UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

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

(Mark One)

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

For the Fiscal Year Ended December 31, 2003

                                       OR

/ /  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 or 15(d) 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]

Indicate  by check mark  whether  the  registrant  is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). YES      NO  X
                                         ---     ---

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant was approximately $55,626,101 based on the closing sales price of the
Common Stock as listed on the Nasdaq  National  Market as of the last day of the
registrant's most recently completed second fiscal quarter. 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 March 5, 2004, there were issued and 2,860,764  outstanding  shares of the
registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the Fiscal Year Ended
     December 31, 2003. (Parts II and IV)
2.   Portions  of  the  Proxy   Statement   for  the  2004  Annual   Meeting  of
     Stockholders. (Part III)



<PAGE>
                                     PART I

Item 1.  Business
-----------------

General

     THE COMPANY:  Cooperative Bankshares,  Inc. (the "Company") is a registered
bank holding company  incorporated in North Carolina in 1994. The Company serves
as the holding company for Cooperative  Bank  ("Cooperative"  or the "Bank"),  a
North  Carolina  chartered  commercial  bank. The Company's  primary  activities
consist of holding the stock of  Cooperative  Bank and operating the business of
the Bank and its  subsidiaries.  Accordingly,  the information set forth in this
report,  including  financial  statements and related data, relates primarily to
Cooperative Bank and its subsidiaries.

     COOPERATIVE BANK:  Chartered in 1898, the Bank's headquarters is located in
Wilmington,  North  Carolina.  With  the  opening  of a  new  branch  office  in
Southport,  North  Carolina,  Cooperative  operates  21 offices  throughout  the
coastal and inland  communities of Eastern North Carolina.  These offices extend
from  Corolla,  located on the Outer  Banks of North  Carolina,  to Tabor  City,
located on the South Carolina border.  The Bank opened two new financial centers
in Wilmington,  North Carolina, one in May 2003 and another in December 2003 and
a new branch office in Morehead  City,  North  Carolina in July 2003. The Bank's
deposit  accounts  are insured up to  applicable  limits by the Federal  Deposit
Insurance Corporation ("FDIC").  Effective December 31, 2002, the Bank converted
its charter from that of a state  savings bank to a state  commercial  bank.  At
December 31, 2003, the Company had total assets of $502.3  million,  deposits of
$367.1 million and stockholders' equity of $43.1 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  retirement 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.  The Bank began offering  Online Banking and Bill Payment in July 2003.
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 large  percentage of its fixed-rate  mortgage
loan  originations in the secondary  market and through  brokered  arrangements.
This enables the Bank to invest its funds in 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.

     On May 31, 2002, the Bank,  through its  subsidiary,  CS&L Services,  Inc.,
acquired  the  operating  assets  of  Lumina  Mortgage  Company  ("Lumina"),   a
Wilmington,   North  Carolina-based   mortgage  banking  firm  with  offices  in
Wilmington,  North  Carolina,  North Myrtle Beach,  South  Carolina and Virginia
Beach,  Virginia.  The purchase price was approximately $740,000 in cash and two
additional  payments of $400,000  each,  one which was paid on July 31, 2003 and
the second which is payable on July 31, 2004.  In October 2002,  CS&L  Services,
Inc. was renamed Lumina Mortgage Company, Inc.

     In December  2002,  the Bank formed two new  subsidiaries,  CS&L  Holdings,
Inc., a Virginia  corporation  ("Holdings")  and CS&L Real Estate Trust,  Inc. a
North Carolina  corporation (the "REIT") which has elected to be taxed as a real
estate  investment  trust.  At December  31, 2003,  Holdings was a  wholly-owned
subsidiary  of the Bank and its only  activity  consisted  of holding all of the
outstanding  shares of common stock of the REIT.  The REIT was formed to enhance
the liquidity and  facilitate  future capital needs of the Bank. At December 31,
2003, the REIT held a participation  interest in approximately $124.6 million in
mortgage loans of the Bank. At December 31, 2003, all of the outstanding  shares
of the  REIT's  common  stock  and 85% of its 7%  preferred  stock  was  held by
Holdings. The remaining shares of 7% preferred stock in the REIT were granted to
approximately 113 officers,  directors and certain other parties pursuant to the
Bank's REIT Bonus Plan. There must be at least 100 stockholders of REIT stock.

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

                                       2
<PAGE>

MARKET AREA

     Cooperative Bank considers its primary market area to be the communities of
Eastern North  Carolina  between the Virginia and 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  92,000 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.

     By acquiring Lumina, the Bank's footprint extended north into Virginia with
an office in Virginia  Beach,  and south into South  Carolina  with an office in
North  Myrtle  Beach.  These areas offer busy real estate  markets that give our
offices the opportunity to make purchase,  refinance and reverse mortgage loans.
Their  markets are similar to those that have proven to be good  investments  in
the past.  The offices are located in coastal  areas with a large  dependence on
the tourism industry and the retirement community.

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, 2003, approximately $267 million, or
66%, of the Bank's loan portfolio, which excludes loans held for sale, consisted
of loans secured by residential  properties.  In recent years, however, the Bank
has emphasized  origination of nonresidential real estate loans, and secured and
unsecured  consumer and  business  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, 2003,  adjustable-rate and fixed-rate loans
totaled  approximately  69% and 31%,  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, 2003.
<TABLE>
<CAPTION>

                                                                               At December 31,
                                        -------------------------------------------------------------------------------------------
                                               2003                 2002               2001               2000            1999
                                        -----------------    ------------------- ----------------  ---------------  ---------------
                                                                              (Dollars in thousands)
                                         Amount      %        Amount      %       Amount   %       Amount      %      Amount    %
                                         ------     ---       ------     ---      ------  ---      ------     ---     ------   ---
<S>                                       <C>        <C>       <C>       <C>       <C>    <C>       <C>       <C>      <C>      <C>
Real estate:
   Construction and land development     $ 57,598   14.34%   $ 51,431    13.16%  $ 62,142  16.64% $ 37,542   10.80% $  1,497   0.45%
   Mortgage:
      1-4 family residential              206,476   51.46     204,395    52.29    209,622  56.13   234,383   67.45   253,857  75.83
      Multi-family residential             13,357    3.33      17,044     4.36     15,626   4.18    17,081    4.92    17,166   5.13
      Commercial                           91,627   22.84      87,257    22.32     55,664  14.90    31,300    9.01    38,765  11.58
      Equity line                          16,006    3.99      14,541     3.72     13,131   3.52    11,954    3.44     9,772   2.92
      Other                                   359    0.09         363     0.09        254   0.07       174    0.05        78   0.02
                                         --------  ------    --------   ------   -------- ------  --------  ------  -------- ------
             Total real estate loans      385,423   96.05     375,031    95.95    356,439  95.44   332,434   95.67   321,135  95.93

