----------------------------------------
                                   COOPERATIVE
                                BANKSHARES, INC.
                    ----------------------------------------
                    Full-Service Banking for the New Century

















                                 Annual Report
                               December 31, 2000

<PAGE>

                          COOPERATIVE BANKSHARES, INC.
--------------------------------------------------------------------------------

PROFILE             Cooperative Bankshares,  Inc., (the "Company") is the parent
                    company of  Cooperative  Bank For  Savings,  Inc.,  SSB (the
                    "Bank").  The Bank is chartered  under the laws of the state
                    of North Carolina to engage in general banking business.

                    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.  In addition,  the Bank also offers  discount
                    brokerage services, annuity sales and mutual funds through a
                    third party arrangement with UVEST Investment Services.

                    Chartered  in 1898,  the Bank's  headquarters  is located in
                    Wilmington,   North   Carolina.   Cooperative   operates  16
                    financial   centers   throughout   the  coastal  and  inland
                    communities of eastern North Carolina.  These centers extend
                    from Corolla located on the Outer Banks of North Carolina to
                    Tabor City located on the South Carolina border.

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

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

TABLE OF CONTENTS

                    Selected Financial and Other Data......................... 2
                    President's Message....................................... 3
                    Management's Discussion & Analysis........................ 4
                    Independent Auditors' Report............................. 16
                    Consolidated Statements of Financial Condition........... 17
                    Consolidated Statements of Operations.................... 18
                    Consolidated Statements of Comprehensive Income.......... 19
                    Consolidated Statements of Stockholders' Equity.......... 19
                    Consolidated Statements of Cash Flows.................... 20
                    Notes to Consolidated Financial Statements............... 22
                    Directors, Officers, and Financial Center Locations...... 42
                    Corporate Information.................................... 43

<PAGE>



                        SELECTED FINANCIAL AND OTHER DATA


                        SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>

AT DECEMBER 31,                                           2000           1999          1998           1997          1996
-------------------------------------------------------------------------------------------------------------------------
                                                                   Dollars in Thousands
<S>                                                <C>            <C>           <C>            <C>           <C>
Selected Financial Condition Data:
  Assets                                           $   414,728    $   410,146   $   389,773    $   369,121   $   341,300
  Loans, net                                           347,503        334,744       321,324        286,692       263,313
  Securities                                            35,027         45,261        44,749         54,904        55,825
  FHLB stock                                             3,755          3,755         2,825          2,688         2,435
  Deposits                                             327,312        304,834       301,656        288,691       278,139
  Borrowed funds                                        55,101         75,106        55,109         50,226        35,435
  Stockholders' equity                                  30,812         29,343        31,613         28,294        25,470

<CAPTION>

YEAR ENDED DECEMBER 31,                                   2000           1999          1998           1997          1996
-------------------------------------------------------------------------------------------------------------------------
                                                                   Dollars in Thousands
<S>                                                 <C>            <C>           <C>            <C>           <C>
Selected Operations Data:
  Interest income                                   $   31,709     $   28,449    $   28,411     $   26,093    $   22,793
  Interest expense                                      19,305         16,422        17,212         15,732        13,630
  Net interest income                                   12,404         12,027        11,199         10,361         9,163
  Provision for loan losses                                970            210           330            153           156
  Noninterest income                                     1,670          1,228         1,180            790           570
  Noninterest expenses (1)                              10,193          8,885         8,275          7,370        12,251
  Income (loss) before income taxes                      2,911          4,160         3,774          3,628        (2,674)
  Net income (loss)                                      1,932          2,680         2,385          2,234        (3,250)

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

Selected Financial Ratios and Other Data:
  Return on average assets                               0.47%          0.69%         0.62%          0.63%       (1.01)%
  Return on average equity                               6.35%          8.88%         7.86%          8.26%      (11.27)%
  Average stockholders' equity to average assets         7.38%          7.74%         7.95%          7.63%         8.89%
  Non-performing assets to total assets                  0.22%          0.35%         1.08%          0.08%         0.02%
  Allowance for loan losses to total loans               0.62%          0.39%         0.35%          0.28%         0.29%
  Dividend payout ratio                                 28.09%             -             -              -             -
Per Share Data:
  Earnings (loss) per:
     Common share - basic                           $     0.71     $     0.95    $     0.79     $     0.75   $    (1.09)
     Common share - diluted                         $     0.69     $     0.90    $     0.74     $     0.70   $    (1.09)
  Cash dividends declared                           $     0.20              -             -              -            -
  Tangible book value                               $    11.35     $    10.92    $    10.38     $     9.48   $     8.54
  Number of common shares outstanding                2,714,610      2,687,919     3,046,284      2,984,396    2,983,396
<FN>
_________
(1)  Includes one time special  assessment for deposit insurance of $1.8 million
     and a  charge-off  of impaired  goodwill of $3.4 million for the year ended
     December 31, 1996.
</FN>
</TABLE>


                                       2
<PAGE>


                               PRESIDENT'S MESSAGE

     Net income for the year ended December 31, 2000 was $1,931,675, or $.69 per
diluted share, including a one-time restructuring charge of $463,572 (after tax)
as compared to  $2,680,430,  or $.90 per diluted  share,  for the same period in
1999.  In addition to the  one-time  restructuring  charge,  the Bank also added
$970,000 to loan loss  reserves for the year ended 2000 compared to $210,000 for
the year ended 1999.  The  decision to increase the loan loss reserve was due to
the  successful  expansion  of the  commercial  loan  portfolio,  and was not in
response to an increase in non-performing assets.  Nonperforming assets actually
decreased  to .22% of assets at December  31, 2000  compared to .35% at the same
time a year ago.  Total  assets  at  December  31,  2000  were  $414.7  million.
Stockholders'  equity was $30.8 million,  or $11.35 per share,  and  represented
7.43% of assets.

     During the year 174 mortgage loans were originated totaling $22,747,022. In
addition,  the Retail Banking Department  originated 873 commercial and consumer
loans in the amount of $52,096,141. We continue to adhere to strict underwriting
criteria.  At  December  31,  2000 loans made by the Retail  Banking  Department
constitute  37.8% of total  loans as compared  to 35.4% at  December  31,  1999.
Continued  growth in our banking  operation  favorably  impacts our net interest
income as these loans generally carry a higher rate of interest than one to four
family mortgage loans.

     In October,  we installed an ATM in the Tabor City  office,  bringing  full
banking service to that community.  This brings total ATMs to seven,  with three
more planned for 2001.

     In January  2000,  the Company  announced  that the Board of Directors  had
declared its first  quarterly  cash  dividend of $.05 per share payable on April
15, 2000 to  stockholders  of record as of April 1, 2000.  This  represented the
company's  first  dividend  payment since our  conversion to a public company in
1991.  Additional  quarterly  dividends  of $.05 per share were  declared in the
remaining quarters of the year 2000.

     In October the company  announced that it had made  significant  changes in
our defined benefit pension plan in a cost cutting effort.  As a result of these
changes,  several  of our  senior  employees  were  adversely  affected  by this
reduction in benefits. It was, therefore,  decided to offer these individuals an
early retirement  option.  Seven individuals chose to take this early retirement
benefit  including  one Branch  Manager and three Senior Vice  Presidents of the
Bank. As a result of this, a one-time  charge was taken in the fourth quarter of
$463,572 after tax. It is projected,  however, that the cost savings effected by
these  changes  will  result  in  pre-tax   savings  during  the  year  2001  of
approximately $750,000. While each of our retired employees will be missed, I am
pleased  to  report  to you that  all  management  positions  have  been  filled
internally by individuals  who have been with the Bank for an extended period of
time and have the complete confidence of the Board of Directors.

     The year 2000 has been a year of change and transition  within the company.
As we  continue  to grow and  expand  our  commercial  loan  portfolio,  we will
continue to strive to maintain strong underwriting  standards.  In addition,  by
paying our first quarterly dividends, the Board and management have demonstrated
confidence in our future earnings  potential.  By adding to our ATM network,  we
have  positioned  the Bank to better  serve our  customers.  By taking  steps to
reduce the cost of our pension as well as our  payroll,  we have  effected  cost
savings  that  should bode the  company  well in the year 2001 and beyond.  As a
result of these  steps  taken in the past year,  I am very  confident  about the
future of our company. Thank you for your support.

                                    Sincerely yours,
                                    Frederick Willetts, III
                                    President



                                       3
<PAGE>


                       MANAGEMENT'S DISCUSSION & ANALYSIS

GENERAL

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

     Chartered in 1898, the Bank's headquarters are located in Wilmington, North
Carolina.  Cooperative  operates 16 financial centers throughout the coastal and
inland communities of eastern North Carolina. These centers extend from Corolla,
located on the Outer  Banks of North  Carolina,  to Tabor  City,  located on the
South Carolina border.

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

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

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

MANAGEMENT STRATEGY

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

     Cooperative  Bank's lending activities have concentrated on the origination
of loans for the purpose of constructing,  financing or refinancing  residential
properties.  As of December 31, 2000, approximately $291 million, or 83%, of the
Bank's loan portfolio consisted of loans secured by residential properties. To a
lesser extent, the Bank originates nonresidential real estate loans, home equity
line of credit  loans,  and secured and unsecured  consumer and business  loans.
While  continuing to place emphasis on residential  mortgage loans,  the Bank is
taking  a  more  aggressive   position  in  pursuing   business   lending,   and
nonresidential  real estate lending  involving loans secured by small commercial
properties with balances generally ranging from $100,000 to $1,000,000. The Bank
originates  adjustable  rate and fixed rate  loans.  As of  December  31,  2000,
adjustable  rate  and  fixed  rate  loans  totaled  approximately  62% and  38%,
respectively, of the Bank's total loan portfolio.

INTEREST RATE SENSITIVITY ANALYSIS

     Interest rate sensitivity refers to the change in interest spread resulting
from changes in interest  rates. To the extent that interest income and interest
expense do not respond  equally to changes in interest  rates, or that all rates
do not change uniformly,  earnings will be affected.  Interest rate sensitivity,
at a point in time,  can be analyzed  using a static gap analysis  that

                                       4
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS


measures  the match in balances  subject to repricing  between  interest-earning
assets  and  interest-bearing  liabilities.  Gap  is  considered  positive  when
interest rate sensitive assets exceed interest rate sensitive  liabilities.  Gap
is considered negative when interest rate sensitive  liabilities exceed interest
rate sensitive assets. At December 31, 2000, Cooperative had a one-year negative
gap position of 1.6%.  During a period of rising  interest rates, a negative gap
would tend to adversely affect net interest  income,  while a positive gap would
tend to result in an increase in net interest income. During a period of falling
interest  rates,  a  negative  gap would  tend to result in an  increase  in net
interest income while a positive gap would tend to adversely affect net interest
income. It is important to note that certain shortcomings are inherent in static
gap  analysis.   Although  certain  assets  and  liabilities  may  have  similar
maturities  or  periods of  repricing,  they may react in  different  degrees to
changes  in  market  interest  rates.   For  example,   part  of  the  Company's
adjustable-rate  mortgage loans are indexed to the National  Monthly Median Cost
of Funds to SAIF-insured institutions.  This index is considered a lagging index
that  may  lag  behind   changes  in  market   rates.   The   one-year  or  less
interest-bearing  liabilities also include checking,  savings,  and money market
deposit  accounts.  Experience has shown that the Company sees relatively modest
repricing   of  these   transaction   accounts.   Management   takes  this  into
consideration in determining acceptable levels of interest rate risk.

     The following  table  indicates the time periods in which  interest-earning
assets and  interest-bearing  liabilities  will mature or reprice in  accordance
with their  contractual  terms.  The table  assumes  prepayments  and  scheduled
principal amortization of fixed-rate loans and mortgage-backed  securities,  and
assumes  that  adjustable  rate loans  will  reprice  at  contractual  repricing
intervals.


