COOPERATIVE BANKSHARES INC
<DOCUMENT>
<TYPE>EX-10.1
<SEQUENCE>2
<FILENAME>cooperative8kfeb1207ex10-1.txt
<TEXT>
<PAGE>


                              EMPLOYMENT AGREEMENT
                              --------------------

         THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into and is
effective this 1st day of January, 2007 (the "Effective Date"), by and between
COOPERATIVE BANKSHARES, INC. (the "Company"), COOPERATIVE BANK (the "Bank") and
FREDERICK WILLETTS, III (the "Employee").

         WHEREAS, the Employee has heretofore been employed by the Company and
the Bank as President and Chief Executive Officer and is experienced in all
phases of the business of the Company and the Bank; and

         WHEREAS, the Board of Directors of each of the Company and the Bank and
the Employee have determined that it is necessary and appropriate to enter into
this Employment Agreement to ensure the Employee's continued service on terms
consistent with his role and his importance to the success of the Company and
the Bank;

         NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
contained herein, and other good and valuable consideration, the adequacy of
which is acknowledged by the parties hereto, it is AGREED as follows:

         1.   DEFINED TERMS
              -------------

         When used anywhere in this Agreement, the following terms shall have
the meaning set forth herein.

         (a)  "BANK BOARD" shall mean the Board of Directors of the Bank.

         (b)  "CHANGE IN CONTROL" shall mean any one of the following events:
(i) the acquisition by any person (or persons acting as a group) of ownership,
holding or power to vote more than 25% of the voting stock of the Company or the
Bank, (ii) the acquisition by any person (or persons acting as a group) of the
ability to control the election of a majority of the Company's or the Bank's
directors, (iii) the acquisition of a controlling influence over the management
or policies of the Company or of the Bank, (iv) the Company or the Bank merges
into or consolidates with another corporation, or merges another corporation
into the Company or the Bank and as a result less than a majority of the
combined voting power of the resulting corporation immediately after the merger
or consolidation is held by persons who were stockholders of the Company or the
Bank immediately before the merger or consolidation; or (v) during any period of
two consecutive years, individuals (the "Continuing Directors") who at the
beginning of such period constitute the Board of Directors of the Company or of
the Bank (the "Existing Board") cease for any reason to constitute at least
two-thirds thereof, provided that any individual whose election or nomination
for election as a member of the Existing Board was approved by a vote of at
least two-thirds of the Continuing Directors then in office shall be considered
a Continuing Director. For purposes of this paragraph, the terms "person" or
"persons acting as a group" shall be construed within the meaning of Section
13(d) of the Securities Exchange Act of 1934 and shall refer to an individual or
a corporation, partnership, trust, association, joint venture, pool, syndicate,
sole proprietorship, unincorporated organization or any other form of entity not
specifically listed herein.

         (c)  "CODE" shall mean the Internal Revenue Code of 1986, as amended
from time to time, and as interpreted through applicable rulings and regulations
in effect from time to time.

         (d)  "COMPANY BOARD" shall mean the Board of Directors of the Company.

<PAGE>
         (e)  "GOOD REASON" shall mean any of the following events, which has
not been consented to in advance by the Employee in writing: (i) the requirement
that the Employee move his personal residence, or perform his principal
executive functions, more than 35 miles from his primary office as of the later
of the Effective Date and the most recent voluntary relocation by the Employee;
(ii) a material reduction in the Employee's base compensation under this
Agreement as the same may be increased from time to time; (iii) the failure by
the Company or the Bank to continue to provide the Employee with compensation
and benefits provided under this Agreement as the same may be increased from
time to time, or with benefits substantially similar to those provided to him
under any of the employee benefit plans in which the Employee now or hereafter
becomes a participant, or the taking of any action by the Company or the Bank
which would directly or indirectly reduce any of such benefits or deprive the
Employee of any material fringe benefit enjoyed by him under this Agreement;
(iv) the assignment to the Employee of duties and responsibilities materially
different from those normally associated with his position; (v) a failure to
reelect the Employee to the Company Board or the Bank Board, if the Employee has
served on such Board at any time during the term of the Agreement; (vi) a
material diminution or reduction in the Employee's responsibilities or authority
(including reporting responsibilities) in connection with his employment with
the Company or the Bank; or (vii) a material reduction in the secretarial or
other administrative support of the Employee.