Commercial, industrial and agricultural    14,599    3.64      13,717     3.51     13,430   3.60    10,970    3.16    10,653   3.18
Consumer                                    6,069    1.52       6,396     1.64      7,285   1.95     7,236    2.08     5,443   1.63
                                         --------  ------    --------   ------   -------- ------  --------  ------  -------- ------
             Total gross loans            406,091  101.21     395,144   101.09    377,154 100.99   350,640  100.91   337,231 100.74
                                         --------  ------    --------   ------   -------- ------  --------  ------  -------- ------

Less:
Unearned discounts and net deferred fees    1,402    0.35       1,331     0.34      1,173   0.31       994    0.29     1,182   0.35
Allowance for loan losses                   3,447    0.86       2,937     0.75      2,523   0.68     2,160    0.62     1,306   0.39
                                         --------  ------    --------   ------   -------- ------  --------  ------  -------- ------
              Net loans                  $401,242  100.00%   $390,876   100.00%  $373,458 100.00% $347,486  100.00% $334,743 100.00%
                                         ========  ======    ========   ======   ======== ======  ========  ======  ======== ======

</TABLE>


                                       4
<PAGE>
     The following table sets forth as of December 31, 2003, certain information
regarding the dollar amount of loans maturing in the Bank's loan portfolio based
on their contractual terms to maturity.
<TABLE>
<CAPTION>


                                   Due Within             Due After             Due After
                                    One Year          1 through 5 Years          5 Years             Total
                                    --------          -----------------          -------           ---------
  <S>                                  <C>                    <C>                  <C>                 <C>
                                                       (In thousands)
Real Estate:
  Construction and land
    development                     $ 30,836               $ 13,368             $ 13,394           $  57,598
  Mortgage
    1-4 family residential            13,575                 17,708              175,193             206,476
    Multi-family residential           3,663                  5,097                4,597              13,357
    Commercial                        13,592                 65,408               12,627              91,627
    Equity line                        3,391                    435               12,180              16,006
    Other                                 57                    302                   --                 359
Commercial, Industrial and
  Agricultural                         6,925                  6,636                1,038              14,599
Consumer                               3,029                  2,764                  276               6,069
                                    --------               --------             --------           ---------
     Total                          $ 75,068               $111,718             $219,305           $ 406,091
                                    ========               ========             ========           =========
</TABLE>
<TABLE>
<CAPTION>

     The next table shows at December  31,  2003,  the dollar  amount of all the
Bank's  loans due after  December 31, 2004 which have fixed  interest  rates and
have floating or adjustable interest rates.


                                                         One to Five            After
                                                            Years            Five Years           Total
                                                         ----------          ----------           -----
<S>                                                         <C>                <C>                <C>
                                                                           (In thousands)
Loans maturing after one year with:
    Fixed interest rates                                  $  53,329         $   51,227          $  104,556
    Floating or adjustable rates                             58,389            168,078             226,467
                                                          ---------         ----------          ----------
       Total                                              $ 111,718         $  219,305          $  331,023
                                                          =========         ==========          ==========
</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  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 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 the ARM at the fully  indexed
rate. While the proportion of fixed and adjustable-rate loan originations in the
Bank's  portfolio  largely depend 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.  The Bank offers  1/1,  3/1 and 5/1 ARM  products.  These loans
adjust  annually  after the end of the first one, three or five-year  period.  A
"Low Doc" program is available for the nonconforming loans.

                                       5
<PAGE>

     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. In recent years the Bank has
sold the majority of fixed-rate mortgage originations in the secondary market or
through brokered arrangements.

     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,  2003,  the Bank had $13.4  million of such loans,  representing
3.3% 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  $57.6
million,  or 14.3%,  of the Bank's total loan portfolio at December 31, 2003. 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 a "spec" 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.   On
construction/permanent  loans, the customer is fully qualified for the permanent
loan based on information received at application.  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 by a spec builder 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.

     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.

                                       6
<PAGE>

     The Bank also  originates  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, 2003
regarding  the dollar  amount of  construction  loans secured by real estate and
real estate  mortgage  loans in the Bank's  portfolio.  A portion of these loans
have 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, 2003 (the "Annual Report").

                                  (In thousands)

Real estate - construction:
    1-4 family residential         $    14,100
    Multi-family residential            17,474
    Commercial                          26,024
                                   -----------
       Total                       $    57,598
                                   ===========



     LOANS   SECURED  BY   NONRESIDENTIAL   REAL   ESTATE:   Loans   secured  by
nonresidential real estate constituted  approximately $92.0 million, or 22.9% of
the Bank's total loan  portfolio at December 31, 2003.  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 as well as being more interest rate  sensitive.  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, 2003, the Bank's consumer loan portfolio
totaled approximately $6.1 million,  representing 1.5% of the Bank's total loans
receivable portfolio. 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, 2003,
the Bank's home equity  loan  portfolio  totaled  approximately  $16.0  million,
representing 4.0% of its total loan portfolio.

     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.

                                       7
<PAGE>

     NON-REAL  ESTATE  BUSINESS  LENDING:  The  Bank  originates  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, 2003, these loans
totaled  approximately $14.6 million or 3.6% of the Bank's total loan portfolio.
Management of  Cooperative  Bank believes that these loans are attractive to the
Bank because 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  continue  to 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  repayments 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  repayments
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 employing conservative underwriting criteria.

     LOANS HELD FOR SALE:  Lumina's  target  market  includes all  homeowners or
potential  homeowners.  Having an extensive diversity of investors offering very
competitive  rates,  Lumina has many loan products  available for  purchasing or
refinancing  mortgage  loans.  These  products  include,  but are not limited to
conventional,  jumbo, FHA, VA, 100% Rural Development  financing,  nonconforming
(B/C), lot loans,  construction permanent,  and no-income verification loans, as
well as other niche products.

