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


















                                 ANNUAL REPORT
                               DECEMBER 31, 2001

<PAGE>
                          COOPERATIVE BANKSHARES, INC.
--------------------------------------------------------------------------------
PROFILE
                    Cooperative Bankshares, Inc. (the "Company") is a registered
                    bank holding company incorporated in North Carolina in 1994.
                    The  Company  was formed  for the  purpose of serving as the
                    holding company for Cooperative Bank 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  was   chartered  in  1898.   The  Bank's
                    headquarters  are  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 Federal Deposit Insurance  Corporation
                    ("FDIC")   insures  the  Bank's   deposit   accounts  up  to
                    applicable limits.

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

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

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

--------------------------------------------------------------------------------
TABLE OF CONTENTS

                    Selected Financial and Other Data......................... 2
                    President's Message....................................... 3
                    Management's Discussion & Analysis........................ 4
                    Independent Auditors' Report..............................15
                    Consolidated Statements of Financial Condition............16
                    Consolidated Statements of Operations.....................17
                    Consolidated Statements of Comprehensive Income...........18
                    Consolidated Statements of Stockholders' Equity...........19
                    Consolidated Statements of Cash Flows.....................20
                    Notes to Consolidated Financial Statements................22
                    Directors, Officers, and Financial Center Locations.......42
                    Corporate Information.....................................43

<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS


                        SELECTED FINANCIAL AND OTHER DATA
<TABLE>
<CAPTION>

AT DECEMBER 31,                                 2001          2000        1999         1998         1997
--------------------------------------------------------------------------------------------------------
                                                                 Dollars in Thousands
<S>                                        <C>           <C>         <C>          <C>          <C>
Selected Financial Condition Data:
  Assets                                   $ 458,114     $ 414,961   $ 410,146    $ 389,773    $ 369,121
  Loans, net                                 373,458       347,486     334,744      321,324      286,692
  Securities                                  47,970        35,027      45,261       44,749       54,904
  FHLB stock                                   4,155         3,755       3,755        2,825        2,688
  Deposits                                   339,830       327,312     304,834      301,656      288,691
  Borrowed funds                              83,097        55,101      75,106       55,109       50,226
  Stockholders' equity                        33,618        30,812      29,343       31,613       28,294


YEAR ENDED DECEMBER 31,                         2001          2000        1999         1998         1997
--------------------------------------------------------------------------------------------------------
                                                                Dollars in Thousands
Selected Operations Data:
  Interest income                           $ 31,117      $ 31,709    $ 28,449     $ 28,411     $ 26,093
  Interest expense                            18,916        19,305      16,422       17,212       15,732
  Net interest income                         12,201        12,404      12,027       11,199       10,361
  Provision for loan losses                      460           970         210          330          153
  Noninterest income                           2,040         1,670       1,228        1,180          790
  Noninterest expenses                         9,303        10,193       8,885        8,275        7,370
  Income before income taxes                   4,478         2,911       4,160        3,774        3,628
  Net income                                   2,889         1,932       2,680        2,385        2,234

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

Selectged Financial Ratios and Other Data:
  Return on average assets                     0.67%         0.47%       0.69%        0.62%        0.63%
  Return on average equity                     8.91%         6.35%       8.88%        7.86%        8.26%
  Average stockholders' equity to
    average assets                             7.57%         7.38%       7.74%        7.95%        7.63%
  Non-performing assets to total assets        0.84%         0.22%       0.35%        1.08%        0.08%
  Allowance for loan losses to total loans     0.67%         0.62%       0.39%        0.35%        0.28%
  Dividend payout ratio                       19.49%        28.09%           -            -            -
Per Share Data:
  Earnings per:
     Common share - basic                     $ 1.03        $ 0.71      $ 0.95       $ 0.79       $ 0.75
     Common share - diluted                   $ 1.02        $ 0.69      $ 0.90       $ 0.74       $ 0.70
  Cash dividends declared                     $ 0.20        $ 0.20           -            -            -
  Tangible book value                        $ 11.86       $ 11.35     $ 10.92      $ 10.38       $ 9.48
  Number of common shares outstanding      2,835,447     2,714,610   2,687,919    3,046,284    2,984,396
</TABLE>

                                       2
<PAGE>

                              PRESIDENT'S MESSAGE


     Net income for the year ended December 31, 2001 was $2,888,943 or $1.02 per
diluted  share,  a 49.6% increase over the same period last year. Net income for
the 12 months ended December 31, 2000 was $1,931,675, or $.69 per diluted share,
which included  one-time  restructuring  charges of $463,572 (after tax).  Total
assets at December 31, 2001 were $458.1 million as compared to $415.0 million at
December  31, 2000, a 10.4%  increase in assets  during the year.  Stockholders'
equity was $33.6 million, or $11.86 per share, and represented 7.34% of assets.

     During the year our Retail Banking  Division  originated 910 commercial and
consumer  loans in the  amount of $111.6  million as  compared  to 873 loans for
$52.1 million during the previous year. At December 31, 2001,  loans made by the
Retail Banking Division constituted 46.9% of total loans as compared to 37.8% at
December 31, 2000.  The Mortgage Loan  Division  originated  249 loans  totaling
$44.6 million as compared to 174 loans  totaling  $22.7 million  during the year
2000. The Mortgage  Division also originated $29.3 million in brokered  mortgage
loans during 2001,  generating $386,500 in fee income,  compared to $6.5 million
in brokered mortgage loans and $93,000 in fee income for the year 2000.

     In April 2001, we opened our 17th  financial  center in  Whiteville,  North
Carolina  giving us two  banking  centers in  Columbus  County.  This center has
exceeded all of its first-year goals for growth in deposits.

     During the past year we installed additional ATM's in Washington,  Corolla,
Whiteville and downtown Wilmington, giving us a total of 11 ATM's.

     During 2001 the company  continued paying a quarterly cash dividend of $.05
per share to our  stockholders,  and it is our hope and  intention  to  continue
paying such dividends in the future.

     The cost  cutting  plan that was  announced  in October  2000  produced the
expected results as earnings improved each quarter in 2001.

     In summary,  the past year has been one that has been  marked by  continued
improvement in earnings and  efficiencies.  With the dramatic increase in retail
and commercial loans, our balance sheet is becoming  increasingly more banklike.
By adding an additional  office in Whiteville and four additional  ATM's we have
increased the number of outlets to provide the people of Eastern North  Carolina
with  the  best  of  community  bank  services  available.  With  the  continued
improvement  in  efficiencies  as a result of our cost cutting  during the prior
year, I am very  confident  about the future of our company.  Thank you for your
support.

                                    Sincerely yours,
                                    Frederick Willetts, III
                                    President

                                       3
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS

GENERAL
     Cooperative  Bankshares,  Inc. (the "Company") is a registered bank holding
company  incorporated  in North Carolina in 1994. The Company was formed for the
purpose of serving as the holding  company  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.

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

CRITICAL ACCOUNTING POLICY
     The Bank's most significant critical accounting policy is the determination
of its allowance for loan losses.  A critical  accounting  policy is one that is
both very  important to the  portrayal  of the Bank's  financial  condition  and
results,  and  requires  management's  most  difficult,  subjective  or  complex
judgments.  What makes these judgments difficult,  subjective and/or complex are
due to the  need to make  estimates  about  the  effects  of  matters  that  are
inherently uncertain.  For further information on the allowance for loan losses,
see the "Financial Condition" in Management's Discussion and Analysis and Note 3
of the "Notes to Consolidated Financial Statements" included the Annual Report.

MANAGEMENT STRATEGY
     Cooperative Bank's lending  activities have  traditionally  concentrated on
the  origination  of  loans  for  the  purpose  of  constructing,  financing  or
refinancing  residential  properties.  In recent  years,  however,  the Bank has
emphasized  origination  of  nonresidential  real estate loans,  equity lines of
credit,  and secured and unsecured  consumer and business  loans. As of December
31, 2001  approximately  $273  million,  or 73%,  of the Bank's  loan  portfolio
consisted of loans secured by residential  properties which includes $34 million
of loans  classified as construction  and land  development.  This was down from
approximately  $291 million,  or 83% at December 31, 2000.  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.

     The Bank has chosen to begin selling a larger  percentage of its fixed rate
mortgage loan originations through broker dealer 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.

     In the past, the Bank has sold fixed rate,  long term mortgage loans in the
secondary market as part of the asset/liability management program. In 2001, the
Bank sold $470,000 in loans in the secondary market.  The Bank generally retains
the  servicing of loans sold outside of the broker  dealer  arrangements,  which
generally  receives a fee payable  monthly of up to 1/4% per annum of the unpaid
balance of each loan.

     The  growth  in  the  loan   portfolio  has  been   concentrated   in  real
estate-backed  construction  and land  development  and  commercial  loans.  The
anticipated  effects  of  these  loans  is to  increase  the  yield  on the loan
portfolio.  These  loans  generally  involve a higher  level of credit risk than
one-to-four family residential  lending due to the concentration of principal in
a  limited  number of loans and  borrowers,  the  effects  of  general  economic
conditions and the volatility of the collateral. This increased risk also causes
the allowance for loan losses to increase,  which is the primary  reason for the
increase in the allowance over the past two years.

INTEREST RATE SENSITIVITY ANALYSIS
     Interest rate sensitivity refers to the change in interest spread resulting
from changes in interest  rates. To the extent that interest income and interest
expense do not respond  equally to changes in interest  rates, or that all rates
do not change uniformly,  earnings will be affected.  Interest rate sensitivity,
at a point in time,  can be analyzed  using a static gap analysis  that measures
the match in balances subject to repricing between  interest-earning  assets and
interest-bearing  liabilities.  Gap is  considered  positive  when interest rate
sensitive assets exceed interest rate sensitive  liabilities.  Gap is considered
negative when interest rate sensitive liabilities exceed interest rate sensitive
assets.  At December 31, 2001,  Cooperative had a one-year negative gap position
of 7.3%.  During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income,  while a positive gap would tend to result
in an  increase  in net  interest  income.  During a period of falling  interest
rates, a negative gap would tend to result in an increase in net interest income
while a positive gap would tend to adversely affect net interest  income.  It is
important to note that certain shortcomings are inherent in static gap analysis.
Although  certain assets and liabilities may have similar  maturities or periods
of repricing,  they may react in different degrees to changes in market interest
rates.  For example,  part of the Company's  adjustable-rate  mortgage loans are
indexed  to  the  National   Monthly  Median  Cost  of  Funds  to   SAIF-insured
institutions.  This  index is  considered  a lagging  index  that

                                       4
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS

may lag behind  changes in market rates.  The one-year or less  interest-bearing
liabilities also include checking,  savings,  and money market deposit accounts.
Experience has shown that the Company sees relatively  modest repricing of these
transaction  accounts.  Management takes this into  consideration in determining
acceptable levels of interest rate risk.

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

<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY ANALYSIS
                                                            Over One     Over Five
                                              One Year      Through       Through      Over Ten
December 31, 2001                             or Less      Five Years    Ten Years       Years      Total
------------------------------------------------------------------------------------------------------------
                                                               (Dollars in thousands)
<S>                                          <C>           <C>           <C>          <C>          <C>
Interest-earning assets:
     Securities                              $   5,058     $  28,634     $   8,795    $   5,483    $  47,970
     Interest-bearing bank balances              1,586            --            --           --        1,586
     Federal Home Loan Bank stock                4,155            --            --           --        4,155
     Loan portfolio                            239,125       100,306        21,133       15,417      375,981
                                             ---------     ---------     ---------    ---------    ---------
        Total                                $ 249,924     $ 128,940     $  29,928    $  20,900    $ 429,692
                                             =========     =========     =========    =========    =========
Interest-bearing liabilities:
     Deposits                                $ 243,389     $  70,980     $   7,744    $      --    $ 322,113
     Borrowed funds                             40,003        33,011        10,016           67       83,097
                                             ---------     ---------     ---------    ---------    ---------
        Total                                $ 283,392     $ 103,991     $  17,760    $      67    $ 405,210
                                             =========     =========     =========    =========    =========

Interest rate sensitivity gap                $ (33,468)    $  24,949     $  12,168    $  20,833    $  24,482
                                             =========     =========     =========    =========    =========

Cumulative interest rate sensitivity gap     $ (33,468)    $  (8,519) $      3,649    $  24,482
                                             =========     =========     =========    =========

Cumulative ratio of interest-earning
    assets to interest-bearing liabilities        88.2%         97.8%        100.9%       106.0%
                                             =========     =========     =========    =========

Ratio of cumulative gap to total assets           (7.3%)        (1.9%)         0.8%         5.3%
                                             =========     =========     =========    =========
</TABLE>
MARKET RISK
     The Company's primary market risk is interest rate risk. Interest rate risk
is the result of differing maturities or repricing intervals of interest earning
assets  and  interest  bearing  liabilities  and the  fact  that  rates on these
financial  instruments do not change uniformly.  These conditions may impact the
earnings  generated by the Company's  interest earning assets or the cost of its
interest  bearing  liabilities,  thus directly  impacting the Company's  overall
earnings.  The Company's  management actively monitors and manages interest rate
risk. One way this is  accomplished  is through the development of and adherence
to the Company's  asset/liability  policy.  This policy sets forth  management's
strategy for matching the risk characteristics of the Company's interest earning
assets  and  liabilities  so as to  mitigate  the  effect of changes in the rate
environment.

