Exhibit 13

Corporate Profile



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 for Cooperative Bank (the Bank); a North Carolina
chartered commercial bank. The Companys primary activities consist of holding the stock of Cooperative Bank and operating the business of the Bank and its subsidiaries. Accordingly, the information set forth in this report, including financial
statements and related data, relates primarily to Cooperative Bank and its subsidiaries.



Cooperative Bank was chartered in 1898. The Banks headquarters are located in Wilmington, North Carolina. Cooperative Bank operates 21 offices 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. In addition, the Bank operates a subsidiary, Lumina Mortgage Company, Inc. (Lumina) a
mortgage banking firm. Lumina has offices in Wilmington, North Carolina, North Myrtle Beach, South Carolina, and Virginia Beach, Virginia. The Banks other subsidiary, CS&L Holdings, Inc. (Holdings) is a Virginia Corporation and
a holding company for CS&L Real Estate Trust, Inc. (the REIT), which is a real estate investment trust. The Federal Deposit Insurance Corporation (FDIC) insures the Banks deposit accounts up to applicable limits.



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



The common stock of the Company is traded on the NASDAQ National Market under the symbol COOP.





2



---

SELECTED FINANCIAL AND OTHER DATA



|                                               |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|---------------------------------------------- |  | -------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|At December 31,                                |  | 2004                 |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                               |  | Dollars in Thousands |        
|Selected Financial Condition Data:             |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Assets                                         |  | $                    | 550,107 |   |      | $ | 502,437 |      |  | $ | 504,220 |   |  | $    | 458,114 |   |  | $ | 414,961 |  
|Loans, net                                     |  |                      | 449,417 |   |      |   | 401,373 |      |  |   | 390,886 |   |  |      | 373,458 |   |  |   | 347,486 |  
|Securities                                     |  |                      | 47,195  |   |      |   | 47,419  |      |  |   | 49,935  |   |  |      | 47,970  |   |  |   | 35,027  |  
|FHLB stock                                     |  |                      | 4,519   |   |      |   | 4,154   |      |  |   | 4,055   |   |  |      | 4,155   |   |  |   | 3,755   |  
|Deposits                                       |  |                      | 414,758 |   |      |   | 367,202 |      |  |   | 357,264 |   |  |      | 339,830 |   |  |   | 327,312 |  
|Borrowed funds                                 |  |                      | 85,426  |   |      |   | 89,505  |      |  |   | 104,678 |   |  |      | 83,097  |   |  |   | 55,101  |  
|Stockholders equity                           |  |                      | 46,910  |   |      |   | 43,143  |      |  |   | 38,448  |   |  |      | 33,618  |   |  |   | 30,812  |  
|                                               |  |                      |         |   |     
|Year Ended December 31,                        |  | 2004                 |         |   | 2003 |   |         | 2002 |  |   | 2001    |   |  | 2000 |        
|                                               |  | Dollars in Thousands |        
|Selected Operations Data:                      |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Interest income                                |  | $                    | 27,603  |   |      | $ | 27,975  |      |  | $ | 29,650  |   |  | $    | 31,173  |   |  | $ | 31,743  |  
|Interest expense                               |  |                      | 9,205   |   |      |   | 10,686  |      |  |   | 13,875  |   |  |      | 18,916  |   |  |   | 19,305  |  
|Net interest income                            |  |                      | 18,398  |   |      |   | 17,289  |      |  |   | 15,775  |   |  |      | 12,257  |   |  |   | 12,438  |  
|Provision for loan losses                      |  |                      | 970     |   |      |   | 740     |      |  |   | 740     |   |  |      | 460     |   |  |   | 970     |  
|Noninterest income                             |  |                      | 5,183   |   |      |   | 6,486   |      |  |   | 4,600   |   |  |      | 1,984   |   |  |   | 1,636   |  
|Noninterest expenses                           |  |                      | 15,586  |   |      |   | 15,041  |      |  |   | 11,888  |   |  |      | 9,303   |   |  |   | 10,193  |  
|Income before income taxes                     |  |                      | 7,025   |   |      |   | 7,994   |      |  |   | 7,747   |   |  |      | 4,478   |   |  |   | 2,911   |  
|Net income                                     |  |                      | 4,681   |   |      |   | 5,404   |      |  |   | 4,944   |   |  |      | 2,889   |   |  |   | 1,932   |  
|                                               |  |                      |         |   |     
|Selected Financial Ratios and Other Data:      |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Return on average assets                       |  |                      | 0.89    | % |      |   | 1.07    | %    |  |   | 1.05    | % |  |      | 0.67    | % |  |   | 0.47    | %
|Return on average equity                       |  |                      | 10.54   | % |      |   | 13.16   | %    |  |   | 13.70   | % |  |      | 8.91    | % |  |   | 6.35    | %
|Average stockholders equity to average assets |  |                      | 8.49    | % |      |   | 8.17    | %    |  |   | 7.64    | % |  |      | 7.57    | % |  |   | 7.38    | %
|Non-performing assets to total assets          |  |                      | 0.04    | % |      |   | 0.05    | %    |  |   | 0.24    | % |  |      | 0.84    | % |  |   | 0.22    | %
|Allowance for loan losses to total loans       |  |                      | 0.94    | % |      |   | 0.84    | %    |  |   | 0.70    | % |  |      | 0.67    | % |  |   | 0.62    | %
|Dividend payout ratio                          |  |                      | 15.89   | % |      |   | 10.54   | %    |  |   | 11.47   | % |  |      | 19.49   | % |  |   | 28.09   | %
|*Per Share Data:                               |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Earnings per:                                  |  |                      |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Common share - basic                           |  | $                    | 1.09    |   |      | $ | 1.27    |      |  | $ | 1.16    |   |  | $    | 0.69    |   |  | $ | 0.47    |  
|Common share - diluted                         |  | $                    | 1.07    |   |      | $ | 1.24    |      |  | $ | 1.15    |   |  | $    | 0.68    |   |  | $ | 0.46    |  
|Cash dividends declared                        |  | $                    | 0.17    |   |      | $ | 0.13    |      |  | $ | 0.13    |   |  | $    | 0.13    |   |  | $ | 0.13    |  
|Book value                                     |  | $                    | 10.93   |   |      | $ | 10.09   |      |  | $ | 9.04    |   |  | $    | 7.90    |   |  | $ | 7.57    |  



|* | Per Share Data has been adjusted to reflect the effects of a 3-for-2 stock split in the form of a 50% stock dividend declared on January 19, 2005 and paid on February 24, 2005.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



3



---

To Our Shareholders



The year 2004 was another good year for our company. Business North Carolina magazine recognized Cooperative Bankshares as one of the top 75 public
companies in North Carolina, ranked by market value. Additionally, U.S. Banker magazine recognized Cooperative Bankshares with a ranking of 107th in a list of top 200 publicly traded community banks in the country based on a three year
average return on equity.



On January 19, 2005, the board of
directors approved a 3-for-2 stock split in the form of a 50% stock dividend. The dividend was paid on February 24, 2005 to stockholders of record on February 8, 2005.



We continue to be pleased with the performance of the four new offices which were opened in 2003. We received regulatory
approval to relocate our Long Leaf office to its new location on Shipyard Boulevard in Wilmington. By providing a superior location, this has allowed us to construct a much more modern and larger facility, reflecting both our commitment to improved
customer service, as well as a need to expand to serve our ever growing customer base at that office. Construction on that facility was commenced in January, and we anticipate a mid summer 2005 opening. Regulators have also approved a new office at
Porters Neck in the northern New Hanover County-Wilmington market. We will relocate the Ogden office to the facility upon completion. This relocation was sorely needed because of the increasing merging traffic onto Market Street almost at the
entrance of the Ogden office.



In addition, we purchased a new
operations and training center which will be in the Dutch Square office complex in Wilmington. This will provide us with a larger, more improved operations building with greater security capabilities as well. In addition, with the growing need to
provide continuous training to our staff, we are dedicating a portion of this building to a training facility which will provide our employees with state of the art audio, visual and computer equipment to further enhance their skills in an effort to
better serve our customers.



Net income for the twelve months
ended December 31, 2004 was $4,681,175, or $1.07 per diluted share, a 13.4% decrease in net income compared to the same period last year. Net income for the twelve months ended December 31, 2003 was $5,404,226, or $1.24 per diluted share. Per share
data has been adjusted for the 3-for-2 stock split paid on February 24, 2005. Net income for the year ended December 31, 2004 was adversely impacted by a slow down in mortgage originations and also with additional expenses associated with multiple
office openings during calendar year 2003. The Bank originated 1,515 loans totaling $237.5 million dollars, while the Banks subsidiary, Lumina Mortgage Company, originated 1007 loans for $160.4 million dollars giving total originations of
$398.0 million.



In summary, while the operating results for
the company were slightly below 2003, we feel that the additional expenses associated with opening four new financial centers will reap long term benefits to the company. In addition, by relocating two of our offices in the Wilmington market, as
well as investing in a new training facility and operations center, we feel that this also bodes well for the long term health of the company. It is for these reasons that I look forward to our future with a great deal of optimism. Thank you for
your continued support.



Sincerely yours,

Frederick Willetts, III

President





4



---

Managements Discussion and Analysis



General



Cooperative Bankshares, Inc. (the Company) is a registered bank holding company incorporated in North Carolina in 1994. The Company is the
parent company of Cooperative Bank (the Bank), a North Carolina chartered commercial bank. Cooperative Bank, headquartered in Wilmington, North Carolina was chartered in 1898. The Bank provides financial services through 21 offices in
Eastern North Carolina. The Banks subsidiary, Lumina Mortgage Company, Inc. (Lumina) is a mortgage banking firm originating and selling residential mortgage loans through offices in Wilmington, North Carolina, North Myrtle Beach,
South Carolina and Virginia Beach, Virginia. The Banks other subsidiary, CS&L Holdings, Inc. (Holdings), is a holding company incorporated in Virginia for CS&L Real Estate Trust, Inc. (the REIT), which is a real
estate investment trust. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.



The following is managements discussion and analysis 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 Annual Report.



Critical Accounting Policies



The preparation of our audited consolidated financial statements and the information included in managements discussion and analysis is governed by
policies that are based on accounting principles generally accepted in the United States of America and general practices within the banking industry. Among the more significant policies are those that govern accounting for allowance for loan losses
and goodwill. These policies are discussed in Note 1 of the Notes to Consolidated Financial Statements included in this Annual Report.



A critical accounting policy is one that is both very important to the portrayal of the Companys financial condition and results, and requires a
difficult, subjective or complex judgment by management. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. Estimates and judgments are integral
to our accounting for certain items, and those estimates and judgments affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure of contingent assets and liabilities. The Company periodically evaluates its
estimates, including those related to the reserve for loan losses and goodwill. While we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, actual results may differ
from these estimates under different assumptions or conditions. Further information regarding the accounting policies that we consider to be critical is provided below.



Allowance for loan losses. The Companys most significant critical accounting policy is the determination of its
allowance for loan losses. The allowance for loan losses reflects the estimated losses that will result from the inability of our customers to make required payments. The allowance for loan losses is the product of managements evaluation of
the risk characteristics of the loan portfolio under current economic conditions and considers such factors as the financial condition of the borrower, fair



5



---

market value of collateral and other items that, in our opinion, deserve current recognition in estimating possible credit losses. Our evaluation process is
based on historical evidence and current trends among delinquencies, defaults and nonperforming assets. Our estimate of the allowance for loan losses does not include the impact of events that might occur in the future.



Management considers the established allowance adequate to absorb losses that
relate to loans outstanding at December 31, 2004, although future additions to the allowance may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for loan losses. Such agencies may require adjustments to the allowance based on their judgments of information available to them at the time of their examination. If the financial condition of
our borrowers were to deteriorate, resulting in an impairment of their ability to make payments, our estimates would be updated and additional provisions may be required. For further information on the allowance for loan losses, see Financial
Condition in Managements Discussion and Analysis and Note 3 of the Notes to Consolidated Financial Statements included in this Annual Report.



Goodwill. Goodwill, which represents the excess of the purchase price over the fair value of net assets acquired in a
business combination, is tested at least annually for impairment. The impairment test is a two-step process that begins with a comparison of book value and stock price. If the initial evaluation suggests that an impairment of the asset value exists,
the second step would determine the amount of the impairment, if any. If the tests conclude that goodwill is impaired, the carrying value would be adjusted, and an impairment loss would be recorded.



Management Strategy



The Banks lending activities have traditionally concentrated on the origination of loans for the purpose of
constructing, financing or refinancing residential properties. In recent years the Bank has emphasized the origination of nonresidential real estate loans, equity lines of credit, and secured and unsecured consumer and business loans. As of December
31, 2004 approximately $309 million, or 68% of the Banks loan portfolio, which excludes loans held for sale, consisted of loans secured by residential properties. This amount includes $49 million of loans classified as construction and land
development. This was up from approximately $267 million, or 66% at December 31, 2003. The Bank originates adjustable rate and fixed rate loans. As of December 31, 2004, adjustable rate and fixed rate loans totaled approximately 66% and 34%,
respectively, of the Banks total loan portfolio.



The
Bank has chosen to sell a large percentage of its fixed rate mortgage loan originations in the secondary market and through brokered arrangements. This enables the Bank to invest its funds in commercial loans, while increasing fee income and
reducing interest rate risk.



In 2004 the Bank sold $7 million
in loans in the secondary market where the Bank retained the servicing of the loans and receives a fee payable monthly of up to 1⁄4% per annum of the unpaid balance of each loan. In addition, the Bank sold $5 million in the secondary market and
$9 million through a



6



---

brokered arrangement where the Bank released the servicing of the loans. Lumina sold $159 million in the secondary market during 2004.



The growth in the loan portfolio was concentrated in one-to-four family
residential loans and real estate-backed commercial loans, including construction loans. The commercial loans generally involve a higher level of credit risk than one-to-four family residential lending due to the concentration of principal in a
limited number of loans and borrowers, the effects of general economic conditions and the volatility of the collateral. This increased risk, along with the growth in the loan portfolio, were the primary reasons for the increase in the allowance for
loan losses over the past several years.



On January 19, 2005,
the Company declared a 3-for-2 stock split in the form of a 50% stock dividend. This split increased the number of common shares outstanding to 4,291,115. All references to per share results and weighted average common and common equivalent shares
outstanding have been adjusted to reflect the effects of this stock split.



The Bank opened four offices in 2003. The Monkey Junction office, located at 5102 South College Road in Wilmington, North Carolina, opened May 2003, and the Morehead City, North Carolina, office located at 137 Highway
24, opened July 2003. The Landfall office at 1313 Military Cutoff Road in Wilmington, North Carolina and the 5210 Southport-Supply Road office in Southport, North Carolina opened December 2003. The Southport office is the Banks first financial
center in Brunswick County. The Bank is planning to move two of its Wilmington offices in 2005 to what management believes are superior locations. Lumina Mortgage opened an office in Surf City, North Carolina, a growing coastal community, in
February 2005.



Interest Rate Sensitivity Analysis



Interest rate sensitivity refers to the change in interest spread resulting
from changes in interest rates. To the extent that interest income and interest expense do not respond equally to changes in interest rates, or that all rates do not change uniformly, earnings will be affected. Interest rate sensitivity, at a point
in time, can be analyzed using a static gap analysis that measures the match in balances subject to repricing between interest-earning assets and interest-bearing liabilities. Gap is considered positive when 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, 2004, the Company had a one-year positive gap position of 8.8%. During a period of rising
interest rates, a positive gap would tend to result in an increase in net interest income, while a negative gap would tend to adversely affect net interest income. During a period of falling interest rates, a positive gap would tend to adversely
affect net interest income while a negative gap would tend to result in an increase in 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



7



---

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 accounts. Management takes this into consideration in determining acceptable levels of interest rate risk.



When Lumina gives a rate lock commitment to a customer, there is a concurrent lock-in for the loan with a secondary market investor under a
best efforts delivery mechanism. Therefore, interest rate risk is mitigated because any commitments to fund loans available for sale are concurrently hedged by a commitment from an investor to purchase the loan under the same terms. Loans are
usually sold within 60 days after closing.



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,
mortgage-backed securities and callable securities and borrowings. The table also assumes that adjustable rate loans will reprice at contractual repricing intervals and transaction and savings accounts will gradually run off and reprice.



