SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


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


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

For the Fiscal Year Ended December 31, 2001

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

For the Transition Period from _________________ to ________________

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

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

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

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

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

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

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

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

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

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

As of February 27, 2002, the aggregate  market value of the voting stock held by
non-affiliates  of the  registrant,  based  on the  closing  sales  price of the
registrant's  common stock as quoted on the NASDAQ Stock Market was  $27,897,607
(2,317,077  shares at $12.04  per  share).  For  purposes  of this  calculation,
directors,  executive  officers  and  beneficial  owners of more than 10% of the
registrant's outstanding voting stock are treated as affiliates.

As of March 22, 2002, there were issued and outstanding  2,835,447 shares of the
registrant's common stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of Annual  Report  to  Stockholders  for the  Fiscal  Year  Ended
     December 31, 2001. (Parts I and II)

2.   Portions of Proxy  Statement for the 2002 Annual  Meeting of  Stockholders.
     (Part III)

<PAGE>

                                     PART I

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

GENERAL

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

     COOPERATIVE BANK.  Chartered in 1898, the Bank's headquarters is located in
Wilmington, North Carolina. Cooperative operates 17 financial centers throughout
the coastal and inland  communities  of eastern  North  Carolina.  These centers
extend  from  Corolla,  located on the Outer Banks of North  Carolina,  to Tabor
City,  located on the South Carolina  border.  The Bank's  deposit  accounts are
insured up to applicable  limits by the Federal  Deposit  Insurance  Corporation
("FDIC").  At December  31,  2001,  Cooperative  Bank had total assets of $458.1
million, deposits of $339.8 million and stockholders' equity of $33.6 million.

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

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

     A new financial center was opened in Whiteville,  North Carolina, (Columbus
County) in April of 2001.

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

MARKET AREA

     Cooperative Bank considers its primary market area to be the communities of
eastern  North  Carolina  extending  from the  Virginia  to the  South  Carolina
borders.  The market is generally segmented into the coastal communities and the
inland areas.  The economies of the coastal  communities  (concentrated in Dare,
Carteret,  Currituck,  Onslow,  Pender, New Hanover and Brunswick  Counties) are
seasonal and largely  dependent on the summer tourism  industry.  The economy of
Wilmington  (the largest  city in the market  area),  a historic  seaport with a
population of  approximately  92,000 is also reliant upon summer  tourism but is
diversified into the chemicals,  shipping,  aircraft  engines,  and fiber optics
industries.  Wilmington  also  serves as a regional  retail  center,  a regional
medical  center and is home of the  University of North  Carolina at Wilmington.
The inland communities  served by the Bank  (concentrated in Bladen,  Brunswick,
Columbus,  Duplin, Hyde, Beaufort and Pender Counties) are largely service areas
for the agricultural activities in eastern North Carolina.

LENDING ACTIVITIES

     GENERAL.  Cooperative  Bank's lending  activities have  concentrated on the
origination of loans for the purpose of  constructing,  financing or refinancing
residential properties.  As of December 31, 2001, approximately $273 million, or
73%, of the Bank's loan  portfolio  consisted  of loans  secured by  residential
properties.  To a lesser extent, the Bank originates  nonresidential real estate
loans, home equity line of credit loans, and secured and unsecured  consumer and
business  loans.  While  continuing to place  emphasis on  residential  mortgage
loans,  the Bank is  taking a more  aggressive  position  in  pursuing  business
lending, and nonresidential real estate lending involving loans secured by small
commercial   properties  with  balances   generally  ranging  from  $100,000  to
$1,000,000.  The Bank  originates  adjustable  rate and fixed rate loans.  As of
December 31, 2001,  adjustable  rate and fixed rate loans totaled  approximately
63% and 37%, respectively, of the Bank's total loan portfolio.

                                       2
<PAGE>

     ANALYSIS OF LOAN  PORTFOLIO.  Set forth below is selected  data relating to
the  composition  of the  Bank's  loan  portfolio  by type of loan  and  type of
collateral on the dates indicated.  Other than as set forth below, there were no
concentrations of loans which exceeded 10% of total loans at December 31, 2001.
<TABLE>
<CAPTION>
                                                                      AT DECEMBER 31,
                                         ----------------------------------------------------------------------------
                                                  2001                      2000                      1999
                                         ----------------------    ----------------------    ---------------------
                                                                   (DOLLARS IN THOUSANDS)
                                             AMOUNT        %         AMOUNT       %           AMOUNT       %
                                             ------        --        ------       -           ------       -
<S>                                         <C>           <C>       <C>           <C>        <C>            <C>
Real estate:
   Construction and land development        $ 62,142      16.64%    $ 37,542      10.80%     $  1,497       0.45%
   Mortgage:
      1-4 family residential                 209,622      56.13      234,383      67.45       253,857      75.83
      Multi-family residential                15,626       4.18       17,081       4.92        17,166       5.13
      Commercial                              55,664      14.90       31,300       9.01        38,765      11.58
      Equity line                             13,131       3.52       11,954       3.44         9,772       2.92
      Other                                      254       0.07          174       0.05            78       0.02
                                            --------     ------     --------     ------      --------     ------
             Total real estate loans         356,439      95.44      332,434      95.67       321,135      95.93

Commercial, industrial and agricultural       13,430       3.60       10,970       3.16        10,653       3.18
Consumer                                       7,285       1.95        7,236       2.08         5,443       1.63
                                            --------     ------     --------     ------      --------     ------
             Total gross loans               377,154     100.99      350,640     100.91       337,231     100.74
                                            --------     ------     --------     ------      --------     ------
Less:
Unearned discounts and net deferred fees       1,173       0.31          994       0.29         1,182       0.35
Allowance for loan losses                      2,523       0.68        2,160       0.62         1,306       0.39
                                            --------     ------     --------     ------      --------     ------
              Net loans                     $373,458     100.00%    $347,486     100.00%     $334,743     100.00%
                                            ========     ======     ========     ======      ========     ======
<CAPTION>