INTEREST RATE SENSITIVITY ANALYSIS
<TABLE>
<CAPTION>
                                                               Over One         Over Five
                                               One Year         Through          Through         Over Ten
December 31, 2000                               or Less        Five Years       Ten Years          Years          Total
-------------------------------------------------------------------------------------------------------------------------
                                                                     (Dollars in thousands)
<S>                                            <C>             <C>               <C>             <C>            <C>
Interest-earning assets:
     Securities                                $  9,067        $ 20,256          $  5,206        $    498       $ 35,027
     Interest-bearing bank balances              13,994               -                 -               -         13,994
     Federal Home Loan Bank stock                 3,755               -                 -               -          3,755
     Loan portfolio                             202,370         108,733            22,305          14,095        347,503
                                               --------        --------          --------        --------       --------
        Total                                  $229,186        $128,989          $ 27,511        $ 14,593       $400,279
                                               ========        ========          ========        ========       ========

Interest-bearing liabilities:
     Deposits (1)                              $220,939        $ 95,870          $ 10,503        $      -       $327,312
     Borrowed funds                              15,002          30,012            10,017              70         55,101
                                               --------        --------          --------        --------       --------
        Total                                  $235,941        $125,882          $ 20,520        $     70       $382,413
                                               ========        ========          ========        ========       ========

Interest rate sensitivity gap                  $ (6,755)       $  3,107          $  6,991        $ 14,523       $ 17,866
                                               ========        ========          ========        ========       ========

Cumulative interest rate sensitivity gap       $ (6,755)         (3,648)         $  3,343        $ 17,866
                                               ========        ========          ========        ========
Cumulative ratio of
  interest-earning assets to interest-bearing
  liabilities                                      97.1%           99.0%            100.9%          104.7%
                                               ========        ========          ========        ========

Ratio of cumulative gap to total assets            (1.6%)          (0.9%)             0.8%           4.3%
                                               ========        ========          ========        ========
-------------------------------------------------------------------------------------------------------------------------
<FN>
  (1) Includes noninterest bearing checking accounts of $12,650
</FN>
</TABLE>


                                       5
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

MARKET RISK

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

     One way to measure the Company's  potential  exposure to interest rate risk
is to estimate the effect of a change in rates on the Company's  Economic  Value
of Equity ("EVE").  The following table sets forth  information  relating to the
Company's  EVE and the  estimated  changes  under  various  interest rate change
scenarios as of December 31, 2000.
<TABLE>
<CAPTION>

     Changes in                   Economic          Estimated        Estimated
    Interest Rates            Value of Equity       $ Change         % Change
    --------------------------------------------------------------------------

    <S>                        <C>                 <C>                  <C>
    400 basis point rise       $15,688,000         (17,460,000)        -53%
    300 basis point rise        21,636,000         (11,512,000)        -35%
    200 basis point rise        26,388,000          (6,760,000)        -20%
    100 basis point rise        29,772,000          (3,376,000)        -10%
    Base Scenario               33,148,000                   -           -
    100 basis point rise        34,187,000           1,039,000           3%
    200 basis point rise        33,089,000             (59,000)          0%
    300 basis point rise        32,600,000            (548,000)         -2%
    400 basis point rise        32,359,000            (789,000)         -2%
</TABLE>

     Computation of prospective  effects of hypothetical  interest rate changes,
such as the above  computations,  are based on numerous  assumptions,  including
relative levels of market interest  rates,  loan  prepayments and deposit decay,
and should not be relied upon as  indicative  of actual  results.  Further,  the
computations  do not  contemplate  any actions  management  could  undertake  in
response to sudden changes in interest rates.

LIQUIDITY

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

     At December 31, 2000,  the  estimated  market value of liquid assets (cash,
cash equivalents,  and marketable  securities) was  approximately  $56.3 million
which  represents  14.7% of  deposits  and  borrowed  funds as compared to $63.7
million or 16.8% of  deposits  and  borrowed  funds at  December  31,  1999.  At
December 31, 2000, and 1999, the investment  portfolio totaled $38.8 million and
$49.0 million, respectively, a decrease of $10.2 million or 20.8 percent. In the
year 2000 the Bank  repositioned  its  investment  portfolio  by  selling  $16.6
million in  securities  and  repurchasing  $11  million to  improve  yield.  The
remaining funds of $5.6 million from the

                                       6
<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

sales plus the maturity of a $5 million bond were used in the sale of the Bank's
Robersonville  office and to fund the increase in loans  receivable.  Management
continues to maintain a portfolio of securities  with short  maturities and call
dates,  consistent  with the Bank's focus on  liquidity.  Investment  securities
available for sale are recorded at their fair value,  with the  unrealized  gain
included as a component of shareholders' equity, net of deferred taxes.

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

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

     The  Company's  primary  uses of  liquidity  are to fund  loans and to make
investments.  At December 31, 2000, outstanding off-balance sheet commitments to
extend credit totaled $24.0 million, and the undisbursed portion of construction
loans was $15.5 million.  Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.

CAPITAL

     Stockholders'  equity at December  31,  2000,  was $30.8  million,  up $1.5
million,  or 5%, from $29.3 million at December 31, 1999.  The improved  capital
position  during the year 2000 reflects the impact of earnings  retention  after
the  repurchase  of 46,385  shares of its common stock at a cost of $480,657 and
the   declaration  of  cash   dividends  for  $542,620,   or  $0.20  per  share.
Stockholders'  equity at  December  31,  2000 and  December  31,  1999  includes
unrealized gains of $30,000 and unrealized losses of $320,000, respectively, net
of tax, on securities available for sale.

     On October  22,  1999 the  Company's  Board of  Directors  approved a Stock
Repurchase  Program.  The Stock  Repurchase  Program  authorized  the Company to
repurchase up to 138,000 shares or approximately 5% of the outstanding shares of
common  stock at the time of approval.  As of May 3, 2000 the Company  completed
the stock repurchase  program with the purchase of 46,385 shares,  at an average
cost of $10.36 per share.

     Under the capital  regulations of the FDIC,  the Bank must satisfy  minimum
leverage  ratio   requirements  and  risk-based  capital   requirements.   Banks
supervised by the FDIC must maintain a minimum  leverage  ratio of core (Tier I)
capital to average  adjusted assets ranging from 3% to 5%. At December 31, 2000,
the Bank's leverage capital ratio was 7.47%. The FDIC's risk-based capital rules
require  banks  supervised  by  the  FDIC  to  maintain  risk-based  capital  to
risk-weighted  assets  of at least  8.00%.  Risk-based  capital  for the Bank is
defined as Tier I capital  plus the balance of  allowance  for loan  losses.  At
December  31,  2000,  the  Bank  had a ratio  of  qualifying  total  capital  to
risk-weighted assets of 12.29%.

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

                                       7


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

     The Company currently exceeds all of its capital  requirements.  Management
expects the Company to continue to exceed  these  capital  requirements  without
altering current operations or strategies.  For further information,  see Note 7
of Notes to Consolidated Financial Statements.

     On December 14, 2000, the Company's Board of Directors approved a quarterly
cash  dividend on its common  stock of $.05 per share.  The dividend was payable
January  16,  2001,  to  shareholders  of record on January 2, 2001.  Any future
payment of dividends is dependent on the  financial  condition and capital needs
of the company,  requirements of regulatory agencies, and economic conditions in
the marketplace.
                                       8


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                 DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999

FINANCIAL CONDITION

     The Company's total assets increased 1.1% to $414.7 million at December 31,
2000, as compared to $410.1  million at December 31, 1999.  The major changes in
the assets are as  follows:  an  increase  of $2.3  million  (14.8%) in cash,  a
decrease of $11.1 million (41.1%) in securities  available for sale, an increase
of $953,000 (5.3%) in held to maturity securities,  an increase of $12.8 million
(3.8%) in loans  receivable,  and a  decrease  of  $574,000  (31.3%)  in prepaid
expenses  and other  assets.  At December  31, 2000,  and 1999,  the  investment
portfolio totaled $38.8 million and $49.0 million,  respectively,  a decrease of
$10.2  million  or 20.9  percent.  In the year  2000 the Bank  repositioned  its
investment portfolio by selling $16.6 million in securities and repurchasing $11
million to improve  yield.  The  remaining  $5.6  million from the sales and the
maturity of a $5 million bond were used to fund the increase in loans receivable
and the sale of the  Bank's  Robersonville  office.  Although  the  Company  has
concentrated its lending  activities on the origination of loans for the purpose
of financing or refinancing residential  properties,  it is becoming more active
in construction, land development, consumer, and business lending.

     The Company's  non-performing  assets (loans 90 days or more delinquent and
foreclosed real estate) were $925,000, or 0.22% of assets, at December 31, 2000,
compared to $1.4 million,  or 0.35% of assets, at December 31, 1999. The Company
assumes an aggressive  position in collecting  delinquent loans and disposing of
foreclosed assets to minimize balances of non-performing assets and continues to
evaluate  the loan and real  estate  portfolios  to  provide  loss  reserves  as
considered  necessary.  Following a detailed review of the Bank's loan portfolio
during the quarter  ended March 31, 2000,  management  authorized an increase of
approximately  $625,000  in the  allowance  for loan  losses.  The  decision  to
increase the allowance for loan losses was  considered  appropriate  in light of
the successful  expansion in the commercial  loan portfolio in recent months and
was not in response to any significant increase in non-performing  assets. These
loans do, however,  pose risks that are not  characteristic  of loans secured by
single family  residences.  While there can be no  guarantee,  in the opinion of
management,  the  allowance for loan losses of $2.2 million at December 31, 2000
is adequate to cover probable losses inherent in the loan portfolio.

     At December 31, 2000 deposits had increased  $22.5 million (7.4%) to $327.3
million as compared to $304.8  million at December  31,  1999.  On February  18,
2000,  the Bank  completed  the  sale of its  $7.1  million  deposit  branch  in
Robersonville,  North Carolina.  Due to deteriorating economic conditions in the
area, the Bank's management  determined it was no longer feasible to continue in
this  market  area  in  competition  with  two  other  banks.  With a new  focus
management took an aggressive position in replacing the $7.1 million in deposits
that were sold and concentrated on gathering certificates of deposits from other
areas. Certificates of deposits increased $21.8 million (9.4%) to $252.6 million
as compared to $230.8 million at December 31, 1999.

     With the  increase in retail  deposits,  the Bank repaid  $20.0  million in
borrowed  funds.  Borrowed funds,  collateralized  through an agreement with the
FHLB for  advances,  are  secured  by the  Bank's  investment  in FHLB stock and
qualifying first mortgage loans. At December 31, 2000, $15.0 million in borrowed
funds mature in 1 year and the remaining  amounts  mature in 2 to 10 years.  For
further information, see Note 6 of Notes to Consolidated Financial Statements.

                                       9


<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

RESULTS OF OPERATIONS

     The net income of the Company depends  primarily upon net interest  income.
Net interest  income is the  difference  between the  interest  earned on loans,
securities  and  interest-bearing  deposits in other banks offset by the cost of
funds,  consisting  principally of the interest paid on deposits and borrowings.
The Company's operations are materially affected by general economic conditions,
the monetary and fiscal policies of the Federal government,  and the policies of
regulatory authorities.

NET INCOME

     Net income  decreased  27.9% to $1.9 million for the year 2000, as compared
to $2.7 million in 1999 and $2.4 million in 1998. The following  analysis of the
Bank's results of operations  will explain the changes that had an effect on net
income for the three years under review.

INTEREST INCOME

     Interest  income  amounted to $31.7  million  during  2000,  a $3.3 million
(11.4%) increase from 1999 levels, compared to essentially no increase from 1998
to 1999.  Interest  income  growth  during 2000 resulted from a higher volume of
earning  assets with a higher  yield.  The average  balance of  interest-earning
assets  increased 6.1% while the yield  increased 38 basis points as compared to
the same period a year ago.  During 1999, the increase in interest income from a
1.9% increase in the average balance of interest-earning  assets was offset by a
13 basis point  decrease in the average yield as compared to 1998.  The yield on
average interest-earning assets for the year 2000 increased to 7.96% as compared
to 7.58% for 1999 and 7.71% for 1998.

INTEREST EXPENSE

     Interest  expense  amounted to $19.3  million  during  2000, a $2.9 million
(17.6%)  increase from 1999 levels,  compared to a $790,000 (4.6%) decrease from
1998 to 1999.  The  increase in interest  expense  during 2000  resulted  from a
higher volume of  interest-bearing  liabilities with an associated  higher cost.
During 2000, the average balance of interest-bearing  liabilities increased 5.6%
while the cost  increased 53 basis  points as compared to 1999.  During 1999 the
decrease in interest  expense,  due to a 33 basis point drop in cost, was offset
in  part  by  the  2%  increase  in  the  average  balance  of  interest-bearing
liabilities  as  compared  to  1998.   The  average  cost  on   interest-bearing
liabilities  for the year 2000  increased to 5.23% as compared to 4.70% for 1999
and 5.03% for 1998.