INTEREST RATE SENSITIVITY ANALYSIS



|                                                                            |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|--------------------------------------------------------------------------- |  | ---------------------- | ------- | - | ------------------------- | - | ------- | ------------------------- |  | - | ------------- | - |  | ----- | ------ | - |  | - | -------
|December 31, 2004                                                           |  | One Yearor Less        |         |   | Over OneThroughFive Years |   |         | Over FiveThroughTen Years |  |   | Over TenYears |   |  | Total
|                                                                            |  | (Dollars in thousands)
|Interest-earning assets:                                                    |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|Securities                                                                  |  | $                      | 6,694   |   |                           | $ | 24,882  |                           |  | $ | 12,776        |   |  | $     | 2,843  |   |  | $ | 47,195 
|Interest-bearing bank balances                                              |  |                        | 4,361   |   |                           |   |        |                           |  |   |              |   |  |       |       |   |  |   | 4,361  
|Federal Home Loan Bank stock                                                |  |                        | 4,519   |   |                           |   |        |                           |  |   |              |   |  |       |       |   |  |   | 4,519  
|All loans                                                                   |  |                        | 317,990 |   |                           |   | 129,596 |                           |  |   | 9,783         |   |  |       | 3,640  |   |  |   | 461,009
|                                                                            |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|Total                                                                       |  | $                      | 333,564 |   |                           | $ | 154,478 |                           |  | $ | 22,559        |   |  | $     | 6,483  |   |  | $ | 517,084
|                                                                            |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|Interest-bearing liabilities:                                               |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|Deposits                                                                    |  | $                      | 251,919 |   |                           | $ | 120,122 |                           |  | $ | 10,157        |   |  | $     |       |   |  | $ | 382,198
|Borrowed funds                                                              |  |                        | 37,345  |   |                           |   | 30,009  |                           |  |   | 18,013        |   |  |       | 59     |   |  |   | 85,426 
|                                                                            |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|Total                                                                       |  | $                      | 289,264 |   |                           | $ | 150,131 |                           |  | $ | 28,170        |   |  | $     | 59     |   |  | $ | 467,624
|                                                                            |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|Interest rate sensitivity gap                                               |  | $                      | 44,300  |   |                           | $ | 4,347   |                           |  | $ | (5,611        | ) |  | $     | 6,424  |   |  | $ | 49,460 
|                                                                            |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|Cumulative interest rate sensitivity gap                                    |  | $                      | 44,300  |   |                           | $ | 48,647  |                           |  | $ | 43,036        |   |  | $     | 49,460 |   |  |   |        
|                                                                            |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|Cumulative ratio of interest-earning assets to interest-bearing liabilities |  |                        | 115.3   | % |                           |   | 111.1   | %                         |  |   | 109.2         | % |  |       | 110.6  | % |  |   |        
|                                                                            |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        
|Ratio of cumulative gap to total assets                                     |  |                        | 8.8     | % |                           |   | 9.7     | %                         |  |   | 8.6           | % |  |       | 9.8    | % |  |   |        
|                                                                            |  |                        |         |   |                           |   |         |                           |  |   |               |   |  |       |        |   |  |   |        



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



8



---

generated by the Companys interest-earning 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-earning assets and interest-bearing 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). At December 31, 2004, the percentage of negative estimated change in EVE decreased in the rising rate environments as compared to
the estimated change at December 31, 2003. The change to EVE in a 200 basis point declining rate environment from December 31, 2003 to December 31, 2004 is negatively impacted and the change for a 100 basis point decline is the same for both years.
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, 2004 (in thousands).



Market Risk Table

(Dollars in thousands)



|                         |  |                         |  |                   |   |  |                   |  
|------------------------ |  | ----------------------- |  | ----------------- | - |  | ----------------- | -
|                         |  | December 31, 2004       | 
|Change in Interest Rates |  | EconomicValue of Equity |  | Estimated$ Change |   |  | Estimated% Change |  
|200 basis point rise     |  | 43,445                  |  | (7,188            | ) |  | -14               | %
|100 basis point rise     |  | 47,290                  |  | (3,343            | ) |  | -7                | %
|Base Scenario            |  | 50,633                  |  |                  |   |  |                  |  
|100 basis point decline  |  | 51,521                  |  | 888               |   |  | 2                 | %
|200 basis point decline  |  | 49,939                  |  | (694              | ) |  | -1                | %



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, selling loans held for sale, deposits, income from operations and borrowings are the main sources of liquidity. The Bank has been granted a line of
credit by the Federal Home loan Bank of Atlanta (FHLB) in an amount of up to 25% of the Banks total assets. At December 31, 2004, the Banks borrowed funds from the FHLB equaled 14% of its total assets. Scheduled loan
repayments are a relatively predictable source of funds, unlike deposits and loan



9



---

prepayments that are significantly influenced by general interest rates, economic conditions and competition.



At December 31, 2004, the estimated market value of liquid assets (cash, cash
equivalents, marketable securities and loans held for sale) was approximately $71 million, representing 14% of deposits and borrowed funds as compared to $72 million or 16% of deposits and borrowed funds at December 31, 2003. The decrease in liquid
assets was primarily due to a decrease in cash. Management maintains a portfolio generally consisting of mortgage-backed securities and securities with short maturities (within 6 years) 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 or loss included as a component of stockholders equity, net of deferred taxes.



The Companys securities portfolio consists of U.S. Treasury, U.S.
Government agency, mortgage-backed and other permissible securities including preferred stock from the Federal Home Loan Mortgage Corporation (FHLMC) and a Household Finance Corporation note. Fannie Mae (FNMA) and FHLMC
guarantee 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 purchase investments. At December 31, 2004, outstanding off-balance sheet
commitments to extend credit totaled $56 million, and the undisbursed portion of construction loans was $55 million. Management considers current liquidity levels adequate to meet the Companys cash flow requirements.



Off-Balance Sheet Arrangements



The Company does not have any off-balance sheet arrangements that have, or
are reasonably likely to have, a current or future effect on the Companys financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material
to investors except as disclosed in Note 3 of Notes To Consolidated Financial Statements.



10



---

Contractual Obligations and Commitments



The Bank enters into agreements that obligate it to make future payments under contracts, such as debt and lease agreements.
In addition, the Bank commits to lend funds in the future such as credit lines and loan commitments. Below is a table of such contractual obligations and commitments at December 31, 2004.



|                                                                                                    |  |                                            |         |                 |   |           |  |          |         |             |   |       |  |   |       
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------ | ------- | --------------- | - | --------- |  | -------- | ------- | ----------- | - | ----- |  | - | ------
|                                                                                                    |  | Payments Due by Period                    
|Contractual Obligations                                                                             |  | Total                                      |         | Less than 1year |   | 1-3 years |  | 4-5years |         | Over 5years
|                                                                                                    |  | (Dollars in thousands)                    
|Borrowed Funds                                                                                      |  | $                                          | 85,426  |                 | $ | 32,343    |  | $        | 20,000  |             | $ | 5,000 |  | $ | 28,083
|Lease Obligations                                                                                   |  |                                            | 8,211   |                 |   | 568       |  |          | 899     |             |   | 834   |  |   | 5,910 
|Deposits                                                                                            |  |                                            | 414,758 |                 |   | 331,514   |  |          | 83,224  |             |   |      |  |   | 20    
|                                                                                                    |  |                                            |         |                 |   |           |  |          |         |             |   |       |  |   |       
|Total Contractual Cash Obligations                                                                  |  | $                                          | 508,395 |                 | $ | 364,425   |  | $        | 104,123 |             | $ | 5,834 |  | $ | 34,013
|                                                                                                    |  |                                            |         |                 |   |           |  |          |         |             |   |       |  |   |       
|                                                                                                    | 
|                                                                                                    |  | Amount of Commitment Expiration Per Period
|Other Commitments                                                                                   |  | TotalAmountsCommitted                      |         | Less than 1year |   | 1-3 years |  | 4-5years |         | Over 5years
|                                                                                                    |  | (Dollars in thousands)                    
|Undisbursed portion of home equity collateralized primarilyby junior liens on 1-4 family properties |  | $                                          | 25,903  |                 | $ | 1,072     |  | $        | 9,261   |             | $ | 946   |  | $ | 14,624
|Other commitments and credit lines                                                                  |  |                                            | 19,070  |                 |   | 4,469     |  |          | 11,897  |             |   | 49    |  |   | 2,655 
|Undisbursed portion of construction loans                                                           |  |                                            | 55,322  |                 |   | 55,322    |  |          |        |             |   |      |  |   |      
|Available for sale mortgage loan commitments                                                        |  |                                            | 3,762   |                 |   | 3,762     |  |          |        |             |   |      |  |   |      
|Fixed-rate mortgage loan commitments                                                                |  |                                            | 1,161   |                 |   | 1,161     |  |          |        |             |   |      |  |   |      
|Adjustable-rate mortgage loan commitments                                                           |  |                                            | 6,040   |                 |   | 6,040     |  |          |        |             |   |      |  |   |      
|                                                                                                    |  |                                            |         |                 |   |           |  |          |         |             |   |       |  |   |       
|Total Commitments                                                                                   |  | $                                          | 111,258 |                 | $ | 71,826    |  | $        | 21,158  |             | $ | 995   |  | $ | 17,279
|                                                                                                    |  |                                            |         |                 |   |           |  |          |         |             |   |       |  |   |       



In the normal course
of business, the Company may enter into purchase agreements for goods or services. In managements opinion, the dollar amount of such agreements at December 31, 2004 is immaterial and has not been included in the previous table.



Capital



Stockholders equity at December 31, 2004, was $46.9 million, up $3.8 million, or 8.7%, from $43.1 million at December
31, 2003. The improved capital position during the year 2004 reflects the impact of earnings retention after the declaration of cash dividends of $744,000 and the exercising of 21,000 stock options after being adjusted to reflect the effects of a
3-for-2 stock split in the form of a 50% stock dividend paid on February 24, 2005. Stockholders equity at December 31, 2004 and December 31, 2003 includes unrealized gains net of tax of $68,000 and $285,000, respectively, on securities
available for sale.



11



---

Under the capital regulations of the Federal Deposit Insurance Corporation (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,
2004, the Banks leverage capital ratio was 8.44%. 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 the allowance for loan losses. At December 31, 2004, the Bank had a ratio of qualifying total capital to risk-weighted assets of 12.00%.



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



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



On January 19, 2005, the Company declared a 3-for-2 stock split in the form
of a 50% stock dividend, which was payable February 24, 2005, to shareholders of record on February 8, 2005. This split increased the number of common shares outstanding to 4,291,115.



On December 15, 2004, the Companys Board of Directors approved a quarterly cash dividend on its common stock of $.05
per share after being adjusted to reflect the effects of the 3-for-2 stock split. The dividend was payable January 17, 2005, to shareholders of record on January 2, 2005. 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.



Related Party Transactions



The Bank has had, and expects to have in the future, banking transactions in the ordinary course of business with several directors, officers and their associates (Related Parties) on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable transactions with others. Those transactions neither involve more than normal risk of collectibility, nor present any unfavorable features. The one exception is officers
can participate in the Banks employee loan program which offers a six month adjustable rate that is 1% above the Banks cost of funds rounded up to the next 1⁄4%. An employee can only have one property at any given time that qualifies
for the employee rate program. The interest rate and a reduced origination fee are the only favorable terms. Officers do not receive preferential treatment in this program over other employees. For further information, see Note 3 of Notes to
Consolidated Financial Statements included in this Annual Report and the Companys Proxy Statement for its 2005 Annual Meeting of Stockholders.



12



---

FINANCIAL CONDITION



The Companys total assets increased 9.5% to $550.1 million at December 31, 2004, as compared to $502.4 million at December 31, 2003. The major
change in assets is an increase of $48.9 million (12.1%) in loans which can be primarily attributed to the opening of four new branches since May 2003 and the Bank being located in vibrant markets. These factors also allowed the Bank to attract an
increase in deposits of $47.6 million (13.0%). The increase in deposits and retained earnings and the reduction in cash and cash equivalents of $2 million (10.9%) helped fund the increase in loans and enabled the Bank to reduce its total borrowings
by $4.1 million (4.6%).



The Companys nonperforming
assets (nonaccrual loans, accruing loans 90 days or more delinquent and foreclosed real estate) were $207,000, or 0.04% of assets, at December 31, 2004, compared to $267,000 or 0.05% of assets, at December 31, 2003. The Company assumes an aggressive
position in collecting delinquent loans and disposing of foreclosed assets to minimize balances of nonperforming assets and continues to evaluate the loan and real estate portfolios to provide loss reserves as considered necessary. While there can
be no guarantee, in the opinion of management, the allowance for loan losses of $4.4 million at December 31, 2004 is adequate to cover probable losses inherent in the loan portfolio. For further information see Results of Operation-Provision
for Loan Losses.



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



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



RESULTS OF OPERATION



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.



13



---

Net Income



Net income decreased 13.4% to $4.7 million for 2004, as compared to $5.4 million for 2003 and $4.9 million in 2002. The following analysis of the
Company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 $27.6 million during 2004, a $371,000 (1.3%) decrease from 2003 levels, which decreased $1.7 million (5.7%) from 2002 levels.
Interest income reduction during 2004 resulted from lower yields on earning assets. The average balance of interest-earning assets increased 5.0% but was more than offset by the yield decreasing 35 basis points as compared to 2003. The yield fell
because of the action the Federal Reserve took to reduce interest rates hoping to spur the economy. The Federal Reserves actions continued to cause adjustable rate loans to adjust down and new loans to be made at a lower rate. This trend may
reverse in the future since the Federal Reserve has started to increase rates since June of 2004. During 2003, the decrease in interest income was due to the yield on average interest-earning assets decreasing 74 basis points because of the interest
rate cuts. The average balance of interest-earning assets increased 6.0% as compared to 2002. The yield on average interest-earning assets for the year 2004 decreased to 5.57% as compared to 5.92% for 2003 and 6.66% for 2002.



Interest Expense



Interest expense amounted to $9.2 million during 2004, a $1.5 million (13.9%) decrease from 2003 levels, compared to a $3.2
million (23%) decrease from 2003 to 2002. The decrease in interest expense during 2004 resulted from a lower cost of interest-bearing liabilities. During 2004, the average balance of interest-bearing liabilities increased 2.3% but was more than
offset by the cost decreasing 39 basis points as compared to 2003. During 2003 the decrease in interest expense was due to an 87 basis point drop in the average rate paid against a 4.4% increase in the average balance of interest-bearing liabilities
as compared to 2002. The average cost of interest-bearing liabilities for the year 2004 decreased to 2.07% as compared to 2.46% for 2003 and 3.33% for 2002.



Net Interest Income



Net interest income totaled $18.4 million during 2004, an increase of $1.1 million, or 6.4% over 2003, when net interest income was $17.3 million. During
2003, net interest income increased $1.5 million or 9.6% over the $15.8 million recorded during 2002. The Average Yield/Cost Analysis table analyzes the interest-earning assets and interest-bearing liabilities for the three years ending December 31,
2004. The Rate/Volume Analysis table identifies the causes for changes in interest income and interest expense for 2004 and 2003. The interest rate spread was 3.50% for 2004, compared to 3.47% for 2003 and 3.33% for 2002. These increases were due to
interest-earning assets increasing more than interest-bearing liabilities. In addition, there were larger decreases in the cost of liabilities versus the yield on assets. This can be attributed to the Banks success in obtaining both low and no
cost deposits. The net yield on interest-earning assets was 3.71% for 2004 compared to 3.66% for 2003 and 3.54% for 2002.



14



---



AVERAGE YIELD/COST
ANALYSIS



The following table contains information relating
to the Companys average balance sheets and reflects the average yield on earning assets and average cost of interest-bearing liabilities for the periods indicated. Such 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.



|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|------------------------------------------------------------------------------------- |  | ------------------ | ------- | -------- | ----------------- | ----------------- |  | ----------------- | -------------- |  | -------- | ------- | ----------------- | - | ------ | -------------- | ----- | -------- |  | ----------------- | ------- |  | - | ------ |  | ----- | -
|                                                                                      |  | For the year ended |        
|                                                                                      |  | DECEMBER 31, 2004  |         |          | DECEMBER 31, 2003 |                   |  | DECEMBER 31, 2002 |               
|(Dollars in thousands)                                                                |  | AverageBalance     |         | Interest |                   | AverageYield/Cost |  |                   | AverageBalance |  | Interest |         | AverageYield/Cost |   |        | AverageBalance |       | Interest |  | AverageYield/Cost |        
|ASSETS                                                                                |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Interest-earning assets:                                                              |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Interest-bearing deposits in other banks                                              |  | $                  | 4,029   |          | $                 | 49                |  | 1.22              | %              |  | $        | 4,315   |                   | $ | 47     |                | 1.09  | %        |  | $                 | 2,732   |  | $ | 52     |  | 1.90  | %
|Securities:                                                                           |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Available for sale                                                                    |  |                    | 46,156  |          |                   | 2,057             |  | 4.46              | %              |  |          | 40,658  |                   |   | 1,868  |                | 4.59  | %        |  |                   | 41,185  |  |   | 2,180  |  | 5.29  | %
|Held to maturity                                                                      |  |                    | 3,205   |          |                   | 161               |  | 5.02              | %              |  |          | 6,164   |                   |   | 253    |                | 4.10  | %        |  |                   | 7,206   |  |   | 433    |  | 6.01  | %
|FHLB stock                                                                            |  |                    | 4,230   |          |                   | 150               |  | 3.55              | %              |  |          | 3,855   |                   |   | 147    |                | 3.81  | %        |  |                   | 4,141   |  |   | 220    |  | 5.31  | %
|All loans                                                                             |  |                    | 438,296 |          |                   | 25,186            |  | 5.75              | %              |  |          | 417,216 |                   |   | 25,660 |                | 6.15  | %        |  |                   | 390,220 |  |   | 26,765 |  | 6.86  | %
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total interest-earning assets                                                         |  |                    | 495,916 |          |                   | 27,603            |  | 5.57              | %              |  |          | 472,208 |                   |   | 27,975 |                | 5.92  | %        |  |                   | 445,484 |  |   | 29,650 |  | 6.66  | %
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Noninterest-earning assets                                                            |  |                    | 27,200  |          |                   |                   |  |                   |                |  |          | 30,878  |                   |   |        |                |       |          |  |                   | 27,330  |  |   |        |  |       |  
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total assets                                                                          |  | $                  | 523,116 |          |                   |                   |  |                   |                |  | $        | 503,086 |                   |   |        |                |       |          |  | $                 | 472,814 |  |   |        |  |       |  
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                  |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Interest-bearing liabilities:                                                         |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Deposits                                                                              |  | $                  | 356,036 |          |                   | 6,426             |  | 1.80              | %              |  | $        | 343,471 |                   |   | 7,291  |                | 2.12  | %        |  | $                 | 334,990 |  |   | 10,149 |  | 3.03  | %
|Borrowed funds                                                                        |  |                    | 89,221  |          |                   | 2,779             |  | 3.11              | %              |  |          | 91,767  |                   |   | 3,395  |                | 3.70  | %        |  |                   | 81,867  |  |   | 3,726  |  | 4.55  | %
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total interest-bearing liabilities                                                    |  |                    | 445,257 |          |                   | 9,205             |  | 2.07              | %              |  |          | 435,238 |                   |   | 10,686 |                | 2.46  | %        |  |                   | 416,857 |  |   | 13,875 |  | 3.33  | %
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Noninterest-bearing liabilities                                                       |  |                    | 33,459  |          |                   |                   |  |                   |                |  |          | 26,778  |                   |   |        |                |       |          |  |                   | 19,855  |  |   |        |  |       |  
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total liabilities                                                                     |  |                    | 478,716 |          |                   |                   |  |                   |                |  |          | 462,016 |                   |   |        |                |       |          |  |                   | 436,712 |  |   |        |  |       |  
|Stockholders equity                                                                  |  |                    | 44,400  |          |                   |                   |  |                   |                |  |          | 41,070  |                   |   |        |                |       |          |  |                   | 36,102  |  |   |        |  |       |  
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Total liabilities and stockholders equity                                            |  | $                  | 523,116 |          |                   |                   |  |                   |                |  | $        | 503,086 |                   |   |        |                |       |          |  | $                 | 472,814 |  |   |        |  |       |  
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Net interest income                                                                   |  |                    |         |          | $                 | 18,398            |  |                   |                |  |          |         |                   | $ | 17,289 |                |       |          |  |                   |         |  | $ | 15,775 |  |       |  
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Interest rate spread                                                                  |  |                    |         |          |                   |                   |  | 3.50              | %              |  |          |         |                   |   |        |                | 3.46  | %        |  |                   |         |  |   |        |  | 3.33  | %
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Net yield on interest-earning assets                                                  |  |                    |         |          |                   |                   |  | 3.71              | %              |  |          |         |                   |   |        |                | 3.66  | %        |  |                   |         |  |   |        |  | 3.54  | %
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  
|Percentage of average interest-earning assets to average interest-bearing liabilities |  |                    |         |          |                   |                   |  | 111.4             | %              |  |          |         |                   |   |        |                | 108.5 | %        |  |                   |         |  |   |        |  | 106.9 | %
|                                                                                      |  |                    |         |          |                   |                   |  |                   |                |  |          |         |                   |   |        |                |       |          |  |                   |         |  |   |        |  |       |  