                                                         AT DECEMBER 31,
                                         -------------------------------------------------
                                                    1998                      1997
                                           ----------------------    ---------------------
                                                    (DOLLARS IN THOUSANDS)
                                             AMOUNT       %            AMOUNT        %
                                             ------       -            ------        -
<S>                                         <C>            <C>         <C>         <C>
Real estate:
   Construction and land development        $  1,376       0.43%       $     --        -- %
   Mortgage:
      1-4 family residential                 265,172      82.52         252,645      88.12
      Multi-family residential                12,941       4.03           9,209       3.21
      Commercial                              26,296       8.18          11,715       4.09
      Equity line                              8,811       2.74           8,074       2.82
      Other                                       52       0.02              89       0.03
                                            --------     ------        --------     ------
             Total real estate loans         314,648      97.92         281,732      98.27

Commercial, industrial and agricultural        3,997       1.24           2,752       0.96
Consumer                                       5,073       1.59           4,356       1.52
                                            --------     ------        --------     ------
             Total gross loans               323,718     100.75         288,840     100.75
                                            --------     ------        --------     ------
Less:
Unearned discounts and net deferred fees       1,216       0.38           1,274       0.44
Allowance for loan losses                      1,178       0.37             874       0.31
                                            --------     ------        --------     ------
              Net loans                     $321,324     100.00%       $286,692     100.00%
                                            ========     ======        ========     ======
</TABLE>

                                       3
<PAGE>

     The following table sets forth as of December 31, 2001, certain information
regarding the dollar amount of loans maturing in the Bank's loan portfolio based
on their contractual terms to maturity.
<TABLE>
<CAPTION>
                                              DUE WITHIN             DUE AFTER       DUE AFTER
                                               ONE YEAR          1 THROUGH 5 YEARS    5 YEARS               TOTAL
                                               --------          -----------------    -------               -----
                                                                         (IN THOUSANDS)
<S>                                             <C>                   <C>              <C>                 <C>
Real Estate
  Construction and land development             $ 29,045              $ 28,232         $ 4,865             $ 62,142
  Mortgage
    1-4 family residential                         6,459                12,461         190,702              209,622
    Multi-family residential                       3,051                 6,345           6,230               15,626
    Commercial                                     7,620                35,127          12,917               55,664
    Equity line                                    2,751                 1,256           9,124               13,131
    Other                                             15                   239              --                  254
Commercial, Industrial & Agricultural              7,694                 4,375           1,361               13,430
Consumer                                           3,442                 3,316             527                7,285
                                                --------              --------        --------             --------
    Total                                       $ 60,077              $ 91,351       $ 225,726             $377,154
                                                ========              ========       =========             ========
</TABLE>

     The next table shows at December  31,  2001,  the dollar  amount of all the
Bank's loans due after one year from December 31, 2001 which have fixed interest
rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                                         ONE TO FIVE            AFTER
                                                            YEARS            FIVE YEARS           TOTAL
                                                         -----------         ----------           -----
                                                                           (IN THOUSANDS)
<S>                                                       <C>               <C>                 <C>
Loans maturing after one year with:
    Fixed interest rates                                  $ 41,341          $   81,330          $  122,671
    Floating or adjustable rates                            50,010             144,396             194,406
                                                          --------          ----------          ----------
Total                                                     $ 91,351          $  225,726          $  317,077
                                                          ========          ==========          ==========
</TABLE>

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

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

     The Bank has offered adjustable rate mortgage loans ("ARMs") since 1979 and
presently offers one-year ARMs with rate adjustments tied to prime or the weekly
average yield on U.S. Treasury Securities adjusted to a constant maturity of one
year.  The  Bank  offers  introductory  interest  rates  on ARMs  which  are not
generally fully indexed.  The interest rates on these loans generally  include a
cap of 2%  per  adjustment  and 6%  over  the  life  of  the  loan.  The  Bank's
underwriting  policies  require that the borrower  qualify for a fully indexed 1
year ARM at the fully indexed rate. While the proportion of fixed and adjustable
rate loan  originations in the Bank's portfolio  largely depends on the level of
interest  rates,  the Bank has strongly  emphasized ARMs in recent years and has
been  relatively  successful in maintaining the level of ARM  originations  even
during periods of declining interest rates. In addition to the one-year ARM, the
Bank offers 3/1 and 5/1 ARM products.  These loans adjust annually after the end
of the first three or five-year period. A "Low Doc" program is available for the
non-conforming loans.

     Cooperative Bank also originates 15 to 30 year fixed rate mortgage loans on
one- to four-family  units. The Bank generally charges a higher interest rate on
such loans if the  property is not  owner-occupied.  The  majority of

                                       4
<PAGE>

fixed rate  loans are  underwritten  according  to  Federal  Home Loan  Mortgage
Corporation   ("FHLMC")  or  Federal  National  Mortgage   Association  ("FNMA")
guidelines, so that the loans qualify for sale in the secondary market. The Bank
has sold fixed rate loans in the  secondary  market  from time to time when such
sales were consistent with the Bank's liquidity and asset/liability goals.

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

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

     Cooperative Bank also originates loans secured by multi-family  properties.
At December 31,  2001,  the Bank had $15.6  million of such loans,  representing
4.2% of its total loan portfolio. These loans are primarily secured by apartment
buildings located in the Bank's market area.

     CONSTRUCTION  LOANS.  The Bank originates loans to finance the construction
of one-to four- and multi-family  dwellings,  housing  developments,  commercial
projects and condominiums.  Construction  loans amounted to approximately  $62.1
million,  or 16.6%,  of the Bank's total loan portfolio at December 31, 2001. In
recent years,  the Bank has emphasized the origination of construction  loans in
response  to the  significant  demand  for such  loans by  borrowers  engaged in
building and  development  activities in the growing  communities  of its market
area.  In  addition,  construction  loans  afford  the Bank the  opportunity  to
increase the interest rate sensitivity of its loan portfolio.

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

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

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

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

                                       5
<PAGE>

     The following table sets forth certain  information as of December 31, 2001
regarding  the dollar  amount of  construction  loans secured by real estate and
real  estate  mortgage  loans  maturing in the Bank's  portfolio  based on their
contractual  terms to  maturity.  A portion of these  loans have  provisions  to
convert  to  permanent  loans  upon  completion  of  construction.  For  further
information,  see Note 3 of Notes to Consolidated  Financial Statements included
in the  Company's  Annual  Report to  Stockholders  for the  Fiscal  Year  Ended
December 31, 2001 (the "Annual Report").

