing  loans  which  are  contractually  past  due 90 or more  days  totaling
$358,000.

     NON-PERFORMING  ASSETS  AND  ASSET  CLASSIFICATION.   Loans  are  generally
classified as nonaccrual if they are past due for a period of more than 90 days,
unless  such loans are well  secured and in the  process of  collection.  If any
portion of a loan is  classified  as doubtful or is  partially  charged off, the
loan is generally  classified  as  nonaccrual.  Loans that are less than 90 days
past due may also be  classified as nonaccrual if repayment in full of principal
and/or  interest is in doubt.  As of December 31, 2000, the Bank had three loans
in non-accrual status with an aggregate principal balance of $333,000.

     Real estate  acquired by the Bank as a result of  foreclosure is classified
as real  estate  owned  until  such time as it is sold.  When such  property  is
acquired,  it is  recorded  at the lower of the unpaid  principal  balance  plus
unpaid accrued interest of the related loan or the fair value of the real estate
less costs to sell the property.  Any required write-down of the loan is charged
to the  allowance  for loan  losses.  At  December  31,  2000,  the  Bank  owned
approximately  $234,000 of property  acquired as the result of foreclosure or by
deed in lieu of  foreclosure  and classified as "real estate owned." At December
31, 2000, the Bank had 26 loans in the process of foreclosure  and/or bankruptcy
with an aggregate principal balance of approximately $1.8 million.


                                       9
<PAGE>

     The  following  table sets  forth  information  with  respect to the Bank's
non-performing  assets for the periods indicated.  During the periods shown, the
Bank had no  restructured  loans  within the meaning of  Statement  of Financial
Accounting Standards ("SFAS") No. 15.
<TABLE>
<CAPTION>
                                                                          AT DECEMBER 31,
                                                      --------------------------------------------------------
                                                        2000        1999        1998       1997         1996
                                                       ------      ------      ------     ------       ------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                                   <C>         <C>         <C>         <C>         <C>
Non-accruing loans                                    $    333    $    267    $     --    $     --    $    787

Accruing loans which are contractually
  past due 90 days or more                            $    358    $    934    $  1,765    $    357    $    665

Total                                                 $    691    $  1,201    $  1,765    $    357    $  1,452
                                                      ========    ========    ========    ========    ========
Percentage of total loans                                  .20%        .36%        .55%        .12%        .55%
                                                      ========    ========    ========    ========    ========
Other non-performing assets (1)                       $    234    $    245    $  2,439    $    251    $     42
                                                      ========    ========    ========    ========    ========
Total non-performing assets                           $    925    $  1,446    $  4,204    $    608    $  1,494
                                                      ========    ========    ========    ========    ========
Total non-performing assets to total assets                .22%        .35%       1.08%        .16%        .44%
                                                      ========    ========    ========    ========    ========
<FN>
__________
(1)      Other  non-performing  assets represent  property  acquired by the Bank
         through  foreclosure or repossession.  This property is carried at fair
         value less estimated costs of sale.
</FN>
</TABLE>

     During  the  year  ended  December  31,  2000,  gross  interest  income  of
approximately  $10,896  would have been  recorded on  nonaccrual  loans had such
loans been  current  throughout  the  period.  Approximately  $4,786 in interest
income from such loans was  included in income for the year ended  December  31,
2000.

     Except as set forth above,  the Bank had no loans which were not classified
as non-accrual,  90 days past due or restructured but which may be so classified
in the  near  future  because  management  has  concerns  as to the  ability  of
borrowers to comply with repayment terms. For further information, see Note 3 of
Notes to Consolidated Financial Statements in the Annual Report.

     ALLOWANCE  FOR LOAN  LOSSES.  Management  considers a variety of factors in
establishing the appropriate levels for the provision and the allowance for loan
losses.  Consideration  is given to, among other  things,  the impact of current
economic conditions, the diversification of the loan portfolio,  historical loss
experience,  the review of loans by the loan review  personnel,  the  individual
borrower's  financial and managerial  strengths,  and the adequacy of underlying
collateral.

     The process used to allocate the allowance for loan losses considers, among
other  factors,  whether  the  borrower  is a  mortgage,  retail  or  commercial
customer,  whether the loan is secured or unsecured,  and whether the loan is an
open or closed-end  agreement.  Generally,  loans are evaluated  among groups of
loans with similar characteristics. The probable loss projections for each group
are the basis for the  allowance  allocation.  The loss  estimates  are based on
prior experience and current economic conditions.  The unallocated allowance for
loan losses primarily  represents the impact of certain conditions that were not
considered  in allocating  the allowance to the specific  components of the loan
portfolio.


                                       10
<PAGE>

     The  following  table  analyzes  activity in the Bank's  allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                     ----------------------------------------------------------
                                                        2000        1999        1998        1997        1996
                                                       ------      ------      ------      ------      ------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                                   <C>          <C>         <C>         <C>         <C>
Balance at beginning of period                        $1,306       $1,178      $  874      $  807      $  737
Provision for loan losses                                970          210         330         153         156
Loans charged-off - net                                  116           82          26          86          86
                                                      ------       ------      ------      ------      ------
Balance at end of period                              $2,160        1,306      $1,178      $  874      $  807
                                                      ======       ======      ======      ======      ======
Ratio of net charge-offs to average
  loans outstanding during the period                    .03%         .03%        .01%        .03%        .03%
                                                      ======       ======      ======      ======      ======
Ratio of loan loss reserve to total loans                .62%         .39%        .36%        .30%        .30%
                                                      ======       ======      ======      ======      ======
</TABLE>

     Management  believes that it has established the Bank's existing  allowance
for loan losses in accordance  with generally  accepted  accounting  principles.
Additions to the allowance may be necessary, however, due to changes in economic
conditions,  real  estate  market  values,  growth in the  portfolio,  and other
factors.  In addition,  bank  regulators  may require  Cooperative  Bank to make
additional  provisions for losses in the course of their  examinations  based on
their  judgments as to the value of the Bank's assets.  For further  information
regarding the Bank's allowance for loan losses see "Management's  Discussion and
Analysis" and Note 3 of Notes to Consolidated Financial Statements in the Annual
Report.

     The following table sets forth  information  about the Bank's allowance for
loan losses by asset  category at the dates  indicated.  The  allocation  of the
allowance to each  category is not  necessarily  indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
                                                                       AT DECEMBER 31
                                 ---------------------------------------------------------------------------------------
                                        2000                  1999                  1998                  1997
                                        ----                  ----                  ----                  ----
                                                                   (DOLLARS IN THOUSANDS)

                                               Percent             Percent              Percent                Percent
                                                  of                  of                   of                    of
                                               Loans to            Loans to             Loans to               Loans to
                                     Amount  Total Loans  Amount  Total Loans  Amount  Total Loans  Amount   Total Loans
<S>                                    <C>      <C>       <C>         <C>      <C>        <C>       <C>        <C>
Real estate:
Construction and land development   $  428      10%      $   15       --%     $   14       --%     $  --        --%
Mortgage
    1-4 family residential             499      67          530       75         605       82        571        87
    Multi-family residential           213       5          163        5         129        4         92         3
    Commercial                         526       9          380       12         301        8        123         4
    Equity line                         65       3           15        3          13        3         12         3
    Other                                2       1            1       --                   --          1        --
                                    ------     ---       ------      ---     -------      ---      -----       ---
          Total real estate loans    1,733      95%       1,104       95%      1,063       97%       799        97%

Commercial, industrial &               166       3          152        3          59        1         41         1
  agricultural
Consumer                                77       2           50        2          40        2         34         2
Unallocated                            184      --           --       --          16       --         --        --
                                    ------     ---       ------      ---     -------      ---      -----       ---
          Total gross loans          2,160     100%      $1,306      100%    $ 1,178      100%     $ 874       100%
                                    ======     ===       ======      ===     =======      ===      =====       ===
</TABLE>

                                       11
<PAGE>


INVESTMENT ACTIVITIES

     The Bank is required under applicable regulations to maintain liquid assets
equal to at least 10% of its total  assets.  For  purposes of this  requirement,
liquid assets consist of cash and readily  marketable  investments.  Cooperative
Bank has  generally  maintained a liquidity  portfolio  in excess of  regulatory
requirements.  Liquidity levels may be increased or decreased depending upon the
yields on  investment  alternatives  and upon  management's  judgment  as to the
attractiveness  of the yields then available in relation to other  opportunities
and its  expectation of the level of yield that will be available in the future,
as well as management's  projections as to the short term demand for funds to be
used in the Bank's loan origination and other activities.

