<PAGE>
 
                                  EXHIBIT 13
<PAGE>
 
                                  COOPERATIVE


                                BANKSHARES, INC.



                                 ANNUAL REPORT
                               DECEMBER 31, 1996
<PAGE>
 
                          COOPERATIVE BANKSHARES, INC.


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PROFILE            Cooperative Bankshares, Inc., is the parent company of
                   Cooperative Bank For Savings, Inc., SSB. The Bank is
                   chartered under the laws of the state of North Carolina to
                   engage in general banking business. Cooperative offers a wide
                   range of retail banking services including deposit services,
                   banking cards and alternative investment products. These
                   funds are used for the extension of credit through mortgage
                   loans, consumer loans and other installment credit such as
                   home equity, auto, boat loans and check reserve.

                   Chartered in 1898, Cooperative's headquarters is located in
                   Wilmington, North Carolina. Cooperative operates 17 offices
                   throughout the coastal and inland communities of eastern
                   North Carolina from Corolla located on the Outer Banks of
                   North Carolina to Tabor City located on the South Carolina
                   border.

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

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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.

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TABLE OF CONTENTS  Selected Financial and Other Data .....................    2
                   President's Message ...................................    3
                   Management's Discussion & Analysis .................... 4-11
                   Report of Independent Accountants .....................   12
                   Consolidated Statements of Financial Condition.........   13
                   Consolidated Statements of Operations .................   14
                   Consolidated Statements of Stockholders' Equity .......   15
                   Consolidated Statements of Cash Flows  ................16-17
                   Notes to Consolidated Financial Statements ............18-36 
                   Directors, Officers, and Office Locations .............   38
                   Corporate Information .................................   39
             

 

                                       1
<PAGE>
 
                       SELECTED FINANCIAL AND OTHER DATA
<TABLE> 
<CAPTION> 
----------------------------------------------------------------------------------------------------------------

                                            DECEMBER 31,   December 31,   December 31,    March 31,    March 31,
Financial Condition (Dollars in Thousands)     1996           1995           1994           1994         1993
-----------------------------------------------------------------------------------------------------------------
<S>                                         <C>            <C>            <C>          <C>          <C>   
  Assets                                    $  341,300     $  311,843     $  324,252   $  312,513   $  307,586
  Loans receivable, net                        263,313        234,008        240,194      215,497      205,446
  Mortgage-backed and related securities        28,825         30,907         31,658       37,202       39,301
  Cash, securities and other investments        40,942         35,540         40,320       47,039       48,872
  Goodwill                                           0          3,602          3,894        4,113        4,405
  Deposits                                     278,139        270,071        266,079      273,704      283,148
  Borrowed funds                                35,435         10,089         30,000        9,650            0
  Stockholders' equity                      $   25,470     $   29,083     $   26,923   $   26,148   $   21,639
-----------------------------------------------------------------------------------------------------------------
<CAPTION> 

Summary of Operations (Dollars in Thousands
except per share amounts) 
                                            YEAR ENDED     Year ended     9 Mo. ended   Year ended   Year ended
                                            DECEMBER 31,   December 31,   December 31,   March 31,    March 31,
                                                1996           1995           1994         1994         1993
-----------------------------------------------------------------------------------------------------------------
<S>                                         <C>            <C>            <C>          <C>          <C>   
  Interest income                           $   22,793     $   21,904         16,610       22,079       24,189
  Interest expense                              13,630         13,701          8,302       10,565       12,648
  Net interest income                            9,163          8,203          8,308       11,514       11,541
  Provision for loan losses                        156              3              0           30          140
  Non-interest income                              570            620            502        1,538          636
  Non-interest expenses (1)                     12,251          7,121          4,967        6,269        5,871
  Income (loss) before income taxes and
    accounting change                           (2,674)         1,699          3,843        6,753        6,166
  Income (loss) before accounting change        (3,250)         1,024          2,487        4,032        3,927
  Cumulative effect of a change in
    accounting for income taxes                      0              0              0          203            0
  Net income (loss)                         $   (3,250)    $    1,024     $    2,487   $    4,235   $    3,927
----------------------------------------------------------------------------------------------------------------- 
Other Selected Data

Return on average assets (2)                    (1.01)%          0.32%          1.01%        1.35%        1.28%
Return on average equity (2)                   (11.40)%          3.62%         12.28%       17.46%       19.88%
Stockholders' equity to total assets              7.46%          9.33%          8.30%        8.37%        7.04%
Non-performing assets to total assets             0.44%          0.25%          0.15%        0.30%        0.86%
Allowance for loan losses to total loans          0.29%          0.31%          0.31%        0.34%        0.33%
-----------------------------------------------------------------------------------------------------------------
Per Share Data (3)
 
Net income (loss)                           $    (2.18)    $     0.65     $     1.57   $     2.69   $     2.52
Tangible book value                         $    17.07     $    17.08     $    15.44   $    14.77   $    11.55
Number of common shares outstanding          1,491,698      1,491,698      1,491,698    1,491,698    1,491,698
-----------------------------------------------------------------------------------------------------------------
</TABLE> 
 
(1) Includes one time special assessment for deposit insurance of $1.8 million
    and a charge-off of impaired goodwill of $3.4 million.

(2) Return on average assets and return on average equity for the nine months
    ended December 31, 1994 have been annualized for comparative purposes.
    
(3) All per share amounts are adjusted for all stock dividends and splits.
 
 

                                       2
<PAGE>
 
                              PRESIDENT'S MESSAGE

TO OUR STOCKHOLDERS:

        The year 1996 was one marked by continued improvement in the overall
condition of Cooperative Bankshares, Inc. As the year progressed the Bank's net
interest margin, or the difference between interest from earning assets and
interest expense from liabilities, continued to widen. This allowed the Bank's
net income to increase steadily throughout the year as each quarter resulted in
improved earnings.

EARNINGS

        Net income for the year ended December 31, 1996, rose 45% over the
previous year to $1,487,895 or $.94 per share, excluding a one time, special
assessment for deposit insurance of $1,782,810, and a charge-off of good will of
$3,359,791 related to an acquisition made in 1983. Income for the year ended
December 31, 1995, was $1,024,381, or $.65 per share. Net loss for 1996 after
the one time charges was $3,249,853 or $2.18 per share.

LOANS

        During the year 696 mortgage loans were originated totaling $67,337,259,
a 51% increase over the level of originations in the previous year. Despite this
increase in the overall level of loan volume, we continue to adhere to strict
underwriting criteria. While we now make a wide range of loans, including
consumer and commercial loans, the primary focus during the past year has
continued to be on origination of one-to-four family residential loans. During
1995, the Bank consolidated its loan servicing and originating operations,
utilizing an automated system to better facilitate the origination and servicing
of our loans. I am pleased to report that this increase in overall loan volume
during 1996 has not caused any substantial increase in either personnel or other
overhead expense due to the previous consolidation of these operations, allowing
a more streamlined, cost efficient operation.

ASSET QUALITY

        The quality of our assets remains a top priority for the Bank. As of
December 31, 1996, nonperforming loans and real estate owned, totaled
$1,494,394, or 0.44% of assets. The allowance for loan losses has been increased
to $807,539; and while this is considered to be adequate at the present time to
cover any potential loan loss exposure, the Bank is continuing to add to this
allowance to further protect our investment in loans.

RECENT DEVELOPMENTS

        As previously mentioned, the Bank was assessed a one time special
assessment of $1,782,810 to recapitalize the SAIF insurance fund of the FDIC.
SAIF insured financial institutions throughout the country were assessed this
one time charge as of September 30, 1996. Going forward, this assessment will
have a positive effect on both the overall strength and condition of the SAIF
insurance fund, since it has been completely recapitalized. It will also
positively impact the earnings of Cooperative since we will now benefit from a
significant decrease in the premiums paid to the SAIF fund in the future. The
charge-off of $3,359,791 also positively affects the Bank's future earnings,
since the Bank was charging off goodwill over the next twelve years at the rate
of approximately $292,000 per year.

        The Retail Banking Division continues to develop new products, and is
emphasizing currently a new commercial checking account called, "Strictly
Business". With the addition of this commercial checking account as well as
commercial, consumer, and personal loans and checking accounts, we are now truly
a full service community bank.

        During the previous several years, the Bank had experienced a downturn
in earnings, largely due to a shrinkage in the Bank's net interest margin. I am
pleased to report that the net interest margin for the year ended December 31,
1996, had grown to 2.97% as compared to 2.67% at the same period in 1995. While
we anticipate that this margin will continue to expand in the future, it is also
important to note that the Bank has taken steps to reduce its exposure to
fluctuations in interest rates in the future.

SUMMARY

        I am pleased that the Bank's performance during the past year
substantially exceeded that of the previous year, and am particularly proud of
the efforts put forward by our staff, officers, and Directors in bringing these
results to fruition. I am also pleased that we have the recapitalization of our
deposit insurance fund behind us and can anticipate enhanced earnings as a
result of a reduction in our deposit insurance premiums. Both the reduced SAIF
premium and the charge-off of goodwill should improve earnings of the Bank in
the future. I continue to remain optimistic about our future, and appreciate
your confidence and support.

Sincerely,

Frederick Willetts, III

President

                                       3

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

        Cooperative Bank is chartered under the laws of the state of North
Carolina to engage in general banking business. The Bank offers a wide range of
retail banking services including deposit services, banking cards and
alternative investment products. These funds are used for the extension of
credit through mortgage loans, savings account loans and other installment
credit such as home equity, auto and boat loans and check reserve.

        The Company conducts its operations through its main office in
Wilmington, North Carolina and 16 offices throughout eastern North Carolina. The
Company considers its primary market for savings and lending activities to be
the communities of eastern North Carolina extending from the Virginia to the
South Carolina borders.

        The Company's Board of Directors approved a change in the Company's
fiscal year end from March 31 to December 31, effective with the nine months
ended December 31, 1994. Accordingly, this report presents financial information
for the nine month transition period ended December 31, 1994, and the fiscal
years ended December 31, 1995 and 1996. The following management's discussion
and analysis is presented to assist in understanding the Company's financial
condition and results of operations. This discussion should be read in
conjunction with the consolidated financial statements and accompanying notes
presented in this report.

MANAGEMENT STRATEGY

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

        Cooperative Bank's lending activities are concentrated on the
origination of conventional mortgage loans for the purpose of constructing,
financing or refinancing one-to four-family residential properties. As of
December 31, 1996, $258.7 million, or 93.2%, of the Bank's loan portfolio
consisted of loans secured by one- to four family residential properties. Also
at that date, approximately 96.0% of the Bank's total loan portfolio consisted
of loans secured by residential real estate. To a lesser extent, the Bank
originates multi-family, nonresidential real estate loans, home equity line of
credit loans, secured and unsecured consumer and business loans. While
continuing to place primary emphasis on residential mortgage loans, the Bank is
taking a more aggressive position in pursuing business lending, and
nonresidential real estate lending involving loans secured by small commercial
properties with balances generally ranging from $100,000 to $500,000. The Bank's
primary emphasis is to originate adjustable rate loans with the fixed rate loan
as an option. As of December 31, 1996, adjustable rate loans totaled $182.8
million, or 69.2%, and fixed rate loans totaled $81.3 million or 30.8% of the
Bank's total loan portfolio.

INTEREST RATE SENSITIVITY ANALYSIS

        Interest rate sensitivity refers to the change in interest spread
resulting from changes in interest rates. To the extent that interest income and
interest expense do not respond equally to changes in interest rates, or that
all rates do not change uniformly, earnings will be affected. Interest rate
sensitivity, at a point in time, can be analyzed using a static gap analysis
that measures the match in balances subject to repricing between interest-
earning assets and interest-bearing liabilities.