                                       5
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS

     One way to measure the Company's  potential  exposure to interest rate risk
is to estimate the effect of a change in rates on the Company's  Economic  Value
of Equity ("EVE"). At December 31, 2001, the negative estimated change in EVE is
significantly  reduced  in the  rising  rate  environments  as  compared  to the
estimated change at December 31, 2000. There are not significant  changes to EVE
in declining  rate  environments  from  December 31, 2000, to December 31, 2001,
except for the 400 basis point decline in rates which had a significant increase
in EVE. The following table sets forth information relating to the Company's EVE
and the estimated  changes under  various  interest rate change  scenarios as of
December 31, 2001 (in thousands).

 Market Risk Table
December 31, 2001
<TABLE>
<CAPTION>
    Change in                     Economic            Estimated        Estimated
    Interest Rates             Value of Equity         $ Change        % Change
--------------------------------------------------------------------------------
<S>                                <C>                 <C>               <C>
400 basis point rise               $ 21,736            (11,259)         -34%
300 basis point rise                 24,654             (8,341)         -25%
200 basis point rise                 27,850             (5,145)         -16%
100 basis point rise                 31,624             (1,371)          -4%
Base Scenario                        32,995                  -             -
100 basis point decline              34,255              1,260            4%
200 basis point decline              31,898             (1,097)          -3%
300 basis point decline              32,647               (348)          -1%
400 basis point decline              37,140              4,145           13%
</TABLE>

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

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

     At December 31, 2001,  the  estimated  market value of liquid assets (cash,
cash equivalents,  and marketable  securities) was approximately  $60.5 million,
representing  14.3% of deposits and borrowed  funds as compared to $52.8 million
or 13.8% of  deposits  and  borrowed  funds at  December  31,  2000.  Management
maintains a portfolio  generally  consisting of  mortgage-backed  securities and
securities  with short  maturities  (within 5 years) and call dates,  consistent
with the Bank's focus on liquidity. Investment securities available for sale are
recorded at their fair value,  with the  unrealized  gain or loss  included as a
component of shareholders' equity, net of deferred taxes.

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

                                       6
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS

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

     The  Company's  primary uses of liquidity are to fund loans and to purchase
investments.  At December 31, 2001, outstanding off-balance sheet commitments to
extend credit totaled $30.3 million, and the undisbursed portion of construction
loans was $33.7 million.  Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS
     The Bank enters into  agreements  that obligate it to make future  payments
under  contracts,  such as debt and  lease  agreements.  In  addition,  the Bank
commits to lend funds in the future such as credit  lines and loan  commitments.
Below is a table of such contractual obligations and commitments at December 31,
2001 (in thousands).
<TABLE>
<CAPTION>
                                                         Payments Due by Period
                                     ----------------------------------------------------
                                                   Less
                                                  than 1      1-3         4-5     Over 5
    Contractual Obligations            Total       year      years       years     years
                                     ----------------------------------------------------
<S>                                  <C>        <C>        <C>        <C>        <C>
Borrowed Funds                       $ 83,097   $ 35,000   $ 25,000   $   --     $ 23,097
Lease Obligations                       1,495         95        186        169      1,045
Deposits                              339,830    296,739     43,055       --           36
                                     ----------------------------------------------------
Total Contractual Cash Obligations   $424,422   $331,834   $ 68,241   $    169   $ 24,178
                                     ====================================================
</TABLE>
<TABLE>

                                                       Amount of Commitment Expiration
                                                                    Per Period
                                                -----------------------------------------------------
                                                 Total        Less
                                                 Amounts      than 1       1-3       4-5      Over 5
        Other Commitments                       Committed      year       years     years      years
                                                -----------------------------------------------------
<S>                                              <C>          <C>       <C>         <C>       <C>
Undisbursed portion of home equity
   collateralized primarily by junior liens
   on 1-4 family properties                      $12,031      $    --   $    --     $  --     $12,031
Other commitments and credit lines                15,755       10,356     3,689       111       1,599
Undisbursed portion of construction loans         33,728       33,728      --          --          --
Fixed-rate mortgage loan commitments                 618          618      --          --          --
Adjustable-rate mortgage loan
   commitments                                     1,881        1,881      --          --          --
                                                 ----------------------------------------------------`
Total Commitments                                $64,013      $46,583   $ 3,689     $ 111     $13,630
                                                 ====================================================
</TABLE>


CAPITAL
     Stockholders'  equity at December  31,  2001,  was $33.6  million,  up $2.8
million,  or 9.1%, from $30.8 million at December 31, 2000. The improved capital
position  during the year 2001 reflects the impact of earnings  retention  after
the  declaration  of cash  dividends  of $563,034,  or $0.20 per share,  and the
exercising of 141,537 stock options.  Stockholders'  equity at December 31, 2001
and  December  31, 2000  includes  unrealized  gains net of tax of $188,000  and
$30,000, respectively, on securities available for sale.

     Under the capital  regulations of the FDIC,  the Bank must satisfy  minimum
leverage  ratio   requirements  and  risk-based  capital   requirements.   Banks
supervised by the FDIC must maintain a minimum  leverage  ratio of core (Tier I)
capital to average  adjusted assets ranging from 3% to 5%. At December 31, 2001,
the Bank's leverage capital ratio was 7.47%. The FDIC's risk-based capital rules
require  banks  supervised  by  the  FDIC  to  maintain  risk-


                                       7
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS

based capital to risk-weighted assets of at least 8.00%.  Risk-based capital for
the Bank is defined as Tier I capital  plus the  balance of  allowance  for loan
losses.  At December 31, 2001, the Bank had a ratio of qualifying  total capital
to risk-weighted assets of 11.00%.

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

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

     On December 20, 2001, the Company's Board of Directors approved a quarterly
cash  dividend on its common  stock of $.05 per share.  The dividend was payable
January  16,  2002,  to  shareholders  of record on January 2, 2002.  Any future
payment of dividends is dependent on the  financial  condition and capital needs
of the Company,  requirements of regulatory agencies, and economic conditions in
the marketplace.

RELATED PARTY TRANSACTIONS
     The Bank has had, and expects to have in the future,  banking  transactions
in the ordinary  course of business with several  directors,  officers and their
associates  ("Related  Parties")  on  substantially  the same  terms,  including
interest rates and  collateral,  as those  prevailing at the time for comparable
transactions with others.  Those  transactions  neither involve more than normal
risk of collectibility,  nor present any unfavorable features. The one exception
is officers can  participate in the Bank's  employee loan program which offers a
six month  adjustable  rate that is 1% above the Bank's cost of funds rounded up
to the  next  1/4%.  Only  the  employees'  primary  residence  can be  used  as
collateral and the interest rate is the only favorable term. Officers do not get
preferential  treatment  in this  program  over  other  employees.  For  further
information,  see Note 3 of Notes to Consolidated  Financial Statements included
in the Annual Report and the Proxy.


                                       8
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS


                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS

                 DECEMBER 31, 2001 COMPARED TO DECEMBER 31, 2000

FINANCIAL CONDITION
     The Company's  total assets  increased  10.4% to $458.1 million at December
31, 2001, as compared to $415.0  million at December 31, 2000. The major changes
in the assets are as  follows:  a decrease of $5.9  million  (32.2%) in cash and
cash equivalents,  an increase of $26.9 million (167.7%) in securities available
for sale, a decrease of $14.0 million (73.7%) in held to maturity securities, an
increase of $26.0  million  (7.5%) in net loans  receivable,  and a $9.1 million
(722.6%) increase in other assets. At December 31, 2001 and 2000, the investment
portfolio totaled $52.1 million and $38.8 million,  respectively, an increase of
$13.3  million or 34.4  percent.  On January 1, 2001,  the  Company  transferred
held-to-maturity  investment  securities with an amortized cost of approximately
$5,978,000 to the  available-for-sale  category at fair value as allowed by SFAS
No. 133. The unrealized loss at the time of transfer was  approximately  $32,000
before taxes. The Bank funded the increase in securities, loans and other assets
with a $12.5 million (3.8%) increase in retail deposits, a $28.0 million (50.8%)
increase in borrowed funds and other  available  liquid assets.  The increase in
other assets was due to an increase in cash  surrender  value of bank owned life
insurance (BOLI) of $8.1 million and a $600,000 increase in prepaid  maintenance
due to the purchase of a 5 year  maintenance  agreement  on the core  processing
software.  Although  the  Company  has  historically  concentrated  its  lending
activities  on the  origination  of  loans  for  the  purpose  of  financing  or
refinancing  residential  properties,  it is now actively pursuing construction,
land development, consumer, and business lending.

     The Company's  nonperforming  assets (nonaccrual  loans,  accruing loans 90
days or more delinquent and foreclosed real estate) were $3.8 million,  or 0.84%
of assets,  at December  31, 2001,  compared to $925,000 or 0.22% of assets,  at
December  31,  2000.  The  Company  usually  assumes an  aggressive  position in
collecting  delinquent  loans and  disposing  of  foreclosed  assets to minimize
balances of  nonperforming  assets and  continues  to evaluate the loan and real
estate portfolios to provide loss reserves as considered necessary.  In light of
what happened on September 11, 2001, and the economic conditions in general, the
Mortgage  Division  has taken the approach to work with our  borrowers  and help
them through these  uncertain times which is part of the reason for the increase
in nonperforming assets. Of the $3.1 million in nonaccrual and accruing loans 90
days or more  delinquent,  $2.6  million is  secured  by 1-4 family  residential
property,  which  have  historically  experienced  low  charge  offs  due to the
adequacy of the collateral.  Therefore,  while there can be no guarantee, in the
opinion of management, the allowance for loan losses of $2.5 million at December
31, 2001 is adequate to cover probable losses inherent in the loan portfolio.

     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.  An independent third party
annually  reviews  our  risk  grade  for  appropriateness.   The  probable  loss
projections  for  each  risk  grade  group  are  the  basis  for  the  allowance
allocation.  The loss  estimates  are based on prior  experience,  general  risk
associated with each loan group and current economic conditions. The unallocated
allowance for loan losses primarily  represents the impact of certain conditions
that were not considered in allocating the allowance to the specific  components
of the loan portfolio.

     At December 31, 2001 deposits had increased  $12.5 million (3.8%) to $339.8
million as compared to $327.3  million at December 31,  2000.  With the focus to
restructure  the  balance  sheet to be more  reflective  of a  commercial  bank,
management took an aggressive position in attracting  noninterest bearing demand
deposit  accounts.  Noninterest  bearing demand accounts  increased $5.0 million
(40.0%) to $17.7 million as compared to $12.7 million at December 31, 2000.

     During the first six months of 2001, the Bank had excess liquidity which it
invested in various  securities to increase yield.  During the second six months
of 2001,  loans increased $23 million while deposits  increased only $1 million.
To fund this loan growth and to purchase $8.1 million in BOLI, the Bank received
$28.0  million in borrowed  funds.  Borrowed  funds,  collateralized  through an
agreement  with the Federal Home Loan Bank (FHLB) for  advances,  are secured by
the Bank's  investment in FHLB stock and  qualifying  first mortgage  loans.  At

                                       9
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS


December  31,  2001,  $35  million in  borrowed  funds  mature in 1 year and the
remaining amounts mature in 2 to 10 years. For further  information,  see Note 6
of Notes to Consolidated Financial Statements.