NET INTEREST INCOME

     Net interest  income  totaled  $12.4  million  during 2000,  an increase of
$377,000 or 3.1% over 1999, when net interest  income was $12.0 million.  During
1999, net interest income grew $829,000 or 7.4% over the $11.2 million  recorded
during 1998. Table 3 analyzes the  interest-earning  assets and interest-bearing
liabilities for the three years ending December 31, 2000. Table 4 identifies the
causes for changes in interest  income and  interest  expense for 2000 and 1999.
The  interest  rate  spread was 2.73% for 2000,  compared  to 2.87% for 1999 and
2.68% for  1998.  The net yield on  interest-earning  assets  was 3.11% for 2000
compared to 3.20% for 1999 and 3.04% for 1998.


                                       10
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS


                           AVERAGE YIELD/COST ANALYSIS

     The following table contains  information relating to the Company's average
balance  sheet and  reflects  the average  yield on assets and  average  cost of
liabilities  for the periods  indicated.  Such  annualized  yields and costs are
derived  by  dividing  income or expense by the  average  balances  of assets or
liabilities, respectively, for the periods presented. The average loan portfolio
balances include nonaccrual loans.
<TABLE>
<CAPTION>
                                                                        For the year ended
                            ------------------------------------------------------------------------------------------------------
                                    December 31, 2000                    December 31, 1999                  December 31, 1998
                            --------------------------------     ----------------------------    ---------------------------------
(DOLLARS IN THOUSANDS)                               Average                          Average                              Average
                            Average                  Yield/      Average               Yield/    Average                   Yield/
                            Balance     Interest      Cost       Balance    Interest    Cost     Balance     Interest       Cost
                            --------------------------------     ----------------------------    ---------------------------------
<S>                         <C>         <C>          <C>        <C>         <C>        <C>       <C>         <C>            <C>
ASSETS
Interest-earning assets:
   Securities and other
     interest-earning
     assets                 $ 50,167    $ 2,926      5.83%      $ 46,741    $ 2,628    5.62%     $ 55,344    $ 3,107        5.61%
   Mortgage-backed and
     related securities        1,362         88      6.46%         9,219        547    5.93%       11,725        738        6.29%
   Loan portfolio            346,848     28,695      8.27%       319,480     25,274    7.91%      301,412     24,566        8.15%
                            --------    -------    ------       --------    -------  ------      --------    -------      ------
    Total interest-earning
     assets                  398,377     31,709      7.96%       375,440     28,449    7.58%      368,481     28,411        7.71%
                                        -------                             -------                          -------
Non-interest earning assets   13,423                              14,540                           13,370
                            --------                            --------                         --------
    Total assets            $411,800                            $389,980                         $381,851
                            ========                            ========                         ========

LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities:
   Checking with interest   $ 16,085    $    83      0.52%      $ 15,394   $     92    0.60%     $ 14,117    $   120        0.85%
   Savings                    22,923        307      1.34%        26,087        384    1.47%       28,714        500        1.74%
   Money market accounts      19,689        713      3.62%        20,011        756    3.78%       11,977        431        3.60%
   Time deposits             244,682     13,959      5.70%       230,682     11,606    5.03%      236,043     12,840        5.44%
                            --------    -------    ------       --------    -------  ------      --------    -------      ------
    Total interest-bearing
      deposits              $303,379     15,062      4.96%      $292,174     12,838    4.39%      290,851     13,891        4.78%
Borrowed funds                65,470      4,243      6.48         57,036      3,584    6.28%       51,506      3,321        6.45%
                            --------    -------    ------       --------    -------  ------      --------    -------      ------
    Total interest-bearing
      liabilities            368,849    $19,305      5.23%       349,210    $16,422    4.70%      342,357     17,212        5.03%
Demand deposits               10,711                               8,478                            6,571
Other liabilities              1,838                               2,120                            2,578
Stockholders' equity          30,402                              30,172                           30,345
                            --------                            --------                         --------
    Total liabilities
      and stockholders'
      equity                $411,800                            $389,980                         $381,851
                            ========                            ========                         ========
Net interest income                     $12,404                             $12,027                          $11,199
                                        =======                             =======                          =======
Interest rate spread                                 2.73%                             2.87%                                2.68%
                                                   ======                            ======                               ======
Net yield on interest                                3.11%                             3.20%                                3.04%
  -earning assets                                  ======                            ======                               ======

Percentage of average
  interest-earning assets
  to average interest-
  bearing liabilities                              108.0%                            107.5%                               107.6%
                                                   =====                             =====                                =====
</TABLE>

                                       11
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS

                              RATE/VOLUME ANALYSIS

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

                                   December 31, 1999 vs. December 31, 2000       December 31, 1998 vs. December 31, 1999
                                             Increase (Decrease)                           Increase (Decrease)
                                                    Due to                                       Due to
(DOLLARS IN THOUSANDS)             ---------------------------------------       ----------------------------------------
                                    Volume         Rate            Total         Volume            Rate           Total
                                   ---------------------------------------       ----------------------------------------
<S>                                  <C>            <C>               <C>         <C>              <C>          <C>
Interest income:
   Securities and other
     interest-earning assets         $    198       $   100        $   298       $   (484)        $     5      $   (479)
   Mortgage-backed and related
     securities                          (503)           44           (459)          (151)            (40)         (191)
   Loan portfolio                       2,230         1,191          3,421          1,443            (735)          708
                                     --------       -------        -------       --------         -------      ---------
    Total interest-earning assets       1,925         1,335          3,260            808            (770)           38
                                     --------       -------        -------       --------         -------      ---------

Interest expense:
   Checking with interest                   4           (13)            (9)            10             (38)          (28)
   Savings                                (45)          (32)           (77)           (43)            (73)         (116)
   Money market accounts                  (12)          (31)           (43)           302              22           324
   Time deposits                          733         1,620          2,353           (287)           (947)        (1,234)
   Borrowed funds                         544           115            659            350             (86)           264
    Total interest-bearing
      liabilities                       1,224         1,659          2,883            332          (1,122)          (790)
                                     --------       -------        -------       --------         -------      ---------
Change in net interest income        $    701       $  (324)       $   377       $    476         $   352      $     828
                                     ========       =======        =======       ========         =======      =========
</TABLE>

PROVISION FOR LOAN LOSSES
     The provision for loan losses  charged to  operations  was $970,000  during
2000,  compared to $210,000  during 1999 and $330,000 during 1998. The provision
for 2000  includes an increase of  approximately  $625,000 made during the first
quarter  in  response  to a  detailed  review  of  the  Bank's  loan  portfolio.
Management's   decision  to  increase  the  loan  loss  reserve  was  considered
appropriate  in  light  of  the  successful  expansion  in the  commercial  loan
portfolio and was not in response to any significant  increase in non-performing
assets.  While  commercial  loans typically earn a higher yield than traditional
residential mortgage loans, they do pose an incrementally higher level of credit
risk to the Company.  A review of the portfolio during the first quarter of 2000
highlighted  this trend in the  portfolio  and prompted  management to make this
provision.  Non-performing assets at December 31, 2000 were $925,000 compared to
$1.4 million at

                                       12

<PAGE>

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

December 31, 1999 and $4.2 million at December 31,  1998.  Net  charge-offs  for
2000 were $117,000  compared to $82,000  during 1999 and $26,000 during 1998. At
December  31,  2000,  the  allowance  for loan  losses was 0.62% of net loans as
compared to 0.39% for 1999 and 0.37% for 1998. With the additional  provision in
2000,  net of  charge-offs,  the  allowance  for loan losses  increased  to $2.2
million at December  31, 2000  compared to $1.3 million at December 31, 1999 and
$1.2  million  at  December  31,  1998.  Management  considers  this level to be
appropriate  based on lending  volume,  the current level of  delinquencies  and
other  non-performing  assets,  overall  economic  conditions and other factors.
Future increases to the allowance may be necessary,  however,  due to changes in
loan  composition or loan volume,  changes in economic or market area conditions
and other factors.  Additionally,  various regulatory  agencies,  as an integral
part of their examination  process,  periodically review the Company's allowance
for loan losses.  Such agencies may require the  recognition of additions to the
allowance based on their judgments of information  available to them at the time
of their examination.

NONINTEREST INCOME

     Total noninterest income increased to $1.7 million during 2000, an increase
of $413,000 or 32.8%.  This compares to $1.3 million  during 1999 and 1998.  The
major components in the year 2000 that had the most impact on noninterest income
were the sale of $6.4  million in  mortgage-backed  securities  at a net loss of
$287,000  and the sale of the Bank's  Robersonville  branch  office at a gain of
$583,000. The funds from the mortgage-backed security sale were used in the sale
of the Robersonville  branch.  Due to deteriorating  economic  conditions in the
area, the Bank's management  determined it was no longer feasible to continue in
this market area in competition  with two other banks.  During the year 2000 the
Bank sold $45,000 in fixed rate loans at a small gain as compared to the sale of
$40 million in 1999 at a gain of  $161,000,  and the sale of $14 million in 1998
at a gain of $270,000.  The funds from the loan sales were used in the operation
of the Bank to extend  credit to home and  commercial  loan  customers.  Service
charges and fees on loans increased to $447,000  (38.7%) during the year 2000 as
compared  to $322,000  (5.4%) for 1999 and  $306,000  in 1998.  The  increase in
service charges and fees on loans for 1999 can be attributed to a higher average
balance  of  loans  serviced  for  others  while  the  increase  in 2000  can be
attributed to fees collected for loan settlement services on loans processed for
other lenders.  Deposit-related  fees  increased to $923,000  (18.5%) during the
year 2000 as  compared to $778,000  (13.3%) for 1999 and  $687,000 in 1998.  The
increase in deposit-related  fees can be attributed to an increase in the volume
of checking  accounts  during the periods  under  review and a change in the fee
structure during the year 2000.

NONINTEREST EXPENSE

     Total  noninterest  expense  was $10.2  million  during the year  2000,  an
increase of $1.3 million or 14.3% from 1999.  The major  increase in noninterest
expense  during  the  year  2000  was  due  to  the  increase  in  cost  of  the
multi-employer  defined  benefit  retirement  plan and a one- time offering of a
special early retirement  benefit to certain  employees.  With a modification to
the defined benefit plan in 1999 and an increase in eligible  participants,  the
Company expensed $304,000 in 2000 as compared to $120,000 in 1999 and no expense
in 1998.  During the year 2000 the defined  benefit plan was changed again which
will substantially  reduce required  contributions going forward. As a result of
this change,  the Bank  offered a special  early  retirement  benefit to certain
employees meeting the eligibility  requirements,  resulting in a one-time charge
of  $754,000  to  compensation  and  fringe  benefits.   The  6.5%  increase  in
compensation  and fringe  benefits  for 1999 as compared to 1998  resulted  from
increased  staffing  levels and normal  increases  in  salaries,  benefits,  and
incentive-based  compensation.  The Bank's  occupancy and equipment  expense was
$2.0  million  during  2000,  an increase of 2.8% as compared to $1.9 million in
1999 and $1.6  million in 1998.  The  increase in the years 2000 and 1999 can be
attributed  to  additional  maintenance  necessary  to keep  the  buildings  and
equipment


                                       13
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS


in good  repair,  increases  in  property  tax,  increases  in the  cost of data
processing services,  and normal increases in utility expenses.  The decrease of
63.8% in the federal deposit  insurance premium during the year 2000 is due to a
reduction in the premium.  Advertising  cost for the year 2000 was  $398,000,  a
decrease of 10.5% as compared to $445,000 in 1999 and  $404,000 in 1998.  During
1999  the Bank had an  aggressive  advertising  campaign  for the  promotion  of
various products.  After the initial promotion, the advertising was cut back and
the Bank took a more  conservative  approach to  advertising in the year 2000. A
more conservative  approach was taken with other operating expense that resulted
in a reduction of 1.2% during 1999 as compared to 1998. This carried over in the
year 2000, and other operating expense was essentially  unchanged as compared to
1999.