         (f)  "JUST CAUSE" shall mean, in the good faith determination of the
Company Board and the Bank Board, the Employee's personal dishonesty, willful
misconduct, breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of this Agreement.
No act, or failure to act, on the Employee's part shall be considered "willful"
unless he has acted, or failed to act, with an absence of good faith and without
a reasonable belief that his action or failure to act was in the best interest
of the Company and the Bank.

         (g)  "PROTECTED PERIOD" shall mean the period that begins on the date
six months before a Change in Control and ends on the later of the second annual
anniversary of the effective date of a Change in Control or the expiration date
of this Agreement (including any renewal terms).

         2.   EMPLOYMENT. The Employee is employed as the President and Chief
              ----------
Executive Officer of the Company and the Bank. The Employee shall render such
administrative and management services to the Company and the Bank as are
currently rendered and as are customarily performed by persons situated in a
similar executive capacity. The Employee shall also promote, as and to the
extent permitted by law, the business of the Company and the Bank. The
Employee's other duties shall be such as the Company Board or the Bank Board may
from time to time reasonably direct, including normal duties as an officer of
the Company and Bank.

         3.   BASE COMPENSATION. The Bank agrees to pay the Employee during the
              -----------------
initial year of the term of this Agreement a salary at the rate of $325,000 per
annum, payable in accordance with the Bank's customary payroll policies. The
Bank Board shall review, not less often than annually, the rate of the
Employee's salary, and in its sole discretion may decide to adjust his salary;
provided, however, in the event of a Change in Control, the Bank Board may not
thereafter adjust the Employee's salary below the level in effect immediately
prior to the Change in Control.

         4.   DISCRETIONARY BONUSES. The Employee shall participate in an
              ---------------------
equitable manner with all other senior management employees of the Bank in
discretionary bonuses that the Bank Board may award from time to time to the
Bank's senior management employees. No other compensation provided for in this
Agreement shall be deemed a substitute for the Employee's right to participate
in such discretionary bonuses.
                                       2

<PAGE>
         5.   PARTICIPATION IN BENEFIT PROGRAMS; EXPENSES.
              -------------------------------------------

         (a)  During the term of this Agreement, the Employee shall be eligible
to participate in all employee benefit plans sponsored by the Bank for its
employees including health, dental, disability, life insurance, retirement,
pension, or any similar programs.

         (b)  The Employee shall be eligible to participate in any executive
compensation or benefits which are or may become available to the Bank's senior
management employees, including, by way of example, but not limitation, any
stock-based compensation or incentive compensation plans, supplemental
retirement programs or any other benefits which are commensurate with the
responsibilities and functions to be performed by the Employee under this
Agreement.

         (c)  The Employee shall be reimbursed for all reasonable out-of-pocket
business expenses which he shall incur in connection with his services under
this Agreement upon substantiation of such expenses in accordance with the
policies of the Bank.

         6.   TERM. The term of this Agreement shall be for the period
              ----
commencing on the Effective Date and ending 60 months thereafter (or such
earlier date as is determined in accordance with Sections 10 or 12).
Additionally, on or before each annual anniversary date of the Effective Date,
the Company Board and the Bank Board may extend the Employee's term of
employment for an additional one-year period beyond the then effective
expiration date, unless the Employee gives notice not later than ninety (90)
days prior to the anniversary date of an intention that the Agreement not be
extended beyond its then current term.

         7.   LOYALTY; NONCOMPETITION.
              -----------------------

         (a)  During the period of his employment hereunder and except for
illnesses, reasonable vacation periods, and reasonable leaves of absence, the
Employee shall devote all his full business time, attention, skill, and efforts
to the faithful performance of his duties hereunder; provided, however, from
time to time, the Employee may serve on the boards of directors of, and hold any
other offices or positions in, companies or organizations, which will not
present any conflict of interest with the Bank or any of its subsidiaries or
affiliates, or unfavorably affect the performance of Employee's duties pursuant
to this Agreement, or will not violate any applicable statute or regulation.
"Full business time" is hereby defined as that amount of time usually devoted to
like companies by similarly situated executive officers. During the term of his
employment under this Agreement, the Employee shall not engage in any business
or activity contrary to the business affairs or interests of the Bank.

         (b)  Nothing contained in this Section shall be deemed to prevent or
limit the Employee's right to invest in the capital stock or other securities of
any business dissimilar from that of the Bank, or, solely as a passive or
minority investor, in any business.