     The primary risk  associated with these loans is the investor lock expiring
in a rising rate environment.  This would cause the loan to lose value and could
cause a loss when the loan is subsequently sold in the secondary market.

     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 Bank employees.

     Mortgage loan applications are accepted at all financial  centers,  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 valuation 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.  Mortgage loans
exceeding 25% of the Bank's legal lending limit can be approved by the President
and two members of the Board of Directors.  Any mortgage  loan  exceeding 50% of
the Bank's legal  lending  limit is approved by the Bank's  Board of  Directors.
Retail and  commercial  loan  authority is  considered to be an aggregate of all
indebtedness to Cooperative  exclusive of mortgage loans originated  through the
mortgage  loan  division or loans up to $100,000  secured by a  Cooperative  CD.
Three members of the Loan  Committee  have the  authority to approve  individual
retail  or  commercial  loans  up to 25%  of the  Bank's  legal  lending  limit.
Aggregate  indebtedness  exceeding  25% is  reported  to the Board at their next
meeting. Any retail or commercial loan exceeding 50% of the Bank's legal lending
limit  must be  approved  by the  President  and two  members  of the  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  chosen  to  sell a  large
percentage of its fixed-rate  mortgage loan originations in the secondary market
and through brokered arrangements.  This enables the Bank to invest its funds in
commercial loans,  while increasing fee income. The Bank has, from time to time,
sold

                                       8
<PAGE>

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 may  retain  the  servicing  of the  loans  (i.e.,
collection of principal and interest payments),  for which it generally receives
a fee payable  monthly of 1/4% per annum of the unpaid  balance of each loan. As
of December 31, 2003, the Bank was servicing  approximately 782 loans for others
aggregating approximately $44.9 million.

     The Bank generally does not purchase loans,  and did not purchase any loans
during the last three fiscal years.

     LOAN COMMITMENTS:  The Bank issues loan commitments to qualified  borrowers
primarily for the  construction,  purchase and  refinancing of residential  real
estate.  Such  commitments  are made on specified  terms and  conditions and are
typically  for  terms  of  up to  45  days.  A  non-refundable  application  and
underwriting  fee is collected by Cooperative  Bank at the time of  application.
Lumina  collects actual fees at the time of  application.  Management  estimates
that  historically,  less  than  20% of such  commitments  expire  unfunded.  At
December  31,  2003,  Cooperative  Bank  had  outstanding  loan  commitments  of
approximately  $6.8  million  and  Lumina  had  approximately  $3.0  million  in
outstanding loan commitments.  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 for originating
loans.  Origination  fees  generally  are  calculated  as a  percentage  of  the
principal  amount of the loan and are charged to the borrower.  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 net deferred fee or cost on loans  originated as held
for sale is recorded to gain on sale of loans when the loan is sold.

     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  Bank  processing  the loan using Wells Fargo or InterFirst  closing
documents.  Cooperative  Bank receives a settlement  service fee for  processing
these loans.  These loans  generate fee income and reduce the interest rate risk
of the Bank.

     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,  2003,  the Bank had
accruing  loans  which  were  contractually  past due 90 or more  days  totaling
$147,000.

     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, 2003, the Bank had one loan in
non-accrual  status with an aggregate  principal  balance of $120,000,  which is
considered  impaired  in  accordance  with SFAS  No.114,  with no  corresponding
valuation allowances.

     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  upon
foreclosure  is charged to the allowance for loan losses.  At December 31, 2003,
the Bank owned no property  acquired as the result of  foreclosure or by deed in
lieu of foreclosure and

                                       9
<PAGE>

classified as "real estate  owned." At December 31, 2003,  the Bank had 19 loans
in the process of  foreclosure  and/or  bankruptcy  with an aggregate  principal
balance of approximately $890,000.  Loans in bankruptcy paying as agreed are not
included in nonperforming assets. Any losses management  anticipates on loans in
the process of foreclosure  and/or bankruptcy have already been recorded through
the allowance for loan losses.

     The  following  table sets  forth  information  with  respect to the Bank's
nonperforming  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,
                                                   --------------------------------------------------------------
                                                     2003         2002         2001         2000          1999
                                                   --------     --------     --------     --------      --------
      <S>                                             <C>         <C>           <C>         <C>            <C>
                                                                       (Dollars in thousands)

Non accruing loans                                 $     120    $     335    $     505    $     333     $    267
Accruing loans which are contractually
   past due 90 days or more                              147          249        2,563          358          934
                                                   ---------    ---------    ---------    ---------     --------
   Total                                           $     267    $     584    $   3,068    $     691     $  1,201
                                                   =========    =========    =========    =========     ========
Percentage of total loans (1)                            .07%         .15%         .81%         .20%         .36%
                                                   =========    =========    =========    =========     ========
Other nonperforming assets (2)                     $      --    $     619    $     759    $     234     $    245
                                                   =========    =========    =========    =========     ========
Total nonperforming assets                         $     267    $   1,203    $   3,827    $     925     $  1,446
                                                   =========    =========    =========    =========     ========
Total nonperforming assets to total assets               .05%         .24%         .84%         .22%         .35%
                                                   =========    =========    =========    =========     ========
</TABLE>

---------------
(1)  Total loans do not include loans held for sale.

(2)  Other nonperforming  assets represent property acquired by the Bank through
     foreclosure  or  repossession.  This property is carried at fair value less
     estimated costs of sale.

     During  the  year  ended  December  31,  2003,  gross  interest  income  of
approximately $9,000 would have been recorded on nonaccrual loans had such loans
been  current  throughout  the period.  No  interest  income from such loans was
included in income for the year ended December 31, 2003.

     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  reviewed and risk graded
among groups of loans with similar characteristics.  The probable loss estimates
for each risk grade group are the basis for the allowance  allocation.  The loss
estimates are based on prior experience,  general risk associated with each loan
group 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
such  as  current  economic  conditions.  The  Bank  increased  the  unallocated
allowance at December 31, 2003 because of the  possibility  of  additional  loan
losses due to the property damage that occurred on the North Carolina coast from
Hurricane Isabel in October 2003.