                                       4
<PAGE>


                      MANAGEMENT'S DISCUSSION & ANALYSIS 
 
Gap is considered positive when the amount of interest rate sensitive assets
exceed the amount of interest rate sensitive liabilities. Gap is considered
negative when the amount of interest rate sensitive liabilities exceed the
amount of interest rate sensitive assets. At December 31, 1996, Cooperative had
a one-year negative gap position of 1.0%. 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, most of the Company's adjustable-rate mortgage loans are
indexed to the National Monthly Median Cost of Funds to SAIF-insured
institutions. This index is considered a lagging index that may lag behind
changes in market rates. The one-year or less interest-bearing liabilities also
include checking, savings, and money market deposit accounts. Experience has
shown that the Company sees relatively modest repricing of these transaction
accounts. Management takes this into consideration in determining acceptable
levels of interest rate risk.

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

<TABLE>
<CAPTION>
 
 
INTEREST SENSITIVITY ANALYSIS
                                                               Over One     Over Five
                                              One Year         Through       Through    Over Ten
December 31, 1996                              or Less        Five Years    Ten Years     Years      Total
------------------------------------------------------------------------------------------------------------
                                                          (Dollars in thousands)
<S>                                       <C>                <C>           <C>          <C>        <C>
Interest-earning assets:
    Securities and other
        interest-earning assets                  $ 16,528      $  6,023      $11,010     $ 5,000    $ 38,561
    Mortgage-backed and related                    22,902         2,907          888       2,711      29,408
     securities
    Loan portfolio                                169,485        53,254       20,805      19,781     263,325
                                          ------------------------------------------------------------------ 
        Total                                    $208,915      $ 62,184      $32,703     $27,492    $331,294
                                          ------------------------------------------------------------------ 
 
Interest-bearing liabilities:
    Deposits (1)                                 $200,926      $ 67,129      $10,057     $    33    $278,145
    Borrowed funds                                 10,208        25,101           24         102      35,435
                                          ------------------------------------------------------------------ 
        Total                                    $211,134      $ 92,230      $10,081     $   135    $313,580
                                          ------------------------------------------------------------------ 
 
Interest rate sensitivity gap                    $ (2,219)     $(30,046)     $22,622     $27,357    $ 17,714
                                          ------------------------------------------------------------------ 
 
Cumulative interest rate sensitivity gap         $ (2,219)     $(32,265)     $(9,643)    $17,714
                                          ------------------------------------------------------------------ 
Cumulative ratio of interest-earning
    assets to interest-bearing                                                                    
    liabilities                                      98.9%         89.4%        96.9%      105.6% 
                                          ------------------------------------------------------------------ 
 
Ratio of cumulative gap to total assets              (0.7%)        (9.5%)       (2.8%)       5.2%
                                          ------------------------------------------------------------------ 
</TABLE> 
 
(1) Includes noninterest bearing checking accounts of $4,230,000

                                       5
<PAGE>
 
                      MANAGEMENT'S DISCUSSION & ANALYSIS

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, 1996, the estimated market value of liquid assets
(cash, cash equivalents, and marketable securities) was approximately $68.4
million, which represents 21.8% of deposits and borrowed funds as compared to
$65.3 million or 23.3% of deposits and borrowed funds at December 31, 1995.  The
increase in liquid assets during the twelve months ended December 31, 1996, was
due to the purchase of $4.0 million in Federal Home Loan Bank bonds and $2.0
million in Federal Farm Credit Bank Bonds with a maturity ranging from two to
five years.

SECURITY PORTFOLIO

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

         The Company's investment in mortgage-related securities includes
collateralized mortgage obligations ("CMO").  CMOs are securities derived by
reallocating the cash flows from mortgage-backed securities or pools of mortgage
loans in order to create multiple classes, or tranches, of securities with
coupon rates and average lives that differ from the underlying collateral as a
whole.  At December 31, 1996, the Company's investment in CMOs totaled $15
million, or 25.7% of the securities portfolio.  Of the $15 million, a $10
million CMO is guaranteed either directly or indirectly through mortgage-backed
securities underlying the obligations of FNMA.  This FNMA CMO has a 30 year
term, floats at 155 basis points over the 30 day London Interbank Offered Rate
("LIBOR") on a monthly basis and has a lifetime interest rate cap of 8%.  The
remaining $5 million CMO securities were issued by Chase Mortgage Finance
Corporation and represent a beneficial interest in a pool of fixed-rate one- to
four-family mortgage loans.  The Chase CMO has a 30 year term, floats at 180
basis points over the 30 day LIBOR on a monthly basis and has a lifetime
interest rate cap of 8%.

         The Company's investment in U. S. Government agency bonds includes $5
million in Federal Home Loan Banks' Dual Indexed Consolidated Bonds maturing
August 4, 2003.  These bonds had an 8% interest rate from August 4, 1993,
through August 3, 1995, at which time the rate was adjusted to 3.485% based on
an indexing formula.  Subsequent interest rates will also be based on an
indexing formula and will adjust annually on February 4 and August 4.  The
indexing formula states that the interest rate per annum will be equal to a rate
determined by the 10-Year CMT less the 6 month LIBOR plus a margin of 2.9% for
August 4, 1995, increasing 30 basis points annually to 5.0% for August 4, 2005.

         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.

                                       6
<PAGE>
                      MANAGEMENT'S DISCUSSION & ANALYSIS

 
         The Company's primary uses of liquidity are to fund loans and to make
investments.  At December 31, 1996, outstanding off-balance sheet commitments to
extend credit totaled $12.9 million, and the undisbursed portion of construction
loans was $12.2 million.  Management considers current liquidity levels adequate
to meet the Company's cash flow requirements.

CAPITAL

         Stockholders' equity at December 31, 1996, was $25.5 million, down
12.4% from $29.1 million at December 31, 1995.  The total at December 31, 1996,
and December 31, 1995, includes $372 thousand and $298 thousand respectively,
net of tax, of unrealized losses on securities available for sale marked to
estimated fair market value under Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities
("SFAS 115").  The reduction in equity was due to a one-time special assessment
for deposit insurance of $1.8 million and a charge-off of goodwill of $3.4
million.

         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, 1996,
the Bank's ratio of Tier I capital was 7.8%.  The FDIC's risk-based capital
rules require banks supervised by the FDIC to maintain risk-based capital to
risk-weighted assets of at least 8.00%.  Risk-based capital for the Bank is
defined as Tier 1 capital plus the balance of allowance for loan losses.  At
December 31, 1996, the Bank had a ratio of qualifying total capital to risk-
weighted assets of 15.0%.

         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 9 of Notes to Consolidated Financial Statements.

OTHER INFORMATION

         Pursuant to recently enacted legislation, the FDIC levied an assessment
on institutions with deposits insured by the Savings Association Insurance Fund
(the "SAIF") in order to recapitalize the SAIF.  The assessment, set by the FDIC
at 0.657% of SAIF-insured deposits as of March 31, 1995, was paid on November
27, 1996.  The effect of this assessment was to reduce the Company's net income,
before income taxes, for the year ended December 31, 1996, by $1.8 million.  As
a result of this legislation, the Company's deposit insurance premiums declined
substantially commencing January 1, 1997.

         In addition to numerous regulatory relief provisions contained in the
recent legislation, the legislation provides for a merger of the SAIF and the
Bank Insurance Fund effective January 1, 1999 if there are no insured savings
associations remaining on that date, and directs the Secretary of Treasury to
make recommendations to the Congress by March 31, 1997, with respect to
establishment of a common charter for banks and thrift institutions.

         The Company has continually evaluated the realizability of its goodwill
relating to the 1983 purchase of a savings and loan.  In September  1996, this
evaluation process indicated that the related branches were continuing to
experience decreased profitability that had permanently impaired the goodwill.
Due to this permanent impairment the Company recognized a charge-off of goodwill
of $3.4 million to non-interest expense during the year ended December 31, 1996.

         In October 1995, the Company opened a new branch office in the Ogden
area of Wilmington, North Carolina.  The capital investment in the new branch
increased the Company's non-earning assets by $840 thousand or 6.9% resulting in
a slight decrease in interest income.  Due to the start-up cost of the new
branch office, other operating expenses increased slightly in 1996.  The new
branch could have a negative effect on net income for a short period of time.

                                       7
<PAGE>
 
                       MANAGEMENT'S DISCUSSION & ANALYSIS

FINANCIAL CONDITION AND RESULTS OF OPERATIONS AT DECEMBER 31, 1996 COMPARED TO
DECEMBER 31, 1995

FINANCIAL CONDITION

         The Company's total assets increased 9.5% to $341.3 million at December
31, 1996, as compared to $311.8 million at December 31, 1995.  The two major
changes in the assets were the purchase of $6.0 million in available for sale
securities and the $29.3 million (12.5%) increase in loans receivable.  The
securities were Federal Home Loan Bank bonds and Federal Farm Credit Bank bonds
with two and five year maturity dates.  The security purchase and the increase
in loans during the current period were funded by retail deposits, borrowed
funds, and liquid assets.  The Company concentrates its lending activities on
the origination of conventional mortgage loans for the purpose of the
construction, financing or refinancing of one- to four-family residential
properties.  At December 31, 1996, over 93% of the Company's loan portfolio
consisted of loans secured by one- to four-family residential properties.

         Of the $8.1 million increase in retail deposits during the twelve month
period ended December 31, 1996, $1.3 million was a deposit to a checking account
from a local municipality.  The increase in retail deposits was used in part to
fund the increase in loans receivable. Borrowed funds, collateralized through an
agreement with the Federal Home Loan Bank ("FHLB") for advances, are secured by
the Company's investment in FHLB stock and qualifying first mortgage loans.
Borrowed funds at December 31, 1996, in the amount of $10.0 million, mature in
May 1997 with the remaining amount maturing in later years.  For further
information, see Note 8 of Notes to Consolidated Financial Statements.

         The Company's non-performing assets (loans 90 days or more delinquent
and foreclosed real estate) were $1.5 million, or 0.44% of assets, at December
31, 1996, compared to $772 thousand, or 0.25% of assets, at December 31, 1995.
An increase in delinquent single family loans caused non-performing assets to be
higher for the period ended December 31, 1996, as compared to December 31, 1995.
The Company takes an aggressive position in collecting delinquent loans to keep
non-performing assets down and continues to evaluate the loan and real estate
portfolios to provide loss reserves as considered necessary.  In the opinion of
management, the allowance for loan losses of $807 thousand at December 31, 1996,
is adequate to cover potential losses.  Subsequent to December 31, 1996, three
of the non-performing loans were brought current and transferred to a new
borrower, reducing the balance of non-performing assets by approximately $300
thousand.

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 and securities portfolios and 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 (LOSS)

         The net loss of $3.3 million for the year ended December 31, 1996, as
compared to $1.0 million in income for the same period a year ago, was the
direct result of one-time special charges.  Pursuant to recently enacted
legislation, the FDIC levied an assessment on institutions with deposits insured
by the Savings Association Insurance Fund (the "SAIF") in order to  recapitalize
the SAIF.  The effect of this assessment was to reduce the Company's net income,
before income taxes, for the year ended December 31, 1996, by $1.8 million.  As
a result of this legislation, the Company's deposit insurance premiums declined
substantially commencing January 1, 1997.  As discussed earlier, the Company
recognized a charge-off of impaired goodwill of $3.4 million to non-interest
expense during the year ended December 31, 1996.  Excluding the one-time special
assessment for deposit insurance and the charge-off of goodwill, net income for
the year ended December 31, 1996, would have been $1.5 million, compared to $1.0
million for the previous year.