15



---



RATE/VOLUME ANALYSIS



The table below provides information regarding changes in
interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in volume (change 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.



|                                         |  |                                                                                      |       |   |                                                                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|---------------------------------------- |  | ------------------------------------------------------------------------------------ | ----- | - | ------------------------------------------------------------------------------------ | - | ------ | ----- |  | - | ------ | - |  | ---- | ----- | - | ----- | - | ------ | - |  | - | ------ | -
|                                         |  | For the year ended December 31, 2003 vs. December 31, 2004Increase (Decrease) Due
to |       |   | For the year ended December 31, 2002 vs. December 31, 2003Increase (Decrease) Due
to |  
|(Dollars in thousands)                   |  | Volume                                                                               |       |   | Rate                                                                                 |   |        | Total |  |   | Volume |   |  | Rate |       |   | Total |  
|Interest income:                         |  |                                                                                      |       |   |                                                                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Interest-bearing deposits in other banks |  | $                                                                                    | (4    | ) |                                                                                      | $ | 6      |       |  | $ | 2      |   |  | $    | 23    |   |       | $ | (28    | ) |  | $ | (5     | )
|Securities:                              |  |                                                                                      |       |   |                                                                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Available for sale                       |  |                                                                                      | 243   |   |                                                                                      |   | (54    | )     |  |   | 189    |   |  |      | (28   | ) |       |   | (284   | ) |  |   | (312   | )
|Held to maturity                         |  |                                                                                      | (141  | ) |                                                                                      |   | 49     |       |  |   | (92    | ) |  |      | (57   | ) |       |   | (123   | ) |  |   | (180   | )
|FHLB stock                               |  |                                                                                      | 13    |   |                                                                                      |   | (10    | )     |  |   | 3      |   |  |      | (14   | ) |       |   | (59    | ) |  |   | (73    | )
|All loans                                |  |                                                                                      | 1,252 |   |                                                                                      |   | (1,726 | )     |  |   | (474   | ) |  |      | 1,778 |   |       |   | (2,883 | ) |  |   | (1,105 | )
|                                         |  |                                                                                      |       |   |                                                                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Total interest-earning assets            |  |                                                                                      | 1,363 |   |                                                                                      |   | (1,735 | )     |  |   | (372   | ) |  |      | 1,702 |   |       |   | (3,377 | ) |  |   | (1,675 | )
|                                         |  |                                                                                      |       |   |                                                                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Interest expense:                        |  |                                                                                      |       |   |                                                                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Deposits                                 |  |                                                                                      | 260   |   |                                                                                      |   | (1,125 | )     |  |   | (865   | ) |  |      | 252   |   |       |   | (3,110 | ) |  |   | (2,858 | )
|Borrowed funds                           |  |                                                                                      | (92   | ) |                                                                                      |   | (524   | )     |  |   | (616   | ) |  |      | 416   |   |       |   | (747   | ) |  |   | (331   | )
|                                         |  |                                                                                      |       |   |                                                                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Total interest-bearing liabilities       |  |                                                                                      | 168   |   |                                                                                      |   | (1,649 | )     |  |   | (1,481 | ) |  |      | 668   |   |       |   | (3,857 | ) |  |   | (3,189 | )
|                                         |  |                                                                                      |       |   |                                                                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  
|Net interest income                      |  | $                                                                                    | 1,195 |   |                                                                                      | $ | (86    | )     |  | $ | 1,109  |   |  | $    | 1,034 |   |       | $ | 480    |   |  | $ | 1,514  |  
|                                         |  |                                                                                      |       |   |                                                                                      |   |        |       |  |   |        |   |  |      |       |   |       |   |        |   |  |   |        |  



Provision for Loan Losses



The provision for loan losses charged to operations was
$970,000 during 2004 compared to $740,000 during 2003 and 2002. The commercial loan portfolio, which contains loans with a higher degree of risk, continues to expand which is why the provision for loan losses increased in 2004. Non-performing assets
at December 31, 2004 were $207,000 compared to $267,000 at December 31, 2003 and $1.2 million at December 31, 2002. Net charge-offs for 2004 were $64,000 compared to $230,000 during 2003 and $326,000 during 2002. At December 31, 2004, the allowance
for loan losses was 0.94% of total loans as compared to 0.84% for 2003 and 0.70% for 2002. The allowance for loan losses increased to $4.4 million at December 31, 2004 compared to $3.4 million at December 31, 2003 and $2.9 million at December 31,
2002. Management considers this level to be appropriate based on lending volume, the current level and types of delinquencies and other nonperforming assets, historical charge off patterns, overall economic conditions and other factors. Future
increases to the allowance may be necessary 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



16



---

require the recognition of adjustments to the allowance for loan losses based on their judgments of information available to them at the time of their
examination.



Noninterest Income



Total noninterest income decreased to $5.2 million during 2004, a decrease
of $1.3 million or 20.0% from 2003. This compares to $6.5 million and $4.6 million during 2003 and 2002, respectively. The component that had the most impact on the change in noninterest income was the gain on sale of loans resulting in net gains of
$2.5 million in 2004 versus gains of $4.0 million in 2003 and $1.7 in 2002. The reduction in 2004 can be primarily attributed to diminished mortgage banking activities caused by lower refinancing volumes. The gain realized in 2003 was primarily a
result of the May 31, 2002 purchase of Lumina and the high volume of refinances due to the low interest rate environment. Service charges and fees on loans decreased to $506,000 (10.8%) for the year ended 2004 as compared to $567,000 and $690,000
during 2003 and 2002, respectively. These reductions were mainly caused by a reduction in the volume of loans closed through brokered arrangements. Deposit related fees increased 19.6% in 2004 primarily due to a new service the Bank offered
beginning in April 2003, for checking accounts with non-sufficient funds and new accounts associated with the new branches. During 2002 the Bank sold a parking lot for $500,000, resulting in the gain on sale of real estate. The only similar
transaction that occurred since 2002 was the sale of a building in 2003, however, the gain was deferred. Net gain on sale of securities decreased to $10,000 during 2004, a decrease of $41,000 or 81.1% from 2003. Net gain on sale of securities
decreased $85,000 or 62.5% during 2003 because in 2002, the Bank sold more bonds to purchase mortgage-backed securities to give the Bank greater cash flow. In 2004 and 2003, Bank-owned life insurance earnings decreased 14.2% and 7.2% respectively,
from the previous year due to the reduction in interest rates being paid on this investment. Other income increased to $236,000 (19.6%) during the year 2004 as compared to $197,000 (11.7% decrease) during the year 2003 and $223,000 for 2002. The
majority of the other income changes can be attributed to the change in commissions for annuity sales and mutual funds, through UVEST Investment Services sold each year.



Noninterest Expense



Total noninterest expense was $15.6 million during the year 2004, an increase of $545,000 or 3.6% from 2003. The major increase in noninterest expense
during the year 2004 can be attributed to occupancy and equipment cost increasing to $3.3 million (18.2%) in 2004 as compared to $2.8 million (19.2%) in 2003 and $2.3 million in 2002. These increases were primarily caused by the opening of four new
branches since May of 2003. The companys compensation and fringe benefit expense was $9.3 million during 2004, an increase of 0.7% as compared to $9.3 million during 2003 and $7.0 million in 2002. The increases were due to the rise in the
costs of benefits, staffing levels, including the staffing for additional branches, and normal increases in salaries. In 2004, incentive pay decreased after increasing in 2003 because of the higher refinancing volumes. In addition, the May 31, 2002
purchase of Lumina resulted in higher personnel costs. Professional and examination fees increased to $460,000 (26.2%) in 2004 due to higher audit and consulting fees. These fees were higher in 2002 due to organizing Holdings and the REIT.
Advertising costs for the year 2004 were $525,000 a decrease of 9.3% as compared to $579,000 in 2003 and $358,000 in 2002. Other noninterest expense was $2.0 million during 2004, a decrease of 2.9% as compared to $2.1 million in 2003 and $1.6
million in 2002. The increase in



17



---

advertising and other expense in 2003 was mainly due to the full year effect of the purchase of Lumina and the opening of four new financial centers. In
addition, real estate owned expense was approximately $100,000 higher in 2003 than 2004 and 2002 primarily due to losses and expenses incurred in disposing of foreclosed properties.



Income Taxes



The effective tax rate for the years ended December 31, 2004, 2003 and 2002 was 33.4%, 32.4% and 36.2%, respectively. The lower rates in 2004 and 2003
resulted principally from a change in organizational structure, which included the formation of Holdings and the REIT, that the Company implemented in December 2002. In addition to the benefits for which the revised structure was implemented, it
also resulted in reduced state income taxes. State taxing authorities have recently announced that they will vigorously pursue taxpayers who have utilized certain organizational structures that result in reduced state income taxes, including the
structure the Company has utilized. While the Company believes its tax position is sound, it has decided to modify its business plan in 2005 and subsequent years in response to that announcement. If the organizational structure utilized by the
Company were to be challenged by state taxing authorities for past years and resulted in an assessment, the Company estimates that its exposure could be as much as $500,000 net of federal tax benefit and including interest and penalties. If such an
assessment were to occur, the Company would vigorously contest the assessment based on the belief that it has fully complied with relevant tax laws. Accordingly, the Company has not accrued a liability for such a possible assessment. As a result of
the modified business plan, however, the Company estimates that its effective tax rate will increase to approximately 36%-37% in 2005.



Recent Accounting Pronouncements



See Note 1 to the Notes to Consolidated Financial Statements for a full description of recent accounting pronouncements including the
respective expected dates of adoption and effects on results of operations and financial condition.



Note Regarding Forward-Looking Statements



This document, as well as other written communications made from time to time by Cooperative Bankshares, Inc. and subsidiaries and oral communications made from time to time by authorized officers of the Company, may
contain statements relating to the future results of the Company (including certain projections, such as earnings projections, necessary tax provisions and business trends) that are considered forward looking statements as defined in the
Private Securities Litigation Reform Act of 1995 (the PSLRA). Such forward-looking statements may be identified by the use of such words as believe, expect, should, planned, estimated and
potential. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA. The Companys ability to predict future results is inherently uncertain and cautions you
that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement. These factors include among others, changes in market interest rates and general and regional
economic conditions, changes in government regulations, changes in accounting principles and the quality or composition of the loan and investment portfolios and other factors that may be described in



18



---

the Companys quarterly reports on Form 10-Q and in its annual report on Form 10-K, each filed with the Securities and Exchange Commission, which are
available at the Securities and Exchange Commissions Internet website (www.sec.gov) and to which reference is hereby made.



SELECTED QUARTERLY DATA



The following table contains selected financial data for the Company on a quarterly basis for the previous eight quarters.



|                                               |  |                      |         |   |       |   |         |        |  |   |         |   |  |        |         |   |       |   |         |        |  |   |         |   |  |   |         |   |  |   |         |  
|---------------------------------------------- |  | -------------------- | ------- | - | ----- | - | ------- | ------ |  | - | ------- | - |  | ------ | ------- | - | ----- | - | ------- | ------ |  | - | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                               |  | 2004                 |         |   | 2003  |  
|                                               |  | Fourth               |         |   | Third |   |         | Second |  |   | First   |   |  | Fourth |         |   | Third |   |         | Second |  |   | First   |  
|                                               |  | Dollars in Thousands |        
|Selected Quarter-End Balances:                 |  |                      |         |   |       |   |         |        |  |   |         |   |  |        |         |   |       |   |         |        |  |   |         |   |  |   |         |   |  |   |         |  
|Assets                                         |  | $                    | 550,107 |   |       | $ | 544,696 |        |  | $ | 527,876 |   |  | $      | 518,882 |   |       | $ | 502,437 |        |  | $ | 496,497 |   |  | $ | 522,084 |   |  | $ | 512,585 |  
|Loans, net                                     |  |                      | 449,417 |   |       |   | 443,897 |        |  |   | 430,904 |   |  |        | 411,619 |   |       |   | 401,373 |        |  |   | 388,908 |   |  |   | 394,627 |   |  |   | 401,088 |  
|Securities                                     |  |                      | 47,195  |   |       |   | 48,235  |        |  |   | 48,561  |   |  |        | 52,221  |   |       |   | 47,419  |        |  |   | 48,577  |   |  |   | 42,465  |   |  |   | 47,819  |  
|FHLB stock                                     |  |                      | 4,519   |   |       |   | 4,554   |        |  |   | 4,654   |   |  |        | 4,354   |   |       |   | 4,154   |        |  |   | 3,905   |   |  |   | 4,005   |   |  |   | 3,805   |  
|Deposits                                       |  |                      | 414,758 |   |       |   | 399,463 |        |  |   | 380,595 |   |  |        | 376,450 |   |       |   | 367,202 |        |  |   | 363,077 |   |  |   | 373,709 |   |  |   | 375,027 |  
|Borrowed funds                                 |  |                      | 85,426  |   |       |   | 96,503  |        |  |   | 99,445  |   |  |        | 95,135  |   |       |   | 89,505  |        |  |   | 88,099  |   |  |   | 104,047 |   |  |   | 94,820  |  
|Stockholders equity                           |  |                      | 46,910  |   |       |   | 45,802  |        |  |   | 44,391  |   |  |        | 44,227  |   |       |   | 43,143  |        |  |   | 42,237  |   |  |   | 41,022  |   |  |   | 39,816  |  
|                                               | 
|                                               |  | Dollars in Thousands |        
|Selected Operations Data:                      |  |                      |         |   |       |   |         |        |  |   |         |   |  |        |         |   |       |   |         |        |  |   |         |   |  |   |         |   |  |   |         |  
|Interest income                                |  | $                    | 7,341   |   |       | $ | 7,016   |        |  | $ | 6,693   |   |  | $      | 6,553   |   |       | $ | 6,683   |        |  | $ | 6,917   |   |  | $ | 7,153   |   |  | $ | 7,222   |  
|Interest expense                               |  |                      | 2,514   |   |       |   | 2,348   |        |  |   | 2,164   |   |  |        | 2,179   |   |       |   | 2,322   |        |  |   | 2,640   |   |  |   | 2,794   |   |  |   | 2,930   |  
|Net interest income                            |  |                      | 4,827   |   |       |   | 4,668   |        |  |   | 4,529   |   |  |        | 4,374   |   |       |   | 4,361   |        |  |   | 4,277   |   |  |   | 4,359   |   |  |   | 4,292   |  
|Provision for loan losses                      |  |                      | 225     |   |       |   | 225     |        |  |   | 300     |   |  |        | 220     |   |       |   | 180     |        |  |   | 180     |   |  |   | 180     |   |  |   | 200     |  
|Noninterest income                             |  |                      | 1,285   |   |       |   | 1,396   |        |  |   | 1,357   |   |  |        | 1,145   |   |       |   | 1,333   |        |  |   | 1,800   |   |  |   | 1,819   |   |  |   | 1,534   |  
|Noninterest expenses                           |  |                      | 3,846   |   |       |   | 3,916   |        |  |   | 3,924   |   |  |        | 3,900   |   |       |   | 3,787   |        |  |   | 3,755   |   |  |   | 3,880   |   |  |   | 3,619   |  
|Income before income taxes                     |  |                      | 2,041   |   |       |   | 1,923   |        |  |   | 1,662   |   |  |        | 1,399   |   |       |   | 1,727   |        |  |   | 2,142   |   |  |   | 2,118   |   |  |   | 2,007   |  
|Net income                                     |  |                      | 1,353   |   |       |   | 1,286   |        |  |   | 1,124   |   |  |        | 918     |   |       |   | 1,163   |        |  |   | 1,430   |   |  |   | 1,423   |   |  |   | 1,388   |  
|                                               |  |                      |         |   |       |   |         |       
|Selected Financial Ratios and Other Data:      |  |                      |         |   |       |   |         |        |  |   |         |   |  |        |         |   |       |   |         |        |  |   |         |   |  |   |         |   |  |   |         |  
|Return on average assets                       |  |                      | 1.00    | % |       |   | 0.97    | %      |  |   | 0.87    | % |  |        | 0.73    | % |       |   | 0.94    | %      |  |   | 1.12    | % |  |   | 1.13    | % |  |   | 1.11    | %
|Return on average equity                       |  |                      | 11.61   | % |       |   | 11.38   | %      |  |   | 10.03   | % |  |        | 8.98    | % |       |   | 10.85   | %      |  |   | 13.66   | % |  |   | 13.99   | % |  |   | 14.29   | %
|Average stockholders equity to average assets |  |                      | 8.62    | % |       |   | 8.50    | %      |  |   | 8.65    | % |  |        | 8.17    | % |       |   | 8.65    | %      |  |   | 8.22    | % |  |   | 8.04    | % |  |   | 7.75    | %
|*Per Share Data:                               |  |                      |         |   |       |   |         |        |  |   |         |   |  |        |         |   |       |   |         |        |  |   |         |   |  |   |         |   |  |   |         |  
|Earnings per:                                  |  |                      |         |   |       |   |         |        |  |   |         |   |  |        |         |   |       |   |         |        |  |   |         |   |  |   |         |   |  |   |         |  
|Common share - basic                           |  | $                    | 0.32    |   |       | $ | 0.30    |        |  | $ | 0.26    |   |  | $      | 0.21    |   |       | $ | 0.27    |        |  | $ | 0.33    |   |  | $ | 0.33    |   |  | $ | 0.33    |  
|Common share - diluted                         |  | $                    | 0.31    |   |       | $ | 0.30    |        |  | $ | 0.26    |   |  | $      | 0.21    |   |       | $ | 0.27    |        |  | $ | 0.33    |   |  | $ | 0.33    |   |  | $ | 0.32    |  
|Cash dividends declared                        |  | $                    | 0.05    |   |       | $ | 0.05    |        |  | $ | 0.05    |   |  | $      | 0.03    |   |       | $ | 0.03    |        |  | $ | 0.03    |   |  | $ | 0.03    |   |  | $ | 0.03    |  
|Book value                                     |  | $                    | 10.93   |   |       | $ | 10.67   |        |  | $ | 10.34   |   |  | $      | 10.31   |   |       | $ | 10.09   |        |  | $ | 9.88    |   |  | $ | 9.60    |   |  | $ | 9.32    |  