                                       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,
                                                     ----------------------------------------------------------
                                                       2003         2002        2001        2000        1999
                                                     --------     --------    --------    --------    --------
 <S>                                                    <C>         <C>        <C>          <C>          <C>
                                                                       (Dollars in thousands)

Balance at beginning of period                       $   2,937    $  2,523    $  2,160    $  1,306    $  1,178
Provision for loan losses                                  740         740         460         970         210
Gross loans charged-off                                   (237)       (360)       (106)       (146)        (94)
Gross recoveries                                             7          34           9          30          12
                                                     ---------    --------    --------    --------    --------
Balance at end of period                             $   3,447    $  2,937    $  2,523    $  2,160    $  1,306
                                                     =========    ========    ========    ========    ========
Ratio of net charge-offs to average
  loans outstanding during the period                      .06%        .08%        .03%        .03%        .03%
                                                     =========    ========    ========    ========    ========

Ratio of loan loss reserve to total loans                  .84%        .70%        .67%        .62%        .39%
                                                     =========    ========    ========    ========    ========
</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.




                                       11
<PAGE>

     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,
                                    ------------------------------------------------------------------------------------------------
                                          2003                2002              2001                2000                1999
                                    ------------------- ------------------ ------------------- ------------------ ------------------
                                            Percent of         Percent of          Percent of         Percent of         Percent of
                                             Loans in           Loans in            Loans in           Loans in           Loans in
                                            Category to        Category to         Category to        Category to        Category to
                                    Amount  Total Loans Amount Total Loans Amount  Total Loans Amount Total Loans Amount Total Loans
                                    ------  ----------- -----  ----------- ------  ----------- ------ ----------- ------ -----------
  <S>                                <C>      <C>       <C>       <C>       <C>      <C>        <C>       <C>      <C>     <C>
                                                                          (Dollars in thousands)
Real estate :
  Construction and land development $  499      14%     $  511     13%     $  672     16%      $  428    10%         15        1%
  Mortgage:
      1-4 family residential           814      51         854     52         698     56          499    67         530       74
      Multi-family residential         160       3         145      4         143      4          213     5         163        5
      Commercial                     1,146      22         911     22         589     15          526     9         380       12
      Equity line                      150       4         135      4         132      3           65     3          15        3
      Other                              3      --           3     --           2     --            2     1           1       --
                                    ------     ---      ------    ---      ------    ---       ------   ---      ------      ---
          Total real estate loans    2,772      94%      2,559     95%      2,236     94%       1,733    95%      1,104       95%

Commercial, industrial &
 agricultural                          138       4         137      3         214      4          166     3         152        3
Consumer                                58       2          58      2          70      2           77     2          50        2
Unallocated                            479      --         183     --           3     --          184    --          --       --
                                    ------     ---      ------    ---      ------    ---       ------   ---      ------      ---
          Total gross loans         $3,447     100%     $2,937    100%     $2,523    100%      $2,160   100%      1,306      100%
                                    ======     ===      ======    ===      ======    ===       ======   ===      ======      ===


</TABLE>


                                       12
<PAGE>

INVESTMENT 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,
                                                              -------------------------------------------
                                                                2003              2002             2001
                                                              --------          --------         --------
<S>                                                             <C>              <C>               <C>
                                                                             (In thousands)
Securities held to maturity:
   U.S. Government and agency securities                     $       --         $ 5,000          $  5,000
   Mortgage-backed securities                                     3,806           2,860                --
                                                             ----------         -------          --------
      Total securities held to maturity                      $    3,806         $ 7,860          $  5,000

Securities available for sale:
   U.S. Government and agency securities                     $   25,506         $19,663          $ 25,758
   Mortgage-backed securities                                    11,489          14,806            11,123
   Marketable equity securities                                   5,050           5,074             5,099
   Corporate bond                                                 1,568           2,532               990
                                                             ----------         -------          --------
      Total securities available for sale                    $   43,613         $42,075          $ 42,970

      Total investment securities portfolio                  $   47,419         $49,935          $ 47,970
                                                             ==========         =======          ========
</TABLE>


                                       13
<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, 2003.
<TABLE>
<CAPTION>

                                                         After One           After Five          More than      Total Investment
                                  One Year or Less  Through Five Years   Through Ten Years       Ten Years         Portfolio
                                 -----------------  -------------------  ------------------  ---------------- ----------------------
                                 Carrying Average   Carrying  Average    Carrying  Average  Carrying  Average Carrying Fair  Average
                                  Value   Yield     Value     Yield      Value     Yield    Value     Yield     Value  Value  Yield
                                 -------  -----     -----     -----      -----     -----    -----     -----     -----  -----  -----
      <S>                         <C>       <C>      <C>        <C>       <C>       <C>      <C>       <C>       <C>    <C>    <C>
                                                                         (Dollars in thousands)

Securities held to maturity:
  U.S. government and agency
   securities                     $  --       --     $    --      --     $    --     --    $     --     --   $    --  $    --    --
  Mortgage-backed securities         --       --          --      --          --     --       3,806   5.51%    3,806    3,890  5.51%
                                  -----    -----     -------    ----     -------   ----    --------  -----   -------  -------  ----
   Total Securities               $  --       --     $    --      --     $    --     --    $  3,806   5.51%  $ 3,806  $ 3,890  5.51%

Securities available for sale:
  U.S. government and agency
   securities                     $ 202     2.81%    $15,240    4.08%    $10,064   4.21%   $    --      --   $25,506  $25,506  4.12%
  Mortgage-backed securities         --       --          --      --          --     --     11,489    4.74%   11,489   11,489  4.74%
  Marketable equity securities       --       --          --      --          --     --      5,050    6.14%    5,050    5,050  6.14%
  Corporate bond                     --       --       1,568    5.73%         --     --         --      --     1,568    1,568  5.73%
                                  -----    -----     -------    ----     -------   ----    -------    ----   -------  -------  ----
    Total securities available
     for sale                     $ 202     2.81%    $16,808    4.22%    $10,064   4.21%   $16,539    5.16%  $43,613  $43,613  4.58%

       Total investment
        securities portfolio      $ 202     2.81%    $16,808    4.22%    $10,064   4.21%   $20,345    5.23%  $47,419  $47,503  4.65%
                                  =====    =====     =======    ====     =======   ====    =======    ====   =======  =======  ====
</TABLE>




                                       14
<PAGE>

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  attracts  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.