         8.   STANDARDS. The Employee shall perform his duties under this
              ---------
Agreement in accordance with such reasonable standards as the Company Board or
the Bank Board may establish from time to time. The Bank will provide Employee
with the working facilities and staff customary for similar executives and
necessary for him to perform his duties.

         9.   VACATION AND SICK LEAVE.
              -----------------------

         (a)  The Employee shall be entitled to annual vacation and sick leave
benefits in accordance with the policies that the Bank Board periodically
establishes for senior management employees.

                                       3
<PAGE>

         (b)  The Employee shall not receive any additional compensation from
the Bank on account of his failure to take a vacation or sick leave, and the
Employee shall not accumulate unused vacation or sick leave from one fiscal year
to the next, except in either case to the extent authorized by the Bank Board.

         (c)  In addition to the aforesaid paid vacations, the Employee shall be
entitled without loss of pay, to absent himself voluntarily from the performance
of his employment with the Bank for such additional periods of time and for such
valid and legitimate reasons as the Company Board and the Bank Board may in
their discretion determine. Further, the Company Board and the Bank Board may
grant to the Employee a leave or leaves of absence, with or without pay, at such
time or times and upon such terms and conditions as such Boards in their
discretion may determine.

         10.  TERMINATION AND TERMINATION PAY. Subject to Section 12 hereof, the
              -------------------------------
Employee's employment hereunder may be terminated under the following
circumstances:

         (a)  DEATH. The Employee's employment under this Agreement shall
terminate upon his death during the term of this Agreement, in which event the
Employee's estate shall be entitled to receive the compensation due the Employee
through the last day of the calendar month in which his death occurred.

         (b)  DISABILITY. The Company and the Bank may terminate the Employee's
employment after having established the Employee's Disability. For purposes of
this Agreement, "Disability" means a physical or mental infirmity which impairs
the Employee's ability to substantially perform his duties under this Agreement
and which results in the Employee becoming eligible for long-term disability
benefits under the Bank's long-term disability plan (or, if the Bank has no such
plan in effect, which impairs the Employee's ability to substantially perform
his duties under this Agreement for a period of 180 consecutive days). In the
event that the Employee's employment is terminated by reason of his Disability,
the Employee's base salary (at the rate in effect on his termination date) shall
be continued during his continuing period of Disability for a period not to
exceed five years in accordance with the following schedule: (i) 100% of base
salary for the first three years and (ii) 50% of base salary for the next two
years. Any payments made to the Employee under this paragraph (b) shall be
reduced dollar-for-dollar by the amount of any benefits payable to the Employee
under the Bank's long-term disability plan. In addition, beginning on the
Employee's termination date and during his continuing period of Disability for a
period not to exceed five years, the Bank shall continue to provide the Employee
with coverage under the Bank's health, dental and life insurance programs on the
same terms as such benefits were made available to the Employee prior to his
termination date.

              During any period that the Employee shall receive disability
benefits and to the extent that the Employee shall be physically and mentally
able to do so, he shall furnish such information, assistance and documents so as
to assist in the continued ongoing business of the Bank and, if able, shall make
himself available to the Bank to undertake reasonable assignments consistent
with his prior position and his physical and mental health. The Bank shall pay
all reasonable expenses incident to the performance of any assignment given to
the Employee during the disability period.

         (c)  JUST CAUSE. The Company Board and the Bank Board may, by written
notice to the Employee, terminate his employment at any time, for Just Cause.
The Employee shall have no right to receive compensation or other benefits for
any period after termination for Just Cause. No act, or failure to act, on the
Employee's part shall be considered "willful" unless the Employee has acted, or
failed to act, with an absence of good faith and without a reasonable belief
that the action, or failure to act, was in the best interest of the Company.
Notwithstanding the foregoing, the Employee shall not be deemed to have been
terminated for Just Cause unless there shall have been delivered to the Employee

                                       4

<PAGE>

a copy of a resolution duly adopted by the affirmative vote of not less than a
two-thirds majority of the membership of the Company Board and the Bank Board at
a meeting called and held for that purpose (after reasonable notice to the
Employee and an opportunity for the Employee to be heard before the Boards),
finding that in the good faith opinion of the Boards the Employee was guilty of
conduct and specifying the particulars thereof in detail.