|* | Per share data has been adjusted to reflect the effects of a 3-for-2 stock split in the form of a 50% stock dividend declared on January 19, 2005 and paid on February 24, 2005.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



19



---

COOPERATIVE BANKSHARES, INC.



Consolidated Financial Statements



December 31, 2004, 2003 and 2002





20



---

LOGO



REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM



The Board of Directors

Cooperative Bankshares, Inc.



We have audited the accompanying consolidated statements of financial condition of Cooperative Bankshares, Inc. and subsidiary (the Company) as of December 31, 2004 and 2003 and the related consolidated
statements of operations, comprehensive income, stockholders equity, and cash flows for each of the years in the three-year period ended December 31, 2004. 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 audits.



We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 audits provide a reasonable basis for our opinion.



In our opinion, the 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period
ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



LOGO



Sanford, North Carolina

March 9, 2005





21



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Financial Condition



December 31, 2004 and 2003



|                                                                                                        |  |      |             |      |   |            
|------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | ---- | - | -----------
|                                                                                                        |  | 2004 |             | 2003
|Assets                                                                                                  |  |      |             |      |   |            
|Cash and due from banks, noninterest-bearing                                                            |  | $    | 12,031,627  |      | $ | 14,400,034 
|Interest-bearing deposits in other banks                                                                |  |      | 4,360,960   |      |   | 3,993,331  
|                                                                                                        |  |      |             |      |   |            
|Total cash and cash equivalents                                                                         |  |      | 16,392,587  |      |   | 18,393,365 
|                                                                                                        |  |     
|Securities:                                                                                             |  |      |             |      |   |            
|Available for sale (amortized cost of $44,432,476 in 2004 and $43,180,913 in 2003)                      |  |      | 44,535,010  |      |   | 43,613,112 
|Held to maturity (estimated market value of $2,678,860 in 2004 and $3,889,736 in 2003)                  |  |      | 2,659,595   |      |   | 3,806,376  
|FHLB stock                                                                                              |  |      | 4,518,500   |      |   | 4,154,400  
|Loans held for sale                                                                                     |  |      | 7,239,131   |      |   | 6,375,275  
|Loans                                                                                                   |  |      | 453,769,733 |      |   | 404,820,362
|Less allowance for loan losses                                                                          |  |      | 4,353,227   |      |   | 3,447,002  
|                                                                                                        |  |      |             |      |   |            
|Net loans                                                                                               |  |      | 449,416,506 |      |   | 401,373,360
|Accrued interest receivable                                                                             |  |      | 2,085,164   |      |   | 1,852,366  
|Premises and equipment, net                                                                             |  |      | 8,597,015   |      |   | 8,665,698  
|Goodwill                                                                                                |  |      | 1,461,543   |      |   | 1,461,543  
|Other assets                                                                                            |  |      | 13,202,393  |      |   | 12,741,394 
|                                                                                                        |  |      |             |      |   |            
|Total assets                                                                                            |  | $    | 550,107,444 |      | $ | 502,436,889
|                                                                                                        |  |      |             |      |   |            
|Liabilities and Stockholders Equity                                                                    |  |      |             |      |   |            
|Deposits                                                                                                |  | $    | 414,757,904 |      | $ | 367,202,433
|Short-term borrowings                                                                                   |  |      | 32,342,878  |      |   | 41,416,785 
|Escrow deposits                                                                                         |  |      | 194,408     |      |   | 199,433    
|Accrued interest payable                                                                                |  |      | 190,689     |      |   | 180,067    
|Accrued expenses and other liabilities                                                                  |  |      | 2,629,188   |      |   | 2,207,003  
|Long-term obligations                                                                                   |  |      | 53,082,676  |      |   | 48,087,770 
|                                                                                                        |  |      |             |      |   |            
|Total liabilities                                                                                       |  |      | 503,197,743 |      |   | 459,293,491
|                                                                                                        |  |      |             |      |   |            
|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, 2,860,764 and 2,849,447 issued and outstanding |  |      | 2,860,764   |      |   | 2,849,447  
|Additional paid-in capital                                                                              |  |      | 2,673,233   |      |   | 2,638,044  
|Accumulated other comprehensive income                                                                  |  |      | 67,672      |      |   | 285,251    
|Retained earnings                                                                                       |  |      | 41,308,032  |      |   | 37,370,656 
|                                                                                                        |  |      |             |      |   |            
|Total stockholders equity                                                                              |  |      | 46,909,701  |      |   | 43,143,398 
|                                                                                                        |  |      |             |      |   |            
|Total liabilities and stockholders equity                                                              |  | $    | 550,107,444 |      | $ | 502,436,889
|                                                                                                        |  |      |             |      |   |            



See
accompanying notes to consolidated financial statements.





22



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Operations



Years Ended December 31, 2004, 2003 and 2002



|                                                    |  |      |            |      |   |            |  |   |           
|--------------------------------------------------- |  | ---- | ---------- | ---- | - | ---------- |  | - | ----------
|                                                    |  | 2004 |            | 2003 |   | 2002      
|Interest income:                                    |  |      |            |      |   |            |  |   |           
|Loans                                               |  | $    | 25,185,437 |      | $ | 25,660,073 |  | $ | 26,765,390
|Securities                                          |  |      | 2,218,150  |      |   | 2,120,292  |  |   | 2,613,110 
|Other                                               |  |      | 49,436     |      |   | 47,017     |  |   | 51,633    
|Dividends on FHLB stock                             |  |      | 150,172    |      |   | 147,184    |  |   | 219,730   
|                                                    |  |      |            |      |   |            |  |   |           
|Total interest income                               |  |      | 27,603,195 |      |   | 27,974,566 |  |   | 29,649,863
|                                                    |  |      |            |      |   |            |  |   |           
|Interest expense:                                   |  |      |            |      |   |            |  |   |           
|Deposits                                            |  |      | 6,425,637  |      |   | 7,290,985  |  |   | 10,148,866
|Borrowed funds                                      |  |      | 2,779,271  |      |   | 3,394,792  |  |   | 3,726,021 
|                                                    |  |      |            |      |   |            |  |   |           
|Total interest expense                              |  |      | 9,204,908  |      |   | 10,685,777 |  |   | 13,874,887
|                                                    |  |      |            |      |   |            |  |   |           
|Net interest income                                 |  |      | 18,398,287 |      |   | 17,288,789 |  |   | 15,774,976
|Provision for loan losses                           |  |      | 970,000    |      |   | 740,000    |  |   | 740,000   
|                                                    |  |      |            |      |   |            |  |   |           
|Net interest income after provision for loan losses |  |      | 17,428,287 |      |   | 16,548,789 |  |   | 15,034,976
|                                                    |  |      |            |      |   |            |  |   |           
|Noninterest income:                                 |  |      |            |      |   |            |  |   |           
|Gain on sale of loans                               |  |      | 2,523,246  |      |   | 3,971,046  |  |   | 1,657,816 
|Net gain on sale of securities                      |  |      | 9,600      |      |   | 50,663     |  |   | 135,182   
|Service charges and fees on loans                   |  |      | 505,986    |      |   | 567,380    |  |   | 689,620   
|Deposit-related fees                                |  |      | 1,591,762  |      |   | 1,330,370  |  |   | 1,030,429 
|Gain on sale of real estate                         |  |      |           |      |   |           |  |   | 464,977   
|Bank-owned life insurance earnings                  |  |      | 317,377    |      |   | 369,996    |  |   | 398,528   
|Other income, net                                   |  |      | 235,557    |      |   | 196,942    |  |   | 223,008   
|                                                    |  |      |            |      |   |            |  |   |           
|Total noninterest income                            |  |      | 5,183,528  |      |   | 6,486,397  |  |   | 4,599,560 
|                                                    |  |      |            |      |   |            |  |   |           
|Noninterest expenses:                               |  |      |            |      |   |            |  |   |           
|Compensation and fringe benefits                    |  |      | 9,322,226  |      |   | 9,259,464  |  |   | 6,995,307 
|Occupancy and equipment                             |  |      | 3,262,622  |      |   | 2,761,391  |  |   | 2,317,141 
|Professional and examination fees                   |  |      | 460,084    |      |   | 364,522    |  |   | 570,229   
|Advertising                                         |  |      | 525,341    |      |   | 579,314    |  |   | 357,775   
|Other                                               |  |      | 2,016,063  |      |   | 2,076,150  |  |   | 1,647,517 
|                                                    |  |      |            |      |   |            |  |   |           
|Total noninterest expenses                          |  |      | 15,586,336 |      |   | 15,040,841 |  |   | 11,887,969
|                                                    |  |      |            |      |   |            |  |   |           
|Income before income taxes                          |  |      | 7,025,479  |      |   | 7,994,345  |  |   | 7,746,567 
|                                                    |  |      |           
|Income tax expense                                  |  |      | 2,344,304  |      |   | 2,590,119  |  |   | 2,802,070 
|                                                    |  |      |            |      |   |            |  |   |           
|Net income                                          |  | $    | 4,681,175  |      | $ | 5,404,226  |  | $ | 4,944,497 
|                                                    |  |      |            |      |   |            |  |   |           
|Net income per share:                               |  |      |            |      |   |            |  |   |           
|Basic                                               |  | $    | 1.09       |      | $ | 1.27       |  | $ | 1.16      
|Diluted                                             |  | $    | 1.07       |      | $ | 1.24       |  | $ | 1.15      
|                                                    |  |      |           
|Weighted average common shares outstanding:         |  |      |            |      |   |            |  |   |           
|Basic                                               |  |      | 4,289,187  |      |   | 4,271,351  |  |   | 4,253,568 
|Diluted                                             |  |      | 4,366,478  |      |   | 4,348,361  |  |   | 4,288,521 



See
accompanying notes to consolidated financial statements.



23



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Comprehensive Income



Years Ended December 31, 2004, 2003 and 2002



|                                               |  |      |           |   |      |   |           |      |  |   |           |  
|---------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                               |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Net income                                     |  | $    | 4,681,175 |   |      | $ | 5,404,226 |      |  | $ | 4,944,497 |  
|                                               |  |      |           |   |      |   |           |      |  |   |           |  
|Other comprehensive income:                    |  |      |           |   |      |   |           |      |  |   |           |  
|Unrealized gain (loss) arising during the year |  |      | (320,065  | ) |      |   | (558,941  | )    |  |   | 868,332   |  
|Tax benefit (expense)                          |  |      | 108,822   |   |      |   | 242,130   |      |  |   | (338,649  | )
|Reclassification to realized gain              |  |      | (9,600    | ) |      |   | (50,663   | )    |  |   | (135,182  | )
|Tax expense                                    |  |      | 3,264     |   |      |   | 17,225    |      |  |   | 52,721    |  
|                                               |  |      |           |   |      |   |           |      |  |   |           |  
|Other comprehensive income (loss)              |  |      | (217,579  | ) |      |   | (350,249  | )    |  |   | 447,222   |  
|                                               |  |      |           |   |      |   |           |      |  |   |           |  
|Comprehensive income                           |  | $    | 4,463,596 |   |      | $ | 5,053,977 |      |  | $ | 5,391,719 |  
|                                               |  |      |           |   |      |   |           |      |  |   |           |  



See
accompanying notes to consolidated financial statements.





24



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Stockholders Equity



Years Ended December 31, 2004, 2003 and 2002



|                                                |  |             |           |   |                          |   |           |                                            |  |   |                  |   |  |                          |            |   |  |   |            |  
|----------------------------------------------- |  | ----------- | --------- | - | ------------------------ | - | --------- | ------------------------------------------ |  | - | ---------------- | - |  | ------------------------ | ---------- | - |  | - | ---------- | -
|                                                |  | Commonstock |           |   | Additionalpaid-incapital |   |           | AccumulatedOthercomprehensiveincome (loss) |  |   | Retainedearnings |   |  | Totalstockholdersequity |           
|Balance, December 31, 2001                      |  | $           | 2,835,447 |   |                          | $ | 2,435,720 |                                            |  | $ | 188,278          |   |  | $                        | 28,158,835 |   |  | $ | 33,618,280 |  
|Exercise of stock options                       |  |             | 500       |   |                          |   | 4,925     |                                            |  |   |                 |   |  |                          |           |   |  |   | 5,425      |  
|Other comprehensive income, net of taxes        |  |             |          |   |                          |   |          |                                            |  |   | 447,222          |   |  |                          |           |   |  |   | 447,222    |  
|Net income                                      |  |             |          |   |                          |   |          |                                            |  |   |                 |   |  |                          | 4,944,497  |   |  |   | 4,944,497  |  
|Cash dividends ($.13 per share)                 |  |             |          |   |                          |   |          |                                            |  |   |                 |   |  |                          | (567,163   | ) |  |   | (567,163   | )
|                                                |  |             |           |   |                          |   |           |                                            |  |   |                  |   |  |                          |            |   |  |   |            |  
|Balance, December 31, 2002                      |  |             | 2,835,947 |   |                          |   | 2,440,645 |                                            |  |   | 635,500          |   |  |                          | 32,536,169 |   |  |   | 38,448,261 |  
|Exercise of stock options                       |  |             | 13,500    |   |                          |   | 173,590   |                                            |  |   |                 |   |  |                          |           |   |  |   | 187,090    |  
|Tax benefit of stock option exercise            |  |             |          |   |                          |   | 23,809    |                                            |  |   |                 |   |  |                          |           |   |  |   | 23,809     |  
|Other comprehensive loss, net of taxes          |  |             |          |   |                          |   |          |                                            |  |   | (350,249         | ) |  |                          |           |   |  |   | (350,249   | )
|Net income                                      |  |             |          |   |                          |   |          |                                            |  |   |                 |   |  |                          | 5,404,226  |   |  |   | 5,404,226  |  
|Cash dividends ($.13 per share)                 |  |             |          |   |                          |   |          |                                            |  |   |                 |   |  |                          | (569,739   | ) |  |   | (569,739   | )
|                                                |  |             |           |   |                          |   |           |                                            |  |   |                  |   |  |                          |            |   |  |   |            |  
|Balance, December 31, 2003                      |  |             | 2,849,447 |   |                          |   | 2,638,044 |                                            |  |   | 285,251          |   |  |                          | 37,370,656 |   |  |   | 43,143,398 |  
|Exercise of stock options                       |  |             | 14,000    |   |                          |   | 104,625   |                                            |  |   |                 |   |  |                          |           |   |  |   | 118,625    |  
|Stock traded to exercise options (2,683 shares) |  |             | (2,683    | ) |                          |   | (69,436   | )                                          |  |   |                 |   |  |                          |           |   |  |   | (72,119    | )
|Other comprehensive loss, net of taxes          |  |             |          |   |                          |   |          |                                            |  |   | (217,579         | ) |  |                          |           |   |  |   | (217,579   | )
|Net income                                      |  |             |          |   |                          |   |          |                                            |  |   |                 |   |  |                          | 4,681,175  |   |  |   | 4,681,175  |  
|Cash dividends ($.17 per share)                 |  |             |          |   |                          |   |          |                                            |  |   |                 |   |  |                          | (743,799   | ) |  |   | (743,799   | )
|                                                |  |             |           |   |                          |   |           |                                            |  |   |                  |   |  |                          |            |   |  |   |            |  
|Balance, December 31, 2004                      |  | $           | 2,860,764 |   |                          | $ | 2,673,233 |                                            |  | $ | 67,672           |   |  | $                        | 41,308,032 |   |  | $ | 46,909,701 |  
|                                                |  |             |           |   |                          |   |           |                                            |  |   |                  |   |  |                          |            |   |  |   |            |  



See
accompanying notes to consolidated financial statements.