INCOME TAXES

     The  effective  tax rates for the years ended  December 31, 2000,  1999 and
1998  approximate the statutory rate after giving effect to nontaxable  interest
and other permanent tax differences.

NOTE REGARDING FORWARD-LOOKING STATEMENTS

     In addition to  historical  information  contained  herein,  the  following
discussion   contains   forward-looking   statements   that  involve  risks  and
uncertainties.   Economic  circumstances,  the  Company's  operations,  and  the
Company's actual results could differ  significantly from those discussed in the
forward-looking  statements.  Some of the factors that could cause or contribute
to such  differences  are  discussed  herein,  but also  include  changes in the
economy and interest  rates in the nation,  changes in the Company's  regulatory
environment and the Company's market area generally.



                                       14
<PAGE>
                      MANAGEMENT'S DISCUSSION AND ANALYSIS


                             SELECTED QUARTERLY DATA

     The following table contains  selected  financial data for the Company on a
quarterly basis for the previous eight quarters.
<TABLE>
<CAPTION>
                                                2000                                  1999
                               Fourth      Third    Second    First     Fourth    Third   Second   First
----------------------------------------------------------------------  ------------------------------------
                                                           Dollars in Thousands
<S>                            <C>        <C>       <C>       <C>       <C>      <C>        <C>       <C>
Selected Quarter-End Balances:
  Assets                       $414,728   $414,720  $420,735  $410,465  $410,146 $ 389,486  $383,843  $  383,160
  Loans, net                    347,503    348,872   351,678   343,222   334,744   321,727   315,152     320,072
  Securities                     35,027     39,829    38,683    38,619    45,261    47,215    43,220      44,021
  FHLB stock                      3,755      3,755     3,755     3,755     3,755     3,005     2,974       3,006
  Deposits                      327,312    319,647   321,167   316,412   304,834   308,077   303,248     298,986
  Borrowed funds                 55,101     63,103    68,104    63,105    75,106    50,107    50,108      52,108
  Stockholders' equity           30,812     30,713    30,021    29,418    29,343    29,615    29,024      30,148

----------------------------------------------------------------------  ------------------------------------------
                                                           Dollars in Thousands
Selected Operations Data:
  Interest income              $  8,064   $  8,060  $  7,925  $  7,660  $  7,352 $   7,053 $   6,963  $    7,081
  Interest expense                5,088      5,005     4,744     4,468     4,262     4,045     3,984       4,131
  Net interest income             2,976      3,055     3,181     3,192     3,090     3,008     2,979       2,950
  Provision for loan losses          90         90        90       700        45        45        45          75
  Noninterest income                410        335       332       593       281       308       296         372
  Noninterest expenses            3,016      2,162     2,359     2,656     2,303     2,208     2,175       2,228
  Income before income taxes        280      1,138     1,064       429     1,023     1,063     1,055       1,019
  Net income                        235        728       695       274       687       679       673         641

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

Selected Financial Ratios
  and Other Data:
  Return on average assets         0.23%      0.70%     0.67%     0.27%     0.68%     0.70%     0.70%       0.66%
  Return on average equity         3.01%      9.52%     9.28%     3.66%     9.15%     9.15%     9.07%       8.20%
  Average stockholders'
    equity to average assets       7.56%      7.39%     7.25%     7.33%     7.47%     7.68%     7.77%       8.04%
Per Share Data:
  Earnings per:
     Common share - basic      $   0.08   $   0.27  $   0.26  $   0.10  $   0.24 $    0.25 $    0.24  $     0.22
     Common share - diluted    $   0.08   $   0.26  $   0.25      0.10      0.24      0.23      0.23        0.20
  Cash dividends declared      $   0.05   $   0.05  $   0.05      0.05         -         -         -           -
  Tangible book value          $  11.35   $  11.31  $  11.06     10.86     10.92     10.73     10.52       10.43
  Number of common shares
    outstanding               2,714,610  2,714,610 2,714,110 2,709,078 2,687,919 2,761,168 2,759,344   2,890,496


</TABLE>


                                       15
<PAGE>
                            [LETTERHEAD OF KPMG LLP]


                          Independent Auditors' Report

The Board of Directors
Cooperative Bankshares, Inc.

We have audited the accompanying  consolidated  statement of financial condition
of Cooperative Bankshares,  Inc. and subsidiary as of December 31, 2000, and the
related   consolidated   statements   of   operations,   comprehensive   income,
stockholders' equity, and cash flows for the year then ended. These consolidated
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements  based  on  our  audit.  The  accompanying   consolidated   financial
statements of  Cooperative  Bankshares,  Inc. and  subsidiary as of December 31,
1999 and for the each of the two years then ended were audited by other auditors
whose report thereon dated January 21, 2000 expressed an unqualified  opinion on
those statements.

We conducted our audit in accordance with auditing standards  generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain  reasonable  assurance  about  whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

In our opinion,  the 2000 consolidated  financial  statements  referred to above
present fairly, in all material respects,  the financial position of Cooperative
Bankshares,  Inc. and  subsidiary  as of December  31, 2000,  and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

                                       /s/ KPMG LLP


January 19, 2001



                                       16
<PAGE>

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                           December 31, 2000 and 1999
<TABLE>
<CAPTION>

                                                 ASSETS                                       2000                     1999
                                                                                          -------------           -------------
<S>                                                                                       <C>                     <C>
Cash and due from banks, noninterest-bearing                                              $   3,904,275               6,069,823
Interest-bearing deposits in other banks                                                     13,994,293               9,522,187
                                                                                          -------------           -------------
          Total cash and cash equivalents                                                    17,898,568              15,592,010

Securities:
    Available for sale (amortized cost of $16,000,677 in 2000
       and $27,761,376 in 1999)                                                              16,049,376              27,235,985
    Held to maturity (estimated market value of $18,553,526
       in 2000 and $17,114,381 in 1999)                                                      18,977,776              18,024,581
FHLB stock                                                                                    3,755,300               3,755,300
Loans                                                                                       349,662,711             336,049,907
    Less allowance for loan losses                                                            2,159,663               1,306,381
                                                                                          -------------           -------------
          Net loans                                                                         347,503,048             334,743,526

Other real estate owned                                                                         234,711                 244,626
Accrued interest receivable                                                                   2,776,404               2,471,459
Premises and equipment, net                                                                   6,272,610               6,244,551
Prepaid expenses and other assets                                                             1,260,232               1,833,807
                                                                                          -------------           -------------
                Total assets                                                              $ 414,728,025             410,145,845
                                                                                          =============           =============

                                  LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits                                                                                  $ 327,312,324             304,834,455
Borrowed funds                                                                               55,101,477              75,105,567
Escrow deposits                                                                                 560,775                 349,450
Accrued interest payable                                                                         50,528                  50,945
Accrued expenses and other liabilities                                                          890,742                 462,128
                                                                                          -------------           -------------
          Total liabilities                                                                 383,915,846             380,802,545
                                                                                          -------------           -------------
Commitments and contingencies

Stockholders' equity:
    Preferred stock, $1 par value: 3,000,000 shares authorized,
       no shares issued and outstanding                                                            --                      --
    Common stock, $1 par value: 7,000,000 shares authorized,
       2,714,610 and 2,687,919 issued and outstanding                                         2,714,610               2,687,919
    Additional paid-in capital                                                                2,234,936               2,531,998
    Accumulated other comprehensive income (loss)                                                29,707                (320,488)
    Retained earnings                                                                        25,832,926              24,443,871
                                                                                          -------------           -------------
          Total stockholders' equity                                                         30,812,179              29,343,300
                                                                                          -------------           -------------
                Total liabilities and stockholders' equity                                $ 414,728,025             410,145,845
                                                                                          =============           =============
</TABLE>

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


                                       17
<PAGE>


              CONSOLIDATED STATEMENTS OF OPERATIONS

      For the years ended December 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>

                                                                              2000                 1999                 1998
                                                                           ------------          -----------          -----------
<S>                                                                        <C>                    <C>                  <C>
Interest income:
    Loans                                                                  $ 28,694,889           25,274,397           24,566,039
    Securities                                                                2,332,743            2,561,805            3,003,755
    Other                                                                       390,285              379,476              632,669
    Dividends on FHLB stock                                                     291,036              233,730              208,080
                                                                           ------------          -----------          -----------
                Total interest income                                        31,708,953           28,449,408           28,410,543
                                                                           ------------          -----------          -----------
Interest expense:
    Deposits                                                                 15,061,870           12,837,966           13,891,244
    Borrowed funds                                                            4,242,721            3,583,825            3,320,583
                                                                           ------------          -----------          -----------
                Total interest expense                                       19,304,591           16,421,791           17,211,827
                                                                           ------------          -----------          -----------
Net interest income                                                          12,404,362           12,027,617           11,198,716
Provision for loan losses                                                       970,000              210,000              330,000
                                                                           ------------          -----------          -----------
                Net interest income after provision for
                    loan losses                                              11,434,362           11,817,617           10,868,716
                                                                           ------------          -----------          -----------
Noninterest income:
    Gain on sale of loans                                                           245              161,365              269,666
    Net gain (loss) on sale of securities                                      (287,282)                 938                 --
    Service charges and fees on loans                                           446,922              322,146              305,582
    Deposit - related fees                                                      922,737              778,367              686,950
    Gain on sale of branch                                                      582,583                  --                  --
    Other income (loss), net                                                      4,299               (6,085)              (2,671)
                                                                           ------------          -----------          -----------
                Total noninterest income                                      1,669,504            1,256,731            1,259,527
                                                                           ------------          -----------          -----------
Noninterest expenses:
    Compensation and fringe benefits                                          6,046,774            4,670,391            4,383,537
    Occupancy and equipment                                                   1,994,560            1,939,797            1,635,148
    Federal insurance premiums                                                   63,813              176,334              177,588
    Advertising                                                                 397,662              444,521              403,582
    Real estate owned expenses and losses                                        36,031               29,123               79,729
    Other                                                                     1,654,347            1,654,161            1,674,719
                                                                           ------------          -----------          -----------
                Total other operating expenses                               10,193,187            8,914,327            8,354,303
                                                                           ------------          -----------          -----------
Income before income taxes                                                    2,910,679            4,160,021            3,773,940
Income tax expense                                                              979,004            1,479,591            1,388,705
                                                                           ------------          -----------          -----------
Net income                                                                 $  1,931,675            2,680,430            2,385,235
                                                                           ============          ===========          ===========
Net income per share:
    Basic                                                                           .71                  .95                  .79
                                                                           ============          ===========          ===========
    Diluted                                                                         .69                  .90                  .74
                                                                           ============          ===========          ===========
Weighted average common shares outstanding:
    Basic                                                                     2,714,216            2,819,846            3,019,413
                                                                           ============          ===========          ===========
    Diluted                                                                   2,805,611            2,974,043            3,206,392
                                                                           ============          ===========          ===========
</TABLE>

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


                                       18
<PAGE>

         CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

       For the years ended December 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
                                                                              2000                1999                1998
                                                                          ------------          ----------         -----------
<S>                                                                       <C>                    <C>                 <C>
Net income                                                                $  1,931,675           2,680,430           2,385,235
Other comprehensive income (loss):
    Realized (gain) loss on available for sale securities                      287,282                (938)              --
    Tax expense (benefit) on realized gains and losses                        (112,040)                366               --
    Unrealized gain (loss) on available for sale securities                    286,808            (776,995)            264,006
    Tax (expense) benefit on unrealized gains and losses                      (111,855)            303,028            (103,292)
                                                                          ------------          ----------         -----------
                Other comprehensive income (loss)                              350,195            (474,539)            160,714
                                                                          ------------          ----------         -----------
Comprehensive income                                                      $  2,281,870           2,205,891           2,545,949
                                                                          ============          ==========         ===========
</TABLE>

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



      CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

   For the years ended December 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
                                                                                     ACCUMULATED
                                                                                       OTHER
                                                       ADDITIONAL       UNEARNED     COMPREHENSIVE                 TOTAL
                                         COMMON         PAID-IN           ESOP       INCOME (LOSS),  RETAINED    STOCKHOLDERS'
                                         STOCK          CAPITAL          SHARES          NET         EARNINGS       EQUITY
                                        ---------     -----------      ---------    --------------   --------    ------------