         (d)  TERMINATION WITHOUT JUST CAUSE OR FOR GOOD REASON. (i) The Company
Board and the Bank Board may, by written notice to the Employee, terminate his
employment at any time for a reason other than Just Cause, or (ii) the Employee
may, by written notice to the Company and the Bank, terminate his employment for
Good Reason. Upon the occurrence of either event, the Employee shall be entitled
to receive the following compensation and benefits (unless such termination
occurs during the Protected Period, in which event the benefits and compensation
provided for in Section 12 shall apply): (x) a payment equal to the amount of
base salary (at the rate in effect on his termination date) the Employee would
have been paid through the expiration date of this Agreement, including any
renewal term (the "Expiration Date"), (y) the Bank shall cover the entire cost
of the continued participation of the Employee and his spouse in the Bank's
group health, life and disability insurance programs through the Expiration
Date. In the event that coverage under such programs is not available to the
Employee by reason of his status as a former employee, the Bank shall provide
the Employee with substantially comparable coverage on an individual basis. All
cash amounts payable to the Employee under this subsection (d) shall be paid in
one lump sum within ten days of such termination.

         (e)  VOLUNTARY TERMINATION BY EMPLOYEE. The Employee may voluntarily
terminate employment with the Bank during the term of this Agreement, upon at
least 90 days prior written notice to the Company Board and the Bank Board, in
which case the Employee shall receive only his compensation, vested rights and
employee benefits up to the date of his termination (unless such termination
occurs pursuant to Section 10(d) hereof or within the Protected Period, in
Section 12(a) hereof, in which event the benefits and compensation provided for
in Sections 10(d) or 12, as applicable, shall apply).

         11.  NO MITIGATION. The Employee shall not be required to mitigate the
              -------------
amount of any payment provided for in this Agreement by seeking other employment
or otherwise and no such payment shall be offset or reduced by the amount of any
compensation or benefits provided to the Employee in any subsequent employment.

         12.  CHANGE IN CONTROL.
              -----------------

         (a)  TRIGGER EVENTS. The Employee shall be entitled to collect the
greater of (i) the severance benefits set forth in Section 12(b) or (ii) the
severance benefits described in Section 10(d), in the event that either (x) the
Employee voluntarily terminates employment for any reason within the one-year
period beginning on the date of a Change in Control (which for purposes of this
Section 12(a) shall be treated in the same manner as a termination for Good
Reason), (y) the Employee voluntarily terminates employment within 90 days of an
event that both occurs during the Protected Period and constitutes Good Reason,
or (z) the Company or Bank or their successor(s) in interest terminate the
Employee's employment without his written consent and for any reason other than
Just Cause during the Protected Period.

         (b)  SEVERANCE PAYMENTS AND BENEFITS. Upon the occurrence of a trigger
event described in Section 12(a), the Employee shall be entitled to receive the
following payments and benefits:

              (i)  A cash severance benefit equal to three times the sum of (x)
                   the Employee's base salary at the rate in effect on the date

                                       5

<PAGE>

                   of termination or the date immediately preceding the
                   effective date of the Change in Control, whichever is higher
                   and (y) the highest cash bonus paid or accrued on the
                   Employee's behalf during the 60-month period preceding his
                   termination date. The severance benefit shall be payable in
                   one lump sum within ten days of the Employee's last day of
                   employment.

              (ii) For a period of 36 months following the Employee's
                   termination date, the Bank shall, at the Bank's expense,
                   continue the Employee's coverage under the Bank's health,
                   dental, life, and disability programs. In the event that
                   coverage under such programs is not available to the Employee
                   by reason of his status as a former employee, the Bank shall
                   provide the Employee with substantially comparable coverage
                   on an individual basis

         13.  EXCISE TAXES.
              ------------

         (a)  COVERED BENEFITS. "Covered Benefits" shall mean any payment or
benefit paid or provided to the Employee by the Company or any affiliate or any
successor in interest to the Company (whether pursuant to this Agreement or
otherwise) that will be (or in the opinion of Tax Counsel (as defined below)
might reasonably be expected to be) subject to any excise tax (the "Excise Tax")
imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code"). In the event that at any time during or after the Term of Employment
the Employee shall receive any Covered Benefits, the Company shall pay to the
Employee an additional amount (the "Gross-Up Payment") such that the net amount
retained by the Employee from the Gross-Up Payment, after deduction of any
federal, state and local income taxes, Excise Tax, and FICA and Medicare
withholding taxes on the Gross-Up Payment, shall be equal to the Excise Tax on
the Covered Benefits. For purposes of determining the amount of such Excise Tax
on the Covered Benefits, the amount of the Covered Benefits that shall be taken
into account in calculating the Excise Tax shall be equal to (i) the Covered
Benefits, less (ii) the amount of such Covered Benefits that, in the opinion of
tax counsel selected by the Company and reasonably acceptable to the Employee
("Tax Counsel"), are not parachute payments (within the meaning of Section
280G(b)(1) of the Code).