25



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Cash Flows



Years Ended December 31, 2004, 2003 and 2002



|                                                                                         |  |      |              |   |      |   |              |      |  |   |              |  
|---------------------------------------------------------------------------------------- |  | ---- | ------------ | - | ---- | - | ------------ | ---- |  | - | ------------ | -
|                                                                                         |  | 2004 |              |   | 2003 |   |              | 2002 | 
|Net income                                                                               |  | $    | 4,681,175    |   |      | $ | 5,404,226    |      |  | $ | 4,944,497    |  
|Adjustments to reconcile net income to net cash provided (used) by operating activities: |  |      |              |   |      |   |              |      |  |   |              |  
|Net accretion and amortization                                                           |  |      | 37,333       |   |      |   | 395,330      |      |  |   | 300,135      |  
|Depreciation                                                                             |  |      | 941,052      |   |      |   | 880,767      |      |  |   | 801,173      |  
|Net gain on sale of securities                                                           |  |      | (9,600       | ) |      |   | (50,663      | )    |  |   | (135,182     | )
|Gain on sale of loans                                                                    |  |      | (2,523,246   | ) |      |   | (4,248,884   | )    |  |   | (1,777,314   | )
|Deferred tax benefit                                                                     |  |      | (384,856     | ) |      |   | (188,149     | )    |  |   | (3,990       | )
|(Gain) loss on sales of premises and equipment                                           |  |      | 3,412        |   |      |   |             |      |  |   | (464,977     | )
|(Gain) loss on sales of foreclosed real estate                                           |  |      | (6,486       | ) |      |   | 63,890       |      |  |   | (6,855       | )
|Valuation losses on foreclosed real estate                                               |  |      |             |   |      |   | 8,663        |      |  |   |             |  
|Provision for loan losses                                                                |  |      | 970,000      |   |      |   | 740,000      |      |  |   | 740,000      |  
|Proceeds from sales of loans                                                             |  |      | 173,826,604  |   |      |   | 275,871,442  |      |  |   | 106,027,979  |  
|Loan originations held for sale                                                          |  |      | (172,177,430 | ) |      |   | (252,499,961 | )    |  |   | (129,910,600 | )
|Changes in assets and liabilities:                                                       |  |      |              |   |      |   |              |      |  |   |              |  
|Accrued interest receivable                                                              |  |      | (232,798     | ) |      |   | 387,460      |      |  |   | 397,541      |  
|Prepaid expenses and other assets                                                        |  |      | 38,922       |   |      |   | (274,672     | )    |  |   | (148,324     | )
|Accrued interest payable                                                                 |  |      | 10,622       |   |      |   | (104,501     | )    |  |   | 20,177       |  
|Accrued expenses and other liabilities                                                   |  |      | 822,185      |   |      |   | (1,610,964   | )    |  |   | 2,225,719    |  
|                                                                                         |  |      |              |   |      |   |              |      |  |   |              |  
|Net cash provided (used) by operating activities                                         |  |      | 5,996,889    |   |      |   | 24,773,984   |      |  |   | (16,990,021  | )
|                                                                                         |  |      |              |   |      |   |              |      |  |   |              |  
|Purchases of securities available for sale                                               |  |      | (20,492,484  | ) |      |   | (26,936,750  | )    |  |   | (29,203,805  | )
|Purchases of securities held to maturity                                                 |  |      |             |   |      |   | (2,981,945   | )    |  |   | (4,165,348   | )
|Purchase of Lumina Mortgage Company                                                      |  |      | (400,000     | ) |      |   | (400,000     | )    |  |   | (773,188     | )
|Proceeds from maturity of securities available for sale                                  |  |      | 10,200,000   |   |      |   | 13,900,000   |      |  |   |             |  
|Proceeds from sale of securities available for sale                                      |  |      | 5,000,000    |   |      |   | 1,060,000    |      |  |   | 24,058,015   |  
|Proceeds from maturities of securities held to maturity                                  |  |      |             |   |      |   | 5,000,000    |      |  |   |             |  
|Repayments of mortgage-backed securities available for sale                              |  |      | 4,012,721    |   |      |   | 9,654,231    |      |  |   | 6,721,816    |  
|Repayments of mortgage-backed securities held to maturity                                |  |      | 1,147,247    |   |      |   | 1,865,872    |      |  |   | 1,192,533    |  
|Loan originations, net of principal repayments                                           |  |      | (49,096,504  | ) |      |   | (11,364,256  | )    |  |   | (18,131,146  | )
|Proceeds from disposals of foreclosed real estate                                        |  |      | 106,569      |   |      |   | 854,428      |      |  |   | 221,207      |  
|Purchases of premises and equipment                                                      |  |      | (877,981     | ) |      |   | (3,140,041   | )    |  |   | (1,311,187   | )
|Proceeds from sales of premises and equipment                                            |  |      | 2,200        |   |      |   |             |      |  |   | 499,071      |  
|Net expenditures on foreclosed real estate                                               |  |      | (9,487       | ) |      |   | (8,236       | )    |  |   | (111,829     | )
|Purchases of FHLB stock                                                                  |  |      | (7,473,700   | ) |      |   | (2,149,900   | )    |  |   | (350,000     | )
|Proceeds from sale of FHLB stock                                                         |  |      | 7,109,600    |   |      |   | 2,050,200    |      |  |   | 450,200      |  
|Purchases of life insurance                                                              |  |      |             |   |      |   |             |      |  |   | (1,000,000   | )
|                                                                                         |  |      |              |   |      |   |              |      |  |   |              |  
|Net cash used in investing activities                                                    |  |      | (50,771,819  | ) |      |   | (12,596,397  | )    |  |   | (21,903,661  | )
|                                                                                         |  |      |              |   |      |   |              |      |  |   |              |  
|Net increase in deposits                                                                 |  |      | 47,555,471   |   |      |   | 9,937,859    |      |  |   | 17,434,522   |  
|Net proceeds (repayments) on short-term borrowings                                       |  |      | (9,073,907   | ) |      |   | (35,169,042  | )    |  |   | 6,585,827    |  
|Repayments on long-term obligations                                                      |  |      | (5,094       | ) |      |   | (4,822       | )    |  |   | (4,564       | )
|Proceeds received on long-term obligations                                               |  |      | 5,000,000    |   |      |   | 20,000,000   |      |  |   | 15,000,000   |  
|Proceeds from issuance of common stock, net                                              |  |      | 46,506       |   |      |   | 187,090      |      |  |   | 5,425        |  
|Dividends paid                                                                           |  |      | (743,799     | ) |      |   | (569,739     | )    |  |   | (567,163     | )
|Net change in escrow deposits                                                            |  |      | (5,025       | ) |      |   | (24,171      | )    |  |   | 2,660        |  
|                                                                                         |  |      |              |   |      |   |              |      |  |   |              |  
|Net cash provided (used) by financing activities                                         |  |      | 42,774,152   |   |      |   | (5,642,825   | )    |  |   | 38,456,707   |  
|                                                                                         |  |      |              |   |      |   |              |      |  |   |              |  
|Increase (decrease) in cash and cash equivalents                                         |  |      | (2,000,778   | ) |      |   | 6,534,762    |      |  |   | (436,975     | )
|Cash and cash equivalents:                                                               |  |      |              |   |      |   |              |      |  |   |              |  
|Beginning of year                                                                        |  |      | 18,393,365   |   |      |   | 11,858,603   |      |  |   | 12,295,578   |  
|                                                                                         |  |      |              |   |      |   |              |      |  |   |              |  
|End of year                                                                              |  | $    | 16,392,587   |   |      | $ | 18,393,365   |      |  | $ | 11,858,603   |  
|                                                                                         |  |      |              |   |      |   |              |      |  |   |              |  



See
accompanying notes to consolidated financial statements.



26



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Consolidated Statements of Cash Flows



(Continued)



Years Ended December 31, 2004, 2003 and 2002



|                                                                         |  |      |            |   |      |   |            |      |  |   |           
|------------------------------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ----------
|                                                                         |  | 2004 |            |   | 2003 |   |            | 2002
|Cash paid for:                                                           |  |      |            |   |      |   |            |      |  |   |           
|Interest                                                                 |  | $    | 9,194,286  |   |      | $ | 10,790,278 |      |  | $ | 13,854,710
|Income taxes                                                             |  |      | 2,310,700  |   |      |   | 3,278,665  |      |  |   | 2,597,763 
|                                                                         |  |      |           
|Summary of noncash investing and financing activities:                   |  |      |            |   |      |   |            |      |  |   |           
|Transfer from loans to other real estate owned                           |  |      | 394,660    |   |      |   | 479,462    |      |  |   | 989,602   
|Loans to facilitate the sale of foreclosed real estate                   |  |      | 301,086    |   |      |   | 72,000     |      |  |   | 918,450   
|Unrealized gains (losses) on securities available for sale, net of taxes |  |      | (217,579   | ) |      |   | (350,249   | )    |  |   | 447,222   
|Accrual of goodwill for purchase of Lumina Mortgage Company              |  |      |           |   |      |   | 400,000    |      |  |   |          
|Long-term obligations reclassified to short-term borrowings              |  |      | 10,000,000 |   |      |   | 15,000,000 |      |  |   | 20,000,000
|                                                                         |  |      |           
|Sale and leaseback of premises and equipment:                            |  |      |            |   |      |   |            |      |  |   |           
|Increase in other receivable for proceeds on sale                        |  |      |           |   |      |   | 733,942    |      |  |   |          
|Deferred gain on sale                                                    |  |      |           |   |      |   | 121,147    |      |  |   |          



See
accompanying notes to consolidated financial statements.





27



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(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 (the Bank), and the Banks wholly owned subsidiaries, Lumina Mortgage Company, Inc. (Lumina) and CS&L Holdings, Inc. (Holdings)
and Holdings majority owned subsidiary, CS&L Real Estate Trust, Inc. (REIT). All significant intercompany transactions have been eliminated.



Nature of Operations

The
Company operates 24 offices (including 20 full service branches) in Eastern North Carolina, North Myrtle Beach, South Carolina, and Virginia Beach, Virginia, and offers a wide range of banking services including deposits, bankcards, 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 overdraft protection. 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. The
most significant estimates made by the Company in the preparation of the consolidated financial statements are the determination of the reserve for loan losses and fair value estimates.



Effects of Stock Split



On January 19, 2005, the Company declared a 3-for-2 stock split in the form of a 50% stock dividend. This split increased
the number of common shares outstanding to 4,291,115. All references to per share results and weighted average common and common equivalent shares outstanding have been adjusted to reflect the effects of this stock split.



Reclassifications



Certain items included in prior years consolidated 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, 2004, the daily average gross reserve requirement was $1,485,000.







28



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(1) | Basis of Presentation and Significant Accounting Policies (Continued)
|--- | ---------------------------------------------------------------------



| | (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 noninterest 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 sum of 0.20% of total assets as of December 31, 2003 and 4.50% 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 Held for Sale
| | --- | -------------------



As a part of its normal business operations, the Company originates mortgage loans that have been approved by secondary investors. The Company issues a
rate lock commitment to a customer and concurrently locks in with a secondary market investor under a best efforts delivery mechanism. The terms of the loan are set by the secondary investors and are transferred within several weeks of
the Company initially funding the loan. The Company receives origination fees from borrowers and servicing release premiums from the investors that are recognized on the Statement of Operations in the line item gain on sale of loans.
Between the initial funding of the loans by the Company and the subsequent purchase by the investor, the Company carries the loans on its balance sheet at cost.



| | (e) | 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. If a loan is sold, the remaining deferred loan fees and costs are included in gain on sale of loans in the period the loan is sold.







29



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(1) | Basis of Presentation and Significant Accounting Policies (Continued)
|--- | ---------------------------------------------------------------------



| | (e) | Loans and Allowance for Loan Losses (Continued)
| | --- | -----------------------------------------------



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. Smaller-balance homogeneous loans which
consist primarily of residential mortgages and consumer loans are evaluated collectively and reserves are established based on historical loss experience.



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



The allowance for loan losses is established through a
provision charged to income. The allowance is an amount that management believes will be adequate to absorb 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, 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 adjustments to the allowance based on their judgments of information available to them at the time of their examination.



| | (f) | 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. 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. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received.



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.



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.







30



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(1) | Basis of Presentation and Significant Accounting Policies (Continued)
|--- | ---------------------------------------------------------------------



| | (g) | Transfers and Servicing of Financial Assets
| | --- | -------------------------------------------



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 less the amortized amount for retained servicing rights and includes servicing fees from investors and certain charges collected from borrowers, such as late payment fees.



| | (h) | 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.



| | (i) | 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 3 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.



| | (j) | Goodwill
| | --- | --------



The Companys recorded goodwill consists solely of goodwill resulting from the acquisition of Lumina Mortgage Company, Inc. in 2002 is not amortized
but is tested for impairment annually or more often if an event or circumstance indicates that an impairment loss has been incurred.



| | (k) | 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.



| | (l) | Stock-Based Compensation
| | --- | ------------------------



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. The option exercise price is the market price of the common stock on the date the option is granted. 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 as follows:



31



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(1) | Basis of Presentation and Significant Accounting Policies (Continued)
|--- | ---------------------------------------------------------------------



| | (l) | Stock-Based Compensation (Continued)
| | --- | ------------------------------------



|                                                                                                                                            |  |                         |           |   |      |   |           |  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | --------- | - | ---- | - | --------- |  | - | --------- | -
|                                                                                                                                            |  | Year ended December 31, |          
|                                                                                                                                            |  | 2004                    |           |   | 2003 |   | 2002      | 
|Net income, as reported                                                                                                                     |  | $                       | 4,681,175 |   |      | $ | 5,404,226 |  | $ | 4,944,497 |  
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax
effects |  |                         | (369,794  | ) |      |   |          |  |   | (60,543   | )
|                                                                                                                                            |  |                         |           |   |      |   |           |  |   |           |  
|Proforma net income                                                                                                                         |  | $                       | 4,311,381 |   |      | $ | 5,404,226 |  | $ | 4,883,954 |  
|                                                                                                                                            |  |                         |           |   |      |   |           |  |   |           |  
|Earnings per share:                                                                                                                         |  |                         |           |   |      |   |           |  |   |           |  
|Basic - as reported                                                                                                                         |  | $                       | 1.09      |   |      | $ | 1.27      |  | $ | 1.16      |  
|                                                                                                                                            |  |                         |           |   |      |   |           |  |   |           |  
|Basic - proforma                                                                                                                            |  | $                       | 1.01      |   |      | $ | 1.27      |  | $ | 1.15      |  
|                                                                                                                                            |  |                         |           |   |      |   |           |  |   |           |  
|Diluted - as reported                                                                                                                       |  | $                       | 1.07      |   |      | $ | 1.24      |  | $ | 1.15      |  
|                                                                                                                                            |  |                         |           |   |      |   |           |  |   |           |  
|Diluted - proforma                                                                                                                          |  | $                       | .99       |   |      | $ | 1.24      |  | $ | 1.14      |  
|                                                                                                                                            |  |                         |           |   |      |   |           |  |   |           |  



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 2004 and 2002. The weighted average fair values of options granted in 2004 and 2002 were
$5.88 and $2.40, respectively, after giving effect to the 3-for-2 stock split discussed in Note 1. No options were granted in 2003.



|                          |  |      |   |  |      |   |  |      |  
|------------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                          |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Risk-free interest rate   |  | 3.90 | % |  | NA   | % |  | 4.79 | %
|Dividend yield            |  | 1.02 | % |  | NA   | % |  | 1.45 | %
|Expected volatility       |  | 24   | % |  | NA   | % |  | 25   | %
|Expected lives (in years) |  | 8    |   |  | NA   |   |  | 8    |  



| | (m) | Comprehensive Income
| | --- | --------------------



The Company reports as comprehensive income all changes in stockholders equity during the year from nonowner 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 accumulated other comprehensive income is unrealized gains and losses on securities
available for sale.



| | (n) | 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.



32



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(1) | Basis of Presentation and Significant Accounting Policies (Continued)
|--- | ---------------------------------------------------------------------



| | (n) | Segment Information (Continued)
| | --- | -------------------------------



The Company has determined that it operates primarily in one operating segment providing general commercial financial services to customers located in the
single geographic area of Eastern North Carolina, Southeastern Virginia and Northeastern South 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.



| | (o) | New Accounting Pronouncements
| | --- | -----------------------------



On March 9, 2004, the SEC Staff issued Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments (SAB
105). SAB 105 clarifies existing accounting practices relating to the valuation of issued loan commitments, including interest rate lock commitments (IRLC), subject to SFAS No. 149 and Derivative Implementation Group Issue C13,
Scope Exceptions: When a Loan Commitment is included in the Scope of Statement 133. Furthermore, SAB 105 disallows the inclusion of the values of a servicing component and other internally developed intangible assets in the initial and
subsequent IRLC valuation. The provisions of SAB 105 were effective for loan commitments entered into after March 31, 2004. The adoption of SAB 105 did not have a material impact on the consolidated financial statements.