                                            (IN THOUSANDS)
Real estate - construction
    1-4 residential                            $17,523
    Multi-family residential                    17,136
    Commercial                                  27,483
                                               -------
    Total                                      $62,142
                                               =======


     LOANS   SECURED  BY   NONRESIDENTIAL   REAL   ESTATE.   Loans   secured  by
nonresidential real estate constituted  approximately $83.4 million, or 22.1% of
the Bank's  total  loans at  December  31,  2001.  The Bank is  emphasizing  the
origination of these loans because of their profitability,  since they generally
carry a higher  interest rate than single family  residential  mortgage loans as
well  as  being  more  interest  rate   sensitive.   The  Bank  originates  both
construction   loans  and   permanent   loans  on   nonresidential   properties.
Nonresidential  real estate loans are generally made in amounts up to 80% of the
lesser of appraised  value or purchase  price of the property and have generally
been made in amounts under $2.0  million.  The Bank's  permanent  nonresidential
real estate  loans are secured by improved  property  such as office  buildings,
retail centers,  warehouses,  and other types of buildings located in the Bank's
primary  market  area.  Nonresidential  real  estate  loans are either  fixed or
variable  rate. The variable rate loans have interest rates tied to prime or the
weekly average yield on U.S. Treasury Securities adjusted to a constant maturity
of one year.

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

     CONSUMER LENDING.  At December 31, 2001, the Bank's consumer loan portfolio
totaled approximately $7.3 million,  representing 1.9% of the Bank's total loans
receivable.  The Bank also offers home equity loans, which are made for terms of
up to 15 years at adjustable interest rates. As of December 31, 2001, the Bank's
home equity loan portfolio  totaled  approximately  $13.1 million,  representing
3.5% of its total loans receivable.

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

     NON-REAL  ESTATE  BUSINESS  LENDING.  In late 1996,  the Bank  initiated  a
program for  originating  loans to small  businesses  in the Bank's market area,
which  are  secured  by  various  forms of  non-real  estate  collateral  or are
unsecured.  At December  31,  2001,  these  loans  totaled  approximately  $13.4
million. Management of Cooperative Bank believes that these loans are attractive
to the Bank in light of the typically  higher  interest  rate yields  associated

                                       6
<PAGE>

with  them  and  the   opportunity   they  present  for   expanding  the  Bank's
relationships with existing customers and developing broader  relationships with
new  customers.  Accordingly,  the Bank plans to  actively  pursue  this type of
lending in the future in an effort to maintain a profitable  spread  between the
Bank's average loan yield and its cost of funds.

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

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

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

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

     ORIGINATIONS,  PURCHASES,  AND SALES OF MORTGAGE LOANS.  The Bank's general
policy is to  originate  conventional  residential  mortgage  loans under terms,
conditions  and  documentation  which permit sale to the FHLMC,  FNMA or private
investors in the secondary market. The Bank has chosen to begin selling a larger
percentage  of  its  fixed  rate  mortgage  loan  originations   through  broker
arrangements.  This  enables the Bank to invest its funds in  commercial  loans,
while  increasing  fee  income.  The Bank has from time to time sold fixed rate,
long term mortgage loans in the secondary market to meet liquidity  requirements
or as part of the  asset/liability  management  program. In connection with such
sales,  the Bank may retain the  servicing  of the loans  (i.e.,  collection  of
principal and interest payments),  for which it generally receives a fee payable
monthly  of up to 1/4% per  annum of the  unpaid  balance  of each  loan.  As of
December 31, 2001, the Bank was servicing  approximately  1,100 loans for others
aggregating approximately $56.0 million.

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

     LOAN COMMITMENTS. The Bank issues loan origination commitments to qualified
borrowers  primarily  for the  construction  and  purchase of  residential  real
estate.  Such  commitments  are made on specified  terms and  conditions and are
typically  for  terms  of up to  30  days.  A  non-refundable  appraisal,  flood
certificate,  credit  report and  underwriting  fee is  collected at the time of
application.  Management  estimates  that  historically,  less  than 20% of such
commitments expire unfunded. At December 31, 2001, the Bank had outstanding loan
origination  commitments of approximately $2.5 million. For further information,
see Note 3 of Notes to Consolidated  Financial Statements included in the Annual
Report.

     LOAN  ORIGINATION AND OTHER FEES. In addition to receiving  interest at the
stated rate on loans,  the Bank receives loan  origination  fees or "points" for
originating loans.  Origination fees generally are calculated as a percentage of
the principal amount of the loan and are charged to the borrower for creation of
the loan account.

                                       7
<PAGE>

Loan origination  fees and certain direct loan  origination  costs are deferred,
and the net fee or cost is recognized  as an adjustment to interest  income over
the contractual life of the related loan.

     The  Bank is  currently  approved  to  broker  loans  to  Wells  Fargo  and
InterFirst Wholesale Mortgage Lending. These are done on the wholesale side with
Cooperative  Bank  processing  the loan using Wells Fargo or InterFirst  closing
documents.  Cooperative  Bank receives a settlement  service fee for  processing
these loans.  The Bank was successful in 2001, in originating more loans through
wholesalers  to generate  fee income and relieve the Bank of the  interest  rate
risk.

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

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

     DELINQUENCIES. The Bank's collection procedures provide that when a loan is
30 days past due, the borrower is contacted by mail,  and payment is  requested.
If the  delinquency  continues,  subsequent  efforts  are  made to  contact  the
borrower.  If the loan continues in a delinquent status for 60 days or more, the
Bank generally  initiates legal proceedings.  At December 31, 2001, the Bank had
accruing  loans which are  contractually  past due 90 or more days totaling $2.6
million.

     NON-PERFORMING  ASSETS  AND  ASSET  CLASSIFICATION.   Loans  are  generally
classified as nonaccrual if they are past due for a period of more than 90 days,
unless  such loans are well  secured and in the  process of  collection.  If any
portion of a loan is  classified  as doubtful or is  partially  charged off, the
loan is generally  classified  as  nonaccrual.  Loans that are less than 90 days
past due may also be  classified as nonaccrual if repayment in full of principal
and/or interest is in doubt. As of December 31, 2001, the Bank had four loans in
non-accrual status with an aggregate principal balance of $505,000.