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

NET INCOME
     Net income  increased  49.6% to $2.9 million for the year 2001, as compared
to $1.9 million in 2000 and $2.7 million in 1999. The following  analysis of the
Bank's results of operations  will explain the changes that had an effect on net
income for the three years under review.

INTEREST INCOME
     Interest  income  amounted to $31.1 million during 2001, a $592,000  (1.9%)
decrease from 2000 levels,  which  increased $3.3 million  (11.5%) from the 1999
levels.  Interest  income  reduction  during 2001  resulted from lower yields on
earning assets.  The average balance of  interest-earning  assets increased 3.0%
but was more than offset by the yield  decreasing 37 basis points as compared to
the same  period a year ago.  The yield fell  because of the action the  Federal
Reserve  took to  reduce  interest  rates in hopes  to spur the  economy.  Their
actions reduced the prime rate to which many of our loans are tied. During 2000,
the  increase  in  interest  income was due to a 6.0%  increase  in the  average
balance of interest-earning  assets and a 39 basis point increase in the average
yield as compared to 1999. The yield on average  interest-earning assets for the
year 2001 decreased to 7.55% as compared to 7.92% for 2000 and 7.53% for 1999.

INTEREST EXPENSE
     Interest  expense  amounted to $18.9 million during 2001, a $388,000 (2.0%)
decrease from 2000 levels, compared to a $2.9 million (17.6%) increase from 1999
to 2000. The decrease in interest expense during 2001 resulted from a lower cost
of   interest-bearing   liabilities.   During  2001,  the  average   balance  of
interest-bearing liabilities increased 3.2% but was more than offset by the cost
decreasing  26 basis  points as  compared to 2000.  During 2000 the  increase in
interest  expense was due to a 53 basis point  increase in the average rate paid
and a 5.6% increase in the average  balance of  interest-bearing  liabilities as
compared to 1999. The average cost on interest-bearing  liabilities for the year
2001 decreased to 4.97% as compared to 5.23% for 2000 and 4.70% for 1999.

NET INTEREST INCOME
     Net  interest  income  totaled  $12.2  million  during  2001, a decrease of
$203,000 or 1.6% over 2000, when net interest  income was $12.4 million.  During
2000, net interest income grew $377,000 or 3.1% over the $12.0 million  recorded
during 1999. The Average Yield/Cost Analysis table analyzes the interest-earning
assets and interest-bearing  liabilities for the three years ending December 31,
2001.  The  Rate/Volume  Analysis  table  identifies  the causes for  changes in
interest income and interest expense for 2001 and 2000. The interest rate spread
was 2.53% for 2001, compared to 2.69% for 2000 and 2.83% for 1999. The declining
interest  rate spread can be  attributed  to the fact that more  assets  reprice
within 30 days as compared to  liabilities,  therefore the spread  contracted in
2001 due to the rapidly declining interest rate environment. Once interest rates
stabilize,   management   expects  the  spread  between  the  average  yield  on
interest-earning assets and the average cost on interest-bearing  liabilities to
improve. The net yield on interest-earning assets was 2.96% for 2001 compared to
3.10% for 2000 and 3.19% for 1999.

     During  2001,  the Bank  provided  a  retirement  benefit  for its Board of
Directors,  President and Executive Vice President.  In addition,  the Directors
can now defer their Board  compensation.  These  benefits are funded through the
purchase of BOLI, which should enable the Bank to provide these benefits without
a reduction to net income.  This  transaction will have a negative impact on net
interest income of  approximately  $350,000  because it was funded with borrowed
funds.  Noninterest  income  should  be  positively  affected  by  approximately
$250,000.  However,  income  from  the  BOLI  is not  taxable,  resulting  in an
anticipated net increase in net income of approximately $35,000.

                                       10
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS

                           AVERAGE YIELD/COST ANALYSIS

     The following table contains  information relating to the Company's average
balance sheets and reflects the average yield on earning assets and average cost
of interest-bearing liabilities for the periods indicated. Such yields and costs
are derived by dividing  income or expense by the average  balances of assets or
liabilities, respectively, for the periods presented. The average loan portfolio
balances include nonaccrual loans.

<TABLE>
<CAPTION>
                                                                      For the year ended
                                         ----------------------------------------------------------------------
                                                 DECEMBER 31, 2001                    DECEMBER 31, 2000
                                         ---------------------------------    ---------------------------------
(DOLLARS IN THOUSANDS)                                            Average                               Average
                                         Average                   Yield/     Average                   Yield/
                                         Balance      Interest      Cost      Balance      Interest      Cost
                                         -------      --------    -------     -------      --------     -------
<S>                                       <C>         <C>          <C>       <C>               <C>      <C>
ASSETS
Interest-earning assets:
   Interest-bearing deposits in
    other banks                          $  7,648    $   271      3.54%     $  9,528        $   390     4.09%
   Securities:
        Available for sale                  36,671      2,212      6.03%       21,619         1,267     5.86%
        Held to maturity                     7,452        400      5.37%       18,385         1,066     5.80%
   FHLB stock                                3,761        254      6.75%        3,755           291     7.75%
   Loan portfolio                          356,540     27,980      7.85%      346,848        28,695     8.27%
                                          --------    -------      ----      --------       -------     ----
    Total interest-earning assets          412,072     31,117      7.55%      400,135        31,709     7.92%
Non-interest earning assets                 16,676    -------                  11,665       -------
                                          --------                           --------
Total assets                              $428,748                           $411,800
                                          ========                           ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
   Deposits                               $319,777    $15,353      4.80%     $303,379       $15,062     4.96%
   Borrowed funds                           60,943      3,563      5.85%       65,470         4,243     6.48%
                                          --------    -------      ----      --------       -------     ----
    Total interest-bearing liabilities     380,720     18,916      4.97%      368,849        19,305     5.23%
Non-interest bearing liabilities            15,588    -------                  12,549       -------
                                          --------                           --------
    Total liabilities                      396,308                            381,398
    Stockholders' equity                    32,440                             30,402
                                          --------                           --------
Total liabilities and stockholders'
   equity                                 $428,748                           $411,800
                                          ========                           ========
Net interest income                                   $12,201                               $12,404
                                                      =======                               =======
Interest rate spread                                               2.58%                                2.69%
                                                                 ======                               ======
Net yield on interest-earning assets                               2.96%                                3.10%
                                                                 ======                               ======
Percentage of average interest-earning
   assets to average interest-bearing
   liabilities                                                    108.2%                               108.5%
                                                                 ======                               ======
<CAPTION>
                                                  For the year ended
                                           --------------------------------
                                                  DECEMBER 31, 1999
                                           --------------------------------
(DOLLARS IN THOUSANDS)                                             Average
                                           Average                  Yield/
                                           Balance      Interest     Cost
                                           --------     --------   -------
<S>                                       <C>              <C>       <C>
ASSETS
Interest-earning assets:
   Interest-bearing deposits in
    other banks                          $ 10,042         $379      3.77%
   Securities:
        Available for sale                  30,210        1,868      6.18%
        Held to maturity                    14,769          694      4.70%
   FHLB stock                                3,087          234      7.58%
   Loan portfolio                          319,480       25,274      7.91%
                                          --------      -------     -----
    Total interest-earning assets          377,588       28,449      7.53%
Non-interest earning assets                 12,392      -------
                                          --------
Total assets                              $389,980
                                          ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
   Deposits                               $292,174      $12,838      4.39%
   Borrowed funds                           57,036        3,584      6.28%
                                          --------      -------     -----
    Total interest-bearing liabilities     349,210       16,422      4.70%
Non-interest bearing liabilities            10,598      -------
                                          --------
    Total liabilities                      359,808
    Stockholders' equity                    30,172
                                          --------
Total liabilities and stockholders'
   equity                                 $389,980
                                          ========
Net interest income                                     $12,027
                                                        =======
Interest rate spread                                                 2.83%
                                                                   ======
Net yield on interest-earning assets                                 3.19%
                                                                   ======
Percentage of average interest-earning
   assets to average interest-bearing
   liabilities                                                      108.1%
                                                                   ======
</TABLE>

                                       11
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS

                              RATE/VOLUME ANALYSIS

     The table below provides  information  regarding changes in interest income
and  interest   expense  for  the  period   indicated.   For  each  category  of
interest-earning  assets  and  interest-bearing   liabilities,   information  is
provided on changes  attributable  to (i)  changes in volume  (changes in volume
multiplied by old rate) and (ii) changes in rates (change in rate  multiplied by
old  volume).  The  changes  attributable  to changes in  rate-volume  have been
allocated to the other categories based on relative absolute values.
<TABLE>
<CAPTION>
                                                      For the year ended                        For the year ended
                                         December 31, 2000 vs. December 31, 2001  December 31, 1999 vs. December 31, 2000
                                                  Increase (Decrease)                      Increase (Decrease)
                                                         Due to                                   Due to
(DOLLARS IN THOUSANDS)                        ----------------------------------     -----------------------------------
                                               Volume      Rate          Total        Volume         Rate         Total
                                              -------     --------      --------     ---------      ------        ------
<S>                                            <C>          <C>          <C>            <C>           <C>           <C>
Interest income:
   Interest-bearing deposits in other banks   $  (72)     $   (47)       $ (119)       $  (21)      $   32        $   11
   Securities:
        Available for sale                       906           39           945          (508)         (93)         (601)
        Held to maturity                        (593)         (73)         (666)          189          183           372
   FHLB stock                                      -          (37)          (37)           52            5            57
   Loan portfolio                                788       (1,503)         (715)        2,230        1,191         3,421
                                              ------      -------        ------        ------       ------        ------
    Total interest-earning assets              1,029       (1,621)         (592)        1,942        1,318         3,260
                                              ------      -------        ------        ------       ------        ------

Interest expense:
   Deposits                                      797         (506)          291           507        1,717         2,224
   Borrowed funds                               (282)        (398)         (680)          543          116           659
                                              ------      -------        ------        ------       ------        ------
    Total interest-bearing liabilities           515         (904)         (389)        1,050        1,833         2,883
                                              ------      -------        ------        ------       ------        ------
Net interest income                           $  514      $  (717)       $ (203)       $  892       $ (515)       $  377
                                              ======      =======        ======        ======       ======        ======
</TABLE>

PROVISION FOR LOAN LOSSES
     The provision for loan losses  charged to  operations  was $460,000  during
2001,  compared to $970,000  during 2000 and $210,000 during 1999. The provision
for 2000  included an increase of  approximately  $670,000 made in response to a
detailed review of the Bank's loan portfolio.  Management's decision to increase
the loan loss  reserve was  considered  appropriate  in light of the  successful
expansion  in the  commercial  loan  portfolio  and was not in  response  to any
significant increase in non-performing  assets. While commercial loans typically
earn a higher yield than traditional  residential  mortgage loans,  they pose an
incrementally  higher  level of  credit  risk to the  Company.  A review  of the
portfolio  during  the  first  quarter  of 2000  highlighted  this  trend in the
portfolio and prompted  management to make this  provision.  The commercial loan
portfolio  continues  to  expand  which is why the  provision  for  loan  losses
continues  to  increase.  Nonperforming  assets at  December  31, 2001 were $3.8
million  compared to $925,000 at December  31, 2000 and $1.4 million at December
31, 1999. Net charge-offs for 2001 were $97,000 compared to $117,000 during 2000
and $82,000 during 1999. At December 31, 2001, the allowance for loan losses was
0.67% of net  loans as  compared  to 0.62%  for 2000 and  0.39%  for  1999.  The
allowance  for loan  losses  increased  to $2.5  million at  December  31,  2001
compared to $2.2  million at December  31, 2000 and $1.3 million at December 31,
1999. Management considers this level to be appropriate based on lending volume,
the current level and types of  delinquencies  and other  nonperforming  assets,
historical charge off patterns,  overall economic  conditions and other factors.
Future increases to the allowance may be necessary,  however,  due to changes in
loan  composition or loan volume,  changes in economic or market area conditions
and other factors.  Additionally,  various regulatory  agencies,  as an integral
part of their examination  process,  periodically review the Company's allowance
for loan losses.  Such agencies may require the  recognition of additions to the
allowance based on their judgments of information  available to them at the time
of their examination.