<S>                                   <C>             <C>              <C>             <C>        <C>            <C>
Balance, December 31, 1997            $ 2,984,396      6,022,454        (84,824)        (6,663)    19,378,206     28,293,569
    Exercise of stock options              61,888        212,335           --             --             --          274,223
    Tax benefit of stock option
       exercise                              --          289,205           --             --             --          289,205
    Other comprehensive
       income, net  of  taxes                --             --             --          160,714           --          160,714
    Release of ESOP shares                   --          125,380         84,824           --             --          210,204
    Net income for year                      --             --             --             --        2,385,235      2,385,235
                                      -----------    -----------      ---------      ---------    -----------    -----------
Balance, December 31, 1998              3,046,284      6,649,374           --          154,051     21,763,441     31,613,150
    Exercise of stock options              23,424         28,375           --             --             --           51,799
    Tax benefit of stock option
       exercise                              --           66,998           --             --             --           66,998
    Repurchase of stock
       (381,789 shares)                  (381,789)    (4,212,749)          --             --             --       (4,594,538)
    Other comprehensive
       loss, net  of  taxes                  --             --             --         (474,539)          --         (474,539)
    Net income for year                      --             --             --             --        2,680,430      2,680,430
                                      -----------    -----------      ---------      ---------    -----------    -----------
Balance, December 31, 1999              2,687,919      2,531,998           --         (320,488)    24,443,871     29,343,300
    Exercise of stock options              73,076        132,959           --             --             --          206,035
    Tax benefit of stock option
       exercise                              --            4,251           --             --             --            4,251
    Repurchase of stock
       (46,385 shares)                    (46,385)      (434,272)          --             --             --         (480,657)
    Other comprehensive
       income, net  of  taxes                --             --             --          350,195           --          350,195
    Net income for year                      --             --             --             --        1,931,675      1,931,675
    Cash dividends ($.20 per share)          --             --             --             --         (542,620)      (542,620)
                                      -----------    -----------      ---------      ---------    -----------    -----------
Balance, December 31, 2000            $ 2,714,610      2,234,936           --           29,707     25,832,926     30,812,179
                                      ===========    ===========      =========      =========    ===========    ===========
</TABLE>


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


                                       19
<PAGE>

              CONSOLIDATED STATEMENTS OF CASH FLOWS

      For the years ended December 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>

                                                                 2000            1999            1998
                                                            ------------    ------------    ------------
<S>                                                         <C>                <C>             <C>
Net income                                                  $  1,931,675       2,680,430       2,385,235
Adjustments to reconcile net income to net cash
    provided by operating activities:
       Net accretion and amortization                             15,085         117,717          92,952
       Depreciation                                              639,291         664,189         612,526
       Net (gain) loss on sale of securities                     287,282            (938)           --
       Gain on sale of loans                                        (245)       (161,365)       (269,666)
       Benefit from deferred income taxes                       (695,383)       (280,431)       (416,469)
       Release of ESOP shares                                       --              --           125,380
       Loss (gain) on sales of premises and  equipment              (130)          7,783           7,483
       Gain on sale of branch office                            (582,583)           --              --
       Loss on sales of foreclosed real estate                    22,681          16,974           2,498
       Valuation losses on foreclosed real estate                   --            10,000          62,300
       Provision for loan losses                                 970,000         210,000         330,000
       Proceeds from sales of loans                               44,560      39,923,328      13,998,895
       Changes in assets and liabilities:
          Accrued interest receivable                           (309,675)       (184,802)       (114,322)
          Prepaid expenses and other assets                      890,265        (924,337)       (584,995)
          Accrued interest payable                               (26,196)        (28,318)        (46,892)
          Accrued expenses and other liabilities                 496,507         135,275         223,135
                                                            ------------    ------------    ------------
            Net cash provided by operating activities          3,683,134      42,185,505      16,408,060
                                                            ------------    ------------    ------------
Purchases of securities available for sale                   (10,000,000)     (1,999,375)    (15,000,000)
Purchases of securities held to maturity                        (986,604)     (5,000,000)           --
Proceeds from maturity of securities available for sale        5,000,000            --        15,000,000
Proceeds from sale of securities available for sale           16,277,957       2,000,938            --
Proceeds from maturities of securities held to maturity             --              --         8,000,000
Proceeds from maturities of securities available for sale        213,783       3,600,089       2,327,315
Loan originations, net of principal repayments               (15,451,318)    (51,386,357)    (51,092,429)
Proceeds from disposals of foreclosed real estate                353,420         193,452         258,147
Purchases of premises and equipment                             (789,299)       (544,567)     (2,120,263)
Proceeds from sales of premises and equipment                     68,154             500            --
Net cash paid related to sale of branch office                (5,156,761)           --              --
Net expenditures on foreclosed real estate                       (14,985)        (30,880)       (110,139)
Purchases of FHLB stock                                             --          (927,300)       (139,800)
                                                            ------------    ------------    ------------
            Net cash used in investing activities            (10,485,653)    (54,093,500)    (42,877,169)
                                                            ------------    ------------    ------------
Net increase in deposits                                      29,576,608       3,178,251      12,965,570
Proceeds from borrowed funds                                  61,000,000      52,000,000      15,000,000
Principal payments on borrowed funds                         (81,004,090)    (32,003,872)    (10,031,563)
Proceeds from issuance of common stock                           206,035          51,799         274,223
Purchase and retirement of common stock                         (480,657)     (4,594,538)           --
Dividends paid                                                  (406,890)           --              --
Net change in escrow deposits                                    218,071          11,976         (90,509)
                                                            ------------    ------------    ------------
            Net cash provided by financing activities          9,109,077      18,643,616      18,117,721
                                                            ------------    ------------    ------------
Increase (decrease) in cash and cash equivalents               2,306,558       6,735,621      (8,351,388)
Cash and cash equivalents:
    Beginning of year                                         15,592,010       8,856,389      17,207,777
                                                            ------------    ------------    ------------
    End of year                                             $ 17,898,568      15,592,010       8,856,389
                                                            ============    ============    ============

                                                                                             (Continued)
</TABLE>

                                       20
<PAGE>

              CONSOLIDATED STATEMENTS OF CASH FLOWS

      For the years ended December 31, 2000, 1999 and 1998
<TABLE>
<CAPTION>
                                                                             2000                  1999                  1998
                                                                          ------------           -----------           -----------
<S>                                                                       <C>                     <C>                   <C>
Cash paid for:
    Interest                                                              $ 19,305,008            16,450,109            17,258,719
    Income taxes                                                             1,739,500             1,724,000             1,544,000

Summary of noncash investing and financing activities:
    Transfer from loans to foreclosed real estate                              351,201               330,014                34,000
    Loans to facilitate the sale of foreclosed
       real estate                                                                --               2,355,000             2,438,023
    Unrealized gains (losses) on securities available
       for sale, net of taxes                                                  350,195              (474,539)              160,714

</TABLE>

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


                                       21
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(1)    BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

       BASIS OF PRESENTATION

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

       NATURE OF OPERATIONS

       The Company operates 16 offices  (including 15 full service  branches) in
       Eastern  North  Carolina  and  offers a wide  range of  banking  services
       including deposits,  bank cards, and alternative investment products. The
       funds are used for the extension of credit through home loans, commercial
       loans,  consumer loans, and other installment  credit such as home equity
       loans,  auto and boat loans,  and check reserves.  The Company's  primary
       source  of  revenue  is  interest  income  from its  loan and  securities
       portfolios.

       USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

       The  preparation of financial  statements in conformity  with  accounting
       principles  generally  accepted in the United States of America  requires
       management  to make  estimates and  assumptions  that affect the reported
       amounts of assets and liabilities and disclosure of contingent assets and
       liabilities in the financial  statements and accompanying  notes.  Actual
       results could differ from those estimates.

       RECLASSIFICATIONS

       Certain items  included in prior years'  financial  statements  have been
       reclassified  to  conform  to  the  current  year   presentation.   These
       reclassifications  have no  effect  on the net  income  or  stockholders'
       equity as previously reported.

       SIGNIFICANT ACCOUNTING POLICIES

       The significant accounting policies of the Company are summarized below:

       (a)    CASH AND CASH EQUIVALENTS

              Cash and cash  equivalents  include demand and time deposits (with
              original maturities of ninety days or less) at other institutions.

              Federal  regulations  require  institutions to set aside specified
              amounts of cash as reserves against transaction and time deposits.
              As  of  December  31,  2000,   the  daily  average  gross  reserve
              requirement was $656,000.


                                       22
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



       (b)    SECURITIES

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

              Premiums  are  amortized  and  discounts  are  accreted  using the
              effective  interest method over the remaining terms of the related
              securities.  Gains  and  losses  on the  sales of  securities  are
              determined  using  the  specific-identification   method  and  are
              included in non-interest income at the time of sale.

       (c)    FHLB STOCK

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

       (d)    LOANS AND ALLOWANCE FOR LOAN LOSSES

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

              The  Company  evaluates  its loan  portfolio  in  accordance  with
              Statement  of  Financial  Accounting  Standards  ("SFAS") No. 114,
              "Accounting  by Creditors for  Impairment of a Loan" as amended by
              SFAS No. 118,  "Accounting by Creditors for Impairment of a Loan -
              Income Recognition and Disclosure".  Under these standards, a loan
              is considered  impaired,  based on current information and events,
              if it is probable  that the Company  will be unable to collect the
              scheduled payments of principal and interest when due according to
              the  contractual  terms  of the loan  agreement.  Uncollateralized
              loans are measured for  impairment  based on the present  value of
              expected future cash flows discounted at the original  contractual
              interest rate, while all  collateral-dependent  loans are measured
              for  impairment  based on the fair  value  of the  collateral.  As
              permitted  by the  statement,  smaller-balance  homogeneous  loans
              which  consist  primarily of  residential  mortgages  and consumer
              loans are  evaluated  collectively  and reserves  are  established
              based on historical loss experience.


                                       23
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

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

              Additionally,  various regulatory agencies, as an integral part of
              their  examination  process,  periodically  review  the  Company's
              allowance   for  loan  losses.   Such  agencies  may  require  the
              recognition of additions to the allowance based on their judgments
              of information available to them at the time of their examination.

       (e)    INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS

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

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

              While  a  loan  is  classified   as  nonaccrual   and  the  future
              collectibility   of  the   recorded   loan  balance  is  doubtful,
              collections  of interest and principal are generally  applied as a
              reduction to the principal outstanding.

              When the future  collectibility  of the  recorded  loan balance is
              expected,  interest  income may be recognized on a cash basis.  In
              the case where a nonaccrual  loan had been partially  charged-off,
              recognition  of  interest on a cash basis is limited to that which
              would have been  recognized  on the  recorded  loan balance at the
              contractual  interest rate.  Receipts in excess of that amount are
              recorded as  recoveries  to the  allowance  for loan losses  until
              prior charge-offs have been fully recovered.


                                       24
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



       (f)    TRANSFERS AND SERVICING OF FINANCIAL ASSETS

              There were no loan sales in 2000 with retained  servicing  rights.
              Fees on loans sold in 1999 and 1998 are  considered  to adequately
              compensate  the  Company;  therefore,  no  servicing  assets  were
              recorded on those sales.

              Servicing  loans  for  others  generally  consists  of  collecting
              mortgage  payments,   maintaining   escrow  accounts,   disbursing
              payments to investors and foreclosure  processing.  Loan servicing
              income is recorded on the cash basis and includes  servicing  fees
              from investors and certain charges collected from borrowers,  such
              as late payment fees.

       (g)    OTHER REAL ESTATE OWNED

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

       (h)    PREMISES AND EQUIPMENT

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

       (i)    INCOME TAXES

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

       (j)    COMPREHENSIVE INCOME

              The  Company  reports  as  comprehensive  income  all  changes  in
              stockholders' equity during the year from non-owner sources. Other
              comprehensive income refers to all components (revenues, expenses,
              gains, and losses) of comprehensive  income that are excluded from
              net income.  The Company's only  component of other  comprehensive
              income is unrealized gains and losses on securities  available for
              sale.


                                       25
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

       (k)    SEGMENT INFORMATION

              SFAS No. 131,  "Disclosures  about  Segments of an Enterprise  and
              Related  Information",  requires that public business  enterprises
              report  certain  information  about  operating  segments.  It also
              requires  that the  public  business  enterprises  report  related
              disclosures  and  descriptive   information   about  products  and
              services provided by significant  segments,  geographic areas, and
              major  customers,  differences  between the  measurements  used in
              reporting   segments   and   those   used   in  the   enterprise's
              general-purpose   financial   statements,   and   changes  in  the
              measurement of segment amounts from period to period.