                                       8
<PAGE>
 
                      MANAGEMENT'S DISCUSSION & ANALYSIS


                          AVERAGE YIELD/COST ANALYSIS

The following table contains information relating to the Company's average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated.  Such annualized yields and costs are
derived by dividing income or expense by the average balances of asset or
liabilities, respectively, for the periods presented.

<TABLE>
<CAPTION>
                                                                      For the period ended
                           -------------------------------------------------------------------------------------------------------
                                   December 31, 1996               December 31, 1995                    December 31, 1994
                           --------------------------------  -------------------------------    ------------------------------------
(DOLLARS IN THOUSANDS)                             Average                          Average                          Average
                              Average              Yield/    Average                 Yield/      Average             Yield/
                              Balance   Interest    Cost     Balance     Interest     Cost       Balance   Interest  Cost
                           --------------------------------  -------------------------------    ------------------------------------
<S>                        <C>          <C>        <C>       <C>       <C>          <C>         <C>         <C>      <C>
Interest-earning assets:
   Securities and other
     interest-earning         
      assets                  $ 32,511    $ 1,819    5.60%   $ 37,046    $ 2,325     6.28%   $ 46,304    $ 3,149     6.80%
Mortgage-backed and                                                               
 related securities             30,397      2,048    6.74%     32,438      2,200     6.78%     37,906      2,381     6.28% 
                                                                                  
Loan portfolio                 246,038     18,927    7.69%    237,431     17,379     7.32%    229,771     16,616     7.23%
                              --------    -------            --------   --------             --------   -------- 
    Total interest-earning                                                        
     assets                    308,946    $22,794    7.38%    306,915    $21,904     7.14%    313,981    $22,146     7.05% 
                                                                                  
Noninterest-earning assets      11,956                         12,454                          13,435
                              --------                       --------                        -------- 
    Total assets              $320,902                       $319,369                        $327,416
                              ========                       ========                        ======== 
Interest-bearing                                                                  
 liabilities:                                                                     
   Deposits                    271,156     12,670    4.67%    269,468     12,642     4.69%    267,199      9,696     3.63%
   Borrowed funds               14,839        960    6.47%     16,794      1,058     6.30%     28,527      1,373     4.81%
                               -------    -------             -------    -------             --------    ------- 
    Total interest-bearing                                                        
     liabilities               285,995    $13,630    4.77%    286,262    $13,700     4.79%    295,726    $11,069     3.74%
                                                                                  
Noninterest-bearing                                                               
 liabilities                     6,389                          4,842                           4,692
                              --------                      ---------                       ---------
                                                                                  
    Total liabilities          292,384                        291,104                         300,418
    Stockholders' equity        28,518                         28,265                          26,998
                              --------                      ---------                       ---------
Total liabilities and                                                             
 stockholders' equity         $320,902                       $319,369                        $327,416
                              ========                       ========                        ========
                                                                                  
Net interest income                       $ 9,164                        $ 8,204                         $11,077
                                          =======                        =======                         =======
                                                                                  
Interest rate spread                                 2.61%                           2.35%                           3.31%
                                                   ======                         =======                          ======
 
Net yield on interest-earning assets                 2.97%                           2.67%                           3.53%
                                                   ======                         =======                          ======

Percentage of average interest-earning
   assets to average interest-bearing
   liabilities                                      108.0%                          107.2%                         106.2%
                                                   ======                         =======                          =====
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

INTEREST INCOME

         Interest income increased 4% for the year ended December 31, 1996, as
compared to the same period a year ago.  The increase in income can be
principally attributed to an increase in yield and the average balance of the
loan portfolio as compared to the same period last year.  This was partially
offset by decreases in both the average volume and rate of the other categories
of interest-earning assets.  Overall the yield on average interest-earning
assets increased to 7.38% as compared to 7.14% for the same period a year ago,
and the average balance increased slightly.

INTEREST EXPENSE

         Interest expense was essentially unchanged for the year ended December
31, 1996, as compared to the same period a year ago.  The cost of interest-
bearing deposits decreased to 4.67% as compared to 4.69% for the same period
last year.  Although there was a small reduction in average interest-bearing
liabilities, the higher interest rate paid on borrowed funds (6.47%) for the
current year as compared to 6.30% for last year had a negative effect on
interest expense.

                                       9
<PAGE>
 
                     MANAGEMENT'S DISCUSSION AND ANALYSIS


                              RATE/VOLUME ANALYSIS

The table below provides information regarding changes in interest income and
interest expense for the period indicated.  For each category of interest-
earning asset and interest-bearing liabilities, information is provided on
changes attributable to (i) changes in volume (changes in volume multiplied by
old rate); (ii) changes in rates (change in rate multiplied by old volume); and
(iii) changes in rate-volume (changes in rate multiplied by changes in volume).

<TABLE>
<CAPTION>
 
 
                                  DECEMBER 31, 1995 VS. DECEMBER 31, 1996      December 31, 1994 vs. December 31, 1995

                                            INCREASE (DECREASE)                      Increase (Decrease)
                                                  DUE TO                                   Due to
(Dollars in thousands)                                   RATE/                                     Rate/
                                  VOLUME      RATE      VOLUME      TOTAL    Volume     Rate      Volume     Total
                              -----------------------------------------------------------------------------------------
                                                                                                        
<S>                             <C>         <C>        <C>        <C>        <C>      <C>        <C>       <C>
Interest income:                                                                                        
   Securities and other                                                                                 
     interest-earning assets        $(285)     $(252)       $31     $ (506)   $(630)   $  (243)  $  49     $  (824) 
Mortgage-backed and                                                                                     
     related securities              (138)       (14)         1       (151)    (343)       190     (27)       (180)
Loan portfolio                        630        885         32      1,547      554        202       7         763
                              -----------------------------------------------------------------------------------------
                                                                                                        
    Total interest-earning                                                                              
    assets                            207        619         64        890     (419)       149      29        (241)
                              -----------------------------------------------------------------------------------------
                                                                                                        
                                                                                                        
                                                                                                        
Interest expense:                                                                                       
   Deposits                            79        (51)         0         28       82      2,840      24       2,946
   Borrowed funds                    (123)        28         (3)       (98)    (565)       424    (174)       (315)
                              -----------------------------------------------------------------------------------------
                                                                                                        
    Total interest-bearing                                                                              
    liabilities                       (44)       (23)        (3)       (70)    (483)     3,264    (150)      2,631
                              -----------------------------------------------------------------------------------------
                                                                                                        
                                                                                                        
Net interest income                 $ 251      $ 642        $67     $  960    $  64    $(3,115)  $ 179     $(2,872)
                              -----------------------------------------------------------------------------------------

 </TABLE> 

NET INTEREST INCOME

         Net interest income for the year ended December 31, 1996, as compared
to the same period a year ago, increased 11.7%.  A reduction in the Company's
one-year negative gap position in which interest-bearing liabilities reprice
faster than interest-earning assets had a positive effect on increasing the
interest rate margin.  The one-year negative gap has been reduced to 1.0% at
December 31, 1996, as compared to 17.7% for the same period last year. During
the year ended December 31, 1996, the yield on average interest-earning assets
increased 24 basis points, while the cost of average interest-bearing
liabilities decreased 2 basis points, causing net interest income to increase.
The percentage of average interest-earning assets to average interest-bearing
liabilities increased to 108.0% for the year ended December 31, 1996, as
compared to 107.2% for the same period in 1995.

PROVISION FOR LOAN LOSSES

        During the year ended December 31, 1996, the Company had charge-offs
against the allowance for loan losses of $86 thousand consisting of $22 thousand
for consumer loans and $64 thousand for loans on single family residential
property. The Company added $156 thousand to the allowance for loan losses for
the twelve month period ended December 31, 1996, bringing the balance up to $807
thousand. Management considers this level to be appropriate based on lending
volume, the current level of delinquencies and other non-performing assets,
overall economic conditions and other factors. Future increases to the allowance
may be necessary, however, due to changes in loan composition or loan volume,
changes in economic or market area conditions and other factors.

                                       10
<PAGE>
 
                      MANAGEMENT'S DISCUSSION & ANALYSIS


NONINTEREST INCOME

        The gain on sale of other investments of $52 thousand for the year ended
December 31, 1996, was the cash liquidation of equity securities. The
corporation in which the Company had invested was purchased by a third party and
the stock was redeemed at a gain of $46 thousand. The remaining $6 thousand was
from bonds with call options that were called during the year. During the twelve
month period ending December 31, 1995, the Company sold $14.7 million in
securities and $22.5 million in fixed rate mortgage loans at a gain of $23
thousand and $205 thousand, respectively. All of the securities and $13.9
million of the loans sold in 1995 were sold during the quarter ended June 30,
1995. The proceeds from the 1995 sales were used to repay short-term borrowed
funds, and improve the Company's interest rate sensitivity position by reducing
its one-year negative gap. Real estate owned expense and losses decreased by 75%
to $40 thousand as a result of management's commitment to disposing of these
properties in a timely manner. Loan fees for the year ended December 31, 1996,
as compared to last year decreased by 4.9% due to a decrease in servicing fees
on sold loans from repayments. Fee income from deposit operations increased due
to a more aggressive position in offering checking accounts.

OTHER OPERATING EXPENSES

        As previously discussed, the Company recognized a charge-off of impaired
goodwill of $3.4 million to non-interest expense during the year ended December
31, 1996. Further, the FDIC levied an assessment on institutions with deposits
insured by the Savings Association Insurance Fund (the "SAIF") in 1996. The
effect of this assessment was to reduce the Company's income for the year ended
December 31, 1996, by $1.8 million. As a result of this legislation, the
Company's deposit insurance premiums declined substantially commencing January
1, 1997.

        For the year ended December 31, 1996, compensation and related cost was
essentially unchanged as compared to the same period last year. Occupancy and
equipment expense increased 7.4% during the year ended December 31, 1996, as
compared to the same period a year ago. The major part of this increase can be
attributed to depreciation and operating cost of the new branch office opened in
October 1995. The decrease in Federal insurance premium can be attributed to the
recently enacted legislation that resulted in a reduction in the premium for the
fourth quarter of 1996. Advertising increased 1.6% for the twelve month period
ended December 31, 1996, as compared to the same period last year. Other
operating expense category was up 5.4% for the year ended December 31, 1996, as
compared to the same period last year. This was due to the new branch office
opened in October 1995 and normal increases in the purchase of paper, printing
and dues.
 
INCOME TAXES

        The effective tax rates for the years ended December 31, 1996 and 1995
approximate the statutory rate after giving effect to nontaxable interest,
write-off of impaired goodwill, other permanent tax differences, and adjustments
to certain deferred tax liabilities.

                                       11
<PAGE>
 
             [LETTERHEAD OF COOPERS & LYBRAND L.L.P. APPEARS HERE]



REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
Cooperative Bankshares, Inc.
Wilmington, North Carolina

We have audited the accompanying consolidated statements of financial condition
of Cooperative Bankshares, Inc. and subsidiary as of December 31, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1996 and 1995, and the nine months
ended December 31, 1994.  These financial statements are the responsibility of
the Company's management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Cooperative
Bankshares, Inc. and subsidiary as of December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996 and 1995, and the nine months ended December 31, 1994 in
conformity with generally accepted accounting principles.


/s/ Coopers & Lybrand L.L.P.