NONINTEREST INCOME
     Total noninterest income increased to $2.0 million during 2001, an increase
of $371,000 or 22.2% over 2000.  This  compares to $1.7 million and $1.3 million
during 2000 and 1999,  respectively.  The major  component in the year 2001 that
had the most impact on noninterest  income was the sale of securities  resulting
in net gains of  $125,000  versus a loss on sale of  securities  of  $287,000 in
2000.  These gains were realized as the  investment


                                       12
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS

portfolio was being managed during the year of rapidly declining interest rates.
Management  has not  budgeted  any gains on sale of  securities  in the  future.
Service charges and fees on loans increased to $731,000  (63.6%) during the year
2001 as compared to $447,000 (38.7%) for 2000 and $322,000 in 1999. The increase
in service  charges  and fees on loans for 2001 was mainly due to an increase in
loan settlement service fees for loans processed for others.  This program began
in May 2000 and the  volume  has  increased  in 2001 due to the  favorable  rate
environment.  Deposit-related fees increased to $967,000 (16.9%) during the year
2001 as compared to $827,000 (18.1%) for 2000 and $701,000 in 1999. The increase
in  deposit-related  fees can be  attributed  to an  increase  in the  volume of
checking  accounts and a change in the fee structure during the year 2000, which
was in place for the entire year of 2001.  Other  income  increased  to $205,000
(106.1%)  during the year 2001 as  compared  to  $100,000  (39.5%)  for 2000 and
$71,000 in 1999.  The majority of the increase can be attributed to the increase
in the cash surrender value of the BOLI that was purchased in 2001.

NONINTEREST EXPENSE
     Total noninterest expense was $9.3 million during the year 2001, a decrease
of $890,000 or 8.7% from 2000. The major decrease in noninterest  expense during
the year 2001 can be attributed to a modification to the defined benefit plan in
2000 and a onetime  offering of a special  early  retirement  benefit to certain
employees at December 31, 2000.  With a modification to the defined benefit plan
in 2000,  the Company  expensed  $35,000 in 2001 as compared to $304,000 in 2000
and  $120,000 in 1999.  As a result of this  change,  the Bank offered a special
early  retirement   benefit  to  certain   employees   meeting  the  eligibility
requirements,  resulting in a one-time  charge of $754,000 to  compensation  and
fringe  benefits in 2000.  The Bank's  occupancy and equipment  expense was $2.1
million during 2001, an increase of 4.0% as compared to $2.0 million in 2000 and
$1.9 million in 1999.  The increase in the years 2001 and 2000 can be attributed
to additional  maintenance necessary to keep the buildings and equipment in good
repair,  increases in property  tax,  increases  in the cost of data  processing
services,  and normal  increases in utility  expenses.  Advertising cost for the
year 2001 was $278,000,  a decrease of 30.2% as compared to $398,000 in 2000 and
$445,000 in 1999.  The  reduction in  advertising  can be  attributed  to a more
conservative  advertising  policy.  Other operating expense was $1.8 million, an
increase of 5.0% as compared to $1.7  million in 2000 and $1.8  million in 1999.
The majority of the increase can be  attributed  to credits the Bank received in
2000 for phone lines for data processing.  No such credits were received in 2001
and 1999.

INCOME TAXES
     The effective tax rate for the years ended December 31, 2001, 2000 and 1999
was 35.5%, 33.6% and 35.6% respectively.  The increase in the effective tax rate
in 2001 over 2000 was due to lower relative levels of state tax-exempt income.

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

                                       13
<PAGE>
                       MANAGEMENT'S DISCUSSION & ANALYSIS

                             SELECTED QUARTERLY DATA


     The following table contains  selected  financial data for the Company on a
quarterly basis for the previous eight quarters.
<TABLE>
<CAPTION>
                                                                  2001
                                              Fourth       Third        Second       First
----------------------------------------------------------------------------------------------
                                              Dollars in Thousands
<S>                                           <C>          <C>          <C>         <C>
Selected Quarter-End Balances:
  Assets                                      $ 458,114    $ 443,781    $ 427,992   $ 417,408
  Loans, net                                    373,458      364,306      351,104     349,136
  Securities                                     47,970       47,441       51,650      42,767
  FHLB stock                                      4,155        3,755        3,755       3,755
  Deposits                                      339,830      340,615      338,985     328,566
  Borrowed funds                                 83,097       68,098       55,099      55,100
  Stockholders' equity                           33,618       33,010       31,873      31,375

----------------------------------------------------------------------------------------------
                                              Dollars in Thousands
Selected Operations Data:
  Interest income                             $   7,505    $   7,870    $   7,825   $   7,918
  Interest expense                                4,375        4,747        4,823       4,972
  Net interest income                             3,130        3,123        3,002       2,946
  Provision for loan losses                         160          120           90          90
  Noninterest income                                630          533          462         415
  Noninterest expenses                            2,362        2,292        2,275       2,374
  Income before income taxes                      1,238        1,244        1,099         897
  Net income                                        806          805          703         574

----------------------------------------------------------------------------------------------
Selected Financial Ratios and Other Data:
  Return on average assets                        0.72%        0.74%        0.67%       0.56%
  Return on average equity                        9.59%        9.87%        8.77%       7.31%
  Average stockholders' equity to average
    assets                                        7.52%        7.53%        7.63%       7.59%
Per Share Data:
  Earnings per:
     Common share - basic                     $    0.29    $    0.29    $    0.25   $    0.21
     Common share - diluted                   $    0.28    $    0.28    $    0.25   $    0.20
  Cash dividends declared                     $    0.05    $    0.05    $    0.05   $    0.05
  Tangible book value                         $   11.86    $   11.69    $   11.38   $   11.20
  Number of common shares outstanding         2,835,447    2,823,271    2,800,975   2,800,975

<CAPTION>
                                                                    2000
                                                Fourth       Third       Second       First
-----------------------------------------------------------------------------------------------
<S>                                             <C>          <C>         <C>          <C>
Selected Quarter-End Balances:
  Assets                                        $ 414,961    $ 414,720   $ 420,735    $ 410,465
  Loans, net                                      347,486      348,872     351,678      343,222
  Securities                                       35,027       39,829      38,683       38,619
  FHLB stock                                        3,755        3,755       3,755        3,755
  Deposits                                        327,312      319,647     321,167      316,412
  Borrowed funds                                   55,101       63,103      68,104       63,105
  Stockholders' equity                             30,812       30,713      30,021       29,418

-----------------------------------------------------------------------------------------------
                                              Dollars in Thousands
Selected Operations Data:
  Interest income                               $   8,064    $   8,060   $   7,925    $   7,660
  Interest expense                                  5,088        5,005       4,744        4,468
  Net interest income                               2,976        3,055       3,181        3,192
  Provision for loan losses                            90           90          90          700
  Noninterest income                                  410          335         332          593
  Noninterest expenses                              3,016        2,162       2,359        2,656
  Income before income taxes                          280        1,138       1,064          429
  Net income                                          235          728         695          274

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

Selected Financial Ratios and Other Data:
  Return on average assets                          0.23%        0.70%       0.67%        0.27%
  Return on average equity                          3.01%        9.52%       9.28%        3.66%
  Average stockholders' equity to average
    assets                                          7.56%        7.39%       7.25%        7.33%
Per Share Data:
  Earnings per:
     Common share - basic                       $    0.08    $    0.27   $    0.26    $    0.10
     Common share - diluted                     $    0.08    $    0.26   $    0.25    $    0.10
  Cash dividends declared                       $    0.05    $    0.05   $    0.05    $    0.05
  Tangible book value                           $   11.35    $   11.31   $   11.06    $   10.86
  Number of common shares outstanding           2,714,610    2,714,610   2,714,110    2,709,078

</TABLE>
                                       14

<PAGE>


                          INDEPENDENT AUDITORS' REPORT



The Board of Directors
Cooperative Bankshares, Inc.:


We have audited the accompanying  consolidated statements of financial condition
of Cooperative Bankshares, Inc. and subsidiary as of December 31, 2001 and 2000,
and the related  consolidated  statements of operations,  comprehensive  income,
stockholders'   equity,   and  cash  flows  for  the  years  then  ended.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial  statements  based  on  our  audits.  The  accompanying   consolidated
financial statements of Cooperative Bankshares, Inc. and subsidiary for the year
ended  December 31, 1999 were  audited by other  auditors  whose report  thereon
dated January 21, 2000 expressed an unqualified opinion on those statements.

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

In our opinion, the 2001 and 2000 consolidated  financial statements referred to
above  present  fairly,  in all material  respects,  the  financial  position of
Cooperative  Bankshares,  Inc. and  subsidiary as of December 31, 2001 and 2000,
and the  results  of their  operations  and their  cash flows for the years then
ended in conformity with accounting  principles generally accepted in the United
States of America.


                                            /s/ KPMG LLP


Raleigh, North Carolina
January 16, 2002, except as to note 16,
   which is as of February 25, 2002


                                       15
<PAGE>

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           December 31, 2001 and 2000
<TABLE>
<CAPTION>
                                                                          2001           2000
                                                                      ------------   ------------
                       ASSETS
<S>                                                                   <C>               <C>
Cash and due from banks, noninterest-bearing                          $ 10,709,799      3,904,275
Interest-bearing deposits in other banks                                 1,585,779     14,244,161
                                                                      ------------   ------------
                 Total cash and cash equivalents                        12,295,578     18,148,436

Securities:
     Available for sale (amortized cost of $42,661,527 in 2001
        and $16,000,677 in 2000)                                        42,970,180     16,049,376
     Held to maturity (estimated market value of $5,282,815
        in 2001 and $18,553,526 in 2000)                                 5,000,000     18,977,776
FHLB stock                                                               4,154,900      3,755,300
Loans                                                                  375,980,628    349,645,598
     Less allowance for loan losses                                      2,522,737      2,159,663
                                                                      ------------   ------------
                 Net loans                                             373,457,891    347,485,935

Other real estate owned                                                    759,272        234,711
Accrued interest receivable                                              2,637,367      2,776,404
Premises and equipment, net                                              6,471,715      6,272,610
Prepaid expenses and other assets                                       10,367,162      1,260,232
                                                                      ------------   ------------
                 Total assets                                         $458,114,065    414,960,780
                                                                      ============   ============

              LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits                                                              $339,830,052    327,312,324
Borrowed funds                                                          83,097,156     55,101,477
Escrow deposits                                                            220,944        560,775
Accrued interest payable                                                   264,391        300,396
Accrued expenses and other liabilities                                   1,083,242        873,629
                                                                      ------------   ------------
                 Total liabilities                                     424,495,785    384,148,601
                                                                      ------------   ------------
Commitments and contingencies
Stockholders' equity:
     Preferred stock, $1 par value: 3,000,000 shares authorized,
        no shares issued and outstanding                                        --             --
     Common stock, $1 par value: 7,000,000 shares authorized,
        2,835,447 and 2,714,610 issued and outstanding                   2,835,447      2,714,610
     Additional paid-in capital                                          2,435,720      2,234,936
     Accumulated other comprehensive income                                188,278         29,707
     Retained earnings                                                  28,158,835     25,832,926
                                                                      ------------   ------------
                 Total stockholders' equity                             33,618,280     30,812,179
                                                                      ------------   ------------
                 Total liabilities and stockholders' equity           $458,114,065    414,960,780
                                                                      ============   ============
</TABLE>
See accompanying notes to consolidated financial statements.