     Real estate  acquired by the Bank as a result of  foreclosure is classified
as real  estate  owned  until  such time as it is sold.  When such  property  is
acquired,  it is  recorded  at the lower of the unpaid  principal  balance  plus
unpaid accrued interest of the related loan or the fair value of the real estate
less  costs to sell the  property.  Any  required  write-down  of the loan  upon
foreclosure  is charged to the allowance for loan losses.  At December 31, 2001,
the Bank owned  approximately  $759,000  of  property  acquired as the result of
foreclosure  or by deed in lieu of  foreclosure  and  classified as "real estate
owned."  At  December  31,  2001,  the  Bank  had 31  loans  in the  process  of
foreclosure   and/or   bankruptcy  with  an  aggregate   principal   balance  of
approximately  $3.3  million.  Loans in  bankruptcy  paying  as  agreed  are not
included in non-performing assets. Any losses management anticipates on loans in
the process of foreclosure  and/or bankruptcy have already been recorded through
the allowance for loan losses.


                                       8
<PAGE>
     The  following  table sets  forth  information  with  respect to the Bank's
non-performing  assets for the periods indicated.  During the periods shown, the
Bank had no  restructured  loans  within the meaning of  Statement  of Financial
Accounting Standards ("SFAS") No. 15.
<TABLE>
<CAPTION>
                                                                      AT DECEMBER 31,
                                                   -------------------------------------------------------------
                                                     2001         2000         1999         1998          1997
                                                   --------     --------     --------     --------      --------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                                <C>          <C>          <C>          <C>           <C>
Non-accruing loans                                 $     505    $     333    $     267    $      --     $     --
Accruing loans which are contractually
   past due 90 days or more                            2,563          358          934        1,765          357
                                                   ---------    ---------    ---------    ---------     --------
Total                                              $   3,068    $     691    $   1,201    $   1,765     $    357
                                                   =========    =========    =========    =========     ========
Percentage of total loans                                .81%         .20%         .36%         .55%         .12%
                                                   =========    =========    =========    =========     ========
Other non-performing assets (1)                    $     759    $     234    $     245    $   2,439     $    251
                                                   =========    =========    =========    =========     ========
Total non-performing assets                        $   3,827    $     925    $   1,446    $   4,204     $    608
                                                   =========    =========    =========    =========     ========
Total non-performing assets to total assets              .84%         .22%         .35%        1.08%         .16%
                                                   =========    =========    =========    =========     ========
<FN>
______________
(1)  Other non-performing assets represent property acquired by the Bank through
     foreclosure  or  repossession.  This property is carried at fair value less
     estimated costs of sale.
</FN>
</TABLE>

     During  the  year  ended  December  31,  2001,  gross  interest  income  of
approximately  $16,795  would have been  recorded on  nonaccrual  loans had such
loans been  current  throughout  the period.  Approximately  $10,622 in interest
income from such loans was  included in income for the year ended  December  31,
2001.

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

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

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

                                       9
<PAGE>
     The  following  table  analyzes  activity in the Bank's  allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                     ---------------------------------------------------------
                                                       2001         2000        1999        1998        1997
                                                     --------     --------    --------    --------    --------
                                                                       (DOLLARS IN THOUSANDS)
<S>                                                  <C>          <C>         <C>         <C>         <C>
Balance at beginning of period                       $   2,160    $  1,306    $  1,178    $    874    $    807
Provision for loan losses                                  460         970         210         330         153
Gross loans charged-off                                   (106)       (146)        (94)        (29)        (86)
Gross recoveries                                             9          30          12           3          --
                                                     ---------    --------    --------    --------    --------
Balance at end of period                             $   2,523    $  2,160    $  1,306    $  1,178    $    874
                                                     =========    ========    ========    ========    ========
Ratio of net charge-offs to average
  loans outstanding during the period                      .03%        .03%        .03%        .01%        .03%
                                                     =========    ========    ========    ========     =======
Ratio of loan loss reserve to total loans                  .67%        .62%        .39%        .36%        .30%
                                                     =========    ========    ========    ========     =======
</TABLE>

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

                                       10
<PAGE>

     The following table sets forth  information  about the Bank's allowance for
loan losses by asset  category at the dates  indicated.  The  allocation  of the
allowance to each  category is not  necessarily  indicative of future losses and
does not restrict the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>
                                                                       AT DECEMBER 31,
                                          ----------------------------------------------------------------------------
                                                   2001                       2000                   1999
                                          ----------------------    ----------------------    ---------------------
                                                      PERCENT OF                PERCENT OF               PERCENT OF
                                                       LOANS IN                  LOANS IN                 LOANS IN
                                                    CATEGORY TO                CATEGORY TO              CATEGORY TO
                                          AMOUNT    TOTAL LOANS     AMOUNT     TOTAL LOANS    AMOUNT    TOTAL LOANS
                                          ------    ------------    ------     ------------   ------    -----------
                                                                     (DOLLARS IN THOUSANDS)
<S>                                       <C>            <C>        <C>             <C>        <C>           <C>
Real estate:
  Construction and land development       $    672       16%        $   428         10%        $     15      1%
  Mortgage:
      1-4 family residential                   698       56             499         67              530     74
      Multi-family residential                 143        4             213          5              163      5
      Commercial                               589       15             526          9              380     12
      Equity line                              132        3              65          3               15      3
      Other                                      2       --               2          1                1     --
                                          --------      ---         -------         --         --------    ---
          Total real estate loans            2,236       94%          1,733         95%           1,104     95%

Commercial, industrial & agricultural          214        4             166          3              152      3
Consumer                                        70        2              77          2               50      2
Unallocated                                      3       --             184         --               --     --
                                          --------      ---         -------        ---         --------    ---
           Total gross loans              $  2,523      100%        $ 2,160        100%        $  1,306    100%
                                          ========      ===         =======        ===         ========    ===
<CAPTION>
                                                              AT DECEMBER 31,
                                             ------------------------------------------------
                                                    1998                       1997
                                             --------------------      ----------------------
                                                       PERCENT OF                 PERCENT OF
                                                       LOANS IN                   LOANS IN
                                                       CATEGORY TO                CATEGORY TO
                                             AMOUNT    TOTAL LOANS     AMOUNT     TOTAL LOANS
                                             ------    -----------     ------     -----------
                                                         (DOLLARS IN THOUSANDS)
<S>                                        <C>              <C>       <C>            <C>
Real estate:
  Construction and land development        $     14         1%        $     --       0%
  Mortgage:
      1-4 family residential                    605        81              571      87
      Multi-family residential                  129         4               92       3
      Commercial                                301         8              123       4
      Equity line                                13         3               12       3
      Other                                       1        --                1      --
                                           --------       ---         --------     ---
          Total real estate loans             1,063        97%             799      97%