Raleigh, North Carolina
January 31, 1997


                                      12
<PAGE>
 
                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                          DECEMBER 31, 1996 AND 1995

<TABLE> 
<CAPTION> 
                                                                                           1996             1995
                                                                                       ----------------------------
<S>                                                                                    <C>            <C> 
                                    ASSETS
Cash and cash equivalents........................................................      $ 11,507,283    $ 11,889,473
Securities:
  Available for sale.............................................................         5,946,250              --
  Held to maturity (estimated market value, 1996 - $19,705,629; 1995 - 
   $19,885,820)..................................................................        21,053,628      21,063,310
Mortgage-backed and related securities available for sale........................        28,824,918      30,907,341
Other investments................................................................         2,435,000       2,587,101
Loans receivable, net............................................................       263,312,730     234,008,085
Real estate owned:
  Foreclosed.....................................................................            42,146         329,338
  Other..........................................................................                --         206,885
Accrued interest receivable......................................................         1,917,447       1,742,589
Premises and equipment, net......................................................         4,786,292       5,025,587
Goodwill.........................................................................                --       3,602,189
Prepaid expenses and other assets................................................         1,474,164         481,362
                                                                                       ---------------------------- 
                                                                                       $341,299,858    $311,843,260
                                                                                       ============================


                    LIABILITIES AND STOCKHOLDERS' EQUITY 

Deposits.........................................................................      $278,138,909    $270,070,661 
Borrowed funds...................................................................        35,145,362      10,089,017
ESOP note payable................................................................           289,160              --
Escrow deposits...................................................................          620,808         352,668
Accrued interest payable on deposits.............................................           351,295         862,377
Deferred income taxes, net.......................................................         1,075,883         857,500
Accrued expenses and other liabilities...........................................           208,891         528,147
                                                                                       ---------------------------- 
  Total liabilities..............................................................       315,830,308     282,760,370
                                                                                       ---------------------------- 

Commitments and contingencies (Notes 5 and 9)

Stockholders' Equity:
  Preferred stock, $1 par value, 3,000,000 shares authorized, none issued 
   and outstanding...............................................................                --              --  
  Common stock, $1 par value, 7,000,000 shares authorized, 1,491,698 issued 
   and outstanding...............................................................         1,491,698       1,491,698
  Additional paid-in capital.....................................................         6,003,111       6,003,111
  Unearned ESOP shares...........................................................          (289,160)             --
  Net unrealized gain (loss) on securities available for sale....................          (372,265)       (297,938) 
  Retained earnings..............................................................        18,636,166      21,886,019    
                                                                                       ----------------------------  
    Total stockholders' equity ..................................................        25,469,550      29,082,890  
                                                                                       ----------------------------  
                                                                                       $341,299,858    $311,843,260 
                                                                                       ============================
</TABLE> 

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


                                      13
<PAGE>
                    CONSOLIDATED STATEMENTS OF OPERATIONS

            FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE 
                      NINE MONTHS ENDED DECEMBER 31, 1994
<TABLE> 
<CAPTION> 
                                                                 1996                   1995                    1994
                                                             -----------------------------------------------------------

<S>                                                          <C>                     <C>                     <C>     
Interest Income:
  Loans receivable.........................................      $18,926,560         $17,379,495             $12,462,293     
  Mortgage-backed and related securities...................        2,048,268           2,199,582               1,786,026
  Securities...............................................        1,818,629           2,324,569               2,361,966
                                                             -----------------------------------------------------------   
    Total interest income..................................       22,793,457          21,903,646              16,610,285
                                                             -----------------------------------------------------------   
Interest Expense:
  Deposits.................................................       12,669,984          12,642,461               7,272,051   
  Borrowed funds...........................................          960,408           1,058,457               1,030,310
                                                             -----------------------------------------------------------       
    Total interest expense.................................       13,630,392          13,700,918               8,302,361
                                                                        
Net Interest Income........................................        9,163,065           8,202,728               8,307,924    
  Provision for loan losses................................          155,809               2,658                       -    
                                                             -----------------------------------------------------------      
  Net interest income after provision for loan losses....          9,007,256           8,200,070               8,307,924       
                                                             -----------------------------------------------------------      

Noninterest Income:
  Net gains on sale of securities.........................            52,496              22,629                 153,939    
  Net gains on sale of loans and mortgage-backed and
    related securities.....................................                -             205,091                 174,864       
  Real estate owned expenses and losses....................          (39,833)           (159,546)               (148,497)
  Loan fees................................................          295,625             310,783                 202,178    
  Deposit and related fees.................................          257,011             232,353                 159,500      
  Other income, net........................................            4,217               9,151                 (40,248)
                                                             ------------------------------------------------------------     
    Total noninterest income...............................          569,516             620,461                 501,736    
                                                             ------------------------------------------------------------      
Other Operating Expenses:
  Compensation and fringe benefits.........................        3,638,832           3,634,205               2,451,493    
  Occupancy and equipment..................................        1,257,639           1,170,871                 878,427    
  Federal insurance premiums...............................          543,526             658,706                 467,107    
  Advertising..............................................          348,356             343,020                 188,364  
  Amortization of goodwill.................................          242,398             292,069                 219,052 
  Other....................................................        1,077,727           1,022,762                 762,687      
  SAIF assessment..........................................        1,782,810                   -                       -
  Goodwill impairment......................................        3,359,791                   -                       -
                                                             ------------------------------------------------------------      
    Total other operating expenses.........................       12,251,079           7,121,633               4,967,130
                                                             ------------------------------------------------------------       

Income (loss) before income taxes..........................       (2,674,307)          1,698,898               3,842,530
Income tax expense.........................................          575,546             674,517               1,355,677
                                                             ------------------------------------------------------------        
Net income (loss)..........................................  $    (3,249,853)        $ 1,024,381             $ 2,486,853      
                                                             ============================================================ 
Earnings (loss) per:
  Common share.............................................           $(2.18)        
                                                             ================                                             
  Common and common share equivalent.......................                          $       .65             $       1.57     
                                                                                     ============            ============  
  Common share - assuming full dilution....................                          $       .64             $       1.57  
                                                                                     ============            ============ 
</TABLE>

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

                                      14
<PAGE>
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

              FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND 
                    THE NINE MONTHS ENDED DECEMBER 31, 1994

<TABLE> 
<CAPTION> 

                                                                                      NET UNREALIZED
                                                                                      GAIN (LOSS) ON
                                                         ADDITIONAL    UNEARNED         SECURITIES                         TOTAL
                                             COMMON       PAID-IN        ESOP           AVAILABLE         RETAINED     STOCKHOLDERS'
                                             STOCK        CAPITAL       SHARES           FOR SALE         EARNINGS         EQUITY
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>            <C>           <C>            <C>               <C>            <C> 
Balance, March 31, 1994                  $1,491,698     $6,003,111    $        --    $   278,571       $18,374,785    $26,148,165

  Change in unrealized gain (loss) on                                                                                               
   securities available for sale, net                                                                                               
   of income taxes                               --             --             --     (1,712,261)               --     (1,712,261)  
                                                                                                                                    
  Net income for nine months                     --             --             --             --         2,486,853      2,486,853   
                                         ------------------------------------------------------------------------------------------ 
Balance, December 31, 1994                1,491,698      6,003,111             --     (1,433,690)       20,861,638     26,922,757

  Change in unrealized gain (loss) on                                                                                               
   securities available for sale, net                                                                                            
   of income taxes                               --             --             --      1,135,752                --      1,135,752

  Net income for year                            --             --             --             --         1,024,381      1,024,381
                                         ------------------------------------------------------------------------------------------ 
Balance, December 31, 1995                1,491,698      6,003,111             --       (297,938)       21,886,019     29,082,890

  Change in unrealized gain (loss) on                                                                                               
   securities available for sale, net                                                                                               
   of income taxes                               --             --             --        (74,327)               --        (74,327)  
                                                                                                                                    
  Guarantee of ESOP borrowing                    --             --       (800,000)            --                --       (800,000) 

  Release of ESOP shares                         --             --        510,840             --                --        510,840 
  
  Net loss for year                              --             --             --             --         (3,249,853)   (3,249,853)
                                         ------------------------------------------------------------------------------------------ 
Balance, December 31, 1996               $1,491,698     $6,003,111      $(289,160)   $  (372,265)       $18,636,166    25,469,550
                                         ==========================================================================================
</TABLE> 

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

                                      15
<PAGE>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

            For the years ended December 31, 1996 and 1995 and the 
                      nine months ended December 31, 1994
<TABLE> 
<CAPTION> 
                                                                    1996                  1995                    1994
                                                                 ----------------------------------------------------------

<S>                                                              <C>                  <C>                      <C>     
Operating Activities:
  Net income (loss)........................................      $ (3,249,853)        $  1,024,381             $  2,486,853      
  Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Goodwill impairment....................................         3,359,791                    -                        -      
    Net accretion, amortization, and depreciation..........           801,129              802,695                  555,398      
    Net gains on sale of securities........................           (52,496)             (22,629)                (153,939)     
    Net gains on sale of loans and mortgage-backed and
     related securities.....................................                -             (205,091)                (174,864)     
    Provision (benefit) for deferred income taxes..........           290,700             (151,600)                  58,968      
    Loss on sales of premises and equipment................             1,000                    -                        -      
    Loss (gain) on sales of foreclosed real estate.........            13,266               48,972                  (13,735)     
    Valuation losses on foreclosed real estate.............            76,566               86,836                  145,893      
    Provision for loan losses..............................           155,809                2,658                        -      
    Changes in assets and liabilities:
      Accrued interest receivable..........................          (174,858)             297,706                   70,613      
      Prepaid expenses and other assets....................          (992,802)             160,020                  386,884      
      Escrow deposits......................................           268,140             (317,120)                (326,372)     
      Accrued interest payable on deposits.................          (511,082)             840,502                  (18,061)    
      Accrued expenses and other liabilities...............          (319,256)             237,247                 (356,929)     
                                                                 ----------------------------------------------------------      
        Net cash provided by (used in) operating                                                                                    
          activities.......................................          (333,946)           2,804,577                2,660,709       
                                                                 ----------------------------------------------------------     

Investing Activities:
  Purchase of securities available for sale................        (9,997,883)                   -              (29,516,981)     
  Proceeds from sale of securities available for sale......                 -           14,698,750               31,523,312      
  Proceeds from maturity of securities available for sale..         4,000,000                    -                        -      
  Purchase of mortgage-backed and related securities
    available for sale.....................................                 -                    -               (5,148,000)     
  Proceeds from sale of mortgage-backed and related
    securities available for sale..........................                 -                    -                6,109,184      
  Proceeds from principal repayments of mortgage-backed
    and related securities available for sale..............         1,906,819            1,646,885                1,692,448      
  Proceeds from principal repayments of mortgage-backed
    and related securities.................................                 -                    -                1,460,128      
  Proceeds from sales of loans.............................                 -           22,472,343                6,596,900      
  Loan originations, net of principal repayments...........       (29,661,834)         (16,219,011)             (31,093,481)     
  Proceeds from disposals of foreclosed real estate........           605,626              132,280                  246,096      
  Purchases of premises and equipment......................          (241,238)            (621,601)                (779,103)     
  Proceeds from sale of premises and equipment.............            16,202                    -                        -      
  Purchases of other investments...........................                 -              (38,600)                       -      
  Proceeds from sales of other investments.................           199,471                    -                        -      
                                                                 ----------------------------------------------------------      
      Net cash provided by (used in) investing activities..      $(33,172,837)        $ 22,071,046             $(18,909,497)     
                                                                 ----------------------------------------------------------      

</TABLE>
 
(continued)
                                      16
<PAGE>
 
               CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)

                FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 
                  AND THE NINE MONTHS ENDED DECEMBER 31, 1994