     The following table sets forth the carrying value of the Bank's  investment
securities  portfolio  at  the  dates  indicated.   For  additional  information
regarding the Bank's investments,  see Note 2 of Notes to Consolidated Financial
Statements in the Annual Report.
<TABLE>
<CAPTION>
                                                                             AT DECEMBER 31,
                                                              -------------------------------------------
                                                              2000               1999                1998
                                                              -----             ------              -----
                                                                            (IN THOUSANDS)
<S>                                                           <C>               <C>              <C>
Securities held to maturity:
   U.S. Government and agency securities                      $  18,015         $ 18,025         $  13,034
   Mortgage-backed securities                                       963               --                --
                                                              ---------         --------         ---------
       Total securities held to maturity                      $  18,978         $ 18,025         $  13,034

Securities available for sale:
   U.S. Government and agency securities                      $  16,049         $ 20,672         $  21,163
   Mortgage-backed securities                                        --            6,564            10,551
                                                              ---------         --------         ---------
      Total securities available for sale                     $  16,049         $ 27,236         $  31,714

      Total investment securities portfolio                   $  35,027         $ 45,261         $  44,748
                                                              =========         ========         =========

</TABLE>

                                       12
<PAGE>

     The following table sets forth the scheduled  maturities,  carrying values,
market values and average yields for the Bank's investment  securities portfolio
at December 31, 2000.
<TABLE>
<CAPTION>
                                                    AFTER ONE          AFTER FIVE          MORE THAN                 TOTAL
                             ONE YEAR OR LESS    THROUGH FIVE YEARS THROUGH TEN YEARS      TEN YEARS          INVESTMENT PORTFOLIO
                             -----------------   ------------------ -----------------   -----------------   ------------------------
                             CARRYING  AVERAGE   CARRYING  AVERAGE  CARRYING  AVERAGE   CARRYING  AVERAGE   CARRYING  FAIR   AVERAGE
                              VALUE     YIELD     VALUE     YIELD     VALUE    YIELD     VALUE     YIELD     VALUE    VALUE   YIELD
                             --------  -------   --------  -------  --------  -------   --------  -------   --------  -----  -------
                                                                   (DOLLARS IN THOUSANDS)
<S>                           <C>                <C>        <C>     <C>         <C>     <C>                <C>       <C>       <C>
Securities held to maturity:
  U.S. government and
    agency securities         $    --    -- %    $ 13,015   5.39%   $ 5,000     6.21%   $    --      -- %  $ 18,015  $17,568   5.62%
Mortgage-backed
  securities                       --    --            --    --          --      --         963    7.00         963      986   7.00
                              -------   ----     --------   ----    -------     ----    -------    ----    --------  -------   ----
     Total securities held
          to maturity         $    --    --      $ 13,015   5.39    $ 5,000     6.21%   $   963    7.00    $ 18,978  $18,554   5.69

U.S. government and
     agency securities
     available for sale       $ 4,009   6.07     $ 12,040   6.61         --      --          --     --       16,049   16,049   6.48
                              -------   ----     --------   ----    -------     ----    -------    ----    --------  -------   ----

Total investment
  securities portfolio        $ 4,009   6.07%    $ 25,055   5.99%   $ 5,000     6.21%   $   963    7.00%   $ 35,027  $34,603   6.05%
                              =======   ====     ========   ====    =======     ====    =======    ====    ========  =======   ====

</TABLE>

DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

     GENERAL.  Deposits are the major source of the Bank's funds for lending and
other  investment  purposes.  In addition to deposits,  Cooperative Bank derives
funds from interest  payments,  loan  principal  repayments,  borrowed funds and
funds provided by operations.  Scheduled loan repayments are a relatively stable
source of funds,  while deposit  inflows and outflows and loan  prepayments  are
significantly  influenced by general interest rates and money market conditions.
Borrowings may be used to compensate for reductions in the availability of funds
from other sources.  The Bank intends to fund its activities  primarily  through
deposits.

     DEPOSITS. Deposits are attracted from within the Bank's primary market area
through  the  offering of a broad  selection  of deposit  instruments  including
checking,   savings,   money  market  deposit,  and  term  certificate  accounts
(including  negotiated jumbo  certificates in denominations of $100,000 or more)
as well as individual  retirement plans. Deposit account terms vary according to
the minimum balance required,  the time periods the funds must remain on deposit
and the  interest  rate,  among other  factors.  The Bank does not obtain  funds
through  brokers;  however,  the Bank has  begun  attracting  deposits  over the
Internet and considers this a viable  alternative to borrowed funds. For further
information  regarding the Bank's  deposits,  see  "Management's  Discussion and
Analysis" and Note 5 of Notes to Consolidated Financial Statements in the Annual
Report.


                                       13
<PAGE>

     The following table  indicates the amount of the Company's  certificates of
deposit of $100,000 or more by time remaining  until maturity as of December 31,
2000.

                                                                 CERTIFICATES
                    MATURITY PERIOD                               OF DEPOSIT
                    ---------------                              -------------
                                                                 (IN THOUSANDS)

                    Three months or less                         $    15,381
                    Over three through six months                     13,096
                    Over six months through twelve
                          months                                      21,497
                    Over twelve months                                13,046
                                                                 -----------
                          Total                                  $    63,020
                                                                 ===========

     The  following  table sets forth the average  balances and  interest  rates
based on month-end  balances  for  certificates  of deposit and  non-certificate
accounts as of the dates indicated.
<TABLE>
<CAPTION>
                                                               FOR THE YEAR ENDED DECEMBER 31,
                                                 2000                       1999                      1998
                                          ---------------------     ----------------------     ---------------------
                                                                    (DOLLARS IN THOUSANDS)
                                          Average       Average     Average        Average     Average       Average
                                          Balance        Rate       Balance         Rate       Balance        Rate
<S>                                      <C>             <C>       <C>              <C>       <C>             <C>
Passbook and statement savings           $ 22,923        1.34%     $ 26,088         1.47%     $ 28,714        1.74%
NOW                                        16,085        0.52%       15,394         0.59%       14,117        0.85%
Money market                               19,689        3.62%       20,011         3.78%       11,978        3.60%
Certificates of deposit                   244,682        5.70%      230,681         5.03%      236,042        5.44%
                                         --------        ----      --------         ----      --------        ----
                                         $303,379        4.96%     $292,174         4.39%     $290,851        4.78%
                                         ========        ====      ========         ====      ========        ====
</TABLE>

     BORROWINGS. Deposits are the primary source of funds for Cooperative Bank's
lending and investment  activities and for its general business purposes. If the
need arises, the Bank may obtain advances from the FHLB of Atlanta to supplement
its  supply of  loanable  funds  and to meet  deposit  withdrawal  requirements.
Advances from the FHLB are typically secured by the Bank's stock in the FHLB and
a lien on a portion of the Bank's first  mortgage  loans.  The Bank has utilized
FHLB  advances  in recent  periods in order to meet a larger than  typical  loan
demand in the Bank's market area.