     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,
2003.
<TABLE>
<CAPTION>

                                                                        Certificates
                            Maturity Period                              of Deposit
                            ---------------                             ------------
                                <S>                                         <C>
                                                                       (In thousands)

                            Three months or less                       $        33,644
                            Over three through six months                       23,753
                            Over six months through twelve
                                  months                                        22,980
                            Over twelve months                                  11,457
                                                                       ---------------
                               Total                                   $        91,834
                                                                       ===============
</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 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.

     Lumina  borrows  money  on a  short-term  basis  principally  from  another
financial  institution to fund its loans that are held for sale.  This borrowing
is  collateralized  by mortgage  loans held for sale.  When a loan is sold,  the
proceeds are used to repay the borrowing. Loans are usually sold within 60 days.
This  borrowing  agreement is currently  being  renegotiated,  but the financial
institution continues to supply sufficient funds for loans originated by Lumina.

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


                                       15
<PAGE>

COMPETITION

     Cooperative  Bank encounters  strong  competition both in the attraction of
deposits  and in the making of real  estate  and other  loans.  The Bank's  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 and Lumina compete for
loans  primarily  through the interest rates and loan fees they charge,  and the
efficiency and quality of services they provide borrowers.  Factors which affect
competition include general and local economic conditions, current interest rate
levels and volatility in the mortgage markets.

EMPLOYEES

     At December 31, 2003, the Bank had 149 full-time  employees and 7 part-time
employees.  Lumina  had 38 full  time  employees  and 1  part-time  employee  at
December  31,  2003.  None of the  employees  are  represented  by a  collective
bargaining unit. Both companies believe their relationship with the employees is
good.

EXECUTIVE OFFICERS

     At December 31, 2003, the executive  officers of the Bank who were not also
directors were as follows:
<TABLE>
<CAPTION>

                                     Age at
Name                            December 31, 2003                        Position
----                            -----------------                        --------
<S>                                    <C>                                  <C>
O.C. Burrell, Jr.                      55                     Executive Vice President and Chief Operating Officer

Todd L. Sammons, CPA                   42                     Senior Vice President and Chief Financial Officer

Dickson B. Bridger                     44                     Senior Vice President-Mortgage Lending

</TABLE>

     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 a member
of the executive committee and a director of the Child Development Center. He is
also a director of the Wilmington Symphony 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  Church  Council  and  several
committees  at Pine Valley  United  Methodist  Church and is an active member of
Winter Park Optimist.

     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  West
Rotary and serves as an Elder of the Little  Chapel on the  Boardwalk  church at
Wrightsville Beach, North Carolina.


                                       16
<PAGE>

                                   REGULATION

REGULATION OF THE COMPANY

     GENERAL:  The Company is registered as a public company with the Securities
and Exchange  Commission  (the "SEC"),  its common stock is quoted on The Nasdaq
Stock Market,  Inc.  ("Nasdaq")  and it is registered as a bank holding  company
under the Bank  Holding  Company Act of 1956,  as amended  (the  "BHCA") and, as
such, is subject to supervision and regulation by the Federal Reserve Board. The
Company is also subject to regular  examination by the Federal Reserve Board. In
addition,  as a state commercial bank holding company, the Company is subject to
supervision by the  Commissioner  under North Carolina law. As a public company,
the Company is required to file annual,  quarterly and current  reports with the
SEC.  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 BHCA.

     FINANCIAL MODERNIZATION LEGISLATION:  The Gramm-Leach-Bliley ("G-L-B") Act,
which was enacted in November 1999,  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 to 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
imposed new  requirements  on  financial  institutions  with respect to customer
privacy.

     ACQUISITIONS:  Under the BHCA, 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;  (3)
merging or  consolidating  with another bank holding  company;  or (4) 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 BHCA 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 BHCA,  any company  must obtain  approval of the Federal  Reserve
Board prior to acquiring control of the Company or the Bank. For purposes of the
BHCA,  "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 BHCA), 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.

     DIVIDENDS: 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



                                       17
<PAGE>
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.

     STOCK  REPURCHASES:  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.

     SARBANES-OXLEY  ACT OF 2002: On July 30, 2002,  the  Sarbanes-Oxley  Act of
2002 ("SOX") was signed into law. SOX contains provisions  addressing  corporate
and accounting fraud which both amended the Securities  Exchange Act of 1934, as
amended (the "Act") and directed the SEC to promulgate  rules.  SOX provided for
the establishment of a new Public Company Accounting  Oversight Board ("PCAOB"),
to enforce auditing,  quality control and independence  standards for firms that
audit  public  reporting  companies  and will be funded by fees from all  public
reporting  companies.  It is unlawful  for any person  that is not a  registered
public accounting firm ("RPAF") to audit a public reporting  company.  Under the
Act, a RPAF is prohibited  from performing  statutorily  mandated audit services
for a  company  if such  company's  chief  executive  officer,  chief  financial
officer,  comptroller,  chief  accounting  officer  or  any  person  serving  in
equivalent  positions  has been  employed by such firm and  participated  in the
audit of such company during the one-year period  preceding the audit initiation
date. The SEC has prescribed  rules requiring  inclusion of an internal  control
report and  assessment by management in the annual report to  shareholders.  SOX
requires  the RPAF  that  issues  the audit  report  to attest to and  report on
management's  assessment of the Company's  internal controls.  In addition,  SOX
requires that each financial  report  required to be prepared in accordance with
(or reconciled to) generally accepted  accounting  principles and filed with the
SEC reflect all material correcting adjustments that are identified by a RPAF in
accordance  with  generally  accepted  accounting  principles  and the rules and
regulations  of the  SEC.  SOX  requires  chief  executive  officers  and  chief
financial officers, or their equivalent,  to certify to the accuracy of periodic
reports  filed with the SEC,  subject to civil and  criminal  penalties  if they
knowingly or willfully violate this certification requirement.

