I. PURPOSE

The Audit Committee (the “Committee”) will assist the Board of Directors of Cooperative Bankshares, Inc. (the “Corporation”), in fulfilling its oversight responsibilities. The Committee will oversee the accounting and financial reporting processes, audits of financial statements the system of internal controls, and the Corporation’s process for monitoring compliance with laws and regulations. In performing its duties, the Committee will maintain effective working relationships with the Board of Directors, management and the internal and external auditors.

II. STRUCTURE & MEMBERSHIP REQUIREMENTS

The Committee shall consist of three or more directors, each of whom is “independent” both as such term is defined in Section 10A(m)(3) of the Securities Exchange Act of 1934, as amended (the “Act”) and regulations promulgated thereunder by the Securities and Exchange Commission (the “SEC”), the (“SEC Regulations”), or whose failure to be “independent” shall fall within one of the exemptions set forth in the Act and the SEC Regulations, and who is independent as defined under the rules of The Nasdaq Stock Market (“Nasdaq”) as set forth in the National Association of Securities Dealers’ Manual (the “Manual”). Each director shall be free from any relationship that, in the opinion of the Board of Directors, as evidenced by its annual selection of such Committee members, would interfere with the exercise of independent judgment as a Committee member. Each Committee member shall be able to read and understand financial statements (including the Corporation’s balance sheet, income statement and cash flow statement). Additionally, at least one Committee member shall have past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background resulting in the individual’s financial sophistication, including having been a chief executive officer, chief financial officer or other senior officer with financial oversight responsibilities. The members of the Committee may designate a Chair by majority of the full Committee membership. The Committee shall meet at least 4 times annually, or more frequently as circumstances dictate.

III. RESPONSIBILITIES

A. Documents/Reports Review

1. Review the Corporation’s annual financial statements and any certification, report, opinion or review rendered by the independent accountants.

2. A member of the Committee will have quarterly communications with the independent accountants and a representative of the Accounting Department concerning matters of the types described in SAS No. 61 identified in connection with interim reviews. This discussion should be prior to the filing of the Form 10-Q or if that is not possible, the communication should be made as soon as possible.

3. Review any amendments or adjustments including the cause, to any reports or financial information submitted to any governmental body or the public.

4. Review the regular internal reports to management prepared by the internal auditing department and management’s response.

B. Independent Accountants

1. The Committee is directly responsible for the oversight of the independent auditor and has sole authority and responsibility for their appointment, termination and compensation. The independent auditor will report directly to the Committee and the Committee will be responsible for the resolution of any disagreements between management and the independent auditor regarding financial reporting. The Committee shall pre-approve all audit fees and terms and all non-audit services provided by the independent auditor, and shall consider whether these services are compatible with the auditor’s independence. On an annual basis, the Committee should review and discuss with the accountants all significant relationships the accountants have with the Corporation to determine the accountants’ independence.

2. The Committee has the authority and funding available to engage independent counsel and outside advisors when deemed necessary.

3. Review the performance of the independent accountants and approve any proposed discharge of the independent accountants when circumstances warrant.

4. Periodically consult the independent accountants out of the presence of management about internal controls and the fullness and accuracy of the organization’s financial statements.

C. Financial Reporting Processes

1. In consultation with the independent accountants and the internal auditors, review the integrity of the organization’s financial reporting processes, both internal and external.

2. Consider the independent accountants’ judgments about the quality and appropriateness of the Corporation’s accounting principles and underlying estimates as applied in its financial reporting.

3. Consider and approve, if appropriate, major changes to the Corporation’s auditing and accounting principles and practices as suggested by the independent accountants, management, or the internal auditing department.

D. Process Improvement

1. Establish regular and separate systems of reporting to the Committee by management, the independent accountants and the internal auditors regarding any significant judgments made in management’s preparation of the financial statements and the view of each as to appropriateness of such judgments.

2. Following completion of the annual audit, review separately with management, the independent accountants and the internal auditing department any significant difficulties encountered during the course of the audit, including any restrictions of the scope of work or access to required information.

3. Review any significant disagreement among management and the independent accountants or the internal auditing department in connection with the preparation of the financial statements.

4. Review with the independent accountants, the internal auditing department and management the extent to which changes or improvements in financial or accounting practices, as approved by the Committee, have been implemented.

5. The Committee will establish procedures for the receipt, retention and treatment of complaints received by the Corporation regarding accounting, internal accounting controls or auditing matters.

E. Legal Compliance

1. Review activities, organizational structure, qualifications, salary adjustments and performance evaluations of the Chief Auditor.

2. Review any legal or compliance matter that could have a significant impact on the organization’s financial statements.

3. Perform any other activities consistent with this Charter, the Corporation’s By-laws and governing law, as the Committee or the Board deems necessary or appropriate.

4. In keeping with NASDAQ Rule 4350(d)(1) the Committee will review and reassess the adequacy of this Charter not less than annually. In conducting this annual review, the Committee will assess compliance with NASDAQ Rule 4350, and appropriate banking regulations regarding Committee composition, independence, and scope of responsibilities.