         (b)  CERTAIN ASSUMPTIONS. For purposes of this Section 13, the Employee
shall be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Excise Tax is payable
and state and local income taxes at the highest marginal rate of taxation in the
state and locality of the Employee's residence on the effective date of the
Employee's termination, net of the reduction in federal income taxes which could
be obtained from deduction of such state and local taxes. Except as otherwise
provided herein, all determinations required to be made under this Section 13
shall be made by Tax Counsel, which determinations shall be conclusive and
binding on the Employee and Company, absent manifest error.

         (c)  TAX INDEMNIFICATION. The Company shall indemnify and hold the
Employee harmless from any and all losses, costs and expenses (including without
limitation, reasonable attorney's fees, reasonable accountant's fees, interest,
fines and penalties of any kind) which the Employee incurs as a result of any
administrative or judicial review of the Employee's liability under Section 4999
of the Code by the Internal Revenue Service or any comparable state agency
through and including a final judicial determination or final administrative
settlement of any dispute arising out of the Employee's liability for the Excise
Tax or otherwise relating to the classification for purposes of Section 280G of
the Code of any of the Covered Benefits or other payment or benefit in the
nature of compensation made or provided to the Employee by the Company. The

                                       6

<PAGE>

Employee shall promptly notify the Company in writing whenever the Employee
receives notice of the commencement of any judicial or administrative
proceeding, formal or informal, in which the federal tax treatment under Section
4999 of the Code of any amount paid or payable under this Agreement or otherwise
is being reviewed or is in dispute (including a notice of audit or other inquiry
concerning the reporting of the Employee's liability under Section 4999). The
Company may assume control at its expense over all legal and accounting matters
pertaining to such federal or state tax treatment (except to the extent
necessary or appropriate for the Employee to resolve any such proceeding with
respect to any matter unrelated to the Covered Benefits or other payment or
benefit in the nature of compensation made or provided to the Employee by the
Company) and the Employee shall cooperate fully with the Company in any such
proceeding. The Employee shall not enter into any compromise or settlement or
otherwise prejudice any rights the Company may have in connection therewith
without prior consent of the Company. In the event that the Company elects not
to assume control over such matters, the Company shall promptly reimburse the
Employee for all expenses related thereto as and when incurred upon presentation
of appropriate documentation relating thereto.

         14.  INDEMNIFICATION AND INSURANCE.
              -----------------------------

         (a)  To the maximum extent permitted under applicable law, during the
term of this Agreement and for a period of six years thereafter, the Company
shall indemnify the Employee against and hold the Employee harmless from any
costs, liabilities, losses and exposures to the fullest extent and on the most
favorable terms and conditions that similar indemnification is offered to any
director or officer of the Company or any affiliate thereof.

         (b)  During the term of this Agreement and for a period of six years
thereafter, the Company shall cause the Employee to be covered by and named as
an insured under any policy or contract of insurance obtained by either Company
to insure directors and officers against personal liability for acts or
omissions in connection with service as an officer or director of the Company or
any of its affiliates service in other capacities at its request. The coverage
provided to the Employee pursuant to this Section 14 shall be of the same scope
and on the same terms and conditions as the coverage (if any) provided to other
officers or directors of the Company.

         15.  REIMBURSEMENT FOR EXPENSES RELATED TO A DISPUTE REGARDING THE
              -------------------------------------------------------------
AGREEMENT. In the event that any dispute arises between the Employee and the
---------
Bank as to the terms or interpretation of this Agreement, whether instituted by
formal legal proceedings or otherwise, including any action that the Employee
takes to defend against any action taken by the Bank or the Company, the
Employee shall be reimbursed for all costs and expenses, including reasonable
attorneys' fees, arising from such dispute, proceedings or actions, provided
that the Employee obtains either a written settlement or a final judgment by a
court of competent jurisdiction substantially in his favor. Such reimbursement
shall be paid within ten days of Employee's furnishing to the Bank written
evidence, which may be in the form, among other things, of a cancelled check or
receipt, of any costs or expenses incurred by the Employee.