<TABLE> 
<CAPTION> 
                                                                                 1996           1995           1994
                                                                          ---------------------------------------------
<S>                                                                       <C>             <C>             <C> 
Financing Activities:
  Net increase (decrease) in deposits................................        8,068,248       3,991,578      (7,624,895)
  Proceeds from FHLB advances........................................       25,000,000      17,000,000      30,000,000
  Principal payments on FHLB advances................................                -     (28,000,000)     (9,000,000)
  Net decrease in other borrowings...................................                -      (9,000,000)       (650,000)
  Proceeds from FHLB program.........................................           56,345          89,017               -
                                                                          ---------------------------------------------
      Net cash provided by (used in) financing activities............       33,124,593     (15,919,405)     12,725,105
                                                                          ---------------------------------------------
Increase (decrease) in cash and cash equivalents.....................         (382,190)      8,956,218      (3,523,683)

Cash and cash equivalents
  Beginning of period................................................       11,889,473       2,933,255       6,456,938
                                                                          ---------------------------------------------
  End of period......................................................     $ 11,507,283    $ 11,889,473    $  2,933,255
                                                                          =============================================
Supplemental disclosures
  Cash paid for:
    Interest on deposits and borrowed funds..........................     $ 14,141,474    $ 12,860,416    $  8,319,725
    Income taxes.....................................................     $    836,685    $    859,000    $  1,476,000

Summary of noncash investing and financing activities:
  Transfer of securities to available for sale:
    Mortgage-backed and related securities...........................                -    $ 13,370,795               -
  Change in unrealized gain (loss) on securities available
    for sale, net of income taxes....................................     $    (74,327)   $  1,135,752    $ (1,712,261)
  Transfer from loans to foreclosed real estate......................     $    239,729    $    333,594    $     47,164
  Loans to facilitate the sale of foreclosed real estate.............     $     38,348    $    198,250    $    150,150
  Transfer from premises and equipment to real estate owned..........     $          -    $          -    $    252,385
</TABLE> 

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


                                      17
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

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

   On July 29, 1994, the stockholders of the Bank approved a plan of corporate
   reorganization under which the Bank became a wholly-owned subsidiary of the
   Company.  Pursuant to the reorganization, on August 9, 1994, the Company
   issued 1,491,698 shares of its $1.00 par value common stock in exchange for
   1,491,698 shares of the outstanding $1.00 par value common shares of the
   Bank.

   The reorganization was accounted for in a manner similar to a pooling-of-
   interests.  Accordingly, the nine months ended December 31, 1994 has been
   restated as if the combination had occurred as of April 1, 1994.

   The Company changed its fiscal year end from March 31 to December 31,
   effective with the nine months ended December 31, 1994.

   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 deposit services, banking cards, and alternative
   investment products.  The funds are used for the extension of credit through
   mortgage loans, consumer loans, and other installment credit such as home
   equity loans, auto and boat loans, and check reserves.  The Company's primary
   sources of revenue are its loan and securities portfolios.

   Use of Estimates in the Preparation of Financial Statements - The preparation
   of financial statements in conformity with generally accepted accounting
   principles requires management to make estimates and assumptions that affect
   the reported amounts of assets and liabilities and disclosure of contingent
   assets and liabilities at December 31, 1996 and 1995 and the reported amounts
   of revenues and expenses during the periods ended December 31, 1996, 1995 and
   1994.  Actual results could differ from those estimates.

   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.  Interest-bearing deposits aggregated $9,084,216 and $8,202,722
   at December 31, 1996 and 1995, respectively.

b. Securities and Mortgage-Backed and Related 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 earnings and reported as a separate component
   of stockholders' equity.

   Other investments are carried at cost, which approximates market value.

   Premiums are amortized and discounts are accreted using the 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.

   On December 29, 1995, the Company transferred mortgage-backed and related
   securities with a carrying value of $13,370,795 and a market value of
   $13,077,261 from the held to maturity category to the available for sale
   category under a one time amnesty provision from Statement of Financial
   Accounting Standards No. 115.

                                       18
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
c. Loans Receivable and Allowance for Loan Losses - Loans receivable 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 are amortized to
   interest income over the contractual life of the loan using the interest
   method.

   The Company adopted Statement of Financial Accounting Standards No. 114
   ("SFAS 114"), "Accounting by Creditors for Impairment of a Loan", as amended
   by Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
   "Accounting by Creditors for Impairment of a Loan - Income Recognition and
   Disclosure", on January 1, 1995.  Under the new 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.  The adoption of
   SFAS 114 and 118 did not result in any additional provision for credit losses
   at January 1, 1995.

   At December 31, 1996 and 1995, the recorded investment in loans for which
   impairment has been recognized in accordance with SFAS 114 totaled $1,064,261
   and $173,616, respectively, with corresponding valuation allowances of
   $70,385 and $0, respectively. For the year ended December 31, 1996 and 1995,
   the average recorded investment in impaired loans was approximately $485,000
   and $240,000, respectively. The amount of interest recognized on impaired
   loans during the portion of the year that they were impaired was immaterial.
   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 include the accumulation of
   related data. This data includes loan payment status, borrowers' financial
   data and borrowers' operating factors such as cash flows and operating income
   or loss.

   The allowance for loan losses is established through a provision for loan
   losses charged to expense to reduce the recorded balance of loans to their
   estimated net realizable value or fair value, as applicable.  Loans are
   charged against the allowance for loan losses when management believes that
   the collectibility of the principal is unlikely.  The allowance is an amount
   that management believes will be adequate to absorb possible losses on
   existing loans that may become uncollectible, 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.

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

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

                                       19
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
d. Income Recognition on Impaired and Nonaccrual Loans (Continued) - While a
   loan is classified as nonaccrual and the future collectibility of the
   recorded loan balance is doubtful, collections of interest and principal are
   generally applied as a reduction to the principal outstanding, except in the
   case of loans with scheduled amortization where the payment is generally
   applied to the oldest payment due.  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.

e. Foreclosed Real Estate - Foreclosed real estate is recorded initially at the
   lower of the loan balance plus unpaid accrued interest 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.

f. 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.

g. 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 will 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.

   The Company and its subsidiary file consolidated federal income tax returns.

h. Goodwill - Goodwill is amortized using the straight-line method over 25
   years.  The Company evaluates intangible assets for potential impairment by
   analyzing the operating results, trends and prospects for the Company, as
   well as by comparing them to their competitors.  The Company also takes into
   consideration recent acquisition patterns within the banking industry and any
   other events or circumstances which might indicate potential impairment.
   During fiscal year 1996, it was determined that the recorded investment in
   goodwill was impaired.  Accordingly, the carrying value was written down to
   net realizable value through a charge to earnings of $3,359,791.

i. Earnings Per Share - Earnings per share is calculated by dividing net income
   by the weighted average number of common shares and common share equivalents
   of stock options outstanding during the period using the treasury stock
   method.

   The weighted average common shares outstanding for the year ended December
   31, 1996 were 1,490,977. The weighted average common and common share
   equivalents outstanding were 1,582,389 and 1,584,859 for the periods ended
   December 31, 1995 and 1994, respectively. Weighted average common shares
   assuming full dilution outstanding during the periods ended December 31, 1995
   and 1994 were 1,593,385, and 1,587,418 respectively. Unearned ESOP shares are
   not included in the computations of earnings per share.

j. New Accounting Pronouncement - Effective January 1, 1997, the Company will
   adopt the applicable provisions of Statement of Financial Accounting
   Standards No. 125, "Accounting for Transfers and Servicing of Financial
   Assets and Extinguishments of Liabilities".  The impact of adopting this
   statement is not expected to be material to the Company's consolidated
   financial statements.

k. Reclassifications - Certain amounts in the 1995 and 1994 financial statements
   have been reclassified to conform with the 1996 presentation with no effect
   on previously reported stockholders' equity or net income.

                                       20
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2. SECURITIES

   Securities at December 31, 1996 and 1995 are summarized as follows:

<TABLE>
<CAPTION>

                                                                         Gross             Gross          Estimated
                                                     Amortized         Unrealized       Unrealized          Market
                                                       Cost              Gains            Losses             Value
                                                  -----------------------------------------------------------------
<S>                                               <C>                  <C>              <C>             <C> 
1996

U.S. Government and agency securities:
        Held to maturity ........................   $21,053,628         $     -         $1,347,999      $19,705,629
        Available for sale ......................     6,003,733           1,250             58,733        5,946,250
                                                  -----------------------------------------------------------------
                                                    $27,057,361         $ 1,250         $1,406,732      $25,651,879
                                                  =================================================================
1995

U.S. Government and agency securities:
        Held to maturity ........................   $21,063,310               -         $1,177,490      $19,885,820
                                                  =================================================================
</TABLE>

   Maturities of Securities at December 31, 1996 are summarized as follows:

<TABLE> 
<CAPTION> 
                                                                        Estimated
                                                         Amortized        Market
                                                            Cost           Value
                                                        -----------     -----------
<S>                                                     <C>             <C> 
Held to maturity:
  After 5 years through 10 years ..................     $16,053,628     $15,024,065
  After 10 years ..................................       5,000,000       4,681,564
                                                        ---------------------------
        Total .....................................     $21,053,628     $19,705,629
                                                        ===========================
Available for sale after 1 through 5 years ........     $ 6,003,733     $ 5,946,250
                                                        ===========================
</TABLE> 

   Gross realized gains and losses on the sale of securities are summarized as
   follows for the years ended December 31, 1996 and 1995 and the nine months
   ended December 31, 1994:

<TABLE>
<CAPTION>
                                         1996             1995            1994
                                        ----------------------------------------
<S>                                     <C>             <C>             <C> 
Gross realized gains ............       $52,496         $29,545         $377,704
Gross realized losses ...........             -           6,916          223,765

</TABLE> 

                                       21
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
3. MORTGAGE-BACKED AND RELATED SECURITIES

   Mortgage-backed and related securities available for sale at December 31,
   1996 and 1995 are summarized as follows:
 
<TABLE> 
<CAPTION> 
                                                                         Gross             Gross          Estimated
                                                     Amortized         Unrealized       Unrealized          Market
                                                       Cost              Gains            Losses             Value
                                                  -----------------------------------------------------------------
<S>                                               <C>                  <C>              <C>             <C> 
1996:
        GNMA certificates ......................       $ 5,081,604      $       -       $  143,357      $ 4,938,247
        FNMA certificates ......................         6,720,961         19,185          166,425        6,573,721
        FHLMC certificates .....................         2,565,813          9,073                -        2,574,886
        Collateralized mortgage obligations ....        15,038,140              -          300,076       14,738,064
                                                  ------------------------------------------------------------------
                Total ..........................       $29,406,518      $  28,258       $  609,858      $28,824,918
                                                  ==================================================================
1995:
        GNMA certificates ......................       $ 5,150,278      $       -       $  134,100      $ 5,016,178
        FNMA certificates ......................         8,220,516         10,783          170,215        8,061,084
        FHLMC certificates .....................         2,990,845         37,267                -        3,028,112
        Collateralized mortgage obligations ....        15,038,140              -          236,173       14,801,967
                                                  ------------------------------------------------------------------
                Total ..........................       $31,399,779      $  48,050       $  540,488      $30,907,341
                                                  ==================================================================
</TABLE> 
        
   There were no sales of mortgage-backed and related securities for the years
   ended December 31, 1996 and 1995. The Company realized gains of $120,427 on
   sales during the nine months ended December 31, 1994.