In March 2004, the Emerging Issues Task Force (EITF) released
EITF Issue 03-01, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. The Issue provides guidance for determining whether an investment is other-than-temporarily impaired and requires certain
disclosures with respect to these investments. The recognition and measurement guidance for other-than-temporary impairment has been delayed by the issuance of Financial Accounting Standards Board (FASB) Staff Position EITF 03-1-1 on
September 30, 2004. The adoption of Issue 03-1 did not result in any other-than-temporary impairment.



In December 2003, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 03-3,
Accounting for Loans or Certain Debt Securities Acquired in a Transfer. The SOP addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investors initial investment in
loans or debt securities acquired in a transfer if those differences relate to a deterioration of credit quality. The SOP also prohibits companies from carrying over or creating a valuation allowance in the initial accounting for loans
acquired that meet the scope criteria of the SOP. The SOP is effective for loans acquired in fiscal years beginning after December 15, 2004. The adoption of this SOP is not expected to have a material impact on the Companys financial position
or results of operations.



In December 2004, the FASB issued
SFAS No. 123(R), Accounting for Stock-Based Compensation (SFAS No. 123(R)). SFAS No. 123(R) establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This
Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) requires that the fair value of such equity instruments be recognized as an expense in the
historical financial statements as services are performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of fair value were required. The provisions of this Statement are effective for the first interim reporting period that begins
after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) commencing with the quarter ending September 30, 2005. If we had included the cost of employee stock option compensation in our consolidated financial statements, our net income for the
fiscal years ended December 31, 2004, 2003 and 2002 would have decreased by approximately $370,000, $0, and $61,000, respectively. Accordingly, the adoption of SFAS No. 123(R) is expected to have a material effect on our consolidated financial
statements.



33



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(2) | Securities
|--- | ----------



Securities as of December 31, 2004 and 2003 are summarized as follows:



|                                      |  |               |            |                      |   |                       |  |                       |         |  |   |           
|------------------------------------- |  | ------------- | ---------- | -------------------- | - | --------------------- |  | --------------------- | ------- |  | - | ----------
|                                      |  | 2004         
|                                      |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedMarket Value
|Securities available for sale:        |  |               |            |                      |   |                       |  |                       |         |  |   |           
|U.S. Government and agency securities |  | $             | 30,455,543 |                      | $ | 76,346                |  | $                     | 18,688  |  | $ | 30,513,201
|Mortgage-backed securities            |  |               | 7,539,850  |                      |   | 136,359               |  |                       | 155,231 |  |   | 7,520,978 
|Marketable equity securities          |  |               | 4,975,000  |                      |   | 26,865                |  |                       |        |  |   | 5,001,865 
|Corporate bonds                       |  |               | 1,462,083  |                      |   | 36,883                |  |                       |        |  |   | 1,498,966 
|                                      |  |               |            |                      |   |                       |  |                       |         |  |   |           
|Total                                 |  | $             | 44,432,476 |                      | $ | 276,453               |  | $                     | 173,919 |  | $ | 44,535,010
|                                      |  |               |            |                      |   |                       |  |                       |         |  |   |           
|Securities held to maturity:          |  |               |            |                      |   |                       |  |                       |         |  |   |           
|Mortgage-backed securities            |  | $             | 2,659,595  |                      | $ | 19,858                |  | $                     | 593     |  | $ | 2,678,860 
|                                      |  |               |            |                      |   |                       |  |                       |         |  |   |           
|Total                                 |  | $             | 2,659,595  |                      | $ | 19,858                |  | $                     | 593     |  | $ | 2,678,860 
|                                      |  |               |            |                      |   |                       |  |                       |         |  |   |           
|                                      | 
|                                      |  | 2003         
|                                      |  | AmortizedCost |            | GrossUnrealizedGains |   | GrossUnrealizedLosses |  | EstimatedMarket Value
|Securities available for sale:        |  |               |            |                      |   |                       |  |                       |         |  |   |           
|U.S. Government and agency securities |  | $             | 25,148,511 |                      | $ | 358,052               |  | $                     | -       |  | $ | 25,506,563
|Mortgage-backed securities            |  |               | 11,584,165 |                      |   | 201,541               |  |                       | 296,928 |  |   | 11,488,778
|Marketable equity securities          |  |               | 4,975,000  |                      |   | 74,625                |  |                       |        |  |   | 5,049,625 
|Corporate bonds                       |  |               | 1,473,237  |                      |   | 94,909                |  |                       |        |  |   | 1,568,146 
|                                      |  |               |            |                      |   |                       |  |                       |         |  |   |           
|Total                                 |  | $             | 43,180,913 |                      | $ | 729,127               |  | $                     | 296,928 |  | $ | 43,613,112
|                                      |  |               |            |                      |   |                       |  |                       |         |  |   |           
|Securities held to maturity:          |  |               |            |                      |   |                       |  |                       |         |  |   |           
|Mortgage-backed securities            |  | $             | 3,806,376  |                      | $ | 83,360                |  | $                     |        |  | $ | 3,889,736 
|                                      |  |               |            |                      |   |                       |  |                       |         |  |   |           
|Total                                 |  | $             | 3,806,376  |                      | $ | 83,360                |  | $                     |        |  | $ | 3,889,736 
|                                      |  |               |            |                      |   |                       |  |                       |         |  |   |           







34



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(2) | Securities (Continued)
|--- | ----------------------



The following table shows investments gross unrealized losses and fair value, aggregated by investment category and length of time that the
individual securities have been in a continuous unrealized loss position, at December 31, 2004.



|                                      |  |                     |           |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|------------------------------------- |  | ------------------- | --------- | ----------------- | - | ---------- |  | ---------------- | --------- | ---------- | - | ---------------- |  | - | ---------- |  | - | -------
|                                      |  | Less Than 12 Months |           | 12 Months or More |   | Total     
|                                      |  | Fair value          |           | Unrealizedlosses  |   | Fair value |  | Unrealizedlosses |           | Fair value |   | Unrealizedlosses
|Securities available for sale:        |  |                     |           |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|U.S. Government and agency securities |  | $                   | 5,481,851 |                   | $ | 18,688     |  | $                |          |            | $ |                 |  | $ | 5,481,851  |  | $ | 18,688 
|Mortgage-backed securities            |  |                     | 1,484,638 |                   |   | 486        |  |                  | 3,324,132 |            |   | 154,745          |  |   | 4,808,770  |  |   | 155,231
|                                      |  |                     |           |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|Total                                 |  |                     | 6,966,489 |                   |   | 19,174     |  |                  | 3,324,132 |            |   | 154,745          |  |   | 10,290,621 |  |   | 173,919
|Securities held to maturity:          |  |                     |           |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|Mortgage-backed securities            |  |                     | 2,432,619 |                   |   | 593        |  |                  |          |            |   |                 |  |   | 2,432,619  |  |   | 593    
|                                      |  |                     |           |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        
|Total temporarily impaired securities |  | $                   | 9,399,108 |                   | $ | 19,767     |  | $                | 3,324,132 |            | $ | 154,745          |  | $ | 12,723,240 |  | $ | 174,512
|                                      |  |                     |           |                   |   |            |  |                  |           |            |   |                  |  |   |            |  |   |        



At December 31, 2004,
temporarily impaired securities, 12 months or more, consist of one security. This security is an agency backed collateralized mortgage obligation and does not have a premium associated with it. Therefore, the Company believes the impairment relates
to the current interest rate environment and is not a permanent impairment. The remaining securities that have an unrealized loss have been impaired for less than 12 months, are agency backed and have a gross premium of $539. Therefore, the Company
believes these impairments are temporary and relate to the current interest rate environment. It is the Companys opinion that none of the impairments are permanent.



The following table shows the sole investment security with an unrealized loss, its fair value and the length of time that
the security has been in a continuous unrealized loss position, at December 31, 2003.



|                                      |  |                     |           |                   |   |           |  |                  |   |            |   |                  |  |   |           |  |   |        
|------------------------------------- |  | ------------------- | --------- | ----------------- | - | --------- |  | ---------------- | - | ---------- | - | ---------------- |  | - | --------- |  | - | -------
|                                      |  | Less Than 12 Months |           | 12 Months or More |   | Total    
|                                      |  | Fair value          |           | Unrealizedlosses  |   | Fairvalue |  | Unrealizedlosses |   | Fair value |   | Unrealizedlosses
|Securities available for sale:        |  |                     |           |                   |   |           |  |                  |   |            |   |                  |  |   |           |  |   |        
|Mortgage-backed securities            |  | $                   | 4,908,602 |                   | $ | 296,928   |  | $                |  |            | $ |                 |  | $ | 4,908,602 |  | $ | 296,928
|                                      |  |                     |           |                   |   |           |  |                  |   |            |   |                  |  |   |           |  |   |        
|Total temporarily impaired securities |  | $                   | 4,908,602 |                   | $ | 296,928   |  | $                |  |            | $ |                 |  | $ | 4,908,602 |  | $ | 296,928
|                                      |  |                     |           |                   |   |           |  |                  |   |            |   |                  |  |   |           |  |   |        



35



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(2) | Securities (Continued)
|--- | ----------------------



The maturities of securities at December 31, 2004 are summarized as follows:



|                               |  |               |            |                       |   |           
|------------------------------ |  | ------------- | ---------- | --------------------- | - | ----------
|                               |  | AmortizedCost |            | EstimatedMarket Value
|Held to maturity:              |  |               |            |                       |   |           
|Within 1 year                  |  | $             |           |                       | $ |          
|Mortgage-backed securities     |  |               | 2,659,595  |                       |   | 2,678,860 
|                               |  |               |            |                       |   |           
|                               |  | $             | 2,659,595  |                       | $ | 2,678,860 
|                               |  |               |            |                       |   |           
|Available for sale:            |  |               |            |                       |   |           
|Within 1 year                  |  | $             | 300,539    |                       | $ | 297,399   
|After 1 year through 5 years   |  |               | 21,621,143 |                       |   | 21,700,619
|After 5 years through 10 years |  |               | 9,995,944  |                       |   | 10,014,150
|Marketable equity securities   |  |               | 4,975,000  |                       |   | 5,001,865 
|Mortgage-backed securities     |  |               | 7,539,850  |                       |   | 7,520,977 
|                               |  |               |            |                       |   |           
|                               |  | $             | 44,432,476 |                       | $ | 44,535,010
|                               |  |               |            |                       |   |           



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



Sales of investment securities resulted in gross realized gains of $9,600, $50,663 and $135,182 in the years ended 2004, 2003 and 2002, respectively.



Investment securities having an aggregate carrying value of
$14,998,100 at December 31, 2004 were pledged to secure public funds on deposit. Investment securities having an aggregate carrying value of $496,251 at December 31, 2004 were pledged to secure repurchase agreements. Investment securities having an
aggregate carrying value of $1,498,967 at December 31, 2004 were pledged to secure the Treasury tax and loan account with the Federal Reserve Bank.



|(3) | Loans
|--- | -----



Loans at December 31, 2004 and 2003 are summarized as follows (in thousands):



|                                        |  |      |         |   |      |   |         |  
|--------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                        |  | 2004 |         |   | 2003 |  
|Real estate:                            |  |      |         |   |      |   |         |  
|Construction and land development       |  | $    | 63,938  |   |      | $ | 57,598  |  
|Mortgage:                               |  |      |         |   |      |   |         |  
|1-4 family residential                  |  |      | 227,474 |   |      |   | 206,476 |  
|Multi-family residential                |  |      | 14,534  |   |      |   | 13,357  |  
|Commercial                              |  |      | 108,626 |   |      |   | 91,627  |  
|Equity line                             |  |      | 18,440  |   |      |   | 16,006  |  
|Other                                   |  |      | 442     |   |      |   | 359     |  
|                                        |  |      |         |   |      |   |         |  
|Total real estate loans                 |  |      | 433,454 |   |      |   | 385,423 |  
|Commercial, industrial and agricultural |  |      | 15,164  |   |      |   | 14,599  |  
|Consumer                                |  |      | 6,816   |   |      |   | 6,200   |  
|                                        |  |      |         |   |      |   |         |  
|Total gross loans                       |  |      | 455,434 |   |      |   | 406,222 |  
|Unamortized net deferred fees           |  |      | (1,664  | ) |      |   | (1,402  | )
|                                        |  |      |         |   |      |   |         |  
|Loans                                   |  | $    | 453,770 |   |      | $ | 404,820 |  
|                                        |  |      |         |   |      |   |         |  



36



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(3) | Loans (Continued)
|--- | -----------------



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, 2004 (in thousands):



|                             |  |   |        |  
|---------------------------- |  | - | ------ | -
|Balance at beginning of year |  | $ | 9,224  |  
|New loans                    |  |   | 1,815  |  
|Repayments                   |  |   | (1,088 | )
|                             |  |   |        |  
|Balance at end of year       |  | $ | 9,951  |  
|                             |  |   |        |  



Activity in the
allowance for loan losses for the years ended December 31, 2004, 2003 and 2002 is summarized as follows (in thousands):



|                             |  |      |       |   |      |   |       |      |  |   |       |  
|---------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                             |  | 2004 |       |   | 2003 |   |       | 2002 | 
|Balance at beginning of year |  | $    | 3,447 |   |      | $ | 2,937 |      |  | $ | 2,523 |  
|Provision for loan losses    |  |      | 970   |   |      |   | 740   |      |  |   | 740   |  
|Loans charged-off            |  |      | (109  | ) |      |   | (237  | )    |  |   | (360  | )
|Recoveries                   |  |      | 45    |   |      |   | 7     |      |  |   | 34    |  
|                             |  |      |       |   |      |   |       |      |  |   |       |  
|Balance at end of year       |  | $    | 4,353 |   |      | $ | 3,447 |      |  | $ | 2,937 |  
|                             |  |      |       |   |      |   |       |      |  |   |       |  



The following is a
summary of nonperforming assets at December 31, 2004 and 2003 (in thousands):



|                                                   |  |      |     |      |   |    
|-------------------------------------------------- |  | ---- | --- | ---- | - | ---
|                                                   |  | 2004 |     | 2003
|Loans 90 days past due and still accruing interest |  | $    | 112 |      | $ | 147
|Nonaccrual loans                                   |  |      | 95  |      |   | 120
|                                                   |  |      |     |      |   |    
|Total                                              |  | $    | 207 |      | $ | 267
|                                                   |  |      |     |      |   |    



At December 31, 2004
and 2003, the recorded investment in loans considered impaired in accordance with SFAS No. 114 totaled $95,207 and $120,372, respectively, with no corresponding valuation allowances. For the years ended December 31, 2004 and 2003, the average
recorded investment in impaired loans was approximately $44,000 and $150,000, 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.







37



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(3) | Loans (Continued)
|--- | -----------------



The following table summarizes the Companys outstanding off-balance sheet commitments to extend credit at December 31, 2004 and 2003 (in thousands):



|                                                                                                                    |  |      |         |      |   |       
|------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- | ---- | - | ------
|                                                                                                                    |  | 2004 |         | 2003
|Undisbursed portion of home equity lines of credit collateralizedprimarily by junior liens on 1-4 family properties |  | $    | 25,903  |      | $ | 15,431
|Other commitments and credit lines                                                                                  |  |      | 19,070  |      |   | 15,275
|Undisbursed portion of construction loans                                                                           |  |      | 55,322  |      |   | 45,311
|Fixed-rate mortgage loan commitments                                                                                |  |      | 1,161   |      |   | 1,031 
|Adjustable-rate mortgage loan commitments                                                                           |  |      | 6,040   |      |   | 5,815 
|Available-for-sale mortgage loan commitments                                                                        |  |      | 3,762   |      |   | 2,954 
|                                                                                                                    |  |      |         |      |   |       
|Total                                                                                                               |  | $    | 111,258 |      | $ | 85,817
|                                                                                                                    |  |      |         |      |   |       



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
most of 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.



Loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage and other loans
serviced for others were approximately $44,003,000 and $44,851,000 at December 31, 2004 and 2003, respectively. The carrying value of capitalized servicing rights is included in other assets. Changes in mortgage servicing rights capitalized for the
years ended December 31, 2004 and 2003 are as follows:



|                                                            |  |      |         |      |   |        
|----------------------------------------------------------- |  | ---- | ------- | ---- | - | -------
|                                                            |  | 2004 |         | 2003
|Mortgage servicing rights, beginning of year                |  | $    | 201,562 |      | $ | 73,240 
|Mortgage servicing rights, capitalized                      |  |      | 64,498  |      |   | 162,064
|                                                            |  |      |         |      |   |        
|                                                            |  |      | 266,060 |      |   | 235,304
|Accumulated amortization                                    |  |      | 54,282  |      |   | 33,742 
|                                                            |  |      |         |      |   |        
|Mortgage servicing rights, end of year, net of amortization |  | $    | 211,778 |      | $ | 201,562
|                                                            |  |      |         |      |   |        



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.