     The FHLB of Atlanta  functions as a central  reserve bank providing  credit
for the Bank and other member financial institutions.  As a member,  Cooperative
Bank is required to own capital stock in the FHLB and is authorized to apply for
advances on the  security of such stock and  certain of its home  mortgages  and
other assets  (principally,  securities  which are obligations of, or guaranteed
by, the United States),  provided certain standards related to  creditworthiness
have been met.  Advances are made pursuant to several different  programs.  Each
credit program has its own interest rate and range of  maturities.  Depending on
the program,  limitations  on the amount of advances are based either on a fixed
percentage of a member  institution's  net worth or on the FHLB's  assessment of
the institution's creditworthiness.

     For further  information  regarding  the Bank's  borrowings,  see Note 6 of
Notes to Consolidated Financial Statements in the Annual Report.


                                       14
<PAGE>

COMPETITION

     Cooperative  Bank encounters  strong  competition both in the attraction of
deposits  and in the making of real  estate  and other  loans.  Its most  direct
competition for deposits has  historically  come from financial  institutions in
its market area.  Competition for deposits is also realized from brokerage firms
and credit  unions.  The Bank  competes  for  deposits  by  offering  depositors
competitive  rates and a high level of  personal  service  together  with a wide
range of banking products and convenient office locations.

     Competition  for  real  estate  and  other  loans  comes  principally  from
financial  institutions  and  mortgage  companies.  The Bank  competes for loans
primarily  through  the  interest  rates  and  loan  fees  it  charges,  and the
efficiency and quality of services it provides  borrowers.  Factors which affect
competition include the general and local economic conditions,  current interest
rate levels and volatility in the mortgage markets.

EMPLOYEES

     At December 31, 2000, the Bank had 118 full-time  employees and 7 part-time
employees.  The employees are not represented by a collective  bargaining  unit.
The Bank believes its relationship with its employees to be good.

EXECUTIVE OFFICERS

     At December 31, 2000, the executive  officers of the Bank who were not also
directors were as follows:
<TABLE>
<CAPTION>
                                     AGE AT
NAME                            DECEMBER 31, 2000                      POSITION
----                            -----------------                      --------

<S>                                    <C>                    <C>
O.C. Burrell, Jr.                      52                     Executive Vice President and Chief Operating Officer

Todd Sammons                           39                     Senior Vice President and Chief Financial Officer

Dickson B. Bridger                     42                     Senior Vice President-Mortgage Lending
</TABLE>

     Note:  Edward E. Maready,  Eric Gray and Daniel W. Eller retired  effective
December 31, 2000.

     O. C.  BURRELL,  JR. was  employed in May 1993 as Senior Vice  President of
Retail  Banking.  Mr.  Burrell was elected  Executive  Vice  President and Chief
Operating  Officer in 1997. Mr.  Burrell has been in the banking  industry since
1970 and has served in leadership  capacities in various civic and  professional
organizations.  He is  active  in the  Wilmington  Rotary  Club  and  serves  as
treasurer  and director of the Child  Development  Center and is a member of the
Retail Lending Committee of the North Carolina Bankers Association.

     TODD L. SAMMONS was  employed in March 1986 as Auditor.  He was promoted to
Senior  Vice  President-and   Chief  Financial  Officer  in  December  2000.  He
previously  worked with a public  accounting  firm.  He has served in leadership
capacities  in various  professional,  church and civic  organizations.  He is a
Certified Public Accountant.  He serves on the internal auditor's council of the
Financial  Managers Society.  He serves as Treasurer of the Cape Fear Hurricanes
Fourteen and Under AAU Baseball Team.

     DICKSON  B.  BRIDGER  was  employed  in  March  1984  as  a  mortgage  loan
originator.  He was promoted to Vice  President in February 1990 and Senior Vice
President-Mortgage Lending in December 2000. He is a member of Wilmington Rotary
West and  serves as an Elder of the  Little  Chapel on the  Boardwalk  church at
Wrightsville Beach, North Carolina.


                                       15
<PAGE>

                                   REGULATION

     GENERAL.  As a North  Carolina  savings bank with  deposits  insured by the
SAIF,  Cooperative Bank is subject to extensive  regulation by the Administrator
of the North Carolina Savings Banks Division (the "Administrator") and the FDIC.
The Company is also subject to extensive regulation under federal and state law.
The lending  activities and other  investments  of Cooperative  Bank must comply
with various federal  regulatory  requirements.  The  Administrator and the FDIC
periodically  examine  Cooperative  Bank for compliance with various  regulatory
requirements.  The Bank must file  reports with the  Administrator  and the FDIC
describing its activities and financial  condition.  The Bank is also subject to
certain  reserve  requirements  promulgated  by the  Board of  Governors  of the
Federal  Reserve System (the "Federal  Reserve  Board").  This  supervision  and
regulation is intended  primarily for the protection of  depositors.  Certain of
these regulatory requirements are referred to below or appear elsewhere herein.

     The following is a brief summary of certain statutes, rules and regulations
affecting the Company and the Bank. A number of other  statutes and  regulations
have an impact on their operations. The following summary of applicable statutes
and regulations does not purport to be complete and is qualified in its entirety
by reference to such statutes and regulations.

     FINANCIAL  MODERNIZATION  LEGISLATION.  On  November  12,  1999,  President
Clinton  signed  legislation  which  could  have a  far-reaching  impact  on the
financial services  industry.  The  Gramm-Leach-Bliley  ("G-L-B") Act authorizes
affiliations between banking, securities and insurance firms and authorizes bank
holding  companies  and national  banks to engage in a variety of new  financial
activities.  Among  the new  activities  that are  permitted  for  bank  holding
companies are  securities  and  insurance  brokerage,  securities  underwriting,
insurance  underwriting  and merchant  banking.  The Federal  Reserve Board,  in
consultation  with  the  Secretary  of  the  Treasury,  may  approve  additional
financial activities.  The G-L-B Act, however,  prohibits future acquisitions of
existing unitary savings and loan holding companies,  like the Company, by firms
which are engaged in commercial activities and limits the permissible activities
of unitary holding companies formed after May 4, 1999.

     The G-L-B Act imposes  new  requirements  on  financial  institutions  with
respect to customer  privacy.  The G-L-B Act generally  prohibits  disclosure of
customer  information  to  non-affiliated  third parties unless the customer has
been given the  opportunity  to object and has not objected to such  disclosure.
Financial  institutions  are further required to disclose their privacy policies
to customers  annually.  Financial  institutions,  however,  will be required to
comply  with state law if it is more  protective  of customer  privacy  than the
G-L-B Act.  The G-L-B Act directs the federal  banking  agencies,  the  National
Credit Union Administration,  the Secretary of the Treasury,  the Securities and
Exchange  Commission and the Federal Trade Commission,  after  consultation with
the National Association of Insurance Commissioners,  to promulgate implementing
regulations  within six months of enactment.  The privacy provisions will become
effective July 1, 2001.