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

                                       22
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  4. OTHER INVESTMENTS

     Other investments at December 31, 1996 and 1995 are summarized as follows:

<TABLE>
<CAPTION>

                                                                   1996            1995
                                                                --------------------------     
     <S>                                                        <C>             <C> 
     Federal Home Loan Bank of Atlanta ("FHLB") stock ....      $2,435,000      $2,531,700
     FNMA stock ..........................................               -             401
     US League Savings Insurance Group, Ltd. stock .......               -          55,000
                                                                --------------------------
                Total ....................................      $2,435,000      $2,587,101
                                                                ==========================
</TABLE> 
     

   The Company, as member of the Federal Home Loan Bank System, is required to
   maintain an investment in capital stock of the FHLB 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 the FHLB stock, and it has no quoted
   market value.

  5. LOANS RECEIVABLE

     Loans receivable at December 31, 1996 and 1995 are summarized as follows
     (in thousands):

<TABLE>
<CAPTION>
                                                                  1996            1995
                                                                --------        -------- 
<S>                                                             <C>             <C> 
   Mortgage loans collateralized by real estate:
        1-4 family residential properties ...............       $226,765        $203,577
        Multi-family residential properties .............          4,959           5,185
        Non residential properties ......................          5,205           7,145
        1-4 family residential properties under
         construction ...................................         23,152          17,684
        Nonresidential properties under construction.....            752             698
        Multi-family residential properties under
         construction ...................................            267               -

   Installment loans collateralized by real estate:
        1-4 family residential properties ...............          8,820           5,368
        Multi-family residential properties .............            212               -
        Nonresidential properties .......................            475               -
        Multifamily residential properties under
         construction ...................................          2,400               -

   Consumer loans .......................................          3,564           3,351

   Business loans .......................................            510               -

   Consumer and business loans under construction .......            525               -
                                                                --------------------------
                Total loans .............................        277,606         243,008
      Less:
        Undisbursed portion of construction loans .......         12,205           6,958
        Discounts and other .............................          1,281           1,305
        Loan loss reserve ...............................            807             737
                                                                --------------------------
                Net loans ...............................       $263,313        $234,008
                                                                ==========================

</TABLE> 

                                       23
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5. LOANS RECEIVABLE (CONTINUED)

   Activity in the allowance for loan losses for the year ended December 31,
   1996 and 1995 and the nine months ended December 31, 1994 is summarized as
   follows:

<TABLE> 
<CAPTION>
                                                          1996            1995            1994
                                                        ----------------------------------------
<S>                                                     <C>             <C>             <C> 
        Balance at beginning of period .............    $737,000        $737,000        $737,000
        Provision for loan losses ..................     155,809           2,658               -
        Loans charged-off ..........................     (85,270)         (2,658)              -
                                                        ----------------------------------------
        Balance at end of period ...................    $807,539        $737,000        $737,000
                                                        ========================================
</TABLE> 

   The following is a summary of nonperforming assets at December 31, 1996
   and 1995 (in thousands):

<TABLE> 
<CAPTION>
                                                                                 1996            1995
                                                                                ----------------------
 <S>                                                                            <C>             <C>        
        Loans 90 days past due and still accruing interest ................     $  665          $  201
        Nonaccrual loans ..................................................        787             242
        Other real estate owned ...........................................         42             329
                                                                                ----------------------
                                                                                $1,494          $  772
                                                                                ======================
</TABLE> 

   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, 1996 and 1995 (in thousands):

<TABLE>
<CAPTION>
                                                                 1996            1995
                                                                ----------------------
<S>                                                             <C>             <C> 
   Undisbursed portion of home equity lines of credit
     collateralized primarily by junior liens on 1-4
     family properties ....................................     $ 5,274         $4,585
   Unsecured commitments and credit lines .................       2,807            838
   Fixed-rate mortgage loan commitments ...................       1,565            180
   Adjustable-rate mortgage loan commitments ..............       3,287          1,117
                                                                ----------------------
                Total .....................................     $12,933         $6,720
                                                                ======================
</TABLE> 

   The Company, through its normal lending activity, originates and maintains
   loans receivable 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 originations.  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.

                                       24
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. LOANS RECEIVABLE (CONTINUED)

   The Company originates both adjustable and fixed interest rate loans.  The
   composition of these loans at December 31, 1996 and 1995 is summarized as
   follows (in thousands):

<TABLE>
<CAPTION>
                Fixed-rate                                              Adjustable-rate
-----------------------------------------------         --------------------------------------------------
      Term to
      Maturity            1996            1995           Rate Adjustment            1996            1995
------------------      -------         -------         ------------------        --------        --------
<S>                     <C>             <C>             <S>                       <C>             <C> 
1 month -  1 year       $ 2,573         $ 2,573         1 month -  1 year         $151,879        $134,792 
1 year  -  3 years        3,054           1,324         1 year  -  3 years          17,936          36,140
3 years -  5 years        1,817             919         3 years -  5 years          11,574             629
5 years - 10 years        5,706           4,423         5 years - 10 years           1,419               -
Over 10 years            68,162          53,945         Over 10 years                    -               -
-----------------------------------------------         --------------------------------------------------
        Total           $81,312         $63,184                 Total             $182,808        $171,561
===============================================         ==================================================

</TABLE>

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

   Mortgage loans serviced for others were sold without recourse and
   approximated $62,753,000 and $73,843,000 and $61,625,000 at December 31,
   1996, 1995, and 1994, respectively.

   On January 1, 1996 the Company adopted Statement of Financial Accounting
   Standards No. 122, "Accounting for Mortgage Servicing Rights, an Amendment of
   FASB Statement No. 65".  This statement requires that enterprises recognize
   as separate assets rights to service mortgage loans for others, however those
   rights are acquired.  As there were no purchases of servicing rights or sales
   of loans during 1996, there is no recorded investment in mortgage servicing
   rights at December 31, 1996.

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

6. PREMISES AND EQUIPMENT

   Premises and equipment at December 31, 1996 and 1995 are summarized as
   follows:

<TABLE>
<CAPTION>
                                                            1996           1995
                                                        ---------------------------
<S>                                                     <C>             <C> 
Land.................................................   $ 1,446,531     $ 1,446,531
Buildings ...........................................     4,785,996       4,797,041
Leasehold improvements ..............................       438,739         432,839
Furniture and equipment .............................     3,486,791       3,964,894
                                                        ---------------------------
                                                         10,158,057      10,641,305 
Less accumulated depreciation and amortization ......    (5,371,765)     (5,615,718)
                                                        ---------------------------
                Total ...............................   $ 4,786,292     $ 5,025,587
                                                        ===========================      
</TABLE> 

                                       25
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  7. DEPOSITS

     Deposits at December 31, 1996 and 1995, and their weighted average rates
     ("WAR"), are summarized as follows (dollars in thousands):

<TABLE>
<CAPTION>
                                                       1996                    1995
                                                --------------------  --------------------
                                                  WAR     BALANCE       WAR      Balance
                                                --------------------  -------------------
<S>                                             <C>       <C>           <C>    <C>        
     NOW accounts, including non-
        interest-bearing deposits of
        $4,231 and $1,831, respectively         0.76%      $17,104      1.27%   $  12,229
     Money Market                               2.14         7,670      2.14        8,347
     Savings                                    2.00        35,782      2.15       37,287
     Certificates of deposit:
         3 month                                4.44         6,788      4.84        9,530
         6 month                                4.87        31,565      5.43       51,567
         7 month                                5.55        22,188         -            -
         9 month                                5.65         2,566         -            -
        12 month                                5.23        54,292      5.95       89,331
        13 month                                5.89        39,719         -            -
        18 month                                5.47        17,935      5.89       20,062
        22 month                                6.11        16,618         -            -
        24 month                                5.86        18,435      5.97       32,965
        30 month                                5.52         2,757      5.19        3,178
        36 month                                5.42         4,720      5.08        5,575
                                                          --------              ---------  
          Total certificates of deposit         5.46%      217,583      5.74%     212,208
                                                          --------              ---------  
        Total deposits                          4.63%     $278,139      5.00%    $270,071
                                                          ========              =========        
        Total deposits - non-compounded
          weighted average rate                 4.51%                   4.83%
</TABLE>
   Certificates of deposit of $100,000 or more at December 31, 1996 and 1995
   are summarized by maturity as follows (in thousands):
<TABLE>
<CAPTION>
                                                           1996          1995
                                                        -----------------------     
        <S>                                             <C>             <C>
         3 months or less............................   $11,265         $ 8,492
         Over 3 through 6 months.....................     9,198           8,031
         Over 6 through 12 months....................    15,948          14,220
         Over 12 months..............................     6,655           3,067
                                                        -----------------------     
                Total................................   $43,066         $33,810
                                                        =======================
</TABLE>

                                       26
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  7. DEPOSITS (CONTINUED)

     Interest expense on deposits for the years ended December 31, 1996 and 1995
     and the nine months ended December 31, 1994 is summarized as follows:
<TABLE>
<CAPTION>
                                                             1996            1995           1994     
                                                          ------------------------------------------ 
<S>                                                       <C>             <C>             <C>          
       NOW accounts...................................    $   114,890     $   136,114     $  138,013           
       Money Market...................................        164,968         208,900        207,467           
       Savings........................................        716,878         932,748      1,157,758           
       Certificates of deposit........................     11,673,248      11,364,699      5,768,813           
                                                          ------------------------------------------ 
          Total.......................................    $12,669,984     $12,642,461     $7,272,051 
                                                          ========================================== 
</TABLE>
  8. BORROWED FUNDS

     Borrowed funds at December 31, 1996 and 1995 are summarized
     as follows:
<TABLE> 
<CAPTION> 
                                                                             1996           1995     
                                                                        ----------------------------  
<S>                                                                     <C>             <C>                                    
       Advances from FHLB.............................................. $35,000,000     $10,000,000                                 
       Affordable housing Progarm advances from FHLB...................     145,362          89,017                                 
                                                                        ----------------------------
                Total.................................................. $35,145,362     $10,089,017        
                                                                        ============================                                

</TABLE>                                                                 
                                                                          
   Pursuant to a collateral agreement with the FHLB, advances are secured by all
   the Company's FHLB stock and qualifying first mortgage loans. This agreement
   provides for an $82 million line of credit with the FHLB. The maximum month
   end balances were $35 million, $27 million, and $22 million during the years
   ended December 31, 1996 and 1995 and the nine months ended December 31, 1994,
   respectively. 

   Annual principal maturities of Federal Home Bank advances for
   each of the five years subsequent to December 31, 1996 are as follows:

<TABLE>
<CAPTION> 
<S>                                                                                                  <C> 
       1997........................................................................................  $10,000,000
       1998........................................................................................    5,000,000
       1999........................................................................................   10,000,000
       2000........................................................................................            -
       2001........................................................................................   10,000,000 
                                                                                                     -----------
                Total                                                                                $35,000,000
</TABLE>

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

                                       27
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  8. BORROWED FUNDS (CONTINUED)

     Information concerning securities sold under agreement to repurchase for
     the year ended December 31, 1995 and the nine months ended December 31,
     1994 is summarized as follows:

<TABLE>
<CAPTION>
                                                                                     1995            1994
                                                                                  ----------      ------------

 <S>                                                                              <C>             <C>    
       Average balance during the period....................................      $1,446,000      $ 1,413,000                       
       Maximum month end balance during the period..........................       9,000,000       26,332,000
       Weighted average interest rate.......................................            5.65%            3.37%
       Mortgage-backed securities underlying the
        agreement at end of period (carried at
        market value).......................................................      $        -      $ 9,281,000

</TABLE>
   There were no securities sold under agreement to repurchase at December 31,
   1995 or during the year ended December 31, 1996.