                                       16
<PAGE>
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                  Years ended December 31, 2001, 2000 and 1999
<TABLE>
<CAPTION>
                                                               2001          2000           1999
                                                           -----------   -----------    -----------
<S>                                                        <C>            <C>            <C>
Interest income:
     Loans                                                 $27,980,414    28,694,889     25,274,397
     Securities                                              2,611,299     2,332,743      2,561,805
     Other                                                     271,767       390,285        379,476
     Dividends on FHLB stock                                   253,918       291,036        233,730
                                                           -----------   -----------    -----------
                 Total interest income                      31,117,398    31,708,953     28,449,408
                                                           -----------   -----------    -----------
Interest expense:
     Deposits                                               15,352,845    15,061,870     12,837,966
     Borrowed funds                                          3,563,469     4,242,721      3,583,825
                                                           -----------   -----------    -----------
                 Total interest expense                     18,916,314    19,304,591     16,421,791
                                                           -----------   -----------    -----------
Net interest income                                         12,201,084    12,404,362     12,027,617
Provision for loan losses                                      460,000       970,000        210,000
                                                           -----------   -----------    -----------
                 Net interest income after provision for
                    loan losses                             11,741,084    11,434,362     11,817,617
                                                           -----------   -----------    -----------
Noninterest income:
     Gain on sale of loans                                      11,150           245        161,365
     Net gain (loss) on sale of securities                     125,172      (287,282)           938
     Service charges and fees on loans                         731,338       446,922        322,146
     Deposit-related fees                                      967,171       827,432        700,811
     Gain on sale of branch                                         --       582,583             --
     Other income                                              205,428        99,694         71,471
                                                           -----------   -----------    -----------
                 Total noninterest income                    2,040,259     1,669,594      1,256,731
                                                           -----------   -----------    -----------
Noninterest expenses:
     Compensation and fringe benefits                        5,124,945     6,046,774      4,670,391
     Occupancy and equipment                                 2,073,635     1,994,560      1,939,797
     Advertising                                               277,758       397,662        444,521
     Real estate owned expenses and losses                      22,053        36,031         29,123
     Other                                                   1,804,761     1,718,160      1,830,495
                                                           -----------   -----------    -----------
                 Total other operating expenses              9,303,152    10,193,187      8,914,327
                                                           -----------   -----------    -----------
Income before income taxes                                   4,478,191     2,910,679      4,160,021
Income tax expense                                           1,589,248       979,004      1,479,591
                                                           -----------   -----------    -----------
                 Net income                                $ 2,888,943     1,931,675      2,680,430
                                                           ===========   ===========    ===========
Net income per share:
     Basic                                                 $      1.03           .71            .95
                                                           ===========   ===========    ===========
     Diluted                                                      1.02           .69            .90
                                                           ===========   ===========    ===========
Weighted average common shares outstanding:
     Basic                                                   2,797,317     2,714,216      2,819,846
                                                           ===========   ===========    ===========
     Diluted                                                 2,823,191     2,805,611      2,974,043
                                                           ===========   ===========    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       17
<PAGE>
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                  Years ended December 31, 2001, 2000 and 1999
<TABLE>
<CAPTION>
                                                          2001           2000           1999
                                                      -----------     ----------     ----------
<S>                                                   <C>              <C>            <C>
Net income                                            $ 2,888,943      1,931,675      2,680,430
Other comprehensive income (loss):
     Unrealized gain (loss) arising during the year       385,127        286,808       (776,995)
     Tax (expense) benefit                               (150,201)      (111,855)       303,028
     Reclassification to realized (gain) loss            (125,172)       287,282           (938)
     Tax expense (benefit)                                 48,817       (112,040)           366
                                                      -----------     ----------     ----------
                 Other comprehensive income (loss)        158,571        350,195       (474,539)
                                                      -----------     ----------     ----------
Comprehensive income                                  $ 3,047,514      2,281,870      2,205,891
                                                      ===========     ==========     ==========
</TABLE>
See accompanying notes to consolidated financial statements.

                                       18
<PAGE>
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  Years ended December 31, 2001, 2000 and 1999
<TABLE>
<CAPTION>
                                                                              ACCUMULATED
                                                                                 OTHER
                                                                  ADDITIONAL  COMPREHENSIVE                      TOTAL
                                                      COMMON       PAID-IN    INCOME (LOSS),    RETAINED      STOCKHOLDERS'
                                                      STOCK        CAPITAL        NET           EARNINGS         EQUITY
                                                  ------------   -----------  -------------   ------------    -----------
<S>                                               <C>              <C>           <C>            <C>            <C>
Balance, December 31, 1998                        $  3,046,284     6,649,374     154,051        21,763,441     31,613,150
     Exercise of stock options                          23,424        28,375          --                --         51,799
     Tax benefit of stock option exercise                   --        66,998          --                --         66,998
     Repurchase of stock (381,789 shares)             (381,789)   (4,212,749)         --                --     (4,594,538)
     Other comprehensive loss, net of taxes                 --            --    (474,539)               --       (474,539)
     Net income for year                                    --            --          --         2,680,430      2,680,430
                                                  ------------   -----------   ---------      ------------    -----------
Balance, December 31, 1999                           2,687,919     2,531,998    (320,488)       24,443,871     29,343,300
     Exercise of stock options                          73,076       132,959          --                --        206,035
     Tax benefit of stock option exercise                   --         4,251          --                --          4,251
     Repurchase of stock (46,385 shares)               (46,385)     (434,272)         --                --       (480,657)
     Other comprehensive income, net  of  taxes             --            --     350,195                --        350,195
     Net income for year                                    --            --          --         1,931,675      1,931,675
     Cash dividends ($.20 per share)                        --            --          --          (542,620)      (542,620)
                                                  ------------   -----------   ---------      ------------    -----------
Balance, December 31, 2000                           2,714,610     2,234,936      29,707        25,832,926     30,812,179
     Exercise of stock options                         141,537       392,364          --                --        533,901
     Tax benefit of stock option exercise                   --        60,372          --                --         60,372
     Stock traded to exercise options
        (20,700 shares)                                (20,700)     (251,952)         --                --       (272,652)
     Other comprehensive income, net of taxes               --            --     158,571                --        158,571
     Net income for year                                    --            --          --         2,888,943      2,888,943
     Cash dividends ($.20 per share)                        --            --          --          (563,034)      (563,034)
                                                  ------------   -----------   ---------      ------------    -----------
Balance, December 31, 2001                        $  2,835,447     2,435,720     188,278        28,158,835     33,618,280
                                                  ============   ===========   =========      ============    ===========
</TABLE>

See accompanying notes to consolidated financial statements.

                                       19
<PAGE>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended December 31, 2001, 2000 and 1999
<TABLE>
<CAPTION>
                                                                  2001           2000             1999
                                                             ------------    ------------     -----------
<S>                                                          <C>                <C>             <C>
Net income                                                   $  2,888,943       1,931,675       2,680,430
Adjustments to reconcile net income to net cash
     provided by operating activities:
        Net accretion and amortization                             45,494          15,085         117,717
        Depreciation                                              669,842         639,291         664,189
        Net (gain) loss on sale of securities                    (125,172)        287,282            (938)
        Gain on sale of loans                                     (11,150)           (245)       (161,365)
        Benefit from deferred income taxes                       (276,589)       (695,383)       (280,431)
        Loss (gain) on sales of premises and  equipment             8,621            (130)          7,783
        Gain on sale of branch office                                  --        (582,583)             --
        Loss on sales of foreclosed real estate                     3,793          22,681          16,974
        Valuation losses on foreclosed real estate                 36,330              --          10,000
        Provision for loan losses                                 460,000         970,000         210,000
        Proceeds from sales of loans                              506,245          44,560      39,923,328
        Changes in assets and liabilities:
           Accrued interest receivable                            139,037        (309,675)       (184,802)
           Prepaid expenses and other assets                     (843,020)        890,265        (924,337)
           Accrued interest payable                               (36,005)       (169,702)         80,599
           Accrued expenses and other liabilities                 269,985         496,507         135,275
                                                             ------------    ------------     -----------
                 Net cash provided by operating activities      3,736,354       3,539,628      42,294,422
                                                             ------------    ------------     -----------
Purchases of securities available for sale                    (82,123,753)    (10,000,000)     (1,999,375)
Purchases of securities held to maturity                               --        (986,604)     (5,000,000)
Proceeds from maturity of securities available for sale        16,000,000       5,000,000              --
Proceeds from sale of securities available for sale            43,107,351      16,277,957       2,000,938
Proceeds from maturities of securities held to maturity         8,000,000              --              --
Proceeds from maturities of securities available for sale       2,413,006         213,783       3,600,089
Loan originations, net of principal repayments                (28,078,369)    (15,451,318)    (51,386,357)
Proceeds from disposals of foreclosed real estate                 643,413         353,420         193,452
Purchases of premises and equipment                              (902,513)       (789,299)       (544,567)
Proceeds from sales of premises and equipment                       3,518          68,154             500
Net cash paid related to sale of branch office                         --      (5,156,761)             --
Net expenditures on foreclosed real estate                        (35,352)        (14,985)        (30,880)
Purchases of FHLB stock                                          (399,600)             --        (927,300)
Purchases of life insurance                                    (8,088,704)             --              --
                                                             ------------    ------------     -----------
                 Net cash used in investing activities        (49,461,003)    (10,485,653)    (54,093,500)
                                                             ------------    ------------     -----------
Net increase in deposits                                       12,517,728      29,576,608       3,178,251
Proceeds from borrowed funds                                   49,000,000      61,000,000      52,000,000
Principal payments on borrowed funds                          (21,004,321)    (81,004,090)    (32,003,872)
Proceeds from issuance of common stock, net                       261,249         206,035          51,799
Purchase and retirement of common stock                                --        (480,657)     (4,594,538)
Dividends paid                                                   (563,034)       (406,890)             --
Net change in escrow deposits                                    (339,831)        218,071          11,976
                                                             ------------    ------------     -----------
                 Net cash provided by financing activities     39,871,791       9,109,077      18,643,616
                                                             ------------    ------------     -----------
                 Increase (decrease) in cash and
                    cash equivalents                           (5,852,858)      2,163,052       6,844,538
Cash and cash equivalents:
     Beginning of year                                         18,148,436      15,985,384       9,140,846
                                                             ------------    ------------     -----------
     End of year                                             $ 12,295,578      18,148,436      15,985,384
                                                             ============    ============     ===========

                                                                                              (Continued)
</TABLE>

                                       20
<PAGE>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  Years ended December 31, 2001, 2000 and 1999
<TABLE>
<CAPTION>
                                                            2001           2000          1999
                                                        ------------    ----------    ----------
<S>                                                      <C>            <C>           <C>
Cash paid for:
     Interest                                            $18,952,319    19,305,008    16,450,109
     Income taxes                                          1,699,583     1,739,500     1,724,000

Summary of noncash investing and financing activities:
     Transfer from loans to other real estate owned        1,151,318       351,201       330,014
     Transfer of premises and equipment to other real
        real estate owned                                     21,427            --            --
     Loans to facilitate the sale of foreclosed
        real estate                                               --            --     2,355,000
     Unrealized gains (losses) on securities available
        for sale, net of taxes                               158,571       350,195      (474,539)
     Transfer of securities from held to maturity to
        available for sale at fair value                   5,946,000            --            --
</TABLE>

See accompanying notes to consolidated financial statements.

                                       21
<PAGE>

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


(1)  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

     BASIS OF PRESENTATION

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

     NATURE OF OPERATIONS

     The Company  operates 17 offices  (including  16 full service  branches) in
     Eastern  North  Carolina  and  offers  a wide  range  of  banking  services
     including deposits,  bank cards, and alternative  investment products.  The
     funds are used for the extension of credit  through home loans,  commercial
     loans,  consumer loans,  and other  installment  credit such as home equity
     loans,  auto and boat loans,  and check  reserves.  The  Company's  primary
     source  of  revenue  is  interest  income  from  its  loan  and  securities
     portfolios.

     USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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

     RECLASSIFICATIONS

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

     SIGNIFICANT ACCOUNTING POLICIES

     The significant accounting policies of the Company are summarized below:

     (a)  CASH AND CASH EQUIVALENTS

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

          Federal  regulations  require  institutions  to  set  aside  specified
          amounts of cash as reserves against transaction and time deposits.  As
          of December 31, 2001, the daily average gross reserve  requirement was
          $651,000.
                                                                     (Continued)

                                       22
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

          (b)  SECURITIES

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

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

          (c)  FHLB STOCK

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

          (d)  LOANS AND ALLOWANCE FOR LOAN LOSSES

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

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

               The Company  uses  several  factors in  determining  if a loan is
               impaired. The internal asset classification  procedures include a
               thorough  review of significant  loans and lending  relationships
               and the  accumulation  of related  data.  This data includes loan
               payment   status,   borrowers'   financial  data  and  borrowers'
               operating  factors  such as cash  flows and  operating  income or
               loss.
                                                                     (Continued)
                                       23
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

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

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

     (e)  INCOME RECOGNITION ON IMPAIRED AND NONACCRUAL LOANS

          Loans,   including   impaired  loans,  are  generally   classified  as
          nonaccrual if they are past due for a payment of principal or interest
          for a period of more than 90 days,  unless such loans are well-secured
          and in the process of collection.  Loans that are on a current payment
          status  or past  due  less  than 90 days  may  also be  classified  as
          nonaccrual  if repayment in full of  principal  and/or  interest is in
          doubt.  When  interest  accrual is  discontinued,  all unpaid  accrued
          interest is reversed.  Interest income is subsequently recognized only
          to the extent cash payments are received.

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

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

     (f)  TRANSFERS AND SERVICING OF FINANCIAL ASSETS

          There  were  $470,400  in loans sold in 2001 with  retained  servicing
          rights.  The recorded  balance of the rights to service mortgage loans
          for others was $3,898 at  December  31,  2001 and is included in other
          assets.  There  were no loan  sales in 2000  with  retained  servicing
          rights.  Fees on  loans  sold in 1999  are  considered  to  adequately
          compensate the Company;  therefore,  no servicing assets were recorded
          on those sales.

                                                                     (Continued)

                                       24
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

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

     (g)  OTHER REAL ESTATE OWNED

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

     (h)  PREMISES AND EQUIPMENT

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

     (i)  INCOME TAXES

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

     (j)  COMPREHENSIVE INCOME

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

     (k)  SEGMENT INFORMATION

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

                                                                     (Continued)
                                       25
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

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

     (l)  NEW ACCOUNTING PRONOUNCEMENTS

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

          The Financial  Accounting  Standards  Board (FASB) has issued SFAS No.
          140,  "Accounting for Transfers and Servicing of Financial  Assets and
          Extinguishments  of  Liabilities,  a Replacement of FASB Statement No.
          125." It revises the standards for accounting for  securitizations and
          other  transfers  of  financial  assets and  collateral  and  requires
          certain  disclosures,  but it  carries  over  most of SFAS  No.  125's
          provisions  without  reconsideration.  This statement is effective for
          transfers and  servicing of financial  assets and  extinguishments  of
          liabilities   occurring  after  March  31,  2001.  This  statement  is
          effective for  recognition  and  reclassification  of  collateral  and
          disclosures relating to securitization transactions and collateral for
          fiscal years ending after December 15, 2000. The Company  adopted this
          statement during 2001 with no material impact to the Company.

          On  July  1,  2001,  the  Company  adopted  SFAS  No.  141,  "Business
          Combinations".   This  Statement  improves  the  transparency  of  the
          accounting and reporting for business  combinations  by requiring that
          all business  combinations be accounted for under a single method--the
          purchase method. Use of the  pooling-of-interests  method is no longer
          permitted.  SFAS No. 141 requires that the purchase method be used for
          business combinations initiated after June 30, 2001.

          The FASB has  issued  SFAS No.  142  "Goodwill  and  Other  Intangible
          Assets".  This Statement requires that goodwill no longer be amortized
          to  earnings,  but instead be  reviewed  for  impairment.  This change
          provides  investors with greater  transparency  regarding the economic
          value of goodwill  and its impact on  earnings.  The  amortization  of
          goodwill ceases upon adoption of the Statement,  which will be January
          1, 2002.  Management of the Company  anticipates  that due to the fact
          that it does  not  have  goodwill  or  other  intangible  assets,  the
          adoption  of SFAS  No.  142 will not  have a  material  effect  on the
          Company.

                                                                     (Continued)

                                       26
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

(2)  SECURITIES

     Securities as of December 31, 2001 and 2000 are summarized as follows:
<TABLE>
<CAPTION>
                                                                      GROSS           GROSS
                                                  AMORTIZED          UNREALIZED      UNREALIZED      ESTIMATED
                                                    COST               GAINS           LOSSES       MARKET VALUE
                                                ------------         ----------      ----------     -----------
<S>                                             <C>                    <C>            <C>            <C>
      2001:
          SECURITIES AVAILABLE FOR SALE:
           U.S. Government and agency
             securities                         $  25,600,964          268,987        112,134        25,757,817
            Mortgage-backed securities             11,070,696          120,060         67,456        11,123,300
            Marketable equity securities            4,984,950          114,425             --         5,099,375
            Corporate bond                          1,004,917               --         15,229           989,688
                                                -------------      ------------     ---------      ------------

                    Total                       $  42,661,527          503,472        194,819        42,970,180
                                                =============      ===========      =========      ============

          SECURITIES HELD TO MATURITY:
            U.S. Government and agency
              securities                        $   5,000,000          282,815             --         5,282,815
                                                =============      ===========      =========      ============
      2000:
          SECURITIES AVAILABLE FOR SALE:
           U.S. Government and agency
             securities                         $  16,000,677           52,449          3,750        16,049,376
                                                =============      ===========      =========      ============
          SECURITIES HELD TO MATURITY:
            U.S. Government and agency
              securities                        $  18,014,900               --        447,085        17,567,815
            Mortgage-backed securities                962,876           22,835             --           985,711
                                                -------------      -----------      ---------      ------------
                           Total                $  18,977,776           22,835        447,085        18,553,526
                                                =============      ===========      =========      ============
</TABLE>
                                                                     (Continued)
                                       27
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


     The  maturities  of  securities  at  December  31, 2001 are  summarized  as
     follows:
<TABLE>
<CAPTION>

                                                    AMORTIZED        ESTIMATED
                                                       COST         MARKET VALUE
                                                   -----------      ------------
<S>                                                <C>                 <C>
Held to maturity:
    After 1 year through 5 years                   $ 5,000,000         5,282,815
                                                   ===========       ===========
Available for sale:
    After 1 year through 5 years                   $18,001,194        18,146,878
    After 5 years through 10 years                   8,604,687         8,600,627
    Marketable equity securities                     4,984,950         5,099,375
    Mortgage-backed securities                      11,070,696        11,123,300
                                                   -----------       -----------

                                                   $42,661,527        42,970,180
                                                   ===========       ===========
</TABLE>
     Expected  maturities  for  mortgage-backed   securities  will  differ  from
     contractual  maturities  because borrowers have the right to call or prepay
     obligations with or without call or prepayment penalties.

     For the three years ended December 31, 2001, sales of investment securities
     resulted in gross realized gains of $125,172 in 2001,  gross realized gains
     of $4,697 and gross realized losses of $291,979 in 2000, and gross realized
     gains of $938 in 1999.

     Investment  securities having an aggregate carrying value of $11,592,502 at
     December 31, 2001 were pledged to secure public funds on deposit.

                                                                     (Continued)

                                       28
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

(3)  LOANS

     Loans  at  December  31,  2001  and  2000 are  summarized  as  follows  (in
     thousands):
<TABLE>
<CAPTION>
                                                        2001            2000
                                                      ---------       ---------
<S>                                                   <C>                <C>
    Real estate:
      Construction and land development               $  62,142          37,542
      Mortgage:
        1-4 family residential                          209,622         234,383
        Multi-family residential                         15,626          17,081
        Commercial                                       55,664          31,300
        Equity line                                      13,131          11,954
        Other                                               254             174
                                                      ---------       ---------

    Total real estate loans                             356,439         332,434

    Commercial, industrial and agricultural              13,430          10,970
    Consumer                                              7,285           7,236
                                                      ---------       ---------
    Total gross loans                                   377,154         350,640

    Unamortized net deferred fees                        (1,173)           (994)
                                                      ---------       ---------

    Loans                                             $ 375,981         349,646
                                                      =========       =========
</TABLE>

     In the normal course of business,  the Company  originates loans to related
     parties. Related parties include directors,  executive officers,  principal
     shareholders of equity  securities,  or any associate of such persons.  The
     activity with respect to related  party loans is  summarized  below for the
     year ending December 31, 2001:

                  Balance at beginning of year   $ 2,441,071
                  New loans                        4,460,447
                  Repayments                      (1,017,766)
                                                 -----------

                  Balance at end of year         $ 5,883,752
                                                 ===========

     Activity in the allowance for loan losses for the years ended  December 31,
     2001, 2000 and 1999 is summarized as follows:
<TABLE>
<CAPTION>
                                          2001          2000           1999
                                      -----------    -----------    -----------
<S>                                   <C>              <C>            <C>
       Balance at beginning of year   $ 2,159,663      1,306,381      1,178,242
       Provision for loan losses          460,000        970,000        210,000
       Loans charged-off                 (105,775)      (146,474)       (94,034)
       Recoveries                           8,849         29,756         12,173
                                      -----------    -----------    -----------

       Balance at end of year         $ 2,522,737      2,159,663      1,306,381
                                      ===========    ===========    ===========
</TABLE>

                                                                     (Continued)

                                       29
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

     The following is a summary of nonperforming assets at December 31, 2001 and
     2000 (in thousands):
<TABLE>
<CAPTION>
                                                                  2001     2000
                                                                 ------   ------

            <S>                                                  <C>         <C>
            Loans 90 days past due and still accruing interest   $2,563      358
            Nonaccrual loans                                        505      333
            Other real estate owned                                 759      234
                                                                 ------   ------

            Total                                                $3,827      925
                                                                 ======   ======
</TABLE>

     At December 31, 2001 and 2000, the recorded  investment in loans considered
     impaired in  accordance  with SFAS No. 114 totaled  $505,378 and  $332,779,
     respectively,  with no corresponding  valuation  allowances.  For the years
     ended December 31, 2001, 2000 and 1999, the average recorded  investment in
     impaired  loans  was   approximately   $513,000,   $204,000  and  $130,000,
     respectively.  The amount of interest  recognized on impaired  loans during
     the portion of the year that they were impaired was not material.

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

     The following table summarizes the Company's outstanding  off-balance sheet
     commitments to extend credit at December 31, 2001 and 2000 (in thousands):
<TABLE>
<CAPTION>
                                                                 2001     2000
                                                               -------   -------
      <S>                                                      <C>        <C>
      Undisbursed portion of home equity lines of credit
          collateralized primarily by junior liens on
          1-4 family properties                                $12,031    10,475
      Other commitments and credit lines                        15,755    12,233
      Fixed-rate mortgage loan commitments                         618       100
      Adjustable-rate mortgage loan commitments                  1,881     1,158
                                                               -------   -------

      Total                                                    $30,285    23,966
                                                               =======   =======
</TABLE>

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

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

     The Company  originates both adjustable and fixed interest rate loans.  The
     adjustable-rate  loans have interest rate  adjustment  limitations  and are
     indexed to various nationally recognized indexes or financial  instruments.
     Future  market  factors may affect the  correlation  of the  interest  rate
     adjustment with rates the Company pays on the short term deposits that have
     been primarily utilized to fund these loans.
                                                                     (Continued)
                                       30
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


       Mortgage loans serviced for others approximated $56,041,406, $74,140,415
       and $84,128,060 at December 31, 2001, 2000 and 1999, respectively.