     The G-L-B Act contains significant  revisions to the FHLB System. The G-L-B
Act imposes new capital  requirements  on the FHLBs and authorizes them to issue
two classes of stock with differing dividend rates and redemption  requirements.
The G-L-B Act deletes the current requirement that the FHLBs annually contribute
$300 million to pay interest on certain government obligations in favor of a 20%
of net  earnings  formula.  The G-L-B Act expands the  permissible  uses of FHLB
advances by community  financial  institutions (under $500 million in assets) to
include   funding   loans  to  small   businesses,   small   farms   and   small
agri-businesses.  The G-L-B  Act  makes  membership  in the FHLB  voluntary  for
federal savings associations.

     The  G-L-B  Act  contains  a  variety  of  other  provisions   including  a
prohibition  against ATM surcharges  unless the customer has first been provided
notice of the  imposition  and  amount of the fee.  The  G-L-B Act  reduces  the
frequency of Community  Reinvestment Act  examinations for smaller  institutions
and imposes certain reporting requirements on depository  institutions that make
payments  to   non-governmental   entities  in  connection  with  the  Community
Reinvestment  Act.  The  G-L-B  Act  eliminates  the SAIF  special  reserve  and
authorizes a federal  savings  association  that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.



                                       16
<PAGE>

     The  Company  is  unable  to  predict  the  impact  of the G-L-B Act on its
operations  at this time.  Although the G-L-B Act reduces the range of companies
which may acquire control of the Company,  it may facilitate  affiliations  with
companies in the financial services industry.

     BANK  HOLDING  COMPANY  REGULATION.  The  Company is  registered  as a bank
holding  company  under the Bank  Holding  Company Act of 1956,  as amended (the
"Holding Company Act") and, as such, is subject to supervision and regulation by
the Federal Reserve Board. As a bank holding company, the Company is required to
furnish  to the  Federal  Reserve  Board  annual  and  quarterly  reports of its
operations at the end of each period and to furnish such additional  information
as the Federal  Reserve Board may require  pursuant to the Holding  Company Act.
The Company is also subject to regular examination by the Federal Reserve Board.
In addition, as a savings institution holding company, the Company is subject to
supervision by the Administrator under North Carolina law.

     Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal  Reserve Board before (1)  acquiring  direct or indirect
ownership or control of any voting  shares of any bank or bank  holding  company
if,  after  such  acquisition,  the  bank  holding  company  would  directly  or
indirectly  own or control more than 5% of such  shares;  (2)  acquiring  all or
substantially all of the assets of another bank or bank holding company;  or (3)
merging or consolidating  with another bank holding company.  In addition to the
above restrictions under the Holding Company Act, the Company's  investments are
limited  under  North  Carolina  law to those  investments  permitted  for North
Carolina savings banks. See " -- State Law and Regulation."

     The Holding  Company Act prohibits the Federal Reserve Board from approving
an  application  by a bank holding  company to acquire  voting  shares of a bank
located outside the state in which the operations of the holding  company's bank
subsidiaries   are  principally   conducted,   unless  such  an  acquisition  is
specifically  authorized  by state law. The State of North  Carolina has enacted
reciprocal  interstate  banking  statutes that authorize banks and their holding
companies in North  Carolina to be acquired by banks or their holding  companies
in states that have also  enacted  reciprocal  banking  legislation,  and permit
North Carolina banks and their holding  companies to acquire banks in such other
states.

         Under the Holding  Company Act, any company must obtain approval of the
Federal Reserve Board prior to acquiring control of the Company or the Bank. For
purposes of the Holding  Company Act,  "control" is defined as ownership of more
than 25% of any class of  voting  securities  of the  Company  or the Bank,  the
ability to control the election of a majority of the directors,  or the exercise
of a  controlling  influence  over  management or policies of the Company or the
Bank.

         The  Change in Bank  Control  Act and the  regulations  of the  Federal
Reserve Board thereunder require any person or persons acting in concert (except
for companies  required to make  application  under the Holding Company Act), to
file a written  notice  with the  Federal  Reserve  Board  before such person or
persons  may  acquire  control of the  Company  or the Bank.  The Change in Bank
Control Act defines "control" as the power, directly or indirectly,  to vote 25%
or more of any voting  securities  or to direct the  management or policies of a
bank holding company or an insured bank.

         The Holding Company Act also prohibits, with certain exceptions, a bank
holding company from acquiring  direct or indirect  ownership or control of more
than 5% of the voting  shares of a company  that is not a bank or a bank holding
company,  or from engaging directly or indirectly in activities other than those
of  banking,  managing or  controlling  banks,  or  providing  services  for its
subsidiaries.  The principal  exceptions to these  prohibitions  involve certain
non-bank  activities which, by statute or by Federal Reserve Board regulation or
order,  have been  identified as activities  closely  related to the business of
banking or managing or  controlling  banks.  The  activities  of the Company are
subject to these legal and regulatory  limitations under the Holding Company Act
and the Federal  Reserve Board's  regulations  thereunder.  Notwithstanding  the
Federal Reserve Board's prior approval of specific  nonbanking  activities,  the
Federal  Reserve  Board  has  the  power  to  order  a  holding  company  or its
subsidiaries to terminate any activity, or to terminate its ownership or control
of any subsidiary, when it has reasonable cause to believe that the continuation
of such activity or such ownership or control  constitutes a serious risk to the
financial safety,  soundness or stability of any bank subsidiary of that holding
company.

                                       17
<PAGE>

     The Federal  Reserve  Board has adopted  guidelines  regarding  the capital
adequacy of bank holding  companies,  which  require  bank holding  companies to
maintain  specified  minimum  ratios of capital to total  assets and  capital to
risk-weighted assets. See " -- Capital Requirements."

     The  Federal  Reserve  Board has the power to  prohibit  dividends  by bank
holding companies if their actions constitute unsafe or unsound  practices.  The
Federal  Reserve  Board has  issued a policy  statement  on the  payment of cash
dividends by bank holding companies, which expresses the Federal Reserve Board's
view that a bank holding  company  should pay cash  dividends only to the extent
that the  company's net income for the past year is sufficient to cover both the
cash  dividends  and a rate of earning  retention  that is  consistent  with the
company's capital needs, asset quality, and overall financial condition.

     Bank holding  companies  generally are required to give the Federal Reserve
Board notice of any purchase or redemption of outstanding  equity  securities if
the gross  consideration for the purchase or redemption,  when combined with the
net  consideration  paid  for all  such  purchases  or  redemptions  during  the
preceding 12 months,  is equal to 10% or more of the Company's  consolidated net
worth. The Federal Reserve Board may disapprove such a purchase or redemption if
it  determines  that the proposal  would  violate any law,  regulation,  Federal
Reserve  Board  order,  directive,  or any  condition  imposed  by,  or  written
agreement  with,  the Federal  Reserve Board.  The  requirement to receive prior
Federal  Reserve Board approval for such purchases or redemption  does not apply
to bank holding companies that are  "well-capitalized,"  received one of the two
highest examination ratings at their last examination and are not the subject of
any unresolved supervisory issues.