38



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(4) | Premises and Equipment
|--- | ----------------------



Premises and equipment at December 31, 2004 and 2003 are summarized as follows (in thousands):



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | 2004 |        |   | 2003 |  
|Land                                           |  | $    | 2,386  |   |      | $ | 2,239  |  
|Buildings                                      |  |      | 6,685  |   |      |   | 6,486  |  
|Leasehold improvements                         |  |      | 1,083  |   |      |   | 1,058  |  
|Furniture and equipment                        |  |      | 7,981  |   |      |   | 7,523  |  
|                                               |  |      |        |   |      |   |        |  
|                                               |  |      | 18,135 |   |      |   | 17,306 |  
|Less accumulated depreciation and amortization |  |      | (9,538 | ) |      |   | (8,640 | )
|                                               |  |      |        |   |      |   |        |  
|Premises and equipment, net                    |  | $    | 8,597  |   |      | $ | 8,666  |  
|                                               |  |      |        |   |      |   |        |  



(5) Deposits



Deposits at December 31, 2004 and 2003 are summarized as follows (in
thousands):



|                              |  |      |         |      |   |        
|----------------------------- |  | ---- | ------- | ---- | - | -------
|                              |  | 2004 |         | 2003
|Demand                        |  | $    | 32,560  |      | $ | 26,711 
|Checking with interest        |  |      | 28,356  |      |   | 25,918 
|Money market accounts         |  |      | 33,399  |      |   | 26,630 
|Savings                       |  |      | 22,404  |      |   | 21,417 
|Time deposits of $100 or more |  |      | 118,572 |      |   | 91,834 
|Other time deposits           |  |      | 179,467 |      |   | 174,692
|                              |  |      |         |      |   |        
|Total                         |  | $    | 414,758 |      | $ | 367,202
|                              |  |      |         |      |   |        



At December 31, 2004,
the scheduled maturities of time deposits were (in thousands):



|                    |  |   |        
|------------------- |  | - | -------
|2005                |  | $ | 214,795
|2006                |  |   | 69,618 
|2007                |  |   | 13,606 
|2008                |  |   |       
|2009                |  |   |       
|Thereafter          |  |   | 20     
|                    |  |   |        
|Total time deposits |  | $ | 298,039
|                    |  |   |        







39



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(6) | Borrowed Funds
|--- | --------------



Borrowed funds consist of short-term borrowings and long-term obligations. The corresponding weighted average rates (WAR) at December 31, 2004 and 2003
are summarized as follows:



|                                              |  |      |            |     |      |   |      |   |            |  |      |  
|--------------------------------------------- |  | ---- | ---------- | --- | ---- | - | ---- | - | ---------- |  | ---- | -
|                                              |  | 2004 |            | WAR |      |   | 2003 |   | WAR        | 
|Advances from FHLB                            |  | $    | 78,000,000 |     | 3.21 | % |      | $ | 83,000,000 |  | 3.06 | %
|Affordable Housing Program advances from FHLB |  |      | 82,676     |     | 3.50 | % |      |   | 87,770     |  | 3.50 | %
|Advances for loans held for sale              |  |      | 7,178,395  |     | 4.65 | % |      |   | 6,251,087  |  | 3.86 | %
|Repurchase agreements                         |  |      | 164,483    |     | 1.77 | % |      |   | 165,698    |  | 0.37 | %
|                                              |  |      |            |     |      |   |      |   |            |  |      |  
|Total                                         |  | $    | 85,425,554 |     |      |   |      | $ | 89,504,555 |  |      |  
|                                              |  |      |            |     |      |   |      |   |            |  |      |  



Pursuant to a
collateral agreement with the FHLB, advances are collateralized by all the Companys FHLB stock and qualifying first mortgage loans. The balance of qualifying first mortgage loans as of December 31, 2004 was approximately $143,271,000. 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 $93 million, $83 million and $83 million during the years ended December 31, 2004, 2003 and 2002, respectively. Annual
principal maturities of Federal Home Loan Bank advances for the years subsequent to December 31, 2004 are as follows (in thousands):



|     |  |  |        
|---- |  |  | -------
|2005 |  |  | $25,000
|2006 |  |  | 15,000 
|2007 |  |  | 5,000  
|2008 |  |  | 5,000  
|2010 |  |  | 10,000 
|2011 |  |  | 13,000 
|2014 |  |  | 5,000  
|     |  |  |        
|     |  |  | $78,000
|     |  |  |        



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 3.50% and mature at various times between November 2015 and
January 2016.



Lumina borrows money on a short-term basis
principally from another financial institution to fund its loans that are held for sale. The balance of this borrowing was $7.2 million and $6.3 million at December 31, 2004 and 2003, respectively. Borrowings for loans that were funded from this
line of credit were at a rate of 4.65%. This borrowing is collateralized by mortgage loans held for sale. When a loan is sold, the proceeds are used to repay the borrowing. Loans are usually sold within 60 days. This borrowing agreement provides for
a maximum line of credit up to $10 million.



Cooperative
enters into agreements with customers to transfer excess funds in a demand account into a repurchase agreement. Under the repurchase agreement, the Bank sells the customer an interest in securities that are direct obligations of the United States
Government. The customers interest in the underlying security shall be repurchased by the Bank at the opening of the next banking day. The rate fluctuates weekly and is tiered, with the highest rate being .50% below the 90-day Treasury Bill.



40



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(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, 2004, 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. Consequently, the information concerning capital ratios is essentially the same for the Company and the Bank.



As of December 31, 2004 and 2003, 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:



|                                  |  |      |         |   |      |   |         |                                                  |  |       |      |  |       |  
|--------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ------------------------------------------------ |  | ----- | ---- |  | ----- | -
|                                  |  |      |         |   |      |   |         | Minimum Ratio to MaintainWell-Capitalized Status | 
|                                  |  | 2004 |         |   | 2003 |   |         | 2004                                             |  |       | 2003 | 
|Risk-based capital:               |  |      |         |   |      |   |         |                                                  |  |       |      |  |       |  
|Tier I capital                    |  | $    | 45,524  |   |      | $ | 41,486  |                                                  |  |       |      |  |       |  
|Total capital                     |  |      | 49,877  |   |      |   | 44,933  |                                                  |  |       |      |  |       |  
|Risk-adjusted assets              |  |      | 415,498 |   |      |   | 370,895 |                                                  |  |       |      |  |       |  
|Quarterly average tangible assets |  |      | 539,256 |   |      |   | 493,548 |                                                  |  |       |      |  |       |  
|                                  |  |      |         |  
|Tier I capital ratio              |  |      | 10.96   | % |      |   | 11.19   | %                                                |  | 6.00  | %    |  | 6.00  | %
|Total capital ratio               |  |      | 12.00   | % |      |   | 12.11   | %                                                |  | 10.00 | %    |  | 10.00 | %
|Leverage capital ratio            |  |      | 8.44    | % |      |   | 8.41    | %                                                |  | 5.00  | %    |  | 5.00  | %



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 $1,751,792 at December 31, 2004.



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 Office of the Commissioner of Banks.



|(8) | Benefit Plans
|--- | -------------



The Bank 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 five years of employment.



41



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(8) | Benefit Plans (Continued)
|--- | -------------------------



Under the multi-employer plan, the Bank 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 $446,534, $366,814 and $164,618 for the years 2004, 2003 and 2002, respectively.



The Bank maintains a Supplemental Retirement 401(k) Plan (the 401(k)). Employees are able to contribute up to 15% of their eligible annual compensation to
the 401(k) subject to Internal Revenue Service limitations. The Bank 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 2004, 2003 and 2002.



The compensation expense incurred by
the Bank for the 401(k) was $122,548, $105,027, and $90,098 for the years ended December 31, 2004, 2003 and 2002, respectively.



Lumina also maintains a 401(k) plan for its employees. Participants are able to contribute up to 20% of their eligible annual compensation to this plan
subject to Internal Revenue Service limitations. The Company does not match employee contributions.



In 2002, the Bank implemented a non-qualifying deferred compensation plan for certain key executive officers. The Bank has purchased life insurance
policies on the participating officers in order to provide future funding of benefit payments. Benefits for each officer participating in the plan will accrue and vest during the period of employment, and will be paid in monthly benefit payments
over the participants life after retirement. The plan also provides for payment of disability or death benefits in the event a participating officer becomes permanently disabled or dies prior to attainment of retirement age. If the Bank has a
change in control before the officer reaches age 65, the participating officer will be entitled to a benefit. Provisions of $0, $228,445 and $96,910 were expensed for future benefits to be provided under this plan for the years ended December 31,
2004, 2003 and 2002, respectively. The total liability under this plan was $351,787 at December 31, 2004 and 2003 and is included in accrued expenses and other liabilities in the accompanying consolidated statements of financial condition.



The Bank has entered into Director Retirement Agreements with
each of its non-employee directors. Each Agreement provides for a benefit of $19,200 annually for a period of ten years from retirement on or after reaching the normal retirement age of 72. The Director Retirement Agreements provide for a reduced
lump sum payment in the event of termination, including a change of control, with the amount varying depending on the reason for the termination. In order to fund the benefits payable under the Director Retirement Agreements, the Bank has purchased
life insurance policies on each director. The policies are designed to offset the programs costs during the lifetime of the participant and to provide complete recovery of all the programs costs at their death. Expenses related to these
agreements were $49,710, $45,741 and $42,600 for the years ended 2004, 2003 and 2002, respectively. The total liability under these agreements was $148,300 and $98,590 at December 31, 2004 and 2003, respectively.



The Company and Bank have each entered into separate Director Deferred Fee
Agreements with each non-employee director. Interest on the amount deferred is credited at a rate of 10%. Commencing one month after retirement at or after age 72, each director will be entitled to receive the balance in his deferral account in 120
monthly installments. Under these agreements, in the event of a change in control, each director will be entitled to receive, in lump sum payments, the greater of his deferral account balances or $169,748 under his agreement with the Bank and
$77,158 under his agreement with the Company. The expense incurred by the Company and Bank for these agreements was $170,952, $156,311 and $140,784 for the years ended December 31, 2004, 2003 and 2002, respectively. The total liability under these
agreements was $468,047 and $297,095 at December 31, 2004 and 2003, respectively.



42



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(9) | Earnings Per Share
|--- | ------------------



On January 19, 2005, the Company declared a 3-for-2 stock split in the form of a 50% stock dividend. This split increased the number of common shares
outstanding to 4,291,115. All references to per share results and weighted average common and common equivalent shares outstanding have been adjusted to reflect the effects of the stock split.



The following table provides a reconciliation of income available to common
stockholders and the average number of shares outstanding for the years ended December 31, 2004, 2003 and 2002:



|                                     |  |      |           |      |   |           |  |   |          
|------------------------------------ |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                     |  | 2004 |           | 2003 |   | 2002     
|Net income (numerator)               |  | $    | 4,681,175 |      | $ | 5,404,226 |  | $ | 4,944,497
|                                     |  |      |           |      |   |           |  |   |          
|Shares for basic EPS (denominator)   |  |      | 4,289,187 |      |   | 4,271,351 |  |   | 4,253,568
|Dilutive effect of stock options     |  |      | 77,291    |      |   | 77,010    |  |   | 34,953   
|                                     |  |      |           |      |   |           |  |   |          
|Shares for diluted EPS (denominator) |  |      | 4,366,478 |      |   | 4,348,361 |  |   | 4,288,521
|                                     |  |      |           |      |   |           |  |   |          



As of December 31,
2004, 2003 and 2002, there were 73,800, 0, and 21,306, respectively, options outstanding, after giving effect of the stock split, that were antidilutive since the exercise price exceeds the average market price for the year. These options have been
omitted from the calculations of the dilutive effect of stock options.



|(10) | Income Taxes
|---- | ------------



Income tax expense consists of the following components for the years ended December 31, 2004, 2003 and 2002:



|                                |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Current tax expense:            |  |      |           |   |      |   |           |      |  |   |           |  
|Federal                         |  | $    | 2,621,041 |   |      | $ | 2,664,960 |      |  | $ | 2,379,444 |  
|State                           |  |      | 108,119   |   |      |   | 113,308   |      |  |   | 426,616   |  
|                                |  |      |           |   |      |   |           |      |  |   |           |  
|Total current tax expense       |  |      | 2,729,160 |   |      |   | 2,778,268 |      |  |   | 2,806,060 |  
|                                |  |      |           |   |      |   |           |      |  |   |           |  
|Deferred tax expense (benefit): |  |      |           |   |      |   |           |      |  |   |           |  
|Federal                         |  |      | (387,764  | ) |      |   | (191,112  | )    |  |   | (113,579  | )
|State                           |  |      | 2,908     |   |      |   | 2,963     |      |  |   | 109,589   |  
|                                |  |      |           |   |      |   |           |      |  |   |           |  
|Total deferred tax benefit      |  |      | (384,856  | ) |      |   | (188,149  | )    |  |   | (3,990    | )
|                                |  |      |           |   |      |   |           |      |  |   |           |  
|Total tax expense               |  | $    | 2,344,304 |   |      | $ | 2,590,119 |      |  | $ | 2,802,070 |  
|                                |  |      |           |   |      |   |           |      |  |   |           |  



43



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(10) | Income Taxes (Continued)
|---- | ------------------------



The components of the net deferred tax asset at December 31, 2004 and 2003 are as follows:



|                                                 |  |      |           |   |      |   |           |  
|------------------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | -
|                                                 |  | 2004 |           |   | 2003 |  
|Deferred tax assets:                             |  |      |           |   |      |   |           |  
|Allowance for loan losses                        |  | $    | 1,678,169 |   |      | $ | 1,328,819 |  
|Deferred compensation                            |  |      | 386,214   |   |      |   | 326,814   |  
|Other                                            |  |      | 817       |   |      |   | 3,587     |  
|                                                 |  |      |           |   |      |   |           |  
|Total gross deferred tax assets                  |  |      | 2,065,200 |   |      |   | 1,659,220 |  
|                                                 |  |     
|Valuation allowance                              |  |      | (168,023  | ) |      |   | (113,223  | )
|                                                 |  |      |           |   |      |   |           |  
|Total net deferred tax assets                    |  |      | 1,897,177 |   |      |   | 1,545,997 |  
|                                                 |  |      |           |   |      |   |           |  
|Deferred tax liabilities:                        |  |      |           |   |      |   |           |  
|Deferred loan fees                               |  |      | (56,997   | ) |      |   | (77,573   | )
|FHLB stock                                       |  |      | (37,796   | ) |      |   | (99,259   | )
|Premises and equipment                           |  |      | (550,230  | ) |      |   | (530,853  | )
|Unrealized gain on securities available for sale |  |      | (34,862   | ) |      |   | (146,948  | )
|Goodwill                                         |  |      | (62,886   | ) |      |   | (33,901   | )
|                                                 |  |      |           |   |      |   |           |  
|Total gross deferred tax liabilities             |  |      | (742,771  | ) |      |   | (888,534  | )
|                                                 |  |      |           |   |      |   |           |  
|Net deferred tax asset                           |  | $    | 1,154,406 |   |      | $ | 657,463   |  
|                                                 |  |      |           |   |      |   |           |  



The Company has
established a valuation allowance at December 31, 2004 because management has determined that it is more likely than not that some of the deferred tax assets will not be realized. For the year ended December 31, 2004, the valuation allowance
increased $54,800.



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, 2004, 2003 and 2002 are as follows:



|                                                      |  |      |           |   |      |   |           |      |  |   |           |  
|----------------------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                      |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Income taxes at federal tax rate                      |  | $    | 2,388,663 |   |      | $ | 2,718,077 |      |  | $ | 2,633,833 |  
|Increase (decrease) resulting from:                   |  |      |           |   |      |   |           |      |  |   |           |  
|State income taxes, net of federal income tax benefit |  |      | 73,278    |   |      |   | 76,739    |      |  |   | 353,895   |  
|Cash surrender value of bank owned life insurance     |  |      | (107,908  | ) |      |   | (125,799  | )    |  |   | (135,500  | )
|Tax exempt securities                                 |  |      | (72,701   | ) |      |   | (72,701   | )    |  |   | (72,701   | )
|Other                                                 |  |      | 62,972    |   |      |   | (6,197    | )    |  |   | 22,543    |  
|                                                      |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                                 |  | $    | 2,344,304 |   |      | $ | 2,590,119 |      |  | $ | 2,802,070 |  
|                                                      |  |      |           |   |      |   |           |      |  |   |           |  



Retained earnings at
December 31, 2004 and 2003 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.