   Interest expense on borrowed funds is summarized as follows:

<TABLE>
<CAPTION>

                                                                         1996        1995            1994
                                                                      --------------------------------------
<S>                                                                   <C>         <C>             <C>
       Advances from FHLB...........................................  $960,408    $  976,707      $  553,093
       Securities sold under agreement to repurchase................         -        81,750         477,217
                                                                      --------------------------------------
                        Total.......................................  $960,408    $1,058,457      $1,030,310      
                                                                      ======================================
</TABLE>

  9. REGULATORY MATTERS AND CAPITAL REQUIREMENTS

     The Company is subject to various regulatory capital requirements
     administered by the 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 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, 1996, that the
     Company meets all capital adequacy requirements to which it is subject.

     As of December 31, 1996, the most recent notification from the FDIC
     categorized the Company as well capitalized under the regulatory framework
     for prompt corrective action. To be categorized as well capitalized the
     Company 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 Company's category.

                                       28
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  9. REGULATORY MATTERS AND CAPITAL REQUIREMENTS (CONTINUED)

     The Company's actual capital amounts and ratios are also presented in the
     table below (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                                 TO BE
                                                                                           WELL CAPITALIZED                         
                                                                                              UNDER PROMPT
                                                                            FOR CAPITAL        CORRECTIVE
                                                             ACTUAL      ADEQUACY PURPOSES  ACTION PROVISIONS    
                                                        -----------------------------------------------------
                                                        AMOUNT    RATIO   AMOUNT    RATIO    AMOUNT   RATIO 
                                                        -----------------------------------------------------
<S>                                                     <C>       <C>     <C>       <C>      <C>      <C>
As of December 31, 1996:
------------------------

Total Capital (to Risk Weighted Assets)...............  $26,649   15.0%   $14,215    8.0%    $17,768   10.0%
Tier I Capital (to Risk Weighted Assets)..............   25,842   14.5      7,107    4.0      10,661    6.0
Tier I Capital (to Average Assets)....................   25,842    7.8     13,286    4.0      16,608    5.0
Total Tangible Capital (to Total Tangilbe Assets).....   25,740    7.5     17,065    5.0      17,065    5.0

As of December 31, 1995:
------------------------

Total Capital (to Risk Weighted Assets)...............  $26,516   17.2%   $12,311    8.0%    $15,389   10.0%
Tier I Capital (to Risk Weighted Assets)..............   25,779   16.8      6,156    4.0       9,234    6.0
Tier I Capital (to Average Assets)....................   25,779    8.3     12,425    4.0      15,531    5.0
Total Tangible Capital (to Total Tangilbe Assets).....   25,481    8.3     15,412    5.0      15,412    5.0
</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 $4,428,000 at December 31, 1996.

   The Company 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
   Company to fall below the amount required for the liquidation account
   established in connection with the conversion, or to an amount which is less
   than the minimum required by the FDIC and the North Carolina Savings
   Institutions Administrator ("N.C. Administrator").  A stock savings bank
   which has been converted from mutual form for less than five years must
   obtain the prior written approval of the N.C. Administrator before it can
   declare and pay a cash dividend on its capital stock in an amount in excess
   of one-half of the greater of (i) the net income for the most recent fiscal
   year, or (ii) the average of the net income after dividends for the most
   recent fiscal year and not more than two of the immediately preceding fiscal
   years, if applicable.

   During 1996, a memorandum of understanding with certain regulators was
   entered into, complied with, and lifted.


   On September 30, 1996, Congress passed into law a recapitalization plan for
   the Savings Association Insurance Fund (the "SAIF"), the insurance fund
   covering deposits of savings institutions.  The approved plan provided for a
   special assessment of 0.66% on certain deposits as of March 31, 1995.  The
   Company's assessment amounted to approximately $1,783,000.  Future deposit
   insurance premiums are expected to decrease to approximately .06% from the
   .23% of deposits previously paid by the Company.

                                       29
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  10. BENEFIT PLANS

      The Company has a qualified, noncontributory defined-benefit retirement 
      plan (the "Plan") covering substantially all of its employees. The
      benefits are based on each employee's years of service and the employee's
      compensation during the last ten years of employment. The Company's
      funding policy is to contribute annually the maximum amount that can be
      deducted for federal income tax purposes. Contributions are intended to
      provide not only for benefits attributed to service to date but also for
      those expected to be earned in the future.

      On October 25, 1996 the Plan was amended to change the Plan from a single
      employer plan to a multi-employer plan. The effective date of the
      amendment is January 1, 1996. All other provisions of the Plan remain
      substantially the same, with the exception of Plan funding. Under the
      multi-employer plan, the Company will be required to contribute its share
      of the Plan's total pension liability as determined by the plan
      administrator. There were no contributions required or made to the Plan
      during 1996.

      At December 31, 1995, the Company had accrued pension cost related to the
      Plan of $300,784. Upon conversion to a multi-employer plan, the liability
      was eliminated and recognized as a reduction of pension expense. The
      Company recognized $139,350 and $132,246 as the net periodic pension cost
      related to the Plan for the periods ended December 31, 1995 and 1994,
      respectively.

      The Company also maintains an Employee Stock Ownership Plan (the "ESOP")
      for the exclusive benefit of participating employees with the Company.
      Participating employees are full-time employees age 21 or older who have
      completed one year of service. Contributions to the ESOP are allocated
      among participants on the basis of total compensation paid each plan year.
      Except for participants who retire, become disabled, or die during the
      plan year, all other participants must be employed on the last day of the
      plan year in order to receive an allocation.

      Participant benefits become 100% vested after five years of service.
      Vesting will be accelerated upon retirement, death, disability or
      termination of the ESOP. Forfeitures are reallocated to participants on
      the same basis as other contributions in the following plan year. Benefits
      may be payable upon retirement, death, disability, or separation from
      service. The Company's contributions to the ESOP are determined solely at
      the discretion of the Board of Directors.


      On December 23, 1996 the ESOP borrowed $800,000 from another financial
      institution and purchased 42,187 shares of the Company's common stock from
      the defined benefit plan at $18.92 per share. These shares purchased serve
      as collateral for the loan and the loan is guaranteed by the Company.
      Accordingly, the loan was recorded by the Company as a liability and the
      shares recorded as a separate component of stockholders' equity.

      On December 30, 1996, the Company contributed $510,000 to the ESOP to
      repay a portion of the note. This released 27,000 shares from serving as
      collateral for the loan. These shares were allocated to the participants
      according to the plan specifications on December 31, 1996. At December 31,
      1996 there are 15,187 unearned ESOP shares, with an estimated market value
      of approximately $308,000, held in suspense.

      The net expense incurred by the Company for these benefit plans, including
      the effect of the change in the defined benefit plan noted earlier, was
      $209,216, $179,350, and $148,246 for the periods ended December 31, 1996,
      1995, and 1994, respectively.

      On January 1, 1997 the ESOP will be merged into a combined ESOP and 401(k)
      plan (the "KSOP"). The employees' ESOP accounts will be transferred to
      their KSOP accounts on that date. Employees will be able to contribute up
      to 15% of their eligible compensation, subject to Internal Revenue Service
      limitations. The Company will match employee contributions up to a limit
      determined annually by the Board of Directors, which for 1997 will be 6%
      of employee contributions.

                                       30
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  11. INCOME TAXES

      Income tax expense consists of the following components for the years
      ended December 31, 1996 and 1995 and the nine months ended December 31,
      1994:

<TABLE>
<CAPTION>
                                                                                      1996              1995            1994
                                                                                    --------------------------------------------
<S>                                                                                 <C>               <C>             <C>
      Current tax provision.................................................,,      $284,846          $ 826,117       $1,296,709    

      Deferred tax provision (benefit)........................................       290,700           (151,600)          58,968
                                                                                    --------------------------------------------
                Total.........................................................      $575,546          $ 674,517       $1,355,677   
                                                                                    ============================================
</TABLE>

     The components of the net deferred tax liability at December 31, 1996 and
     1995 are as follows:

<TABLE>
<CAPTION>
                                                                                                            1996           1995
                                                                                                            ----           ----
<S>                                                                                                    <C>             <C>
      Deferred tax assets:
        Unrealized loss on securities available for sale.............................................    $  266,818    $  194,500 
        Accrued pension..............................................................................             -       118,810
        Other........................................................................................         9,534        28,222
                                                                                                       --------------------------
                Total................................................................................       276,352       341,532
                                                                                                       --------------------------
        Deferred tax liabilities:
          Deferred loan fees.........................................................................       578,299       667,345
          Allowance for loan losses..................................................................       394,412       181,075
          FHLB stock.................................................................................       212,381       238,190
          Excess servicing fees......................................................................        24,011         9,276
          Excess of book over tax basis of equipment.................................................       143,132       103,146
                                                                                                       --------------------------
                Total................................................................................     1,352,235     1,199,032
                                                                                                       --------------------------
                Net deferred tax liability...........................................................    $1,075,883    $  857,500
                                                                                                       ==========================

</TABLE>

      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, 1996 and 1995 and the nine months ended December 31, 1994 are
      as follows:

<TABLE>
<CAPTION>
                                                                                        1996             1995            1994
                                                                                        ----             ----            ----
<S>                                                                                 <C>               <C>             <C>
      Income taxes at federal tax rate........................................      $ (909,265)       $577,625        $1,306,460
      Increase (decrease) resulting from:
        Amortizaiton and impairment of goodwill...............................       1,216,807          99,303            74,478  
        State income taxes, net of federal income tax benefit.................          59,071          20,130            90,237
        Other.................................................................         208,933         (22,541)         (115,498)
                                                                                    --------------------------------------------
                Total.........................................................      $  575,546        $ 674,517       $1,355,677   
                                                                                    ============================================
</TABLE>

                                       31
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  11. INCOME TAXES (CONTINUED)

      On August 21, 1996, The Small Business Job Protection Act was signed into
      law which repeals the favorable tax bad debt deduction method available to
      savings banks. The Company will be required to change its tax bad debt
      method to the experience method under Internal Revenue Code Section 585
      effective for fiscal year ended December 31, 1996. It is anticipated that
      the change in method will result in taxable income of approximately
      $2,166,000 representing the excess of the Company's tax bad debt reserve
      at December 31, 1996 over the reserve that arose in tax years beginning
      before December 31, 1987 (base year amount). Generally, the income will be
      recognized for tax purposes ratably over a six-year period. A deferred tax
      liability has been established for the effect of this new legislation.

      As of December 31, 1996, the Bank's bad debt reserve for federal tax
      purposes was approximately $5,169,000 which represents the base year
      amount. A deferred tax liability has not been recognized for the base year
      amount. If the Bank uses the base year reserve for any reason other than
      to avoid loan losses, a tax liability could be incurred. It is not
      anticipated that the reserve will be used for any other purpose.

  12. STOCK OPTION PLANS

      The stockholders of the Company adopted a  Stock Option Plan (the "Option
      Plan") for selected employees of the Company and for the 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
      upon being granted.

      The Plan is administered by the Option Plan Committee, a group consisting
      of four nonemployee directors of the Company, who are "disinterested 
      persons" within the meaning of the federal securities law.