     CAPITAL REQUIREMENTS.  The regulations of the Federal Reserve Board and the
FDIC require  bank  holding  companies  and  state-chartered  banks that are not
members of the Federal  Reserve  System to maintain a minimum  leverage  capital
requirement consisting of a ratio of Tier 1 capital to total assets (as defined)
of 3%.  Although  setting a minimum 3% leverage ratio,  the capital  regulations
state that only the strongest bank holding  companies and banks,  with composite
examination  ratings  of 1 under the  rating  system  used by the  federal  bank
regulators,  would be  permitted  to  operate at or near such  minimum  level of
capital.  For all but the most highly rated institutions  meeting the conditions
set forth above,  the minimum  leverage  capital  ratio is 3% plus an additional
"cushion"  amount of at least 100 to 200 basis points.  Any bank or bank holding
company  experiencing  or anticipating  significant  growth would be expected to
maintain capital well above the minimum levels. In addition, the Federal Reserve
Board has indicated  that whenever  appropriate,  and in particular  when a bank
holding company is undertaking  expansion,  seeking to engage in new activities,
it will consider,  on a case-by-case basis, the level of an organization's ratio
of tangible Tier 1 capital (after  deducting all intangibles) to total assets in
making an overall  assessment  of  capital.  Tier 1 capital is the sum of common
stockholders' equity (excluding  accumulated other comprehensive income (loss)),
noncumulative  perpetual  preferred  stock  (including any related  surplus) and
minority  interests in consolidated  subsidiaries,  minus all intangible  assets
(other than certain  purchased  mortgage  servicing  rights and purchased credit
card  receivables),  minus  identified  losses and minus  investments in certain
subsidiaries. As a SAIF-insured, state-chartered bank, the Bank must also deduct
from Tier 1 capital an amount equal to its  investments  in, and  extensions  of
credit  to,  subsidiaries  engaged in  activities  that are not  permissible  to
national banks, other than debt and equity  investments in subsidiaries  engaged
in  activities  undertaken  as  agent  for  customers  or  in  mortgage  banking
activities or in subsidiary depository institutions or their holding companies.

     The  risk-based  capital  rules of the Federal  Reserve  Board and the FDIC
require bank holding  companies and state  non-member  banks to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two basic
components:  a core capital (Tier 1)  requirement  and a  supplementary  capital
(Tier 2) requirement. Supplementary capital elements include, subject to certain
limitations,  the allowance for losses on loans and leases;  perpetual preferred
stock that does not qualify as Tier 1 capital and long-term preferred stock with
an  original  maturity  of at least  20  years  from  issuance;  hybrid  capital
instruments,  including perpetual debt and mandatory convertible securities; and
subordinated debt and intermediate-term preferred stock.

     The risk-based  capital  regulations assign balance sheet assets and credit
equivalent  amounts of off-balance  sheet  obligations to one of four broad risk
categories  based  principally on the degree of credit risk  associated with



                                       18
<PAGE>

the obligor.  The assets and off-balance sheet items in the four risk categories
are weighted at 0%, 20%, 50% and 100%.  These  computations  result in the total
risk-weighted assets.

     The  risk-based  capital  regulations  require  all banks and bank  holding
companies to maintain a minimum  ratio of total  capital to total  risk-weighted
assets of 8%, with at least 4% as core capital.  For the purpose of  calculating
these ratios: (i) supplementary  capital will be limited to no more than 100% of
core capital;  and (ii) the aggregate  amount of certain types of  supplementary
capital will be limited.  In addition,  the risk-based capital regulations limit
the  allowance  for  loan  losses  includable  as  capital  to  1.25%  of  total
risk-weighted assets.

     The federal bank regulatory  agencies,  including the Federal Reserve Board
and the FDIC, have revised their risk-based capital  requirements to ensure that
such  requirements  provide for explicit  consideration  by commercial  banks of
interest  rate risk.  Under  these  requirements,  a bank's  interest  rate risk
exposure is quantified using either the measurement system set forth in the rule
or the bank's  internal  model for  measuring  such  exposure,  if such model is
determined  to be adequate  by the bank's  examiner.  If the dollar  amount of a
bank's interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets,  the bank is required to hold  additional
capital equal to the dollar amount of the excess.  The Bank's  current  interest
rate risk exposure does not exceed 1% of the Bank's total assets.  Management of
the Bank does not believe that this interest rate risk  component has an adverse
effect on the Bank's capital.

     Under North  Carolina  law,  savings banks must maintain a net worth of not
less than 5% of assets. In computing its compliance with this  requirement,  the
savings bank must deduct intangible assets from both net worth and assets.

     The Bank was in compliance with both the FDIC capital  requirements and the
North  Carolina  net  worth  requirement  at  December  31,  2000.  For  further
information  regarding the Bank's capital  requirements,  see Note 7 of Notes to
Consolidated Financial Statements in the Annual Report.

     LIQUIDITY.  North  Carolina  savings  banks must  maintain cash and readily
marketable  investments  in an  amount  not less  than 10% of the  assets of the
savings banks.  The Bank was in compliance with this requirement at December 31,
2000.

     PROMPT CORRECTIVE  REGULATORY  ACTION.  Under the Federal Deposit Insurance
Corporation  Improvement Act of 1991 ("FDICIA"),  the federal banking regulators
are  required  to  take  prompt  corrective  action  if  an  insured  depository
institution  fails  to  satisfy  certain  minimum  capital   requirements.   All
institutions, regardless of their capital levels, are restricted from making any
capital  distribution  or paying any management  fees if the  institution  would
thereafter   fail  to  satisfy  the  minimum  levels  for  any  of  its  capital
requirements.  An  institution  that  fails to meet the  minimum  level  for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased  monitoring by the  appropriate  federal  banking  regulator;  (ii)
required to submit an acceptable capital  restoration plan within 45 days; (iii)
subject to asset growth  limits;  and (iv)  required to obtain prior  regulatory
approval for  acquisitions,  branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the  institution's  holding company
that the  institution  will  comply  with the plan until it has been  adequately
capitalized on average for four  consecutive  quarters,  under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution  into capital  compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized"  institution, as well as any undercapitalized institution that
did not  submit an  acceptable  capital  restoration  plan,  may be  subject  to
regulatory demands for recapitalization,  broader application of restrictions on
transactions  with  affiliates,  limitations on interest rates paid on deposits,
asset  growth  and other  activities,  possible  replacement  of  directors  and
officers,  and restrictions on capital distributions by any bank holding company
controlling the institution.  Any company controlling the institution could also
be required to divest the  institution or the  institution  could be required to
divest   subsidiaries.   The  senior  executive   officers  of  a  significantly
undercapitalized   institution   may  not  receive   bonuses  or   increases  in
compensation  without prior  approval and the  institution  is  prohibited  from
making  payments of principal  or interest on its  subordinated  debt.  In their
discretion,  the  federal  banking  regulators  may also  impose  the  foregoing
sanctions on an  undercapitalized  institution if the regulators  determine that
such


                                       19
<PAGE>

actions are necessary to carry out the purposes of the prompt  corrective action
provisions.  If an institution's ratio of tangible capital to total assets falls
below  a  "critical   capital  level,"  the  institution   will  be  subject  to
conservatorship or receivership within specified time periods.

     Under  regulations  jointly  adopted by the federal banking  regulators,  a
savings  association's  capital  adequacy  for  purposes  of the  FDICIA  prompt
corrective  action rules is determined on the basis of the  institution's  total
risk-based  capital  ratio  (the  ratio of its total  capital  to  risk-weighted
assets),  Tier 1  risk-based  capital  ratio (the  ratio of its core  capital to
risk-weighted  assets)  and  leverage  ratio  (the  ratio  of its Tier 1 or core
capital to adjusted total assets).