              The  Company has  determined  that it  operates  primarily  in one
              operating segment,  the providing of general commercial  financial
              services to  customers  located in the single  geographic  area of
              Eastern North Carolina.  The various  products are those generally
              offered by community  banks,  and the  allocation  of resources is
              based on the overall  performance of the  institution,  versus the
              individual branches or products.

       (l)    NEW ACCOUNTING PRONOUNCEMENTS

              On January 1, 2001, the Company adopted SFAS No. 133,  "Accounting
              for Derivative Instruments and Hedging Activities".  The statement
              is effective for fiscal years  beginning after June 15, 2000, with
              earlier adoption  permitted,  as amended by SFAS No. 137. SFAS No.
              133 establishes  accounting and reporting standards for derivative
              instruments and for hedging activities.  The statement requires an
              entity  to  recognize   all   derivatives   as  either  assets  or
              liabilities  in the  statement of  financial  position and measure
              those  instruments at fair value.  On January 1, 2001, the Company
              transferred   held-to-maturity   investment   securities  with  an
              amortized    cost    of    approximately    $5,978,000    to   the
              available-for-sale  category  at fair value as allowed by SFAS No.
              133. The unrealized loss at the time of transfer was approximately
              $32,000  before  tax.  Such  transfers  from the  held-to-maturity
              category  at the date of  initial  adoption  shall  not call  into
              question the  Company's  intent to hold other debt  securities  to
              maturity in the future. The Company does not engage in any hedging
              activities,   and,  other  than  the  aforementioned  transfer  of
              securities,  the  adoption of the  statement  had no impact on the
              Company.

              The Financial  Accounting Standards Board has issued SFAS No. 140,
              "Accounting  for Transfers  and Servicing of Financial  Assets and
              Extinguishments  of  Liabilities,  a Replacement of FASB Statement
              No.   125."  It  revises  the   standards   for   accounting   for
              securitizations  and  other  transfers  of  financial  assets  and
              collateral and requires certain  disclosures,  but it carries over
              most of SFAS  No.  125's  provisions  with  reconsideration.  This
              statement is effective  for  transfers  and servicing of financial
              assets and  extinguishments  of liabilities  occurring after March
              31,  2001.   This  statement  is  effective  for  recognition  and
              reclassification   of  collateral  and  disclosures   relating  to
              securitization transactions and collateral for fiscal years ending
              after  December  15,  2000.  This  Statement  is not  expected  to
              materially impact the Company.



                                       26
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(2)    SECURITIES

       Securities as of December 31, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
                                                                   GROSS              GROSS          ESTIMATED
                                                AMORTIZED        UNREALIZED         UNREALIZED        MARKET
                                                  COST             GAINS              LOSSES          VALUE
                                              --------------    -------------     -------------    --------------
       <S>                                    <C>                 <C>                <C>             <C>
       2000:
         Securities available for sale:
            U.S. Government and
              agency securities               $  16,000,677           52,449             3,750        16,049,376
                                              ==============    =============     =============    ==============

         Securities held to maturity:
            U.S. Government and
              agency securities               $  18,014,900               --           447,085        17,567,815
            Mortgage-backed
                securities                          962,876           22,835                --           985,711
                                              --------------    -------------     -------------    --------------
                  Total                       $  18,977,776           22,835           447,085        18,553,526
                                              ==============    =============     =============    ==============

       1999:
         Securities available for sale:
            U.S. Government
              and agency securities           $  21,001,441               --           329,869        20,671,572
            Mortgage-backed
                securities                        6,759,935            9,711           205,233         6,564,413
                                              --------------    -------------     -------------    --------------
                  Total                       $  27,761,376            9,711           535,102        27,235,985
                                              ==============    =============     =============    ==============

         Securities held to
            maturity:
              U.S. Government and
                 agency securities            $  18,024,581               --           910,200        17,114,381
                                              ==============    =============     =============    ==============
</TABLE>

                                       27
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



       The  maturities  of  securities  at December 31, 2000 are  summarized  as
       follows:
<TABLE>
<CAPTION>

                                                                                                   ESTIMATED
                                                                               AMORTIZED             MARKET
                                                                                  COST               VALUE
                                                                             ---------------    -----------------

        <S>                                                                  <C>                 <C>
        Held to maturity:
          After 1 year through 5 years                                       $  13,014,900         12,680,940
          After 5 years through 10 years                                         5,000,000          4,886,875
          Mortgage-backed securities                                               962,876            985,711
                                                                             ---------------    -----------------
                                                                             $  18,977,776         18,553,526
                                                                             ===============    =================
        Available for sale:
          Within 1 year                                                      $   4,000,677          4,009,376
          After 1 year through 5 years                                          12,000,000         12,040,000
                                                                             ---------------    -----------------
                                                                             $  16,000,677         16,049,376
                                                                             ===============    =================
</TABLE>

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

       For the three  years  ended  December  31,  2000,  the  Company had gross
       realized gains of $4,697 and gross  realized  losses of $291,979 in 2000,
       and gross realized gains of $938 in 1999, and no realized gains or losses
       in 1998.

       Investment securities having an aggregate carrying value of $5,000,000 at
       December 31, 2000 were pledged to secure public funds on deposit.

(3)    LOANS

       Loans  at  December  31,  2000 and 1999 are  summarized  as  follows  (in
       thousands):
<TABLE>
<CAPTION>

                                                                                2000                1999
                                                                             ------------       --------------
        <S>                                                                  <C>                 <C>
        Real estate:
          Construction and land development                                  $      37,542            1,497
          Mortgage:
             1-4 family residential                                                234,383          253,857
             Multi-family residential                                               17,081           17,166
             Commercial                                                             31,300           38,765
             Equity line                                                            11,954            9,772
             Other                                                                     174               78
                                                                             ---------------    ---------------
                 Total real estate loans                                           332,434          321,135

        Commercial, industrial and agricultural                                     10,970           10,653
        Consumer                                                                     7,236            5,443
                                                                             ---------------    ---------------
                 Total gross loans                                                 350,640          337,231

        Less:
          Unearned discounts and net deferred fees                                     977            1,182
          Allowance for loan losses                                                  2,160            1,306
                                                                             ---------------    ---------------

                 Net loans                                                   $     347,503          334,743
                                                                             ===============    ===============
</TABLE>

                                       28
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



       In the normal course of business, the Company originates loans to related
       parties. Related parties include directors, executive officers, principal
       shareholders of equity securities,  or any associate of such persons. The
       activity with respect to related party loans is summarized  below for the
       year ending December 31, 2000:

        Balance at beginning of year                           $    2,069,908
        New loans                                                   1,352,288
        Repayments                                                    (86,196)
                                                               --------------
        Balance at end of year                                 $    3,336,000
                                                               ==============


       Activity in the  allowance  for loan losses for the years ended  December
       31, 2000, 1999 and 1998 is summarized as follows:
<TABLE>
<CAPTION>

                                                               2000               1999               1998
                                                          ---------------    ---------------    ----------------

        <S>                                               <C>                    <C>                  <C>
        Balance at beginning of year                      $   1,306,381          1,178,242            873,802
        Provision for loan losses                               970,000            210,000            330,000
        Loans charged-off                                      (146,474)           (94,034)           (28,330)
        Recoveries                                               29,756             12,173              2,770
                                                          ---------------    ---------------    ----------------
        Balance at end of year                            $   2,159,663          1,306,381          1,178,242
                                                          ===============    ===============    ================
</TABLE>


         The following is a summary of nonperforming assets at December 31, 2000
         and 1999 (in thousands):
<TABLE>
<CAPTION>
                                                                                  2000                1999
                                                                             ---------------      --------------

        <S>                                                                  <C>                      <C>
        Loans 90 days past due and still accruing interest                   $         358                934
        Nonaccrual loans                                                               333                267
        Other real estate owned                                                        234                245
                                                                             ---------------      --------------
               Total                                                         $         925              1,446
                                                                             ===============      ==============
</TABLE>

       At  December  31,  2000  and  1999,  the  recorded  investment  in  loans
       considered  impaired in accordance with SFAS No. 114 totaled $332,779 and
       $194,728, respectively, with corresponding valuation allowances of $0 and
       $22,609,  respectively.  For the years ended December 31, 2000,  1999 and
       1998, the average recorded investment in impaired loans was approximately
       $204,000,  $130,000 and  $580,000,  respectively.  The amount of interest
       recognized  on  impaired  loans  during the portion of the year that they
       were impaired was not material.

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


                                       29
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       The following  table  summarizes  the Company's  outstanding  off-balance
       sheet  commitments  to extend  credit at  December  31, 2000 and 1999 (in
       thousands):
<TABLE>
<CAPTION>
                                                                                  2000                1999
                                                                             ---------------      --------------
        <S>                                                                 <C>                   <C>
        Undisbursed portion of home equity lines of credit
          collateralized primarily by junior liens on
          1-4 family properties                                              $      10,475              7,593
        Other commitments and credit lines                                          12,233             11,338
        Fixed-rate mortgage loan commitments                                           100              1,183
        Adjustable-rate mortgage loan commitments                                    1,158              1,369
                                                                             ---------------      ---------------
                 Total                                                       $      23,966             21,483
                                                                             ===============      ===============
</TABLE>

       As commitments may expire unused,  the total  commitment  amount does not
       necessarily represent future cash requirements.

       The  Company,  through  its  normal  lending  activity,   originates  and
       maintains  loans which are  substantially  concentrated  in Eastern North
       Carolina,  where its offices are located.  The Company's policy calls for
       collateral or other forms of repayment  assurance to be received from the
       borrower at the time of loan  origination.  Such collateral or other form
       of  repayment  assurance  is subject to changes in economic  value due to
       various  factors beyond the control of the Company and such changes could
       be significant.

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

       Mortgage loans serviced for others approximated $74,140,415,  $84,128,060
       and $58,674,064 at December 31, 2000, 1999 and 1998, respectively.

(4)    PREMISES AND EQUIPMENT

       Premises and  equipment at December 31, 2000 and 1999 are  summarized  as
       follows:
<TABLE>
<CAPTION>
                                                                                  2000                1999
                                                                             ---------------    -----------------
        <S>                                                                  <C>                 <C>
        Land                                                                 $   1,983,684          1,677,245
        Buildings                                                                5,460,049          5,542,243
        Leasehold improvements                                                     307,994            307,994
        Furniture and equipment                                                  5,086,359          4,886,268
                                                                             ---------------    -----------------
                                                                                12,838,086         12,413,750
        Less accumulated depreciation and amortization                          (6,565,476)        (6,169,199)
                                                                             ---------------    -----------------
                 Premises and equipment, net                                 $   6,272,610          6,244,551
                                                                             ===============    =================
</TABLE>


                                       30
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



(5)    DEPOSITS

       Deposits at December  31, 2000 and 1999,  are  summarized  as follows (in
       thousands):
<TABLE>
<CAPTION>
                                                      2000                 1999
                                                  --------------       --------------

       <S>                                        <C>                  <C>
       Demand                                     $      12,650             9,610
       Checking with interest                            18,474            18,167
       Money market accounts                             22,236            21,110
       Savings                                           21,363            25,136
       Time deposits of $100 or more                     63,020            48,824
       Other time deposits                              189,569           181,987
                                                  --------------       --------------
              Total                               $     327,312           304,834
                                                  ==============       ==============
</TABLE>

(6)    BORROWED FUNDS

       Borrowed funds and the  corresponding  weighted  average rates ("WAR") at
       December 31, 2000 and 1999 are summarized as follows:
<TABLE>
<CAPTION>
                                                    2000              WAR               1999             WAR
                                               ---------------    -------------     -------------    ---------------

       <S>                                     <C>                    <C>           <C>                 <C>
       Advances from FHLB                       $ 55,000,000          6.23%         $ 75,000,000        6.11%
       Affordable Housing Program
          Advances from FHLB                         101,477          3.50%              105,567        3.50%
                                                --------------                      -------------
              Total                             $ 55,101,477                        $ 75,105,567
                                                ==============                      =============
</TABLE>

       Pursuant  to  a  collateral   agreement  with  the  FHLB,   advances  are
       collateralized  by all the  Company's  FHLB  stock and  qualifying  first
       mortgage  loans.  This  agreement  with the FHLB  provides  for a line of
       credit up to 25% of the Bank's  assets.  The maximum  month end  balances
       were $75  million,  $75 million,  and $55 million  during the years ended
       December 31, 2000, 1999 and 1998. Annual principal  maturities of Federal
       Home Bank  advances for the years  subsequent to December 31, 2000 are as
       follows:

                                   2001                       $   15,000,000
                                   2002                           15,000,000
                                   2003                           10,000,000
                                   2004                            5,000,000
                                   2010                           10,000,000
                                                              ----------------
                                                              $   55,000,000
                                                              ================

       The Affordable  Housing  Program  advances are funds advanced by the FHLB
       for the Company to lend to borrowers who might not otherwise  qualify for
       a home mortgage.  These advances have an interest rate of 3.5% and mature
       at various times between November 2015 and January 2016.