Commercial, industrial & agricultural            59         1               41       1
Consumer                                         40         2               34       2
Unallocated                                      16        --               --      --
                                           --------       ---         --------     ---
           Total gross loans               $  1,178       100%        $    874     100%
                                           ========       ===         ========     ===
</TABLE>

                                       11
<PAGE>
INVESTMENT ACTIVITIES

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

     The following table sets forth the carrying value of the Bank's  investment
securities  portfolio  at  the  dates  indicated.   For  additional  information
regarding the Bank's investments,  see Note 2 of Notes to Consolidated Financial
Statements in the Annual Report.
<TABLE>
<CAPTION>
                                                                           AT DECEMBER 31,
                                                              -------------------------------------------
                                                                2001              2000             1999
                                                              --------          --------         --------
                                                                             (IN THOUSANDS)
<S>                                                           <C>               <C>              <C>
Securities held to maturity:
   U.S. Government and agency securities                      $  5,000          $18,015          $ 18,025
   Mortgage-backed securities                                       --              963                --
                                                              --------          -------          --------
       Total securities held to maturity                      $  5,000          $18,978          $ 18,025

Securities available for sale:
   U.S. Government and agency securities                      $ 25,758          $16,049          $ 20,672
   Mortgage-backed securities                                   11,123               --             6,564
Marketable equity securities                                     5,099               --                --
   Corporate bond                                                  990               --                --
                                                              --------          -------          --------
Total securities available for sale                           $ 42,970          $16,049          $ 27,236

      Total investment securities portfolio                   $ 47,970          $35,027          $ 45,261
                                                              ========          =======          ========
</TABLE>


                                       12
<PAGE>

The following table sets forth the scheduled maturities, carrying values, market
values and average  yields for the Bank's  investment  securities  portfolio  at
December 31, 2001.
<TABLE>
<CAPTION>
                                                       AFTER ONE         AFTER FIVE
                                ONE YEAR OR LESS  THROUGH FIVE YEARS  THROUGH TEN  YEARS
                                ----------------  ------------------  -------------------
                                CARRYING AVERAGE  CARRYING   AVERAGE  CARRYING  AVERAGE
                                  VALUE   YIELD    VALUE      YIELD    VALUE     YIELD
                                -------  -------  --------   -------  -------  ---------
                                                 (DOLLARS IN THOUSANDS)
<S>                                <C>            <C>         <C>    <C>        <c>
Securities held to maturity:
  U.S. government and agency       $  --     --   $ 5,000     6.20%  $  --           --
                                   -----  -----   -------     ----   -------       ----
    Total securities held          $  --     --   $ 5,000     6.20%  $  --           --
                                   -----  -----   -------     ----   -------       ----

Securities available for sale:
  U.S. Government and agency
    securities                     $  --     --   $17,157     5.25%   $8,601       5.75%
  Mortgage-backed securities          --     --        --       --        --         --
  Marketable equity securities        --     --        --       --        --         --
  Corporate bond                   $  --     --       990     6.12%       --         --
                                   -----  -----   -------     ----   -------       ----
    Total securities available
      for sale                     $  --     --   $18,147     5.30%   $8,601       5.75%
                                   -----  -----   -------     ----    ------       ----
      Total investment
        securities portfolio       $  --     --   $23,147     5.50%   $8,601       5.75%
                                   =====  =====   =======     ====    ======       ====

<CAPTION>
                                 MORE THAN TEN YEARS  TOTAL INVESTMENT PORTFOLIO
                                 -------------------  --------------------------
                                 CARRYING   AVERAGE   CARRYING  FAIR    AVERAGE
                                   VALUE     YIELD      VALUE    VALUE   YIELD
                                 --------- --------   --------  ------  --------
                                              (DOLLARS IN THOUSANDS)
<S>                                <C>       <C>     <C>        <C>       <C>
Securities held to maturity:
  U.S. government and agency       $    --      --   $ 5,000    $ 5,283   6.20%
                                   -------   -----   -------    -------   ----
    Total securities held          $    --      --   $ 5,000    $ 5,283   6.20%
                                   -------   -----   -------    -------   ----

Securities available for sale:
  U.S. Government and agency
    securities                     $    --      --   $25,758    $25,758   5.42%
  Mortgage-backed securities        11,123    6.22%   11,123     11,123   6.22%
  Marketable equity securities       5,099    6.11%    5,099      5,099   6.11%
  Corporate bond                        --      --       990        990   6.12%
                                   -------   -----   -------    -------   ----
    Total securities available
      for sale                     $16,222    6.19%  $42,970    $42,970   5.72%
                                   -------    ----   -------    -------   ----
      Total investment
        securities portfolio       $16,222    6.19%  $47,970    $48,253   5.77%
                                   =======    ====   =======    =======   ====
</TABLE>

DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

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

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

     The following table  indicates the amount of the Company's  certificates of
deposit of $100,000 or more by time remaining  until maturity as of December 31,
2001.
                                                      CERTIFICATES
                   MATURITY PERIOD                    OF DEPOSIT
                   ---------------                    -------------
                                                      (IN THOUSANDS)

                   Three months or less                  $  22,532
                   Over three through six months            17,045
                   Over six months through twelve
                         months                             24,196
                   Over twelve months                       10,837
                                                         ---------
                   Total                                 $  74,610
                                                         =========

     BORROWINGS. Deposits are the primary source of funds for Cooperative Bank's
lending and investment  activities and for its general business purposes. If the
need arises, the Bank may obtain advances from the FHLB of

                                       13
<PAGE>

Atlanta  to  supplement  its  supply  of  loanable  funds  and to  meet  deposit
withdrawal  requirements.  Advances from the FHLB are  typically  secured by the
Bank's  stock in the FHLB and a lien on a portion of the Bank's  first  mortgage
loans.  The Bank has utilized FHLB advances in recent periods in order to meet a
larger than typical loan demand in the Bank's market area.