     The following  table shows the capital ratio  requirements  for each prompt
corrective action category:
<TABLE>
<CAPTION>
                                                     ADEQUATELY                                  SIGNIFICANTLY
                          WELL-CAPITALIZED           CAPITALIZED         UNDERCAPITALIZED        UNDERCAPITALIZED
<S>                        <C>                       <C>                 <C>                     <C>
Total risk-based
    capital ratio          10.0% or more             8.0% or more        Less than 8.0%          Less than 6.0%
Tier 1 risk-based
    capital ratio           6.0% or more             4.0% or more        Less than 4.0%          Less than 3.0%
Leverage ratio              5.0% or more             4.0% or more *      Less than 4.0% *        Less than 3.0%
<FN>
*  3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>

A  "critically  undercapitalized"  savings  association  is defined as a savings
association  that has a ratio of "tangible  equity" to total assets of less than
2.0%.  Tangible  equity is defined as core  capital  plus  cumulative  perpetual
preferred stock (and related surplus) less all intangibles other than qualifying
supervisory  goodwill and certain purchased  mortgage servicing rights. The FDIC
may reclassify a well capitalized savings association as adequately  capitalized
and may require an adequately  capitalized  or  undercapitalized  association to
comply with the supervisory actions applicable to associations in the next lower
capital  category  (but  may not  reclassify  a  significantly  undercapitalized
institution as critically undercapitalized) if the FDIC determines, after notice
and an opportunity for a hearing,  that the savings  association is in an unsafe
or unsound  condition or that the  association  has received and not corrected a
less-than-satisfactory  rating for any CAMELS rating  category.  For information
regarding the position of the Bank with respect to the FDICIA prompt  corrective
action rules, see Note 7 of Notes to Consolidated  Financial Statements included
under Item 7 hereof.

     COMMUNITY REINVESTMENT ACT. The Bank, like other financial institutions, is
subject to the Community  Reinvestment Act ("CRA"). The purpose of the CRA is to
encourage  financial  institutions to help meet the credit needs of their entire
communities,  including  the  needs of  low-and  moderate-income  neighborhoods.
During  the  Bank's   last   compliance   examination,   the  Bank   received  a
"satisfactory"  rating with respect to CRA  compliance.  The Bank's  rating with
respect to CRA  compliance  would be a factor to be  considered  by the  Federal
Reserve Board and the FDIC in considering  applications submitted by the Bank to
acquire branches or to acquire or combine with other financial  institutions and
take other  actions  and,  if such  rating was less than  "satisfactory,"  could
result in the denial of such applications.

     DIVIDEND  LIMITATIONS.  The Bank may not pay dividends on its capital stock
if its  regulatory  capital  would  thereby  be reduced  below the  amount  then
required  for the  liquidation  account  established  for the benefit of certain
depositors of the Bank at the time of its conversion to stock form.

         Earnings of the Bank appropriated to bad debt reserves and deducted for
federal  income tax purposes are not available for payment of cash  dividends or
other distributions to stockholders without payment of taxes at the then current
tax rate by the Bank on the amount of earnings  removed  from the  reserves  for
such  distributions.  See  "Taxation." The Bank intends to make full use of this
favorable tax treatment and does not contemplate use of any earnings in a manner
which  would  limit  the  Bank's  bad  debt  deduction  or  create  federal  tax
liabilities.

                                       20
<PAGE>

     Under  applicable  regulations,  the Bank is  prohibited  from  making  any
capital distributions if after making the distribution, the Bank would have: (i)
a total  risk-based  capital  ratio of less than 8.0%;  (ii) a Tier 1 risk-based
capital ratio of less than 4.0%;  (iii) a leverage ratio of less than 4.0%, (iv)
a  regulatory  net  worth  less  than the  liquidation  account  established  in
connection  with  the  Bank's  conversion  to a  stock  institution,  or  (v)  a
regulatory net worth less than the minimum amount required by the North Carolina
Savings Institutions Administrator.

     DEPOSIT  INSURANCE.  The Bank is  required  to pay  assessments  based on a
percentage of its insured  deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based  deposit insurance  assessment system, the
assessment rate for an insured depository  institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the  institution's  capital level and supervisory  evaluations.  Based on the
data reported to regulators  for the date closest to the last day of the seventh
month preceding the semi-annual assessment period,  institutions are assigned to
one of three  capital  groups -- well  capitalized,  adequately  capitalized  or
undercapitalized  --  using  the  same  percentage  criteria  as in  the  prompt
corrective action  regulations.  See "-- Prompt Corrective  Regulatory  Action."
Within each capital group,  institutions  are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other  information  as the FDIC  determines to be relevant to
the  institution's  financial  condition  and  the  risk  posed  to the  deposit
insurance fund. The Bank is currently  classified as well capitalized under this
assessment system.

     RESTRICTIONS ON CERTAIN ACTIVITIES.  Under applicable law,  state-chartered
banks with deposits insured by the FDIC are generally  prohibited from acquiring
or  retaining  any  equity  investment  of a type  or in an  amount  that is not
permissible  for a national bank. The foregoing  limitation,  however,  does not
prohibit  FDIC-insured  state  banks  from  acquiring  or  retaining  an  equity
investment   in  a   subsidiary   in  which  the  bank  is  a  majority   owner.
State-chartered banks are also prohibited from engaging as principal in any type
of activity  that is not  permissible  for a national bank and  subsidiaries  of
state-chartered,  FDIC-insured state banks have been prohibited from engaging as
principal in any type of activity that is not  permissible for a subsidiary of a
national bank unless in either case the FDIC  determines that the activity would
pose no significant risk to the appropriate  deposit insurance fund and the bank
is, and continues to be, in compliance with applicable capital standards.

     The FDIC has adopted  regulations to clarify the foregoing  restrictions on
activities of FDIC-insured  state-chartered banks and their subsidiaries.  Under
the regulations,  the term activity refers to the authorized conduct of business
by an insured  state bank and includes  acquiring or  retaining  any  investment
other than an equity  investment.  An activity  permissible  for a national bank
includes  any activity  expressly  authorized  for national  banks by statute or
recognized as permissible in regulations,  official circulars or bulletins or in
any order or written  interpretation  issued by the Office of the Comptroller of
the Currency  ("OCC").  In its regulations,  the FDIC indicates that it will not
permit  state banks to  directly  engage in  commercial  ventures or directly or
indirectly  engage in any  insurance  underwriting  activity  other  than to the
extent such  activities are  permissible  for a national bank or a national bank
subsidiary or except for certain  other limited forms of insurance  underwriting
permitted under the regulations.  Under the regulations,  the FDIC permits state
banks that meet applicable  minimum capital  requirements to engage as principal
in certain  activities  that are not  permissible  to national  banks  including
guaranteeing  obligations of others,  activities which the Federal Reserve Board
has found by  regulation  or order to be closely  related to banking and certain
securities activities conducted through subsidiaries.

     Subject  to  limitation  by  the  Administrator,  North  Carolina-chartered
savings banks may make any loan or investment or engage in any activity which is
permitted   to   federally    chartered    institutions.    However,   a   North
Carolina-chartered  savings bank cannot invest more than 15% of its total assets
in business,  commercial,  corporate and agricultural loans. In addition to such
lending  authority,  North  Carolina-chartered  savings banks are  authorized to
invest  funds,  in excess  of loan  demand,  in  certain  statutorily  permitted
investments,  including but not limited to (i) obligations of the United States,
or those  guaranteed  by it; (ii)  obligations  of the State of North  Carolina;
(iii) bank demand or time  deposits;  (iv) stock or  obligations  of the federal
deposit  insurance  fund  or  a  FHLB;  (v)  savings  accounts  of  any  savings
institution as approved by the board of directors; and (vi) stock or obligations
of any agency of the State of North  Carolina or of the United  States or of any
corporation doing business in North Carolina whose principal business is to make
education loans.