     SOX also  increases  the  oversight  and  authority of audit  committees of
publicly traded companies. SOX imposed higher standards for auditor independence
and restricts  provisions of consulting  services by auditing firms to companies
they audit. Any non-audit  services (subject to a 5% de minimis exception) being
provided  to an  audit  client  require  pre-approval  by  the  Company's  audit
committee  members.  Audit committee  members must be independent and are barred
from accepting consulting,  advisory or other compensatory fees from the issuer.
In addition,  all public reporting  companies must disclose whether at least one
member of the committee is an audit committee  "financial expert" (as such terms
is defined by the SEC rules) and if not, why not. Audit  committees of Company's
listed on the Nasdaq must be composed of three directors who meet the definition
of "independent"  set forth both in NASD Rule 4200(a)(15) and Section 10A(m) and
Rule  10A-3  of the  Act,  and  whose  audit  committee  has a  written  charter
containing  specific  elements  set  forth in these  same NASD and SEC rules and
sections.  A  Company  with  stock  quoted  on the  Nasdaq  that  fails to be in
compliance with these audit committee requirements, as well as additional Nasdaq
requirements, will be delisted.

     Due to SOX, longer prison terms will be applied to corporate executives who
violate federal  securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended,  and bonuses
issued  to  top  executives  prior  to  restatement  of  a  company's  financial
statements  are now  subject  to  disgorgement  if such  restatement  was due to
corporate  misconduct.  Executives  are  also  prohibited  from  trading  during
retirement  plan  "blackout"  periods,  and  loans  to  company  executives  are
restricted.  In addition, a provision directs that civil penalties levied by the
SEC as a result  of any  judicial  or  administrative  action  under  the Act be
deposited in a fund for the benefit of harmed investors.

     Although  the  Company  anticipates  it will  incur  additional  expense in
complying with the provisions of the Act and the related rules,  management does
not expect that such  compliance  will have a material  impact on the  Company's
financial condition or results of operations.

                                       18
<PAGE>

REGULATION OF THE BANK

     GENERAL:  As a North  Carolina  chartered  commercial  bank  with  deposits
insured by the Savings Association  Insurance Fund ("SAIF")  administered by the
FDIC,  Cooperative Bank is subject to extensive regulation by the North Carolina
Office of the  Commissioner  of Banks  (the  "Commissioner")  and the FDIC.  The
lending  activities  and other  investments of the Bank must comply with various
federal  regulatory  requirements.  The Commissioner  and the FDIC  periodically
examine  Cooperative Bank for compliance with various  regulatory  requirements.
The Bank must file reports with the  Commissioner  and the FDIC  describing  its
activities and financial condition.  The Bank is also subject to certain reserve
requirements  promulgated by 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.

     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.   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.  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 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.

     In addition to the FDIC regulatory capital  requirements,  the Commissioner
requires   North   Carolina-chartered   commercial   banks   to  have   adequate
capitalization,  which is determined  based upon each bank's  particular  set of
circumstances.  In addition,  regulations  require all North  Carolina-chartered
commercial  banks to  maintain a capital  surplus  at least  equal to 50% of its
common  capital.  Common capital is defined as the par value of its shares times
the number of shares outstanding.


                                       19
<PAGE>

     The Bank was in compliance with both the FDIC capital  requirements and the
North  Carolina  net  worth  requirement  at  December  31,  2003.  For  further
information  regarding the Bank's capital  requirements,  see Note 7 of Notes to
Consolidated Financial Statements in the Annual Report.

     LIQUIDITY REQUIREMENTS: FDIC policy requires that banks maintain an average
daily balance of liquid  assets in an amount which it deems  adequate to protect
the safety and soundness of the bank.  Liquid assets include cash,  certain time
deposits, bankers' acceptances and specified United States government, state, or
federal  agency  obligations.  The FDIC currently has no specific level which it
requires.

     North Carolina banks must maintain a reserve fund in an amount and/or ratio
set by the  North  Carolina  Banking  Commission  to  account  for the  level of
liquidity  necessary  to assure the safety and  soundness  of the State  banking
system.

     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.

     Under  regulations  jointly adopted by the federal banking  regulators,  an
institution'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).


                                       20
<PAGE>

     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%
</TABLE>

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

     *   3.0% if institution has a composite 1 CAMELS rating.

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 in the Annual Report 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.

     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%, or
(iv) a regulatory  net worth less than the  liquidation  account  established in
connection with the Bank's conversion to a stock institution.

     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.  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.


                                       21
<PAGE>

     The FDIC has adopted  regulations to clarify the foregoing  restrictions on
activities of  FDIC-insured  state-chartered  banks and their  subsidiaries.  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.

     TRANSACTIONS WITH AFFILIATES:  Transactions between banks and any affiliate
are governed by Sections 23A and 23B of the Federal Reserve Act and Regulation W
promulgated  thereunder.  An  affiliate of a bank is any company or entity which
controls,  is controlled by or is under common control with the bank. Generally,
Sections 23A and 23B (i) limit the extent to which the 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  nonaffiliate.  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").  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, 2003 of
approximately $4.2 million.

     FEDERAL  RESERVE BOARD  REGULATION:  Pursuant to regulations of the Federal
Reserve Board, all FDIC-insured  depository  institutions  must maintain average
daily  reserves of 3% on the first $6.0 million to $42.1 million of  transaction
accounts,  plus  10%  on  the  remainder.  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, 2003, the
Bank met its reserve requirements.

     North  Carolina  law also  required  the Bank to maintain a reserve fund at
least  equal to the Federal  Reserve  requirement.  In the event the  reservable
liabilities  of the Bank are such that no reserve  is  required  by the  Federal
Reserve,  the Bank would be  required  under  North  Carolina  law to maintain a
reserve  fund  equal to 3% of its total  deposits  of every  kind  which are not
otherwise secured by acceptable collateral.

     PATRIOT  ACT:  The  Patriot  Act  is  intended  to   strengthen   U.S.  law
enforcement's and the intelligence  communities' abilities to work cohesively to
combat terrorism on a variety of fronts. The potential impact of the Patriot Act
on financial  institutions  of all kinds is  significant  and wide ranging.  The
Patriot Act contains sweeping anti-money  laundering and financial  transparency
laws and imposes various  regulations  including  standards for verifying client
identification  at  account  opening,  and rules to  promote  cooperation  among
financial  institutions,  regulators and law enforcement entities in identifying
parties that may be involved in terrorism or money laundering.