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

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

COMPETITION

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

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

EMPLOYEES

     At December 31, 2001, the Bank had 114 full-time  employees and 9 part-time
employees.  The employees are not represented by a collective  bargaining  unit.
The Bank believes its relationship with its employees to be good.

EXECUTIVE OFFICERS

     At December 31, 2001, the executive  officers of the Bank who were not also
directors were as follows:
<TABLE>
<CAPTION>
                                     AGE AT
NAME                            DECEMBER 31, 2001                  POSITION
----                            -----------------                  --------
<S>                                    <C>                    <C>
O.C. Burrell, Jr.                      53                     Executive Vice President and Chief Operating Officer

Todd L. Sammons, CPA                   40                     Senior Vice President and Chief Financial Officer

Dickson B. Bridger                     43                     Senior Vice President-Mortgage Lending
</TABLE>

     O. C.  BURRELL,  JR. was  employed in May 1993 as Senior Vice  President of
Retail  Banking.  Mr.  Burrell was elected  Executive  Vice  President and Chief
Operating  Officer in 1997. Mr.  Burrell has been in the banking  industry since
1970 and has served in leadership  capacities in various civic and  professional
organizations.  He is  active  in

                                       14
<PAGE>

the  Wilmington  Rotary Club and serves as  treasurer  and director of the Child
Development  Center and is a member of the Retail Lending Committee of the North
Carolina Bankers Association.

     TODD L. SAMMONS was  employed in March 1986 as Auditor.  He was promoted to
Senior  Vice  President-and   Chief  Financial  Officer  in  December  2000.  He
previously  worked with a public  accounting  firm.  He has served in leadership
capacities  in various  professional,  church and civic  organizations.  He is a
Certified Public Accountant.  He serves on the Board of Winter Park Optimist. He
serves as Treasurer of the Wilmington Vikings, a junior Legion Baseball Team.

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

                                   REGULATION

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

     The Company is registered as a bank holding  company under the Bank Holding
Company Act of 1956,  as amended (the  "Holding  Company  Act") and, as such, is
subject to supervision and regulation by the Federal Reserve Board.  The Company
is also  subject  to  regular  examination  by the  Federal  Reserve  Board.  In
addition,  as a savings institution  holding company,  the Company is subject to
supervision by the Commissioner under North Carolina law.

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

     FINANCIAL MODERNIZATION LEGISLATION.  The Gramm-Leach-Bliley ("G-L-B") Act,
which was enacted in November 1999,  authorizes  affiliations  between  banking,
securities  and  insurance  firms and  authorizes  bank  holding  companies  and
national banks to engage in a variety of new financial activities. Among the new
activities  that are  permitted to bank holding  companies  are  securities  and
insurance  brokerage,   securities  underwriting,   insurance  underwriting  and
merchant banking.  The Federal Reserve Board, in consultation with the Secretary
of the Treasury,  may approve  additional  financial  activities.  The G-L-B Act
imposed new  requirements  on  financial  institutions  with respect to customer
privacy.

     BANK HOLDING COMPANY REGULATION.  As a bank holding company, the Company is
required to furnish to the Federal Reserve Board annual and quarterly reports of
its  operations  at the  end of  each  period  and to  furnish  such  additional
information  as the Federal  Reserve  Board may require  pursuant to the Holding
Company Act.

     Under the Holding Company Act, a bank holding company must obtain the prior
approval of the Federal  Reserve Board before (1)  acquiring  direct or indirect
ownership or control of any voting  shares of any bank or bank  holding  company
if,  after  such  acquisition,  the  bank  holding  company  would  directly  or
indirectly  own or control more than 5% of such  shares;  (2)  acquiring  all or
substantially  all of the assets of another  bank or bank holding  company;  (3)
merging or  consolidating  with another bank holding  company;  or (4) acquiring
direct or indirect  ownership or control of more than 5% of the voting shares of
a  company  that  is not a bank or a bank  holding

                                       15
<PAGE>

company,  or from engaging directly or indirectly in activities other than those
of  banking,  managing or  controlling  banks,  or  providing  services  for its
subsidiaries.  In addition to the above  restrictions  under the Holding Company
Act, the Company's  investments  are limited  under North  Carolina law to those
investments  permitted for North Carolina  savings banks. See " -- State Law and
Regulation."

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

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

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

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

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

     Bank holding  companies  generally are required to give the Federal Reserve
Board notice of any purchase or redemption of outstanding  equity  securities if
the gross  consideration for the purchase or redemption,  when combined with the
net  consideration  paid  for all  such  purchases  or  redemptions  during  the
preceding 12 months,  is equal to 10% or more of the Company's  consolidated net
worth.

     CAPITAL REQUIREMENTS.  The regulations of the Federal Reserve Board and the
FDIC require  bank  holding  companies  and  state-chartered  banks that are not
members of the Federal  Reserve  System to maintain a minimum  leverage  capital
requirement consisting of a ratio of Tier 1 capital to total assets (as defined)
of 3%.  Although  setting a minimum 3% leverage ratio,  the capital  regulations
state that only the strongest bank holding  companies and banks,  with composite
examination  ratings  of 1 under the  rating  system  used by the  federal  bank
regulators,  would be  permitted  to  operate at or near such  minimum  level of
capital.  For all but the most highly rated institutions  meeting the conditions
set forth above,  the minimum  leverage  capital  ratio is 3% plus an additional
"cushion"  amount of at least 100 to 200 basis points.  Any bank or bank holding
company  experiencing  or anticipating  significant  growth would be expected to
maintain   capital   well  above  the  minimum   levels.   As  a   SAIF-insured,
state-chartered  bank,  the Bank must also  deduct from Tier 1 capital an amount
equal to its investments in, and extensions of credit to,  subsidiaries  engaged
in activities that are not  permissible to national  banks,  other than debt and
equity

                                       16
<PAGE>

investments  in  subsidiaries  engaged  in  activities  undertaken  as agent for
customers  or  in  mortgage  banking  activities  or  in  subsidiary  depository
institutions or their holding companies.