                                       21
<PAGE>

     SAFETY AND SOUNDNESS  STANDARDS.  The federal banking regulatory  agencies,
including the FDIC,  have adopted  standards for the safe and sound operation of
financial institutions, as mandated by the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"). These regulations require insured depository
institutions to maintain internal controls and information  systems and internal
audit  systems  that are  appropriate  for the  size,  nature  and  scope of the
institution's  business.  The rules also require  certain basic  standards to be
observed  in  loan  documentation,   credit  underwriting,  interest  rate  risk
exposure,  and  asset  growth.  Depository  institutions  are also  required  to
maintain  safeguards to prevent the payment of  compensation,  fees and benefits
that are excessive or that could lead to material  financial  loss,  and to take
into account  factors such as  comparable  compensation  practices at comparable
institutions.

     The regulations  also require a depository  institution to maintain a ratio
of  classified  assets to total  capital and  ineligible  allowances  that is no
greater than 1.0, and require that depository institutions have minimum earnings
sufficient  to absorb losses  without  impairing  capital.  The FDIC may require
institutions to file safety and soundness plans to cure any deficiency. The FDIC
may issue orders  directing an institution to correct a deficiency or to take or
refrain from taking actions  prohibited by Section 39 of FDICIA,  and may assess
civil  money  penalties  or take  other  enforcement  action if such an order is
violated.

     TRANSACTIONS  WITH AFFILIATES.  Transactions  between savings banks and any
affiliate  are governed by Sections  23A and 23B of the Federal  Reserve Act. An
affiliate  of a  savings  bank is any  company  or  entity  which  controls,  is
controlled  by or is under  common  control  with the savings  bank.  Generally,
Sections  23A and 23B (i) limit the  extent  to which  the  savings  bank or its
subsidiaries may engage in "covered  transactions"  with any one affiliate to an
amount equal to 10% of such institution's capital stock and surplus, and contain
an aggregate  limit on all such  transactions  with all  affiliates to an amount
equal to 20% of such  capital  stock and surplus and (ii)  require that all such
transactions be on terms  substantially  the same, or at least as favorable,  to
the  institution  or subsidiary  as those  provided to a  non-affiliate.  A bank
holding  company and its  subsidiaries  are considered  "affiliates" of the bank
under Section 23A and 23B. The term "covered transaction" includes the making of
loans,  purchase of assets,  issuance of a guarantee  and similar other types of
transactions.  In addition to the restrictions  imposed by Sections 23A and 23B,
the Bank may not (i) lend or otherwise extend credit to an affiliate, except for
any affiliate  which engages only in activities  which are  permissible for bank
holding companies, or (ii) purchase or invest in any stocks, bonds,  debentures,
notes or similar  obligations of any affiliate,  except for affiliates which are
subsidiaries of the Bank.

     FEDERAL  HOME LOAN BANK  SYSTEM.  The Bank is a member of the FHLB  System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal  Housing  Finance Board  ("FHFB").  The FHLBs  provide a central  credit
facility primarily for member institutions.  As a member of the FHLB of Atlanta,
the Bank is required to acquire and hold shares of capital  stock in the FHLB of
Atlanta in an amount at least equal to 1% of the aggregate  unpaid  principal of
its home mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year,  or 1/20 of its advances  (borrowings)  from the FHLB of
Atlanta,  whichever is greater.  Cooperative  Bank was in  compliance  with this
requirement  with  investment  in FHLB of Atlanta  stock at December 31, 2000 of
approximately  $3.8 million.  The FHLB of Atlanta serves as a reserve or central
bank for its  member  institutions  within  its  assigned  region.  It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB  System.  It makes  advances to members in  accordance  with  policies  and
procedures  established  by the FHLB and the Board of  Directors  of the FHLB of
Atlanta.  Long-term advances may only be made for the purpose of providing funds
for residential housing finance.

     FEDERAL  RESERVE BOARD  REGULATION.  Pursuant to regulations of the Federal
Reserve Board, all FDIC-insured  depository  institutions  must maintain average
daily reserves against their  transaction  accounts.  Because required  reserves
must be maintained in the form of vault cash or in a noninterest bearing account
at a Federal  Reserve Bank,  the effect of the reserve  requirement is to reduce
the amount of the institution's  interest-earning  assets. At December 31, 2000,
the Bank met its reserve requirements.

     STATE  LAW  AND  REGULATION.  North  Carolina  law  contains  comprehensive
provisions  for the  regulation of a savings bank business in the State of North
Carolina,   including  the  manner  of   chartering  a  savings  bank,   capital


                                       22
<PAGE>


requirements,  the composition and  qualifications  of boards of directors,  the
number and manner of selection of officers, and record keeping requirements.

     The Bank derives its investment  power from these laws and  regulations and
must  structure its lending  policies and  procedures to comply with the various
applicable  provisions.  Likewise,  the  investments  by the Bank are regulated,
including  investments  in certain types of specific  properties.  The manner of
establishing savings accounts and evidencing the same is prescribed,  as are the
obligations of the Bank with respect to withdrawals from savings accounts.  As a
North  Carolina  savings bank,  Cooperative  Bank is also  permitted to make any
investment permitted by a federal savings association.

     North Carolina savings banks may conduct  operations through branch offices
located  in the  State of North  Carolina.  The  North  Carolina  Savings  Banks
Commission  of the  Department  of  Commerce  conducts  hearings  on all  branch
applications, and any interested person may present evidence and argument.

     Any plan adopted by the directors of a savings bank under which the savings
bank would  reorganize or merge or consolidate with another savings bank must be
approved by the Administrator.  The plan must also be approved by the members or
stockholders who are entitled to vote, at an annual or special meeting.

     The  Administrator  is required to conduct a periodic  examination  of each
institution under his jurisdiction.  The examination  provides directors with an
independent  assessment of the Bank's  operations and compliance with applicable
laws,  regulations and prudent  operating  policies.  The Administrator may make
such examination jointly with examiners of the FDIC.

                                    TAXATION

     The Bank is subject to the provisions of the Internal Revenue Code of 1986,
as amended (the "Code") in the same general manner as other corporations.

     Legislation  that was effective for tax years  beginning after December 31,
1995 required  savings  institutions to recapture into taxable income over a six
taxable  year  period  the  portion of the tax loan  reserve  that  exceeds  the
pre-1988 tax loan loss reserve. The Bank is no longer allowed to use the reserve
method for tax loan loss provisions, but is allowed to use the experience method
of  accounting  for bad debts used by  commercial  banks under Code section 585.
There will be no future  effect on net income  from the  recapture  because  the
taxes on these bad debt  reserves  has already  been  accrued as a deferred  tax
liability.

     For additional  information  regarding federal and state taxes, see Note 10
of Notes to Consolidated Financial Statements in the Annual Report.

STATE INCOME TAXATION

     Under North Carolina law, the Bank is subject to an annual corporate income
tax of 6.90% of its federal  taxable income as computed under the Code,  subject
to certain  prescribed  adjustments.  In addition to the state corporate  income
tax, the Bank is subject to an annual state franchise tax, which is imposed at a
rate of .15%  applied to the greatest of the Bank's (i) capital  stock,  surplus
and undivided profits, (ii) investment in tangible property in North Carolina or
(iii)  appraised  valuation  of  property  in  North  Carolina.  The  filing  of
consolidated returns is not permitted under North Carolina law.

ITEM 2.  PROPERTIES
-------------------

     The Bank operated 16 offices  throughout the coastal and inland communities
of eastern  North  Carolina at December 31, 2000.  The land is leased for two of
these offices. The Bank owns the buildings for all the offices except one, which
is leased.

                                       23
<PAGE>

For additional  information  relating to premises and  equipment,  see Note 4 to
Consolidated Financial Statements in the Annual Report.