                                       31
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       Interest expense on borrowed funds is summarized as follows:
<TABLE>
<CAPTION>
                                                               2000               1999                1998
                                                          ---------------    ---------------    ---------------

        <S>                                               <C>                 <C>                <C>
        Advances from FHLB                                $   4,242,721          3,583,825          3,320,483
        ESOP loan                                                    --                 --                100
                                                          ---------------    ---------------    ---------------
               Total                                      $   4,242,721          3,583,825          3,320,583
                                                          ===============    ===============    ===============
</TABLE>

(7)    REGULATORY MATTERS AND CAPITAL REQUIREMENTS

       The  Company  is  subject  to  various  regulatory  capital  requirements
       administered  by  federal  and state  banking  agencies.  Failure to meet
       minimum capital requirements can initiate certain mandatory, and possibly
       additional  discretionary,  actions by regulators  that,  if  undertaken,
       could  have  a  direct  material  effect  on the  Company's  consolidated
       financial statements.  Quantitative measures established by regulation to
       ensure capital  adequacy  require the Company to maintain minimum amounts
       and ratios, as set forth in the table below.  Management believes,  as of
       December  31,  2000,   that  the  Company  meets  all  capital   adequacy
       requirements to which it is subject. The Company's only significant asset
       is  its   investment  in   Cooperative   Bank  for  Savings,   Inc.  SSB.
       Consequently,  the information  concerning  capital ratios is essentially
       the same for the Company and the Bank.

       As of  December  31,  2000,  the most recent  notification  from the FDIC
       categorized the Bank as well capitalized  under the regulatory  framework
       for prompt  corrective  action. To be categorized as well capitalized the
       Bank must maintain minimum amounts and ratios,  as set forth in the table
       below.  There are no  conditions or events since that  notification  that
       management believes have changed the Bank's category.

       The Bank's actual  capital  amounts and ratios are also  presented in the
       table below (dollars in thousands) as of December 31:
<TABLE>
<CAPTION>
                                                                                             MINIMUM RATIO TO
                                                                                              MAINTAIN WELL-
                                                                                            CAPITALIZED STATUS
                                                                                      --------------------------------
                                                      2000              1999              2000              1999
                                                  --------------    -------------     -------------    ---------------
       <S>                                          <C>              <C>                <C>               <C>
       Risk-based capital:
         Tier I capital                             $    30,781        29,663
         Total capital                                   32,941        30,969
         Risk-adjusted assets                           268,061       257,606
         Quarterly average tangible
           assets                                       412,312       402,166

       Tier I capital ratio                               11.48%        11.51%            6.00%              6.00%
       Total capital ratio                                12.29%        12.02%           10.00%             10.00%
       Leverage capital ratio                              7.47%         7.38%            5.00%              5.00%

</TABLE>

                                       32
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       A  liquidation  account was  established  at the time of  conversion to a
       stock  institution  in an amount equal to the total net worth of the Bank
       as of March 31, 1991. Each eligible deposit account holder is entitled to
       a  proportionate  share  of  this  account  in the  event  of a  complete
       liquidation  of the Bank,  and only in such an event.  This share will be
       reduced if the account holder's  eligible  deposits fall below the amount
       on the date of record and will  cease to exist if the  account is closed.
       The  liquidation  account  will never be  increased  despite any increase
       after the  conversion  in the  related  eligible  deposit  of an  account
       holder. The liquidation account was approximately  $2,788,012 at December
       31, 2000.

       The Bank may not declare or pay a cash dividend, or repurchase any of its
       capital stock,  if the effect would cause the regulatory net worth of the
       Bank to fall  below  the  amount  required  for the  liquidation  account
       established in connection with the  conversion,  or to an amount which is
       less than the minimum required by the FDIC and the North Carolina Savings
       Institutions Administrator ("N.C. Administrator").

(8)    BENEFIT PLANS

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

       Under the multi-employer  plan, the Company is required to contribute its
       share of the Plan's total  pension  liability as  determined  by the plan
       administrator.  Expenses  related to this Plan were $303,803 and $120,361
       for the years 2000 and 1999, respectively. There was no expense for 1998.

       During  2000,  the Company made  certain  changes to its defined  benefit
       plan.  As a result of these  changes,  three  executives  of the  Company
       decided to take early  retirement.  The  Company  established  a deferred
       compensation  plan for  these  executives,  which  resulted  in a pre-tax
       charge of approximately $686,000.

       The  Company  maintains  a combined  ESOP and 401(k)  plan (the  "KSOP").
       Employees  are  able to  contribute  up to 15% of their  eligible  annual
       compensation to the KSOP subject to Internal Revenue Service limitations.
       The  Company  matches  employee  contributions  up to a limit  determined
       annually by the Board of Directors.  The Board  established  the match at
       50% up to the first 6% of the employee  contribution for 2000 and 100% of
       the first 6% for 1999 and 1998.

       During the year ended  December 31, 1998,  the Company  matched  employee
       contributions by contributing  $85,000 to the KSOP to repay the remaining
       portion of an ESOP note.  This released the  remaining  8,774 shares from
       serving as collateral  for the loan.  These shares were  allocated to the
       participants according to the plan specifications on December 31, 1998.

       The  compensation  expense  incurred  by the  Company  for the  KSOP  was
       $107,784,  $175,638 and  $339,590 for the years ended  December 31, 2000,
       1999 and 1998, respectively.

                                       33
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(9)    EARNINGS PER SHARE

       The following  table  provides a  reconciliation  of income  available to
       common  stockholders and the average number of shares  outstanding  (less
       unearned  ESOP shares) for the years ended  December  31, 2000,  1999 and
       1998:
<TABLE>
<CAPTION>
                                                              2000               1999                1998
                                                         ---------------    ---------------    -----------------

       <S>                                               <C>                 <C>                <C>
       Net income (numerator)                            $   1,931,675          2,680,430          2,385,235
                                                         ===============    ===============    =================

       Shares for basic EPS (denominator)                    2,714,216          2,819,846          3,019,413
       Dilutive effect of stock options                         91,395            154,197            186,979
                                                         ---------------    ---------------    -----------------
       Shares for diluted EPS (denominator)                  2,805,611          2,974,043          3,206,392
                                                         ===============    ===============    =================
</TABLE>

       For the  year  ended  December  31,  2000,  there  were  114,043  options
       outstanding that were  antidilutive  since the exercise price exceeds the
       average  market price for the year.  These options have been omitted from
       the 2000 calculation of the dilutive effect of stock options.

(10)   INCOME TAXES

       Income tax expense  consists of the  following  components  for the years
       ended December 31, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
                                                               2000               1999                1998
                                                          ---------------    ---------------    -----------------

        <S>                                               <C>                <C>                <C>
        Current tax expense                                   1,674,387          1,760,022          1,805,174
        Deferred tax expense (benefit)                         (695,383)          (280,431)          (416,469)
                                                          ---------------    ---------------    -----------------
               Total tax expense                          $     979,004          1,479,591          1,388,705
                                                          ===============    ===============    =================
</TABLE>

       For the year ended  December 31, 2000,  current tax expense  consisted of
       $1,525,540  in federal  tax expense  and  $148,847 in state tax  expense.
       Deferred tax benefit for the year ended  December 31, 2000,  consisted of
       $570,120 in federal tax benefit and $125,263 in state tax benefit.

                                       34
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       The components of the net deferred tax asset  (liability) at December 31,
       2000 and 1999 are as follows:
<TABLE>
<CAPTION>
                                                                                  2000                1999
                                                                             ---------------    -----------------
        <S>                                                                  <C>                          <C>
        Deferred tax assets:
          Unrealized loss on securities available for sale                   $          --            204,902
          Allowance for loan losses                                                693,368            223,127
          Accrued pension cost                                                     264,315             46,483
                                                                             ---------------    -----------------
               Total                                                               957,683            474,512
                                                                             ---------------    -----------------

        Deferred tax liabilities:
          Deferred loan fees                                                       220,418            262,575
          FHLB stock                                                               190,467            190,813
          Excess of book over tax basis of equipment                               208,930            170,564
          Unrealized gain on securities available for sale                          18,992                 --
          Other                                                                      2,186              5,358
                                                                             ---------------    -----------------
               Total                                                               640,993            629,310
                                                                             ---------------    -----------------

               Net deferred tax asset (liability)                        $         316,690           (154,798)
                                                                             ===============    =================
</TABLE>

       The  Company has no  valuation  allowance  at  December  31, 2000 or 1999
       because  management has  determined  that it is more likely than not that
       the results of future operations will generate  sufficient taxable income
       to realize the deferred tax assets.

       Reconciliations  of income taxes computed at the statutory federal income
       tax rate  (34%) to the  provisions  for  income  tax for the years  ended
       December 31, 2000, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
                                                               2000               1999                1998
                                                          ---------------    ---------------    -----------------
        <S>                                               <C>                    <C>                <C>
        Income taxes at federal tax rate                  $     989,631          1,414,407          1,283,140
        Increase (decrease) resulting from:
          State income taxes, net of federal
             income tax benefit                                  15,565            108,200             84,619
          Other                                                 (26,192)           (43,016)            20,946
                                                          ---------------    ---------------    -----------------
               Total                                      $     979,004          1,479,591          1,388,705
                                                          ===============    ===============    =================
</TABLE>

       Retained  earnings at December 31, 2000 and 1999  includes  approximately
       $5,170,000  representing  pre-1988 tax bad debt reserve base year amounts
       for which no deferred  income tax liability has been provided since these
       reserves are not expected to reverse and may never reverse. 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  distributions,
       dissolution, liquidation or redemption of the Bank's stock.

                                       35
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(11)   STOCK OPTION PLAN

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

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

       A summary of the status of the Option Plan as of December 31, 2000,  1999
       and 1998, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
                                           2000                              1999                          1998
                              --------------------------------    ---------------------------    --------------------------
                                                 WEIGHTED                       WEIGHTED                        WEIGHTED
                                                 AVERAGE                         AVERAGE                        AVERAGE
                                                  OPTION                         OPTION                          OPTION
                                NUMBER            PRICE           NUMBER          PRICE        NUMBER            PRICE
                              ------------     -------------    -----------    ------------    -----------    -------------
       <S>                        <C>           <C>             <C>           <C>             <C>              <C>
       Options out-
          standing,
          beginning of
          year                    281,118       $    5.03       225,542       $   2.96        287,430          $  3.28

       Granted                     38,415           10.58       79,000           11.05             --               --

       Exercised                  (73,076)           2.82      (23,424)           2.21        (61,888)            4.43

       Forfeited                      --               --           --              --             --              --
                              ------------      ----------    ---------       ---------    -----------         --------

       Options out-
          standing,
          end of year             246,457       $    6.85      281,118        $   5.03        225,542          $  2.96
                              ============      ==========    =========       =========    ===========         ========
</TABLE>

       On January 1, 1996 the  Company  adopted  SFAS No. 123,  "Accounting  for
       Stock Based Compensation".  As permitted by SFAS No. 123, the Company has
       chosen to continue to apply APB  Opinion  No. 25,  "Accounting  for Stock
       Issued  to  Employees"  and  related  interpretations.   Accordingly,  no
       compensation  cost has been  recognized  for  options  granted  under the
       Option Plan.  Had  compensation  cost for the Company's  Option Plan been
       determined  based on the fair value at the grant  dates for awards  under
       the Option Plan consistent with the method of SFAS No. 123, the Company's
       net income and net  income per share  would have been  reduced to the pro
       forma  amounts  indicated  below.  The  Company did not grant any options
       during the year ended  December  31,  1998;  therefore,  there are no pro
       forma amounts for that period.