     The  risk-based  capital  rules of the Federal  Reserve  Board and the FDIC
require bank holding  companies and state  non-member  banks to maintain minimum
regulatory capital levels based upon a weighting of their assets and off-balance
sheet obligations according to risk. The risk-based capital rules have two basic
components:  a core capital (Tier 1)  requirement  and a  supplementary  capital
(Tier 2) requirement.  The risk-based  capital  regulations assign balance sheet
assets and credit equivalent  amounts of off-balance sheet obligations to one of
four broad  risk  categories  based  principally  on the  degree of credit  risk
associated with the obligor.  The assets and off-balance sheet items in the four
risk categories are weighted at 0%, 20%, 50% and 100%. These computations result
in the total risk-weighted assets.

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

     The federal bank regulatory  agencies,  including the Federal Reserve Board
and the FDIC, have revised their risk-based capital  requirements to ensure that
such  requirements  provide for explicit  consideration  by commercial  banks of
interest  rate risk.  Under  these  requirements,  a bank's  interest  rate risk
exposure is quantified using either the measurement system set forth in the rule
or the bank's  internal  model for  measuring  such  exposure,  if such model is
determined  to be adequate  by the bank's  examiner.  If the dollar  amount of a
bank's interest rate risk exposure, as measured under either measurement system,
exceeds 1% of the bank's total assets,  the bank is required to hold  additional
capital equal to the dollar amount of the excess.  The Bank's  current  interest
rate risk exposure does not exceed 1% of the Bank's total assets.  Management of
the Bank does not believe that this interest rate risk  component has an adverse
effect on the Bank's  capital.  Under North  Carolina  law,  savings  banks must
maintain a net worth of not less than 5% of assets.  In computing its compliance
with this requirement,  the savings bank must deduct intangible assets from both
net worth and assets.

     The Bank was in compliance with both the FDIC capital  requirements and the
North  Carolina  net  worth  requirement  at  December  31,  2001.  For  further
information  regarding the Bank's capital  requirements,  see Note 7 of Notes to
Consolidated Financial Statements in the Annual Report.

     LIQUIDITY.  North  Carolina  savings  banks must  maintain cash and readily
marketable  investments  in an  amount  not less  than 10% of the  assets of the
savings banks.  The Bank was in compliance with this requirement at December 31,
2001.

     PROMPT CORRECTIVE  REGULATORY  ACTION.  Under the Federal Deposit Insurance
Corporation  Improvement Act of 1991 ("FDICIA"),  the federal banking regulators
are  required  to  take  prompt  corrective  action  if  an  insured  depository
institution  fails  to  satisfy  certain  minimum  capital   requirements.   All
institutions, regardless of their capital levels, are restricted from making any
capital  distribution  or paying any management  fees if the  institution  would
thereafter   fail  to  satisfy  the  minimum  levels  for  any  of  its  capital
requirements.  An  institution  that  fails to meet the  minimum  level  for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased  monitoring by the  appropriate  federal  banking  regulator;  (ii)
required to submit an acceptable capital  restoration plan within 45 days; (iii)
subject to asset growth  limits;  and (iv)  required to obtain prior  regulatory
approval for  acquisitions,  branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the  institution's  holding company
that the  institution  will  comply  with the plan until it has been  adequately
capitalized on average for four  consecutive  quarters,  under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution  into capital  compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized"  institution, as well as any undercapitalized institution that
did not  submit an  acceptable  capital  restoration  plan,  may be  subject  to
regulatory demands for recapitalization,  broader application of restrictions on
transactions  with  affiliates,  limitations on interest rates paid on deposits,
asset  growth  and other  activities,  possible  replacement  of

                                       17
<PAGE>

directors and officers,  and  restrictions on capital  distributions by any bank
holding company controlling the institution.

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

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

For  information  regarding  the position of the Bank with respect to the FDICIA
prompt  corrective  action rules, see Note 7 of Notes to Consolidated  Financial
Statements included under Item 7 hereof.

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

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

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

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

     DEPOSIT  INSURANCE.  The Bank is  required  to pay  assessments  based on a
percentage of its insured  deposits to the FDIC for insurance of its deposits by
the SAIF. Under the FDIC's risk-based  deposit insurance  assessment system, the
assessment rate for an insured depository  institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the  institution's  capital level and  supervisory

                                       18
<PAGE>

evaluations.  Within each  capital  group,  institutions  are assigned to one of
three  subgroups on the basis of supervisory  evaluations  by the  institution's
primary supervisory  authority and such other information as the FDIC determines
to be relevant to the  institution's  financial  condition and the risk posed to
the deposit insurance fund. The Bank is currently classified as well capitalized
under this assessment system.

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

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

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

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

                                       19
<PAGE>

     FEDERAL  HOME LOAN BANK  SYSTEM.  The Bank is a member of the FHLB  System,
which consists of 12 district FHLBs subject to supervision and regulation by the
Federal Housing Finance Board ("FHFB").  As a member of the FHLB of Atlanta, the
Bank is  required  to acquire  and hold  shares of capital  stock in the FHLB of
Atlanta in an amount at least equal to 1% of the aggregate  unpaid  principal of
its home mortgage loans, home purchase contracts, and similar obligations at the
beginning of each year,  or 1/20 of its advances  (borrowings)  from the FHLB of
Atlanta,  whichever is greater.  Cooperative  Bank was in  compliance  with this
requirement  with  investment  in FHLB of Atlanta  stock at December 31, 2001 of
approximately $4.2 million.

     FEDERAL  RESERVE BOARD  REGULATION.  Pursuant to regulations of the Federal
Reserve Board, all FDIC-insured  depository  institutions  must maintain average
daily reserves against their  transaction  accounts.  Because required  reserves
must be maintained in the form of vault cash or in a noninterest bearing account
at a Federal  Reserve Bank,  the effect of the reserve  requirement is to reduce
the amount of the institution's  interest-earning  assets. At December 31, 2001,
the Bank met its reserve requirements.

     STATE  LAW  AND  REGULATION.  North  Carolina  law  contains  comprehensive
provisions  for the  regulation of a savings bank business in the State of North
Carolina,   including  the  manner  of   chartering  a  savings  bank,   capital
requirements,  the composition and  qualifications  of boards of directors,  the
number and manner of selection of officers, and record keeping requirements.