      No options were granted or exercised during the years ended December 31,
      1996 and December 31, 1995, or the nine months ended December 31, 1994. At
      December 31, 1996, all outstanding stock options are exercisable and
      exercise prices range from $3.55 to $15.00. On January 1, 1996 the Company
      adopted Statement of Financial Accounting Standards No. 123, "Accounting
      for Stock Based Compensation". As permitted by SFAS 123, the Company has
      chosen to apply APB opinion No. 25, "Accounting for Stock Issued to
      Employees" and related interpretations. The proforma disclosure
      requirements of SFAS are not applicable as there were no grants in the
      periods presented. Stock options, after giving retroactive effect to stock
      dividends and splits, are summarized as follows:

<TABLE>
<CAPTION>
                                                                              
                                                                                  All Directors    
                                                                                   who are not      
                                                                All Officers    Executive Officers                      Reserved
                                                                 as a group         as a group                         for future
                                                                (6 persons)        (7 persons)          Total           issuance    
                                                                ----------------------------------------------------------------- 
<S>                                                             <C>             <C>                     <C>            <C>
      Balance, December 31, 1996 and 1995 and 1994..............   113,260            25,141            138,401          5,824
                                                                =================================================================  
</TABLE>

The weighted average exercise price of these options is $5.66.

                                       32
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
  12. STOCK OPTION PLANS (CONTINUED)
      The following table summarizes additional information about the Plan's 
stock options at December 31, 1996:
<TABLE>
<CAPTION>
                                                                        
                                                                                  NUMBER           REMAINING          NUMBER
                                                                                OUTSTANDING       CONTRACTUAL       EXERCISABLE
EXERCISE PRICE                                                                  AT 12/31/96          LIFE           AT 12/31/96
--------------                                                                  -----------------------------------------------

<S>                                                                             <C>              <C>                <C>
 $ 3.55.....................................................................      106,977        4.75 years           106,977
 $ 5.33.....................................................................        3,712        4.75 years             3,712
 $ 6.40.....................................................................        3,712        4.75 years             3,712
 $15.00.....................................................................       24,000        4.75 years            24,000
                                                                                -----------------------------------------------
                                                                                  138,401                             138,401
                                                                                =========                           =========== 
</TABLE>
  13. PARENT COMPANY FINANCIAL INFORMATION

      Condensed financial information of Cooperative Bankshares, Inc., the
      parent company, at December 31, 1996 and 1995 and for the years ended
      December 31, 1996 and 1995, and the nine months ended December 31, 1994 is
      presented below:

<TABLE>
<CAPTION>
      CONDENSED STATEMENTS OF FINANCIAL CONDITION
                                                                                                          1996            1995
                                                                                                       --------------------------- 
<S>                                                                                                    <C>             <C>
      Assets:             
        Cash.........................................................................................  $     4,072     $    16,649
        Equity investment in subsidiary..............................................................   25,426,326      29,011,934
        Deferred organization costs..................................................................       39,152          54,307
                                                                                                       ---------------------------
                                                                                                       $25,469,550     $29,082,890 
                                                                                                       =========================== 

      Liabilities and Stockholders' Equity:
        Stockholders' equity.........................................................................  $25,469,550     $29,082,890
                                                                                                       =========================== 
</TABLE>
<TABLE> 
<CAPTION> 

      CONDENSED STATEMENTS OF OPERATIONS

                                                                                     1996           1995              1994    
                                                                               ----------------------------------------------

<S>                                                                             <C>              <C>               <C>
      Equity in earnings (loss) of subsidiary...............................    $(3,222,121)     $1,052,137        $2,507,477
      Miscellaneous expenses................................................         27,732          27,756            20,624
                                                                               ----------------------------------------------

                Net income (loss)...........................................    $(3,249,853)     $1,024,381        $2,486,853
                                                                               ==============================================
</TABLE>

                                       33
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
13. PARENT COMPANY FINANCIAL INFORMATION (CONTINUED)

<TABLE> 
<CAPTION> 
CONDENSED STATEMENTS OF CASH FLOWS
                                                                          1996             1995           1994
                                                                        -------------------------------------------
<S>                                                                     <C>             <C>             <C> 
Operating Activities
     Net income (loss) ...........................................      $(3,249,853)    $ 1,024,381     $ 2,486,853
     Equity in undistributed earnings of subsidiary ..............        3,222,121      (1,052,137)     (2,507,477)
     Amortization of deferred organization costs .................           15,155          15,156           6,315
     Payment of deferred organization costs ......................                -               -         (75,778)
                                                                        -------------------------------------------
     Cash flows used in operating activities .....................          (12,577)        (12,600)        (90,087)
Investing Activities
     Dividends received from subsidiary ..........................                -               -         119,336
                                                                        -------------------------------------------
     Increase (decrease) in cash and cash equivalents ............          (12,577)        (12,600)         29,249

Cash and cash equivalents, beginning of period ...................           16,649          29,249               -
                                                                        -------------------------------------------
Cash and cash equivalents, end of period .........................      $     4,072     $    16,649     $    29,249
                                                                        ===========================================

</TABLE> 

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

   The following disclosure of the estimated fair value of financial instruments
   is made in accordance with the requirements of Statement of Financial
   Accounting Standards 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, Mortgage-Backed and Related Securities, and Other Investments 
   
   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.

                                       34
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
 
   Loans Receivable
   
   The fair value of loans receivable 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.

   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 and ESOP Note Payable
   
   Borrowed funds consist of FHLB borrowings with varying maturities.
   The fair values of these liabilities and the ESOP note payable are
   estimated using the discounted values of the contractual cash flows.
   The discount rate is estimated using the rates currently in effect for
   similar borrowings.
   
   Off-Balance Sheet Financial Instruments
   
   The fair value of off-balance sheet financial instruments has not been
   considered in determining on balance sheet fair value.  As discussed
   in Note 5, these off-balance sheet financial instruments are
   commitments to extend credit and are either short term in nature or
   subject to immediate repricing.

                                       35
<PAGE>

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
 
   The carrying amounts and estimated fair values of the Company's financial
   instruments at December 31, 1996 and 1995 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                         1996                           1995
                                                -------------------------       -------------------------
                                                Carrying        Estimated       Carrying        Estimated
                                                 Amount         Fair Value       Amount         Fair Value
                                                --------        ----------      --------        ----------
<S>                                             <C>             <C>             <C>             <C> 
Financial assets:
     Cash and cash equivalents .............    $ 11,507        $ 11,507        $ 11,889        $ 11,889
     Securities:
        Available for sale .................       5,946           5,946               -               -
        Held to maturity ...................      21,054          19,706          21,063          19,886
     Mortgage-backed and related securities:
        Available for sale .................      28,825          28,825          30,907          30,907
     Loans receivable:
        Gross loans ........................     264,120         266,467         234,745         237,686
        Allowance for loan losses ..........        (807)           (807)           (737)           (737)
                                                ------------------------        ------------------------
        Loans receivable, net ..............     263,313         265,660         234,008         236,949

     Other investments......................       2,435           2,435           2,587           2,587
                                                ------------------------        ------------------------
                Total ......................    $333,080        $334,079        $300,454        $302,218
                                                ========================        ========================
Financial liabilities:
     Deposits ..............................    $278,139        $272,503        $270,071        $270,567
     Borrowed funds ........................      35,435          35,252          10,089          10,094
                                                ------------------------        ------------------------
                Total ......................    $313,574        $307,755        $280,160        $280,661
                                                ========================        ========================
</TABLE> 

   The Company's remaining assets and liabilities are not considered financial
   instruments.

                                       36
<PAGE>
 
                                     BLANK

                                       37
<PAGE>
 
                   DIRECTORS, OFFICERS AND OFFICE LOCATIONS

                              BOARD OF DIRECTORS

 
                       FREDERICK WILLETTS, JR., CHAIRMAN
 
                       Cooperative Bankshares, Inc. and
                    Cooperative Bank For Savings, Inc., SSB
 

FREDERICK WILLETTS, III                         JAMES D. HUNDLEY, M.D.
President and Chief Executive Officer,          Partner, Wilmington Orthopaedic
Cooperative Bankshares, Inc. and                  Group P.A.
Cooperative Bank for Savings, Inc., SSB 


CHARLES H. BONEY                                H.T. KING, III
President and Chief Executive Officer,          President, Hanover Iron Works,
Boney Architects                                  Inc.

PAUL G. BURTON                                  DR. WILLIAM H. WAGONER
President, Burton Steel Company                 Chancellor Emeritus of the
                                                  University of North Carolina 
                                                  at Wilmington

F. PETER FENSEL, JR.                            O. RICHARD WRIGHT, JR.
President, F. P. Fensel Supply Company          Attorney, McGougan Wright Worley
                                                  & Harper


              OFFICERS OF COOPERATIVE BANK FOR SAVINGS, INC., SSB

Frederick Willetts, Jr. .....  Chairman of the Board & Executive Vice President
 
Frederick Willetts, III .....  President & Chief Executive Officer
 
O .C. Burrell, Jr. ..........  Senior Vice President - Retail Banking
 
Daniel W. Eller .............  Senior Vice President - Corporate Secretary
 
Eric R. Gray ................  Senior Vice President - Mortgage Lending
 
Edward E. Maready ...........  Senior Vice President - Treasurer
 
Linda B. Garland ............  Vice President - Marketing
 
Carl N. Mathis, Jr. .........  Vice President - Appraising
 
Donna H. Mitchell ...........  Vice President - Mortgage Operations
 
Dare C. Rhodes ..............  Vice President - Human Resources
 
Todd L. Sammons .............  Vice President - Auditing
 
Raymond A. Martin ...........  Assistant Vice President - Data Processing

 
                               OFFICE LOCATIONS
                     (Number of offices in parentheses)

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

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<PAGE>
 
                             CORPORATE INFORMATION

 
                            CORPORATE HEADQUARTERS
                         Cooperative Bankshares, Inc.
                               201 Market Street
                                 P. O. Box 600
                       Wilmington, North Carolina 28402
                                 (910)343-0181
 
           TRANSFER AGENT                               SPECIAL COUNSEL
         First Citizens Bank                 Housley Kantarian & Bronstein, P.C.
     Corporate Trust Department                            Suite 700
          P.O. Box 29522                              1220 19th Street, NW
 Raleigh, North Carolina 27626-0522                   Washington, DC 20036
 
ANNUAL MEETING

The Annual Meeting of Stockholders of Cooperative Bankshares, Inc. will be held 
at the Wilmington Hilton, 301 N. Water Street, Wilmington, North Carolina on 
April 25, 1997 at 11:00 a.m. All stockholders are cordially invited to attend.

FORM 10-K

Copies of Cooperative Bankshares, Inc. Form 10-K may be obtained by stockholders
without charge by writing to Linda B. Garland at the Corporate Headquarters 
address.

 
ADDITIONAL INFORMATION

For additional information please contact Frederick Willetts, III, Daniel W.
Eller or Linda B. Garland at (910) 343-0181

                                 CAPITAL STOCK

Cooperative's common stock is traded on the NASDAQ National Market under the 
symbol "COOP". As of December 31, 1996 there were 1,491,698 shares outstanding 
which were held by 576 stockholders of record. No cash dividends have been paid 
on the common stock since its issuance. Stock performance for 1996 and 1995 is 
given in the following table. All prices have been adjusted by the stock 
dividend and stock splits as described in the notes to the consolidated 
financial statements.
 

                          QUARTERLY COMMON STOCK DATA

--------------------------------------------------------------------------------
<TABLE> 
<CAPTION> 
                             1996                   1995
                        --------------          --------------
QUARTERS ENDED           HIGH    LOW             HIGH    LOW
--------------------------------------------------------------
<S>                     <C>     <C>             <C>     <C> 
December..............  $20.88  $18.25          $22.25  $19.50
September ............   19.00   16.50           22.50   18.00
June .................   18.75   17.00           18.75   15.00
March ................   20.50   18.00           17.25   13.75

</TABLE> 
--------------------------------------------------------------------------------

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                                MAP OF BRANCHES





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