                                       36
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                            2000                                 1999
                                              ---------------------------------     --------------------------------
                                                    AS                                   AS
                                                 REPORTED          PRO FORMA          REPORTED         PRO FORMA
                                              ---------------    --------------     -------------    ---------------

       <S>                                    <C>                  <C>                 <C>              <C>
       Net income                             $   1,931,675         1,884,770           2,680,430        2,513,362
       Net income per share -
          basic                                         .71               .69                 .95              .89
       Net income per share -
          diluted                                       .69               .67                 .90              .85
</TABLE>

       The fair value of each  option  grant is  estimated  on the date of grant
       using  the   Black-Scholes   option-pricing   model  with  the  following
       weighted-average  assumptions  used  for  grants  in 2000 and  1999.  The
       weighted  average  fair  values of options  granted in 2000 and 1999 were
       $1.85 and $3.42, respectively.
<TABLE>
<CAPTION>
                                                              2000               1999
                                                         ---------------    ---------------

                  <S>                                        <C>               <C>
                  Risk-free interest rate                     6.00%             6.25%
                  Dividend yield                               2.0%                0%
                  Expected volatility                           20%             17.8%
                  Expected lives (in years)                      5                 5
</TABLE>

       The following table summarizes  additional  information  about the Option
       Plan at December 31, 2000:
<TABLE>
<CAPTION>
                                                                       REMAINING
                                                     NUMBER            CONTRACTUAL               NUMBER
                       EXERCISE PRICE              OUTSTANDING            LIFE                 EXERCISABLE
                     ------------------           --------------     ----------------       ----------------
                        <S>                         <C>                 <C>                     <C>
                        $ 1.78                        82,286              .75 years               82,286
                          1.78                        25,704              .25 years               25,704
                          2.67                         1,424             1.25 years                1,424
                          7.50                        10,000             3.25 years               10,000
                          9.75                        13,000             1.00 years               13,000
                         10.50                         5,424             6.25 years                5,424
                         10.94                         9,000             8.70 years                9,000
                         11.00                        11,315             9.00 years               11,315
                         11.00                           500              .50 years                  500
                         11.00                        13,600             1.00 years               13,600
                         11.06                        70,000             8.50 years               70,000
                         19.50                         4,204             7.00 years                4,204
                                                  -------------      -----------------       --------------
                                                     246,457             3.93 years              246,457
                                                  =============      =================       ==============
</TABLE>

                                       37
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(12)   PARENT COMPANY FINANCIAL INFORMATION

       Condensed  financial  information  of Cooperative  Bankshares,  Inc., the
       parent  company,  at  December  31, 2000 and 1999 and for the years ended
       December 31, 2000, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>
                                      CONDENSED STATEMENTS OF FINANCIAL CONDITION

                                                                                  2000                1999
                                                                             ---------------    -----------------
        <S>                                                                  <C>                <C>
        Assets:
          Cash                                                               $       1,170                951
          Equity investment in subsidiary                                       30,811,081         29,342,349
           Other assets                                                            135,730                 --
                                                                             ---------------    -----------------
                                                                             $  30,947,981         29,343,300
                                                                             ===============    =================
        Liabilities and stockholders' equity:
          Other liabilities                                                  $     135,802                 --
          Stockholders' equity                                                  30,812,179         29,343,300
                                                                             ---------------    -----------------
                                                                             $  30,947,981         29,343,300
                                                                             ===============    =================
</TABLE>
<TABLE>
<CAPTION>

                                           CONDENSED STATEMENTS OF OPERATIONS

                                                               2000               1999                1998
                                                          ---------------    ---------------    -----------------

        <S>                                               <C>                <C>                <C>
        Dividends from subsidiary                         $     550,620             13,906             11,938
        Equity in undistributed net income
           of subsidiary                                      1,388,908          2,689,944          2,403,474
        Miscellaneous expenses                                   (7,853)           (23,420)           (30,177)
                                                          ---------------    ---------------    -----------------
                                                          $   1,931,675          2,680,430          2,385,235
                                                          ===============    ===============    =================
</TABLE>

                                       38
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>

                                           CONDENSED STATEMENTS OF CASH FLOWS

                                                               2000               1999                1998
                                                          ---------------    ---------------    -----------------
        <S>                                               <C>                <C>                <C>
        Operating activities:
          Net income                                      $   1,931,675          2,680,430          2,385,235
          Equity in undistributed net income
             of subsidiary                                   (1,388,908)        (2,689,944)        (2,403,474)
          Change in other assets                               (135,730)                --                 --
          Change in other liabilities                                72                 --                 --
          Amortization of deferred
             organization costs                                      --              8,841             15,156
                                                          ---------------    ---------------    -----------------
                 Net cash provided by
                   (used in) operating
                   activities                                   407,109               (673)            (3,083)

        Financing activities:
          Cash dividends paid                                  (406,890)                --                 --

        Cash and cash equivalents,
           beginning of year                                        951              1,624              4,707
                                                          ---------------    ---------------    -----------------

        Cash and cash equivalents,
           end of year                                    $       1,170                951              1,624
                                                          ===============    ===============    =================
</TABLE>

(13)   FAIR VALUE OF FINANCIAL INSTRUMENTS

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



                                       39
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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

           CASH AND CASH EQUIVALENTS

           The carrying amount is a reasonable estimate of fair value.

           SECURITIES

           For investments in debt  securities,  fair values are based on quoted
           market  prices or dealer  quotes.  For other  securities,  fair value
           equals quoted market price, if available. If a quoted market price is
           not available, fair value is estimated using quoted market prices for
           similar securities.

           FHLB STOCK

           The carrying amount is a reasonable estimate of fair value.

           LOANS

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

           ACCRUED INTEREST

           The carrying amount is a reasonable estimate of fair value.

           DEPOSITS

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

           BORROWED FUNDS

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


                                       40
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



           OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

           The  fair  value  of  off-balance  sheet  financial   instruments  is
           considered  immaterial.  As  discussed  in Note 4, these  off-balance
           sheet financial  instruments are commitments to extend credit and are
           either short term in nature or subject to immediate repricing.

       The carrying amounts and estimated fair values of the Company's financial
       instruments at December 31, 2000 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                               2000                                 1999
                                                  -------------------------------     ---------------------------------
                                                    CARRYING        ESTIMATED            CARRYING          ESTIMATED
                                                     AMOUNT         FAIR  VALUE           AMOUNT          FAIR VALUE
                                                  --------------    ---------------    -------------    ----------------
       <S>                                        <C>                <C>               <C>                <C>
       Financial assets:
         Cash and cash equivalents                 $     17,899          17,899            15,592             15,592
         Securities:
            Available for sale                           16,049          16,049            27,236             27,236
            Held to maturity                             18,978          18,554            18,025             17,114
         Loans, net                                     347,503         348,196           334,744            330,960
         FHLB stock                                       3,755           3,755             3,755              3,755
         Accrued interest receivable                      2,776           2,776             2,471              2,471

       Financial liabilities:
         Deposits                                       327,312         324,987           304,834            297,168
         Borrowed funds                                  55,101          53,391            75,106             74,645
         Accrued interest payable                            51              51                51                 51
</TABLE>

(14) STOCK REPURCHASE PLAN

     On October  21,  1999 the  Company's  Board of  Directors  approved a Stock
     Repurchase  Program  authorizing  the Company to  repurchase  up to 138,000
     shares, or approximately 5% of the then outstanding shares of common stock.
     During  2000,  the Company  purchased  46,385  shares at an average cost of
     $10.36 per share pursuant to the program.

(15) BRANCH SALE

     During February 2000, the Company sold the Robersonville, N. C. branch with
     $7.1  million in  deposits  to  Southern  Bank & Trust  Company.  A gain of
     $582,583 was realized on the sale.


                                       41
<PAGE>
                    DIRECTORS, OFFICERS AND FINANCIAL CENTERS


<TABLE>
<CAPTION>
                               BOARD OF DIRECTORS
    Frederick Willetts, III, Chairman, President and Chief Executive Officer
                        Cooperative Bankshares, Inc. and
                     Cooperative Bank For Savings, Inc., SSB



<S>                                                          <C>
Paul G. Burton                                               H. T. King, III
President, Burton Steel Company                              President, Hanover Iron Works, Inc.

F. Peter Fensel, Jr.                                         R. Allen Rippy
President, F. P. Fensel Supply Company                       Vice President, Rippy Cadillac Oldsmobile, Inc.

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



                          OFFICERS OF COOPERATIVE BANK

Frederick Willetts, III                                                   Chairman, President-Chief Executive Officer
O. C. Burrell, Jr.                                                   Executive Vice President-Chief Operating Officer
Dickson B. Bridger                                                             Senior Vice President-Mortgage Lending
Todd L. Sammons                                                         Senior Vice President-Chief Financial Officer
Sandra B. Carr                                                               Vice President-Retail Banking Operations
Linda B. Garland                                                                  Vice President-Secretary/ Marketing
Raymond A. Martin                                                                 Vice President-Information Services
Carl N. Mathis, Jr.                                                                         Vice President-Appraising
Donna H. Mitchell                                                                  Vice President-Mortgage Operations
Susie K. Register                                                        Vice President-Mortgage Servicing/Processing
Dare C. Rhodes                                                                         Vice President-Human Resources
Phillip T. Whittington                                                              Vice President-Commercial Lending

                                OFFICE LOCATIONS

                       Beaufort                                              Morehead City
                       Belhaven                                               Tabor City
                        Corolla                                                 Wallace
                     Elizabethtown                                          Washington (2)
                   Jacksonville (2)                                         Wilmington (4)
                   Kill Devil Hills



                                       42
<PAGE>

                             CORPORATE INFORMATION


                             CORPORATE HEADQUARTERS
                          Cooperative Bankshares, Inc.
                                201 Market Street
                                                   P.O. Box 600
                        Wilmington, North Carolina 28402
                                 (910) 343-0181

                     TRANSFER AGENT                                                SPECIAL COUNSEL
                   First Citizens Bank                                          Stradley Ronon Housley
               Corporate Trust Department                                     Kantarian & Bronstein, LLP
                     P.O. Box 29522                                         1220 19th Street, NW Suite 700
           Raleigh, North Carolina 27626-0522                                    Washington, DC 20036


                     ANNUAL MEETING                                                   FORM 10-K
    The Annual Meeting of Stockholders of Cooperative              Copies of Cooperative Bankshares, Inc. Form 10-K
 Bankshares, Inc. will be held at the Four Points Hotel           may be obtained by stockholders without charge by
   by Sheraton, 5032 Market Street, Wilmington, North               writing to Linda B. Garland at the Cooperative
      Carolina, on April 27, 2001 at 11:00 a.m. All                             Headquarters address.
      stockholders are cordially invited to attend.


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


</TABLE>

                                 CAPITAL STOCK

Cooperative Bankshares, Inc. stock is traded on the NASDAQ National Market under
the  symbol  "COOP".  As of  December  31,  2000,  there were  2,714,610  shares
outstanding,  which were held by 564  stockholders of record.  The Company began
paying a quarterly cash dividend in April 2000.  Stock  performance for 2000 and
1999 is given in the following table.
<TABLE>
<CAPTION>
                                                            QUARTERLY COMMON STOCK DATA
                                                               2000                             1999
             ----------------------------------------------------------------------------------------------------
             QUARTERS ENDED                            HIGH             LOW             HIGH             LOW
             ----------------------------------------------------------------------------------------------------
             <S>                                      <C>              <C>             <C>              <C>
             December                                 $12.000          $9.000          $11.625          $9.500
             September                                 10.250           8.250           12.750          10.500
             June                                      11.625           8.000           13.000           9.875
             March                                     12.125           8.875           14.000           9.000
</TABLE>
<PAGE>


                         [Map showing location of Bank's
                               Financial Centers]

<PAGE>



























                          COOPERATIVE BANKSHARES, INC.

                             Corporate Headquarters
                               201 Market Street
                                  P.O. Box 600
                        Wilmington, North Carolina 28402
                               www.coop-bank.com