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

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

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

                                    TAXATION

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

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

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

STATE INCOME TAXATION

     Under North Carolina law, the Bank is subject to an annual corporate income
tax of 6.90% of its federal  taxable income as computed under the Code,  subject
to certain  prescribed  adjustments.  In addition to the state corporate  income
tax, the Bank is subject to an annual state franchise tax, which is imposed at a
rate of .15%  applied to the greatest of the Bank's (i) capital  stock,  surplus
and undivided profits, (ii) investment in tangible property in

                                       20
<PAGE>
North Carolina or (iii) appraised  valuation of property in North Carolina.  The
filing of consolidated returns is not permitted under North Carolina law.

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

     The Bank operated 17 offices  throughout the coastal and inland communities
of eastern  North  Carolina at December 31,  2001.  The Bank has a total of four
offices that are subject to leases.  The land is leased for two of these offices
on which the Bank has built  it's own  buildings.  One  office is a lease of the
land and the building on it and one is an office  condominium  that is leased by
the bank. For  additional  information  relating to premises and equipment,  see
Note 4 to Consolidated Financial Statements in the Annual Report.

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

     None.

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

     No matters were  submitted to a vote of security  holders during the fourth
quarter of the fiscal year ended December 31, 2001.

                                     PART II

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

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

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

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

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

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

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

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

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

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

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

     None.


                                       21
<PAGE>
                                   PART III

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

     (a) Directors of the Registrant

     The  information  contained  under the  section  captioned  "Proposal  I --
Election of  Directors" in the Proxy  Statement  for the 2002 Annual  Meeting of
Stockholders (the "Proxy Statement") is incorporated herein by reference.

     (b) Principal Officers of the Registrant

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

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

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

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

     (a)  Security Ownership of Certain Beneficial Owners

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

     (b)  Security Ownership of Management

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

     (c)  Changes in Control

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

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

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

                                     PART IV

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

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

          (1)  Consolidated Financial Statements

               1.   Independent Auditors' Report of KPMG LLP *
               2.   Consolidated   Statements  of  Financial   Condition  as  of
                    December 31, 2001 and 2000 *

                                       22
<PAGE>

               3.   Consolidated  Statements of  Operations  for the Years Ended
                    December 31, 2001, 2000 and 1999 *
               4.   Consolidated  Statements  of  Comprehensive  Income  for the
                    Years Ended December 31, 2001, 2000 and 1999 *
               5.   Consolidated  Statements  of  Stockholders'  Equity  for the
                    Years Ended December 31, 2001, 2000 and 1999 *
               6.   Consolidated  Statements  of Cash Flows for the Years  Ended
                    December 31, 2001, 2000, and 1999 *
               7.   Notes to Consolidated Financial Statements *

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


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

     (b) During the fourth  quarter of 2001,  the  Registrant  filed one Current
Report on Form 8-K on October 22, 2001 reporting third quarter earnings.

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

        3.2             Bylaws                                                                   *

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

        10.2            Employment Agreement with Frederick Willetts, III                        *

        10.3            Severance Agreement with Todd L. Sammons

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

        10.5            Severance Agreement with Dickson B. Bridger                            ****

        10.6            Amendment to Severance Agreement of O.C. Burrell, Jr.                    *

        10.7            Indemnity Agreement with Directors and Executive                         *
                        Officers

        10.8            Director Retirement Agreements between Cooperative Bank
                        for Savings and Each Non-Employee Director of Cooperative Bank

        10.9            Director Deferred Fee Agreements between Cooperative Bankshares, Inc.
                        and each Director of the Company

        10.10           Director Deferred Fee Agreements between Cooperative Bank
                        for Savings and Each Non-Employee Director of Cooperative Bank

                                       23
<PAGE>

        10.11           Executive Indexed Retirement Agreements between
                        Cooperative Bank for Savings and Frederick Willetts, III
                        and O. C. Burrell

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

        13              Annual Report to Stockholders for the year ended
                        December 31, 2001

        21              Subsidiaries

        23.1            Consent of KPMG LLP

        23.2            Consent of PricewaterhouseCoopers, LLP

        23.3            PricewaterhouseCoopers, LLP Report of Independent Accountants
<FN>
________
*    Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-4 (Reg. No. 33-79206).
**   Incorporated  by reference to the  Registrant's  Registration  Statement on
     Form S-8 (Reg. No. 333-92219).
***  Incorporated by reference to the Registrant's Form 10-K for the fiscal year
     ended December 31, 1997.
**** Incorporated by reference to the Registrant's Form 10-K for the fiscal year
     ended December 31, 2000.
</FN>
</TABLE>



                                       24
<PAGE>
                                   SIGNATURES

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

                                   COOPERATIVE BANKSHARES, INC.




Date:  March 28, 2002              By:/s/ Frederick Willetts, III
                                      ------------------------------------------
                                      Frederick Willetts, III
                                      President and Chief Executive Officer
                                      (Duly Authorized Representative)

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


By: /s/ Frederick Willetts, III                            Date:  March 28, 2002
    -------------------------------------------------
       Frederick Willetts, III
       President, Chief Executive Officer and Chairman
       (Principal Executive Officer and Director)

By: /s/ Todd Sammons                                       Date:  March 28, 2002
    -------------------------------------------------
       Todd Sammons
       Senior Vice President and Chief Financial Officer
       (Principal Financial and Accounting Officer)


By: /s/ James D. Hundley, M.D.                             Date:  March 28, 2002
    -------------------------------------------------
       James D. Hundley, M.D.
       (Director)

By: /s/ O. Richard Wright, Jr.                             Date:  March 28, 2002
    -------------------------------------------------
       O. Richard Wright, Jr.
       (Director)

By: /s/ Paul G. Burton                                     Date:  March 28, 2002
    -------------------------------------------------
       Paul G. Burton
       (Director)

By: /s/ H. Thompson King, III                              Date:  March 28, 2002
    -------------------------------------------------
       H. Thompson King, III
       (Director)

By: /s/ F. Peter Fensel, Jr.                               Date:  March 28, 2002
    -------------------------------------------------
       F. Peter Fensel, Jr.
       (Director)

By: /s/ R. Allen Rippy                                     Date:  March 28, 2002
    -------------------------------------------------
       R. Allen Rippy
       (Director)

By: /s/ Russell M. Carter                                  Date:  March 20, 2002
    -------------------------------------------------
       Russell M. Carter
       (Director)