(4)  PREMISES AND EQUIPMENT

     Premises  and  equipment at December  31, 2001 and 2000 are  summarized  as
     follows:
<TABLE>
<CAPTION>
                                                       2001            2000
                                                   ------------    ------------
<S>                                                <C>                <C>
  Land                                             $  1,983,684       1,983,684
  Buildings                                           5,523,756       5,460,049
  Leasehold improvements                                307,994         307,994
  Furniture and equipment                             5,786,263       5,086,359
                                                   ------------    ------------

                                                     13,601,697      12,838,086
  Less accumulated depreciation and amortization     (7,129,982)     (6,565,476)
                                                   ------------    ------------

  Premises and equipment, net                      $  6,471,715       6,272,610
                                                   ============    ============
</TABLE>

(5)  DEPOSITS

     Deposits  at  December  31, 2001 and 2000,  are  summarized  as follows (in
     thousands):
<TABLE>
<CAPTION>
                                                        2001              2000
                                                       --------         --------
<S>                                                    <C>                <C>
    Demand                                             $ 17,716           12,650
    Checking with interest                               18,523           18,474
    Money market accounts                                24,862           22,236
    Savings                                              20,175           21,363
    Time deposits of $100 or more                        74,610           63,020
    Other time deposits                                 183,944          189,569
                                                       --------         --------
    Total                                              $339,830          327,312
                                                       ========         ========
</TABLE>

     At December 31, 2001,  the  scheduled  maturities of time deposits were (in
     thousands):

                     2002                          $215,463
                     2003                            41,611
                     2004                             1,444
                     2005                                --
                     2006                                --
                     Thereafter                          36
                                                   --------

                     Total time deposits           $258,554
                                                   ========
                                                                     (Continued)
                                       31
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


(6)  BORROWED FUNDS

     Borrowed  funds  and the  corresponding  weighted  average  rates  (WAR) at
     December 31, 2001 and 2000 are summarized as follows:
<TABLE>
<CAPTION>
                                 2001       WAR          2000          WAR
                             -----------    ---      -----------       ---

<S>                          <C>           <C>       <C>              <C>
Advances from FHLB           $83,000,000   4.59%     $55,000,000      6.23%
Affordable Housing Program
    Advances from FHLB            97,156   3.50%         101,477      3.50%
                             -----------             -----------
                 Total       $83,097,156             $55,101,477
                             ===========             ===========
</TABLE>

     Pursuant  to  a   collateral   agreement   with  the  FHLB,   advances  are
     collateralized  by all  the  Company's  FHLB  stock  and  qualifying  first
     mortgage  loans.  The  balance of  qualifying  first  mortgage  loans as of
     December 31, 2001 was approximately  $126,571,000.  This agreement with the
     FHLB  provides  for a line of credit up to 25% of the  Bank's  assets.  The
     maximum  month end balances  were $83 million,  $75 million and $75 million
     during the years ended December 31, 2001, 2000 and 1999.  Annual  principal
     maturities  of  Federal  Home Bank  advances  for the years  subsequent  to
     December 31, 2001 are as follows:

              2002                           $     35,000,000
              2003                                 20,000,000
              2004                                  5,000,000
              2010                                 10,000,000
              2011                                 13,000,000
                                             ----------------
                                             $     83,000,000
                                             ================


     The Affordable  Housing Program advances are funds advanced by the FHLB for
     the Company to lend to borrowers who might not otherwise qualify for a home
     mortgage.  These  advances  have an  interest  rate of 3.50% and  mature at
     various times between November 2015 and January 2016.

(7)  REGULATORY MATTERS AND CAPITAL REQUIREMENTS

     The  Company  is  subject  to  various  regulatory   capital   requirements
     administered by federal and state banking agencies. Failure to meet minimum
     capital   requirements  can  initiate  certain   mandatory,   and  possibly
     additional discretionary,  actions by regulators that, if undertaken, could
     have a direct  material  effect  on the  Company's  consolidated  financial
     statements.  Quantitative  measures  established  by  regulation  to ensure
     capital  adequacy  require  the  Company to  maintain  minimum  amounts and
     ratios,  as set  forth  in the  table  below.  Management  believes,  as of
     December 31, 2001, that the Company meets all capital adequacy requirements
     to  which  it is  subject.  The  Company's  only  significant  asset is its
     investment in Cooperative  Bank for Savings,  Inc. SSB.  Consequently,  the
     information  concerning  capital  ratios  is  essentially  the same for the
     Company and the Bank.

                                                                     (Continued)
                                       32
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

     As of December  31, 2001 and 2000,  the most recent  notification  from the
     FDIC  categorized  the  Bank  as  well  capitalized  under  the  regulatory
     framework  for  prompt  corrective   action.  To  be  categorized  as  well
     capitalized the Bank must maintain minimum amounts and ratios, as set forth
     in  the  table  below.  There  are  no  conditions  or  events  since  that
     notification that management believes have changed the Bank's category.

     The Bank's  actual  capital  amounts and ratios are also  presented  in the
     table below (dollars in thousands) as of December 31:
<TABLE>
<CAPTION>
                                                                   MINIMUM RATIO TO MAINTAIN
                                                                    WELL-CAPITALIZED STATUS
                                                                   --------------------------
                                    2001           2000              2001              2000
                                 ----------      ---------         --------           -------
<S>                              <C>               <C>             <C>                <C>
      Risk-based capital:
          Tier I capital         $   33,428        30,781
          Total capital              35,951        32,941
          Risk-adjusted assets      326,820       268,061
          Quarterly average
            tangible assets         447,214       412,312

      Tier I capital ratio            10.23%        11.48%           6.00%             6.00%
      Total capital ratio             11.00%        12.29%          10.00%            10.00%
      Leverage capital ratio           7.47%         7.47%           5.00%             5.00%
</TABLE>

     A liquidation  account was established at the time of conversion to a stock
     institution  in an  amount  equal to the  total net worth of the Bank as of
     March 31,  1991.  Each  eligible  deposit  account  holder is entitled to a
     proportionate share of this account in the event of a complete  liquidation
     of the Bank,  and only in such an event.  This share will be reduced if the
     account  holder's  eligible  deposits  fall below the amount on the date of
     record and will cease to exist if the  account is closed.  The  liquidation
     account will never be increased  despite any increase  after the conversion
     in the  related  eligible  deposit of an account  holder.  The  liquidation
     account was approximately $2,509,453 at December 31, 2001.

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

(8)  BENEFIT PLANS

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

                                                                     (Continued)

                                       33
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

     Under the  multi-employer  plan,  the Company is required to contribute its
     share of the Plan's  total  pension  liability  as  determined  by the plan
     administrator.  Expenses  related to this Plan were  $34,537,  $303,803 and
     $120,361 for the years 2001, 2000 and 1999, respectively.

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

     The Company maintains a combined ESOP and 401(k) plan (the KSOP). Employees
     are able to contribute up to 15% of their eligible  annual  compensation to
     the KSOP  subject to  Internal  Revenue  Service  limitations.  The Company
     matches employee  contributions  up to a limit  determined  annually by the
     Board of Directors.  The Board established the match at 50% up to the first
     6% of the employee  contribution for 2001 and 2000 and 100% of the first 6%
     for 1999.

     The compensation  expense incurred by the Company for the KSOP was $78,585,
     $107,784 and $175,638 for the years ended December 31, 2001, 2000 and 1999,
     respectively.

(9)  EARNINGS PER SHARE

     The following table provides a reconciliation of income available to common
     stockholders  and the average  number of shares  outstanding  for the years
     ended December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
                                               2001         2000         1999
                                            ----------   ----------   ----------
<S>                                         <C>           <C>          <C>
     Net income (numerator)                 $2,888,943    1,931,675    2,680,430
                                            ==========   ==========   ==========

     Shares for basic EPS (denominator)      2,797,317    2,714,216    2,819,846
     Dilutive effect of stock options           25,874       91,395      154,197
                                            ----------   ----------   ----------

     Shares for diluted EPS (denominator)    2,823,191    2,805,611    2,974,043
                                            ==========   ==========   ==========
</TABLE>

     For the year  ended  December  31,  2001 and 2000,  there  were  14,204 and
     114,043,  respectively, of options outstanding that were antidilutive since
     the exercise  price  exceeds the average  market price for the year.  These
     options have been omitted from the 2001  calculation of the dilutive effect
     of stock options.

(10) INCOME TAXES

     Income tax expense consists of the following components for the years ended
     December 31, 2001, 2000 and 1999:
<TABLE>
<CAPTION>
                                         2001            2000          1999
                                      -----------    -----------    -----------
<S>                                   <C>              <C>            <C>
      Current tax expense             $ 1,865,837      1,674,387      1,760,022
      Deferred tax benefit               (276,589)      (695,383)      (280,431)
                                      -----------    -----------    -----------

      Total tax expense               $ 1,589,248        979,004      1,479,591
                                      ===========    ===========    ===========
</TABLE>

                                                                     (Continued)
                                       34
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

     For the year ended  December  31,  2001,  current tax expense  consisted of
     $1,651,815  in federal  tax  expense  and  $214,022  in state tax  expense.
     Deferred tax benefit for the year ended  December  31,  2001,  consisted of
     $227,083 in federal tax benefit and $49,506 in state tax  benefit.  For the
     year ended December 31, 2000,  current tax expense  consisted of $1,525,540
     in federal tax expense and  $148,847  in state tax  expense.  Deferred  tax
     benefit for the year ended  December  31,  2000,  consisted  of $570,120 in
     federal tax benefit and $125,263 in state tax benefit.

     The  components of the net deferred tax asset at December 31, 2001 and 2000
     are as follows:
<TABLE>
<CAPTION>
                                                            2001        2000
                                                         ----------   ----------
<S>                                                      <C>          <C>
  Deferred tax assets:
      Allowance for loan losses                          $  972,515      693,368
      Accrued pension cost                                  207,118      264,315
                                                         ----------   ----------

  Total                                                   1,179,633      957,683
                                                         ----------   ----------

  Deferred tax liabilities:
      Deferred loan fees                                    167,046      220,418
      FHLB stock                                            190,467      190,467
      Excess of book over tax basis of equipment            204,231      208,930
      Unrealized gain on securities available for sale      120,376       18,992
      Other                                                   5,618        2,186
                                                         ----------   ----------

  Total                                                     687,738      640,993
                                                         ----------   ----------

  Net deferred tax asset                                 $  491,895      316,690
                                                         ==========   ==========
</TABLE>

     The Company has no valuation allowance at December 31, 2001 or 2000 because
     management has determined  that it is more likely than not that the results
     of future operations will generate sufficient taxable income to realize the
     deferred tax assets.

     Reconciliations  of income taxes  computed at the statutory  federal income
     tax  rate  (34%) to the  provisions  for  income  tax for the  years  ended
     December 31, 2001, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
                                                    2001           2000          1999
                                                -----------    -----------    -----------
<S>                                             <C>                <C>          <C>
Income taxes at federal tax rate                $ 1,522,585        989,631      1,414,407
Increase (decrease) resulting from:
    State income taxes, net of federal income
      tax benefit                                   108,581         15,565        108,200
    Cash surrender value of bank owned
      life insurance                                (34,035)            --             --
    Other                                            (7,883)       (26,192)       (43,016)
                                                -----------    -----------    -----------

Total                                           $ 1,589,248        979,004      1,479,591
                                                ===========    ===========    ===========
</TABLE>

                                                                     (Continued)
                                       35
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

     Retained  earnings at December  31,  2001 and 2000  includes  approximately
     $5,170,000 representing pre-1988 tax bad debt reserve base year amounts for
     which no  deferred  income tax  liability  has been  provided  since  these
     reserves are not expected to reverse and may never  reverse.  Circumstances
     that would  require an accrual of a portion or all of this  unrecorded  tax
     liability are a reduction in qualifying  loan levels relative to the end of
     1987, failure to meet the definition of a bank, dividend payments in excess
     of  accumulated   tax  earnings  and  profits,   or  other   distributions,
     dissolution, liquidation or redemption of the Bank's stock.