                                       22
<PAGE>

                                    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. Circumstances that would require an accrual of a
portion or all of this  unrecorded  tax  liability are a reduction in qualifying
loan levels  relative to the end of 1987,  failure to meet the  definition  of a
bank,  dividend  payments in excess of accumulated tax earnings and profits,  or
other distribution, liquidation or redemption of the Bank's stock.

     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.  Lumina is
subject to an annual corporate income tax in North Carolina,  South Carolina and
Virginia at a rate of 6.90%, 5.00% and 6.00% respectively.


                                       23
<PAGE>



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

     The Bank operated 21 offices  throughout the coastal and inland communities
of eastern  North  Carolina  at  December  31,  2003.  The Bank has a total of 6
offices that are subject to leases. The land is leased for 3 of these offices on
which the Bank has built its own buildings.  Two offices are a lease of the land
and the  building on it and one is an office  condominium  that is leased by the
Bank.  Lumina  operated 4 offices in Wilmington,  North  Carolina;  North Myrtle
Beach, South Carolina;  and Virginia Beach,  Virginia.  All of these offices are
leased. For additional information relating to premises and equipment,  see Note
4 of Notes to Consolidated Financial Statements in the Annual Report.

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

     Although the Company and Bank,  from time to time,  are involved in various
legal proceedings in the normal course of business,  there are no material legal
proceedings  to which the  Company or the Bank or any  subsidiary  is a party to
which any of their property is subject.

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, 2003.


                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
-------------------------------------------------------------------------------

     The   information   contained  under  the  section   captioned   "Corporate
Information" in the Annual Report,  filed as Exhibit 13 hereto,  is incorporated
herein 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
and 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 Report of Independent  Accountants,  Consolidated  Financial Statements
and Notes to Consolidated  Financial  Statements contained in the Annual Report,
which are listed under Item 15 herein, are incorporated herein by reference.

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

     The  information  contained  in the section  captioned  "Relationship  With
Public  Accountants"  in  the  Company's  definitive  Proxy  Statement  for  the
Company's  2004  Annual  Meeting of  Stockholders  (the  "Proxy  Statement")  is
incorporated herein by reference.


                                       24
<PAGE>

ITEM 9A.  CONTROLS AND PROCEDURES
---------------------------------

     As of the end of the  period  covered  by this  report,  management  of the
Company  carried  out  an  evaluation,   under  the  supervision  and  with  the
participation  of  the  Company's  principal  executive  officer  and  principal
financial officer, of the effectiveness of the Company's disclosure controls and
procedures.  Based on this evaluation, the Company's principal executive officer
and principal financial officer concluded that the Company's disclosure controls
and  procedures  are  effective  in  ensuring  that  information  required to be
disclosed  by the  Company  in  reports  that it  files  or  submits  under  the
Securities Exchange Act of 1934, as amended, is recorded, processed,  summarized
and reported,  within the time periods  specified in the Securities and Exchange
Commission's  rules  and  forms.  It  should  be noted  that the  design  of the
Company's  disclosure  controls  and  procedures  is based in part upon  certain
reasonable  assumptions about the likelihood of future events,  and there can be
no reasonable  assurance  that any design of disclosure  controls and procedures
will  succeed  in  achieving  its  stated  goals  under  all  potential   future
conditions,  regardless of how remote, but the Company's principal executive and
financial  officers have  concluded that the Company's  disclosure  controls and
procedures are, in fact, effective at a reasonable assurance level.

     There have been no changes in the Company's internal control over financial
reporting  (to the extent  that  elements  of internal  control  over  financial
reporting are subsumed within disclosure controls and procedures)  identified in
connection  with the evaluation  described in the above  paragraph that occurred
during the Company's last fiscal quarter,  that has materially  affected,  or is
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.

                                    PART III

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

     For information  concerning the Board of Directors,  the  identification of
the Audit Committee and the audit committee  financial  expert,  the information
contained under the section  captioned  "Proposal I -- Election of Directors" in
the Proxy Statement is incorporated herein by reference.

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

     Information  regarding  delinquent  Form 3, 4 and 5 filers is  incorporated
herein by reference to the section captioned "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.

     The  Company has  adopted a Code of Ethics  that  applies to the  Company's
directors,  officers and employees,  including its principal  executive officer,
principal financial officer and principal accounting officer and it is posted on
our website at www.coop-bank.com.

     The Company intends to satisfy the disclosure requirements under Item 10 of
Form 8-K regarding an amendment to, or a waiver from, a provision of its Code of
Ethics by posting such information on its internet website at www.coop-bank.com.

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.


                                       25
<PAGE>

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

     (a)  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

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

     (c)  CHANGES IN CONTROL

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

     (d)  SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

          The following table sets forth certain  information as of December 31,
          2003 with respect to the Company's equity compensation plans.
<TABLE>
<CAPTION>

                                          (a)                     (b)                               (c)
                                                           Weighted-average        Number of securities remaining
                                Number of securities to        exercise           available for future issuance under
                                be issued upon exercise  price of outstanding           equity compensation
                                of outstanding options,    options, warrants          plans (excluding securities
                                   warrants & rights          and rights              reflected in column (a))
                                -----------------------  --------------------     -----------------------------------
<S>                                     <C>                    <C>                              <C>
Equity compensation plans
  approved by security holders              128,443                $11.01                        135,062

Equity compensation plans not
  approved by security holders                   --                    --                             --
                                            -------                ------                        -------
Total                                       128,443                $11.01                        135,062
                                            =======                ======                        =======
</TABLE>


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

     The information  required by this item is incorporated  herein by reference
to the section captioned "Transactions with Management" in the Proxy Statement.


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------

     The information  required by this item is incorporated  herein by reference
to the section  captioned  "Audit and Other Fees Paid to the Independent  Public
Accountant" in the Proxy Statement.