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

     None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended December 31, 2000.

                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
------------------------------------------------------------------------------

     The   information   contained  under  the  section   captioned   "Corporate
Information" in the Annual Report is incorporated by reference.

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

     The information  required by this item is incorporated  herein by reference
to the  tables  captioned  "Selected  Financial  and Other  Data" in the  Annual
Report.

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
--------------------------------------------------------------------------------

     The information contained in the section captioned "Management's Discussion
& Analysis" in the Annual Report is incorporated herein by reference.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------

     The information contained in the section captioned "Management's Discussion
and Analysis" in the Annual Report is incorporated herein by reference.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------

     The  financial  statements  contained in the Annual Report which are listed
under Item 14 herein are incorporated herein by reference.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------

     The  information  required by this item is incorporated by reference to the
Company's  Current  Report on Form 8-K filed on September  27, 2000 and its Form
8-K/A filed on October 6, 2000.


                                       24
<PAGE>


                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

     (a)  Directors of the Registrant

     The  information  contained  under the  section  captioned  "Proposal  I --
Election of  Directors" in the Proxy  Statement  for the 2001 Annual  Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.

     (b)  Principal Officers of the Registrant

     The information contained under the caption "Executive Officers" under Part
I of this Form 10-K is incorporated herein by reference.

ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

     The  information  contained  under the  section  captioned  "Proposal  I --
Election  of  Directors"  in the  Proxy  Statement  is  incorporated  herein  by
reference.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------

     (a)  Security Ownership of Certain Beneficial Owners

          Information  required by this item is incorporated herein by reference
          to the sections  captioned  "Voting  Securities and Principal  Holders
          Thereof" in the Proxy Statement.

     (b)  Security Ownership of Management

          Information  required by this item is incorporated herein by reference
          to the sections captioned "Proposal I -- Election of Directors" in the
          Proxy Statement.

     (c)  Changes in Control

          Management of the Bank knows of no arrangements,  including any pledge
          of any person of securities of the Bank, the operation of which may at
          a subsequent date result in a change in control of the Bank.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

     The information  required by this item is incorporated  herein by reference
to the  sections  captioned  "Proposal I -- Election of  Directors"  and "Voting
Securities and Principal Holders Thereof" in the Proxy Statement.


                                       25
<PAGE>


                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------

     (a) Contents.  The following financial statements are filed as part of this
         --------
Annual Report on Form 10-K.

          (1)  Consolidated Financial Statements

               1.   Independent Auditors' Report of KPMG LLP *
               2.   Report of Independent Accountants of  PricewaterhouseCoopers
                    LLP **
               3.   Consolidated   Statements  of  Financial   Condition  as  of
                    December 31, 2000 and 1999 *
               4.   Consolidated  Statements of  Operations  for the Years Ended
                    December 31, 2000, 1999 and 1998 *
               5.   Consolidated  Statements  of  Comprehensive  Income  for the
                    Years Ended December 31, 2000, 1999 and 1998 *
               6.   Consolidated  Statements  of  Stockholders'  Equity  for the
                    Years Ended December 31, 2000, 1999 and 1998 *
               7.   Consolidated  Statements  of Cash Flows for the Years  Ended
                    December 31, 2000, 1999, and 1998 *
               8.   Notes to Consolidated Financial Statements *

               _____________
               *  Incorporated  by  reference to the Annual  Report  attached
                  hereto as Exhibit 13.
               ** Filed as Exhibit 23.2 hereto.


          (2)  Financial  Statement Schedules (All financial statement schedules
               have  been  omitted  as  the  required   information   is  either
               inapplicable or included in the Consolidated Financial Statements
               or related notes.)

     (b) During the fourth  quarter of 2000,  the  Registrant  filed one Current
Report on Form 8-K on October 23, 2000. The Registrant also amended a previously
filed Current  Report on Form 8-K. The amendment was filed on October 6, 2000 to
amend a Form 8-K filed on September 27, 2000.

     (c) The  following  exhibits are either filed as part of this report or are
incorporated herein by reference:
<TABLE>
<CAPTION>
        No.                         Description                                                Page
        ---                         -----------                                                ----

        <S>             <C>                                                                     <C>
        3.1             Articles of Incorporation                                                *

        3.2             Bylaws                                                                   *

        10.1            Cooperative Bank for Savings, Inc. 1990 Stock                            *
                        Option Plan

        10.2            Cooperative Bankshares, Inc. 1998 Stock Option and
                        Incentive Plan                                                          **

        10.3            Employment Agreement with Frederick Willetts, III                        *

        10.4            Severance Agreement with Todd L. Sammons                                 *

        10.5            Severance Agreement with O.C. Burrell, Jr.                              ***

                                       26
<PAGE>

        10.6            Severance Agreement with Dickson B. Bridger

        10.7            Amendments to Severance Agreements Todd L. Sammons
                        and O.C. Burrell, Jr.                                                    *

        10.8            Indemnity Agreement with Directors and Executive                         *
                        Officers

        11              Statement re: computation of per share earnings -
                        Reference is made to the Company's Consolidated
                        Statements of Operations attached hereto as Exhibit 13,
                        which are incorporated herein by reference

        13              Annual Report to Stockholders for the year ended
                        December 31, 2000

        21              Subsidiaries

        23.1            Consent of KPMG LLP

        23.2            Consent of PricewaterhouseCoopers LLP

        23.3            PricewaterhouseCoopers LLP Report of Independent Accountants
<FN>
____________
*    Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-4 (Reg. No. 33-79206).
**   Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-8 (Reg. No. 333-92219)
***  Incorporated by reference to the Registrant's Form 10-K for the fiscal year
     ended December 31, 1997.
</FN>
</TABLE>


                                       27
<PAGE>
                                   SIGNATURES

     Pursuant to the  requirements of Section 13 of the Securities  Exchange Act
of 1934,  the  registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                       COOPERATIVE BANKSHARES, INC.




Date:  March 22, 2001                  By: /s/ Frederick Willetts, III
                                           ----------------------------------
                                           Frederick Willetts, III
                                           President and Chief Executive Officer
                                           (Duly Authorized Representative)

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.


By: /s/ Frederick Willetts, III                            Date:  March 22, 2001
    -------------------------------------------------
       Frederick Willetts, III
       President, Chief Executive Officer and Chairman
       (Principal Executive Officer and Director)

By: /s/ Todd Sammons                                       Date:  March 22, 2001
    -------------------------------------------------
       Todd Sammons
       Senior Vice President and Chief Financial Officer
       (Principal Financial and Accounting Officer)

By: /s/ James D. Hundley, M.D.                             Date:  March 27, 2001
    -------------------------------------------------
       James D. Hundley, M.D.
       (Director)

By: /s/ O. Richard Wright, Jr.                             Date:  March 29, 2001
    -------------------------------------------------
       O. Richard Wright, Jr.
       (Director)

By: /s/ Paul G. Burton                                     Date:  March 28, 2001
    -------------------------------------------------
       Paul G. Burton
       (Director)

By: /s/ H. Thompson King, III                              Date:  March 29, 2001
    -------------------------------------------------
       H. Thompson King, III
       (Director)

By: /s/ F. Peter Fensel, Jr.                               Date:  March 28, 2001
    -------------------------------------------------
       F. Peter Fensel, Jr.
       (Director)

By: //s/ R. Allen Rippy                                    Date:  March 26, 2001
    -------------------------------------------------
       R. Allen Rippy
       (Director)

By: /s/ Russell M. Carter                                  Date:  March 28, 2001
    -------------------------------------------------
       Russell M. Carter
       (Director)