(11) STOCK OPTION PLAN

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

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

     A summary of the status of the Option Plan as of December  31,  2001,  2000
     and 1999, and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
                            2001                     2000                        1999
                   ------------------------  ------------------------    -----------------------
                                WEIGHTED                  WEIGHTED                    WEIGHTED
                                 AVERAGE                   AVERAGE                    AVERAGE
                    NUMBER     OPTION PRICE   NUMBER     OPTION PRICE    NUMBER     OPTION PRICE
                   --------    -----------   --------    ------------    -------    ------------
<S>                 <C>        <C>            <C>        <C>             <C>        <C>
Options
  outstanding,
  beginning of
  year              246,457    $    6.85      281,118    $   5.03        225,542    $  2.96
Granted              18,000        13.38       38,415       10.58         79,000      11.05
Exercised          (141,537)        3.77      (73,076)       2.82        (23,424)      2.21
Forfeited            (4,977)       10.86           --          --             --         --
                   --------    ---------     --------    --------        -------    -------
Options
    outstanding,
    end of year     117,943    $   11.37      246,457    $   6.85        281,118    $  5.03
                   ========    =========     ========    ========       ========    =======
</TABLE>

                                                                     (Continued)

                                       36
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

     On January 1, 1996 the Company adopted SFAS No. 123,  "Accounting for Stock
     Based  Compensation".  As permitted by SFAS No. 123, the Company has chosen
     to continue to apply APB Opinion No. 25,  "Accounting  for Stock  Issued to
     Employees" and related interpretations.  Accordingly,  no compensation cost
     has been  recognized  for  options  granted  under  the  Option  Plan.  Had
     compensation  cost for the Company's  Option Plan been determined  based on
     the fair  value at the  grant  dates  for  awards  under  the  Option  Plan
     consistent  with the method of SFAS No. 123, the  Company's  net income and
     net income  per share  would  have been  reduced  to the pro forma  amounts
     indicated below.
<TABLE>
<CAPTION>
                                2001                         2000                        1999
                      ------------------------     -----------------------      ------------------------
                          AS           PRO             AS           PRO           AS              PRO
                       REPORTED       FORMA         REPORTED       FORMA        REPORTED         FORMA
                      ----------     ---------     ---------     ---------      ---------      ---------
<S>                   <C>            <C>           <C>           <C>            <C>            <C>
Net income            $2,888,943     2,859,846     1,931,675     1,884,770      2,680,430      2,513,362
Net income per
    share - basic           1.03          1.02           .71           .69           .95             .89
Net income per
    share - diluted         1.02          1.01           .69           .67           .90             .85
</TABLE>

     The fair value of each option grant is estimated on the date of grant using
     the Black-Scholes  option-pricing model with the following weighted-average
     assumptions  used for grants in 2001 and 2000.  The  weighted  average fair
     values of options  granted  in 2001,  2000 and 1999 were  $2.65,  $1.85 and
     $3.42, respectively.
<TABLE>
<CAPTION>
                                                  2001                   2000                    1999
                                                ---------              ---------               --------
<S>                                               <C>                     <C>                    <C>
Risk-free interest rate                           4.86%                   6.00%                  6.25%
Dividend yield                                    1.85%                    2.0%                     0%
Expected volatility                                 20%                     20%                  17.8%
Expected lives (in years)                            8                       5                      5
</TABLE>


                                                                     (Continued)

                                       37
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

     The following table summarizes additional information about the Option Plan
     at December 31, 2001:
<TABLE>
<CAPTION>
                                                           REMAINING
                                         NUMBER           CONTRACTUAL              NUMBER
        EXERCISE PRICE                OUTSTANDING             LIFE               EXERCISABLE
        --------------                -----------         ------------           -----------
           <S>                          <C>                 <C>                    <C>
           $ 7.50                       10,000              2.25 years             10,000
            10.50                        5,424              5.25 years              5,424
            10.94                        9,000              7.70 years              9,000
            11.00                       10,315              8.00 years             10,315
            11.00                          500               .40 years                500
            11.00                          500               .20 years                500
            11.06                       60,000              7.50 years             60,000
            11.50                        8,000                10 years              8,000
            14.88                       10,000              9.10 years             10,000
            19.50                        4,204              6.00 years              4,204
                                  ------------           -------------           --------
                                       117,943              7.20 years            117,943
                                  ============           =============           ========
</TABLE>

(12) PARENT COMPANY FINANCIAL INFORMATION

     Condensed financial information of Cooperative Bankshares, Inc., the parent
     company, at December 31, 2001 and 2000 and for the years ended December 31,
     2001, 2000 and 1999 is presented below:

                   CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
                                                                     2001                   2000
                                                              ----------------           ------------
<S>                                                           <C>                        <C>
      Assets:
          Cash                                                $          1,753                  1,170
          Equity investment in subsidiary                           33,616,593             30,811,081
          Other assets                                                 141,772                135,730
                                                              ----------------           ------------

                                                              $     33,760,118             30,947,981
                                                              ================           ============
      Liabilities and stockholders' equity:
          Other liabilities                                   $        141,838                135,802
          Stockholders' equity                                      33,618,280             30,812,179
                                                              ----------------           ------------

                                                              $     33,760,118             30,947,981
                                                              ================           ============
</TABLE>
                                                                     (Continued)

                                       38
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


                       CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
                                                                  2001                  2000                   1999
                                                           ----------------      ----------------       ----------------

<S>                                                        <C>                            <C>                  <C>
      Dividends from subsidiary                            $        347,309               825,242              4,556,645
      Equity in undistributed net income of subsidiary            2,586,569             1,114,286             (1,852,795)
      Miscellaneous expenses                                        (44,935)               (7,853)               (23,420)
                                                           ----------------      ----------------       ----------------

                                                           $      2,888,943             1,931,675              2,680,430
                                                           ================      ================       ================
<CAPTION>
                       CONDENSED STATEMENTS OF CASH FLOWS

                                                                  2001                  2000                   1999
                                                           ----------------      ----------------       ----------------
<S>                                                        <C>                          <C>                    <C>
      Operating activities:
          Net income                                       $      2,888,943             1,931,675              2,680,430
          Equity in undistributed net income of
            subsidiary                                           (2,586,569)           (1,114,286)             1,852,795
          Change in other assets                                         --              (135,730)                    --
          Change in other liabilities                                    (6)                   72                     --
          Amortization of deferred organization costs                    --                    --                  8,841
                                                           ----------------      ----------------       ----------------
              Net cash provided by (used in)                        302,368               681,731              4,542,066
                operating activities

      Financing activities:
          Proceeds from issuance of common stock, net               261,249               206,035                 51,799
          Purchase and retirement of common stock                        --              (480,657)            (4,594,538)
          Cash dividends paid                                      (563,034)             (406,890)                    --
                                                           ----------------      ----------------       ----------------
                Net cash used in financing activities              (301,785)             (681,512)            (4,542,739)
                                                           ----------------      ----------------       ----------------

      Increase (decrease) in cash and cash
           equivalents                                                  583                   219                   (673)
      Cash and cash equivalents, beginning of year                    1,170                   951                  1,624
                                                           ----------------      ----------------       ----------------

      Cash and cash equivalents, end of year               $          1,753                 1,170                    951
                                                           ================      ================       ================
</TABLE>

                                                                     (Continued)

                                       39
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000

(13) FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

          CASH AND CASH EQUIVALENTS

          The carrying amount is a reasonable estimate of fair value.

          SECURITIES

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

          FHLB STOCK

          The carrying amount is a reasonable estimate of fair value.

          LOANS

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

          ACCRUED INTEREST

          The carrying amount is a reasonable estimate of fair value.

          DEPOSITS

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

          BORROWED FUNDS

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

                                                                     (Continued)

                                       40
<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           December 31, 2001 and 2000


          OFF-BALANCE SHEET FINANCIAL INSTRUMENTS

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

     The carrying  amounts and estimated fair values of the Company's  financial
     instruments at December 31, 2001 and 2000 are as follows (in thousands):
<TABLE>
<CAPTION>
                                                  2001                                   2000
                                    -----------------------------------       -------------------------------
                                        CARRYING         ESTIMATED FAIR          CARRYING      ESTIMATED FAIR
                                         AMOUNT              VALUE                AMOUNT           VALUE
                                    ---------------    ----------------       -------------  ----------------
<S>                                  <C>                    <C>                    <C>            <C>
      Financial assets:
          Cash and cash
            equivalents              $    12,296            12,296                 18,148         18,148
          Securities:
            Available for sale            42,970            42,970                 16,049         16,049
            Held to maturity               5,000             5,283                 18,978         18,554
          Loans, net                     373,458           376,503                347,486        348,179
          FHLB stock                       4,155             4,155                  3,755          3,755
          Accrued interest
            receivable                     2,637             2,637                  2,776          2,776
      Financial liabilities:
          Deposits                       339,830           340,320                327,312        324,987
          Borrowed funds                  83,097            86,451                 55,101         53,391
          Accrued interest
            payable                          264               264                    300            300
</TABLE>

(14) STOCK REPURCHASE PLAN

     On October  21,  1999 the  Company's  Board of  Directors  approved a Stock
     Repurchase  Program  authorizing  the Company to  repurchase  up to 138,000
     shares, or approximately 5% of the then outstanding shares of common stock.
     The  Company did not  purchase  any shares  pursuant to the program  during
     2001.  During 2000, the Company  purchased 46,385 shares at an average cost
     of $10.36 per share pursuant to the program.

(15) BRANCH SALE

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

(16) SUBSEQUENT EVENT

     On February 25, 2002,  the Company sold a parcel of real estate,  resulting
     in a gain of approximately $450,000 (unaudited).


                                       41

<PAGE>
                   DIRECTORS, OFFICERS AND FINANCIAL CENTERS
<TABLE>
<CAPTION>

                                      BOARD OF DIRECTORS
                                  Cooperative Bankshares, Inc.
                             Cooperative Bank For Savings, Inc., SSB


<S>                                                               <C>
FREDERICK WILLETTS, III                                           James D. Hundley, M.D.
CHAIRMAN, PRESIDENT & CEO                                         President, Wilmington Orthopaedic Group P.A.

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

Russell M. Carter                                                 R. Allen Rippy
President, Atlantic Corporation                                   Vice President, Rippy Cadillac Oldsmobile, Inc.

F. Peter Fensel, Jr.                                              O. Richard Wright, Jr.
President, F. P. Fensel Supply Company                            Attorney McGougan, Wright, Worley, Harper & Bullard



                                OFFICERS OF COOPERATIVE BANK

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

                                            FINANCIAL CENTER LOCATIONS

                        Beaufort                                                      Tabor City
                        Belhaven                                                       Wallace
                      Elizabethtown                                                 Washington (2)
                    Jacksonville (2)                                                  Whiteville
                    Kill Devil Hills                                                Wilmington (4)
                      Morehead City
                                          Corolla -Loan Production Office
</TABLE>

                                       42
<PAGE>
                             CORPORATE INFORMATION
<TABLE>
<CAPTION>
                                              CORPORATE HEADQUARTERS
                                           Cooperative Bankshares, Inc.
                                                 201 Market Street
                                                   P.O. Box 600
                                         Wilmington, North Carolina 28402
                                                  (910) 343-0181
<S>                                                                         <C>

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


                     ANNUAL MEETING                                                   FORM 10-K
    The Annual Meeting of Stockholders of Cooperative                Copies of Form 10-K may be obtained without
             Bankshares, Inc. will be held:                          charge by writing to Linda B. Garland at the
              HILTON WILMINGTON RIVERSIDE,                                 Corporate Headquarters address.
      301 NORTH WATER STREET, WILMINGTON, NC 28401
              APRIL 26, 2002 AT 11:00 A.M.
    All stockholders are cordially invited to attend.



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

                                            ANNUAL DISCLOSURE STATEMENT
                              "This information has not been reviewed or confirmed
                                 for accuracy or relevancy by Federal Deposit
                                        Insurance Corporation (FDIC)."
</TABLE>

                                  CAPITAL STOCK



Cooperative Bankshares, Inc. stock is traded on the NASDAQ National Market under
the  symbol  "COOP".  As of  December  31,  2001,  there were  2,835,447  shares
outstanding,  which were held by 544  stockholders of record.  The Company began
paying a quarterly cash dividend in April 2000.  Stock  performance for 2001 and
2000 is given in the following table.

                           QUARTERLY COMMON STOCK DATA

                                   2001                     2000
 ---------------------------------------------------------------------
 QUARTERS ENDED             HIGH         LOW          HIGH        LOW
 ---------------------------------------------------------------------
 December                 12.400       9.500        12.000      9.000
 September                13.500       9.500        10.250      8.250
 June                     12.500      10.800        11.625      8.000
 March                    15.750       9.750        12.125      8.875
 ---------------------------------------------------------------------

                                       43

<PAGE>


                       COOPERATIVE BANK FINANCIAL CENTERS


1. Main Office       5. Jacksonville     9. Beaufort       13. Kill Devil Hills
2. Hanover           6. Wallace         10. Jacksonville   14. Washington
3. Long Leaf         7. Elizabethtown   11. Washington     15. Ogden
4. Morehead City     8. Tabor City      12. Belhaven       18  Whiteville


Loan Origination Office
     17  Corolla




[PICTURE  OF MAP OF  COUNTIES  OF  EASTERN  NORTH  CAROLINA  WITH  LOCATIONS  OF
FINANCIAL CENTERS INDICATED]

                                       44