44



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(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, 2004, 2003 and 2002, and changes during the years then ended is presented below after giving retroactive effect to stock dividends and splits including the 3-for-2 stock split in the form of a 50% stock dividend announced on January 19,
2005:



|                                       |  |         |   |      |                            |       |        |         |   |                            |   |        |  |         |                               |  |   |     
|-------------------------------------- |  | ------- | - | ---- | -------------------------- | ----- | ------ | ------- | - | -------------------------- | - | ------ |  | ------- | ----------------------------- |  | - | ----
|                                       |  | 2004    |   | 2003 |                            | 2002 
|                                       |  | Number  |   |      | Weightedaverageoptionprice |       | Number |         |   | Weightedaverageoptionprice |   | Number |  |         | Weighted average option price
|Options outstanding, beginning of year |  | 192,665 |   |      | $                          | 7.34  |        | 212,915 |   |                            | $ | 7.52   |  | 176,915 |                               |  | $ | 7.58
|Granted                                |  | 73,800  |   |      |                            | 17.99 |        |        |   |                            |   |       |  | 38,250  |                               |  |   | 7.23
|Exercised                              |  | (21,000 | ) |      |                            | 5.65  |        | (20,250 | ) |                            |   | 9.24   |  | (750    | )                             |  |   | 7.23
|Forfeited                              |  |        |   |      |                            |      |        |        |   |                            |   |       |  | (1,500  | )                             |  |   | 7.33
|                                       |  |         |   |      |                            |       |        |         |   |                            |   |        |  |         |                               |  |   |     
|Options outstanding, end of year       |  | 245,465 |   |      | $                          | 10.69 |        | 192,665 |   |                            | $ | 7.34   |  | 212,915 |                               |  | $ | 7.52
|                                       |  |         |   |      |                            |       |        |         |   |                            |   |        |  |         |                               |  |   |     



The following table
summarizes additional information about the Option Plan at December 31, 2004:



|               |  |                    |  |                            |  |                   
|-------------- |  | ------------------ |  | -------------------------- |  | ------------------
|Exercise Price |  | Number Outstanding |  | Remaining Contractual Life |  | Number Exercisable
|$7.00          |  | 8,136              |  | 2.25 years                 |  | 8,136             
|7.23           |  | 30,750             |  | 7.00 years                 |  | 30,750            
|7.29           |  | 13,500             |  | 4.70 years                 |  | 13,500            
|7.33           |  | 13,223             |  | 5.00 years                 |  | 13,223            
|7.37           |  | 87,750             |  | 4.50 years                 |  | 87,750            
|7.67           |  | 12,000             |  | 7.00 years                 |  | 12,000            
|13.00          |  | 6,306              |  | 3.00 years                 |  | 6,306             
|17.80          |  | 6,000              |  | 9.10 years                 |  | 6,000             
|18.00          |  | 21,750             |  | 10.00 years                |  | 21,750            
|18.00          |  | 46,050             |  | 10.00 years                |  | 46,050            
|               |  |                    |  |                            |  |                   
|               |  | 245,465            |  | 6.50 years                 |  | 245,465           
|               |  |                    |  |                            |  |                   







45



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(12) | Parent Company Financial Information
|---- | ------------------------------------



Condensed financial information of Cooperative Bankshares, Inc., the parent company, at December 31, 2004 and 2003 and for the years ended December 31,
2004, 2003 and 2002 is presented below:



Condensed Statements
of Financial Condition



|                                      |  |      |            |      |   |           
|------------------------------------- |  | ---- | ---------- | ---- | - | ----------
|                                      |  | 2004 |            | 2003
|Assets:                               |  |      |            |      |   |           
|Cash                                  |  | $    | 1,953      |      | $ | 2,433     
|Equity investment in subsidiary       |  |      | 47,054,093 |      |   | 43,233,958
|Other assets                          |  |      | 200,254    |      |   | 142,472   
|                                      |  |      |            |      |   |           
|                                      |  | $    | 47,256,300 |      | $ | 43,378,863
|                                      |  |      |            |      |   |           
|Liabilities and stockholders equity: |  |      |            |      |   |           
|Other liabilities                     |  | $    | 346,599    |      | $ | 235,465   
|Stockholders equity                  |  |      | 46,909,701 |      |   | 43,143,398
|                                      |  |      |            |      |   |           
|                                      |  | $    | 47,256,300 |      | $ | 43,378,863
|                                      |  |      |            |      |   |           



Condensed Statements
of Operations



|                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|------------------------------------------------ |  | ---- | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                 |  | 2004 |            |   | 2003 |   |            | 2002 | 
|Dividends from subsidiary                        |  | $    | 722,293    |   |      | $ | 397,649    |      |  | $ | 575,739    |  
|Equity in undistributed net income of subsidiary |  |      | 4,037,714  |   |      |   | 5,069,903  |      |  |   | 4,426,679  |  
|Miscellaneous expenses                           |  |      | (78,832    | ) |      |   | (63,326    | )    |  |   | (57,921    | )
|                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|                                                 |  | $    | 4,681,175  |   |      | $ | 5,404,226  |      |  | $ | 4,944,497  |  
|                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|                                                
|Condensed Statements of Cash Flows               | 
|                                                 |  | 2004 |            |   | 2003 |   |            | 2002 | 
|Operating activities:                            |  |      |            |   |      |   |            |      |  |   |            |  
|Net income                                       |  | $    | 4,681,175  |   |      | $ | 5,404,226  |      |  | $ | 4,944,497  |  
|Equity in undistributed net income of subsidiary |  |      | (4,037,714 | ) |      |   | (5,069,903 | )    |  |   | (4,426,680 | )
|Change in other assets                           |  |      | (57,781    | ) |      |   | (675       | )    |  |   | (25        | )
|Change in other liabilities                      |  |      | 111,133    |   |      |   | 49,521     |      |  |   | 44,106     |  
|                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash provided by operating activities        |  |      | 696,813    |   |      |   | 383,169    |      |  |   | 561,898    |  
|                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Financing activities:                            |  |      |            |   |      |   |            |      |  |   |            |  
|Proceeds from issuance of common stock, net      |  |      | 46,506     |   |      |   | 187,090    |      |  |   | 5,425      |  
|Cash dividends paid                              |  |      | (743,799   | ) |      |   | (569,739   | )    |  |   | (567,163   | )
|                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Net cash used in financing activities            |  |      | (697,293   | ) |      |   | (382,649   | )    |  |   | (561,738   | )
|                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Increase (decrease) in cash and cash equivalents |  |      | (480       | ) |      |   | 520        |      |  |   | 160        |  
|Cash and cash equivalents, beginning of year     |  |      | 2,433      |   |      |   | 1,913      |      |  |   | 1,753      |  
|                                                 |  |      |            |   |      |   |            |      |  |   |            |  
|Cash and cash equivalents, end of year           |  | $    | 1,953      |   |      | $ | 2,433      |      |  | $ | 1,913      |  
|                                                 |  |      |            |   |      |   |            |      |  |   |            |  



46



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(13) | Acquisition
|---- | -----------



On May 31, 2002, the Bank acquired the operating assets of Wilmington-based Lumina Mortgage Company. The combined resources of these two companies enable
the Bank to offer a wider range of products to a larger customer base. Lumina has offices in Wilmington, North Carolina, North Myrtle Beach, South Carolina and Virginia Beach, Virginia. Their 2001 loan originations totaled $118 million. The purchase
price was $740,061 in cash with two future contingent payments based on loan origination volume and meeting certain profitability goals of Lumina in the two subsequent years after the purchase. The agreement was subsequently amended to change the
contingent payments into two payments of $400,000 each payable on July 31, 2003 and 2004. These payments are considered additional purchase price and, accordingly, goodwill related to this acquisition was increased by $800,000.



|                                       |  |   |          
|-------------------------------------- |  | - | ---------
|Goodwill at December 31, 2002          |  | $ | 661,543  
|Additions to goodwill                  |  |   | 800,000  
|                                       |  |   |          
|Goodwill at December 31, 2004 and 2003 |  | $ | 1,461,543
|                                       |  |   |          



The following table
summarizes the estimated fair value of assets acquired and liabilities assumed at May 31, 2002, excluding $33,127 of professional fees that were included in goodwill as part of this transaction:



|                                       |  |   |        
|-------------------------------------- |  | - | -------
|Property and equipment                 |  | $ | 71,584 
|Goodwill                               |  |   | 628,416
|Other assets                           |  |   | 51,729 
|                                       |  |   |        
|Total assets acquired                  |  |   | 751,729
|                                       |  |   |        
|Accrued expenses and other liabilities |  |   | 11,668 
|                                       |  |   |        
|Total liabilities assumed              |  |   | 11,668 
|                                       |  |   |        
|Net assets acquired                    |  | $ | 740,061
|                                       |  |   |        



Presented below are
the unaudited proforma consolidated condensed statement of operations for the Company and Lumina Mortgage Company, for the year ended December 31, 2002, assuming the acquisition was completed at the beginning of the period presented. The unaudited
proforma information presented below is not necessarily indicative of the results of operations that would have resulted had the merger been completed at the beginning of the applicable period presented, nor is it necessarily indicative of the
results of operations in future periods.



|                                                    |  |            |           
|--------------------------------------------------- |  | ---------- | ----------
|                                                    |  | Year Ended
|                                                    |  | 2002      
|Interest income                                     |  | $          | 29,648,777
|Interest expense                                    |  |            | 13,973,200
|                                                    |  |            |           
|Net interest income                                 |  |            | 15,675,577
|Provision for loan losses                           |  |            | 740,000   
|                                                    |  |            |           
|Net interest income after provision for loan losses |  |            | 14,935,577
|                                                    |  |            |           
|Noninterest income                                  |  |            | 6,167,688 
|Noninterest expense                                 |  |            | 13,235,876
|                                                    |  |            |           
|Income before income taxes                          |  |            | 7,867,389 
|Income tax expense                                  |  |            | 2,849,191 
|                                                    |  |            |           
|Net income                                          |  | $          | 5,018,198 
|                                                    |  |            |           
|Net income per share:                               |  |            |           
|Basic                                               |  | $          | 1.18      
|Diluted                                             |  |            | 1.17      



47



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



(14) Fair Value of Financial Instruments



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



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



Cash and Cash Equivalents



The carrying amount is a reasonable estimate of fair value.



Securities



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 Held for Sale



The carrying amount is a reasonable estimate of fair value since they will
be sold in a short period.



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 short-term loans and 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.



Off-Balance Sheet Financial Instruments



The fair value of off-balance sheet financial instruments is considered immaterial. As discussed in Note 3, these off-balance sheet financial instruments
are commitments to extend credit and are either short term in nature or subject to immediate repricing.



48



---

COOPERATIVE BANKSHARES, INC. AND SUBSIDIARY



Notes to Consolidated Financial Statements



December 31, 2004, 2003 and 2002



|(14) | Fair Value of Financial Instruments (Continued)
|---- | -----------------------------------------------



The carrying amounts and estimated fair values of the Companys financial instruments at December 31, 2004 and 2003 are as follows (in thousands):



|                            |  |                |         |                     |   |                |  |                     |         |  |   |        
|--------------------------- |  | -------------- | ------- | ------------------- | - | -------------- |  | ------------------- | ------- |  | - | -------
|                            |  | 2004           |         | 2003               
|                            |  | CarryingAmount |         | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|Financial assets:           |  |                |         |                     |   |                |  |                     |         |  |   |        
|Cash and cash equivalents   |  | $              | 16,393  |                     | $ | 16,393         |  | $                   | 18,393  |  | $ | 18,393 
|Securities:                 |  |                |         |                     |   |                |  |                     |         |  |   |        
|Available for sale          |  |                | 44,535  |                     |   | 44,535         |  |                     | 43,613  |  |   | 43,613 
|Held to maturity            |  |                | 2,660   |                     |   | 2,679          |  |                     | 3,806   |  |   | 3,890  
|Loans held for sale         |  |                | 7,239   |                     |   | 7,239          |  |                     | 6,375   |  |   | 6,375  
|Loans, net                  |  |                | 449,417 |                     |   | 446,466        |  |                     | 401,373 |  |   | 407,207
|FHLB stock                  |  |                | 4,519   |                     |   | 4,519          |  |                     | 4,154   |  |   | 4,154  
|Accrued interest receivable |  |                | 2,085   |                     |   | 2,085          |  |                     | 1,852   |  |   | 1,852  
|Financial liabilities:      |  |                |         |                     |   |                |  |                     |         |  |   |        
|Deposits                    |  |                | 414,758 |                     |   | 413,838        |  |                     | 367,202 |  |   | 367,806
|Borrowed funds              |  |                | 85,426  |                     |   | 84,855         |  |                     | 89,505  |  |   | 89,468 
|Accrued interest payable    |  |                | 191     |                     |   | 191            |  |                     | 180     |  |   | 180    



|(15) | Asset Sale
|---- | ----------



During December 2003, the Company sold the Ogden branch for $800,000. A gain of $121,147 was deferred because the Company is now leasing this property and
another property, under operating leases, from the purchaser of the Ogden branch. This gain will be recognized as a reduction of rental expense over the lives of these leases.



During February 2002, the Company sold a parking lot for $500,000. A gain of $464,977 was realized on the sale.



|(16) | Leases
|---- | ------



The Company has several noncancelable operating leases, primarily for office space, that expire over the next twenty years. These leases generally contain
renewal options for periods ranging from two to five years and require the Company to pay all executory costs such as maintenance and insurance. Rental expense for operating leases was approximately $544,000, $312,000 and $200,000 during 2004, 2003
and 2002, respectively.



Future minimum lease payments under
noncancelable operating leases as of December 31, 2004 are (in thousands):



|                             |  |   |      
|---------------------------- |  | - | -----
|Year ending December 31:     |  |  
|2005                         |  | $ | 568  
|2006                         |  |   | 476  
|2007                         |  |   | 423  
|2008                         |  |   | 409  
|2009                         |  |   | 425  
|After 2009                   |  |   | 5,910
|                             |  |   |      
|Total minimum lease payments |  | $ | 8,211
|                             |  |   |      



49



---

|                                   |  |                                                                                                                                                                                       
|---------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                   | 
|Cooperative Bank Locations         |  | Special Counsel                                                                                                                                                                       
|Beaufort                           |  | Muldon Murphy & Aguggia LLP                                                                                                                                                           
|Belhaven                           |  | Attorneys at Law                                                                                                                                                                      
|Elizabethtown                      |  | 5101 Wisconsin Avenue, N.W.                                                                                                                                                           
|Jacksonville (2)                   |  | Washington, DC 20016                                                                                                                                                                  
|Kill Devil Hills                   |  |                                                                                                                                                                                       
|Morehead City (2)                  |  | Annual Meeting                                                                                                                                                                        
|Southport                          |  | The Annual Meeting of Stockholders of
Cooperative Bankshares, Inc. will be held: Hilton Wilmington Riverside 301 North Water Street, Wilmington, NC 28401 April 29, 2005 at 11:00 a.m.
|Tabor City                         | 
|Wallace                            | 
|Washington (2)                     | 
|Whiteville                         | 
|Wilmington (6)                     | 
|Corolla (Loan Production Office)   |  | Independent Auditors Dixon Hughes
PLLC Post Office Box 70 Sanford, North Carolina 27331-0070                                                                                          
|Lumina Mortgage Company Locations  | 
|Wilmington, NC                     | 
|North Myrtle Beach, SC             | 
|Virginia Beach, VA                 |  | Form 10-K Copies of Form 10-K may be obtained without charge by writing to: Linda B. Garland at the Corporate Headquarters address or visit the company website at
www.coop-bank.com. 
|Corporate Headquarters             | 
|Cooperative Bankshares, Inc.       | 
|201 Market Street                  | 
|P.O. Box 600                       | 
|Wilmington, North Carolina 28402   |  | Additional Information For additional
information, please contact Linda B. Garland or Todd Sammons at (910) 343-0181.                                                                 
|(910) 343-0181                     | 
|www.coop-bank.com                  | 
|                                   | 
|Transfer Agent                     |  | Annual Disclosure Statement This
information has not been reviewed or confirmed for accuracy or relevancy by Federal Deposit Insurance Corporation (FDIC).                           
|First Citizens Bank                | 
|Corporate Trust Department, DAC61  | 
|P.O. Box 29522                     | 
|Raleigh, North Carolina 27626-0522 |  |                                                                                                                                                                                       



Capital Stock

Cooperative Bankshares, Inc. stock is traded on the NASDAQ National Market under the symbol COOP. As of December 31, 2004, there were 4,291,115 shares held by
525 stockholders of record. On February 24, 2005, the Company paid a 3-for-2 stock split in the form of a 50% stock dividend. All references to per share results and shares outstanding have been adjusted to reflect the effects of this stock split. A
$0.03 per share dividend was declared for four quarters in 2003. During 2004, $0.03 was paid in the first quarter and $0.05 for the three remaining quarters. Stock performance for 2004 and 2003 is given reflecting the effects of a 3-for-2 stock
split in the form of a 50% stock dividend in the table below.



Quarterly
Common Stock Data



|               |  |        |  |        |  |        |  |       
|-------------- |  | ------ |  | ------ |  | ------ |  | ------
|               |  | 2004   |  | 2003  
|Quarters Ended |  | High   |  | Low    |  | High   |  | Low   
|December       |  | 18.667 |  | 16.067 |  | 17.600 |  | 14.900
|September      |  | 16.333 |  | 14.467 |  | 18.507 |  | 12.667
|June           |  | 17.500 |  | 14.773 |  | 13.500 |  | 12.313
|March          |  | 18.607 |  | 16.800 |  | 13.100 |  | 10.633



50



---

|                                                                                                                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                              | 
|Board of Directors  Cooperative Bankshares, Inc. Cooperative Bank  Frederick Willetts, III Chairman, President & Chief Executive Officer  Paul G. Burton President, Burton Steel Company  Russell M. Carter President, Atlantic Corporation  F. Peter Fensel, Jr. President, F. P.
Fensel Supply Company  James D. Hundley, M.D. President, Wilmington Orthopaedic Group P.A.                                |  | H. T. King, III President, Hanover Iron Works, Inc.  R. Allen Rippy Vice President, Rippy Automotive Company  O.
Richard Wright, Jr. Attorney, McGougan, Wright, Worley, Harper & Bullard                                                                                                                                    
|                                                                                                                                                                                                                                                                                                                                                                                                              | 
|Officers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, CPA Senior Vice President-Chief Financial Officer  Sandra B. Carr Vice President-Retail Banking Operations  George B. Church Vice
President-Business Banking |  | Linda B. Garland Vice President-Marketing/Corporate Secretary  Raymond A. Martin Vice President-Information Services  Donna H. Mitchell Vice
President-Mortgage Operations  John P. Payne,
CPA General Auditor  Susie K. Register Vice
President-Mortgage Servicing/Processing  Dare C.
Rhodes  Vice President-Human Resource
|                                                                                                                                                                                                                                                                                                                                                                                                              | 
|OfficersLumina Mortgage Company  Frederick Willetts, III President  Dickson B. Bridger Vice President/Secretary  O.C. Burrell, Jr. Vice
President  Todd L. Sammons, CPA Treasurer                                                                                                                                                                                                                            |  | Deborah Spinella Vice President  Joyce Barley Vice President  Teresa Leatherwood Assistant Secretary                                                                                                                                                                                                                         



51