                                       26
<PAGE>

                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------

     (a)  LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT.
          ------------------------------------------------

              (1) Financial  Statements.  The following  consolidated
                  ---------------------  financial  statements are  incorporated
                  by reference from Item 8 hereof:

                  Report of Independent Auditors
                  Consolidated Statements of Financial Condition as of December
                   31, 2003 and 2002
                  Consolidated Statements of Operations for the Years Ended
                   December 31, 2003, 2002 and 2001
                  Consolidated Statements of Comprehensive Income for the Years
                   Ended December 31, 2003, 2002 and 2001
                  Consolidated Statements of Stockholders' Equity for the Years
                   Ended December 31, 2003, 2002 and 2001
                  Consolidated Statements of Cash Flows for the Years Ended
                   December 31, 2003, 2002, and 2001
                  Notes to Consolidated Financial Statements

              (2) Financial Statement Schedules. All schedules for which
                  ------------------------------ provision is made in the
                  applicable accounting regulations of the Securities and
                  Exchange Commission are omitted, except for the report below,
                  because of the absence of conditions under which they are
                  required or because the required information is included in
                  the consolidated financial statements and related thereto.

                  The report of KPMG LLP with respect to the consolidated
financial condition, operations, comprehensive income, stockholders' equity and
cash flows for the years ended December 31, 2002 and 2001.

              (3) Exhibits. The following is a list of exhibits filed as part of
                  --------- this Annual Report on Form 10-K or incorporated
                  herein by reference and is also the Exhibit Index.
<TABLE>
<CAPTION>

        No.                         Description
        ---                         -----------
        <S>                             <C>
        3.1*                        Articles of Incorporation
        3.2                         Bylaws, as amended
        10.1**                      Cooperative Bankshares, Inc. 1998 Stock Option and Incentive Plan
        10.2*                       Employment Agreement with Frederick Willetts, III
        10.3****                    Severance Agreement with Todd L. Sammons
        10.4***                     Severance Agreement with O.C. Burrell, Jr.
        10.5****                    Severance Agreement with Dickson B. Bridger
        10.6*                       Amendment to Severance Agreement of O.C. Burrell, Jr.
        10.7*                       Indemnity Agreement with Directors and Executive Officers
        10.8*****                   Director Retirement Agreements between Cooperative Bank and Each Non-Employee Director
                                     of Cooperative Bank
        10.9*****                   Director Deferred Fee Agreements between Cooperative Bankshares, Inc. and each Director of the
                                    Company
        10.10*****                  Director Deferred Fee Agreements between Cooperative Bank and Each Non-Employee Director of
                                    Cooperative Bank
        10.11*****                  Executive Indexed Retirement Agreements between Cooperative Bank and Frederick Willetts, III and
                                     O. C. Burrell, Jr.
        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 Fiscal Year Ended December 31, 2003
        21                          Subsidiaries
        23.1                        Consent of Dixon Hughes PLLC
        23.2                        Consent of KPMG LLP
</TABLE>

                                       27
<PAGE>
<TABLE>
<CAPTION>

        NO.                         DESCRIPTION
        ---                         -----------
        <S>                              <C>
        31.1                        Rule 13a-14(a) Certification of Chief Executive Officer
        31.2                        Rule 13a-14(a) Certification of Chief Financial Officer
        32                          Certification Pursuant to 18 U.S.C. Section 1350
</TABLE>

-------------------
*    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.
**** Incorporated by reference to the Registrant's Form 10-K for the fiscal year
     ended December 31, 2000.
*****Incorporated  by  reference  to the  Registrant's  Form 10-K for the fiscal
     year ended December 31, 2001.

     (b) REPORTS ON FORM 8-K. The Company filed the following  Current Report on
         --------------------
Form 8-K during the last quarter covered by this report.
<TABLE>
<CAPTION>

         Date of Report                     Item(s) Reported           Financial Statement Filed
         --------------                     ----------------           -------------------------
            <S>                                 <C>                                <C>
       October 23, 2003                          7, 12                              N/A
</TABLE>

     (c)  EXHIBITS.  The  exhibits  required by Item 601 of  Regulation  S-K are
          ---------
either  filed as part of this  Annual  Report  on Form 10-K or  incorporated  by
reference herein.

     (d) FINANCIAL  STATEMENTS AND SCHEDULES EXCLUDED FROM ANNUAL REPORT.  There
         ----------------------------------------------------------------
are no other financial  statements and financial  statement schedules which were
excluded from the Annual Report  pursuant to Rule 14a-3(b) which are required to
be included herein.




                                       28
<PAGE>

                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) 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.
<TABLE>
<CAPTION>
<S>                                                             <C>
                                                              COOPERATIVE BANKSHARES, INC.




Date:  March 17, 2004                                         By: /s/Frederick Willetts, III
                                                                 -----------------------------------------
                                                                     Frederick Willetts, III
                                                                     President and Chief Executive Officer
                                                                     (Duly Authorized Representative)
</TABLE>

     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.
<TABLE>
<CAPTION>
<S>                                                                                     <C>

By:    /s/Frederick Willetts, III                                            Date:  March 17, 2004
    -------------------------------------------------
       Frederick Willetts, III
       President, Chief Executive Officer and Chairman
       (Principal Executive Officer and Director)

By:   /s/Todd L. Sammons                                                     Date:  March 17, 2004
    -------------------------------------------------
       Todd L. Sammons
       Senior Vice President and Chief Financial Officer
       (Principal Financial and Accounting Officer)

By:  /s/Paul G. Burton                                                       Date:  March 17, 2004
    -------------------------------------------------
       Paul G. Burton
       (Director)

By:  /s/Russell M. Carter                                                    Date:  March 17, 2004
    -------------------------------------------------
       Russell M. Carter
       (Director)

By:  /s/F. Peter Fensel, Jr.                                                 Date:  March 17, 2004
    -------------------------------------------------
       F. Peter Fensel, Jr.
       (Director)

By:  /s/James D. Hundley                                                     Date:  March 17, 2004
    -------------------------------------------------
       James D. Hundley
       (Director)

By:  /s/H. Thompson King, III                                                Date:  March 17, 2004
    -------------------------------------------------
       H. Thompson King, III
       (Director)

By:  /s/R. Allen Rippy                                                       Date:  March 17, 2004
    -------------------------------------------------
       R. Allen Rippy
       (Director)

By:  /s/O. Richard Wright, Jr.                                               Date:  March 17, 2004
    -------------------------------------------------
       O. Richard Wright, Jr.
       (Director)
</TABLE>