         16.  FEDERAL INCOME TAX WITHHOLDING. The Bank may withhold all federal
              ------------------------------
and state income or other taxes from any benefit payable under this Agreement as
shall be required pursuant to any law or government regulation or ruling.

         17.  SUCCESSORS AND ASSIGNS.
              ----------------------

         (a)  COMPANY AND THE BANK. This Agreement shall not be assignable by
the Company Bank, provided that this Agreement shall inure to the benefit of and

                                       7

<PAGE>

be binding upon any corporate or other successor of the Company or the Bank
which shall acquire, directly or indirectly, by merger, consolidation, purchase
or otherwise, all or substantially all of the assets or stock of the Company or
the Bank.

         (b)  EMPLOYEE. Since the Company and the Bank are contracting for the
unique and personal skills of the Employee, the Employee shall be precluded from
assigning or delegating his rights or duties hereunder without first obtaining
the written consent of the Bank; provided, however, that nothing in this
paragraph shall preclude (i) the Employee from designating a beneficiary to
receive any benefit payable hereunder upon his death, or (ii) the executors,
administrators, or other legal representatives of the Employee or his estate
from assigning any rights hereunder to the person or persons entitled thereunto.

         (c)  ATTACHMENT. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or
to exclusion, attachment, levy or similar process or assignment by operation of
law, and any attempt, voluntary or involuntary, to effect any such action shall
be null, void and of no effect.

         18.  AMENDMENTS. No amendments or additions to this Agreement shall be
              ----------
binding unless made in writing and signed by all of the parties, except as
herein otherwise specifically provided.

         19.  SOURCE OF PAYMENTS. Unless otherwise determined by the Company
              ------------------
Board and except to the extent contemplated by Section 5(b), the Executive shall
not receive any separate compensation or benefits from the Company for services
rendered under this Agreement; provided, however, that the Company agrees that
it shall be jointly and severally liable with the Bank for the payment of all
amounts and the provision of all benefits due the Employee under any provision
of this Agreement.

         20.  SPECIAL LIMITATIONS. (1) If the Employee is removed and/or
              -------------------
permanently prohibited from participating in the conduct of the Bank's affairs
by an order issued under Sections 8(e)(4) or 8(g)(1) of the Federal Deposit
Insurance Act ("FDIA") (12 U.S.C. Sections 1818(e)(4) and (g)(1)), all
obligations of the Bank under this Agreement shall terminate, as of the
effective date of the order, but vested rights of the parties shall not be
affected.

         (2)  If the Bank is in default (as defined in Section 3(x)(1) of FDIA),
all obligations under this Agreement shall terminate as of the date of default;
however, this Paragraph shall not affect the vested rights of the parties.

         (3)  If a notice served under Section 8(e)(3) or (g)(1) of the FDIA (12
U.S.C. Section 1818(e)(3) or (g)(1)) suspends and/or temporarily prohibits the
Employee from participating in the conduct of the Bank's affairs, the Bank's
obligations under this Agreement shall be suspended as of the date of such
service, unless stayed by appropriate proceedings. If the charges in the notice
are dismissed, the Bank may in its discretion (i) pay the Employee all or part
of the compensation withheld while its contract obligations were suspended, and
(ii) reinstate (in whole or in part) any of its obligations which were
suspended.

         (4)  Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and any regulations promulgated thereunder.


                                       8

<PAGE>

         (5)  Any payments in the nature of severance made to the Employee under
this Agreement are subject to and conditioned upon their compliance with Section
409A of the Internal Revenue Code of 1986, as amended, and any regulations
promulgated under Section 409A regarding any delay in such payments by the
Company.

         21.  APPLICABLE LAW. Except to the extent preempted by federal law, the
              --------------
laws of the State of North Carolina shall govern this Agreement in all respects,
whether as to its validity, construction, capacity, performance or otherwise.

         22.  SEVERABILITY. The provisions of this Agreement shall be deemed
              ------------
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.

         23.  ENTIRE AGREEMENT. This Agreement, together with any understanding
              ----------------
or modifications thereof as agreed to in writing by the parties, shall
constitute the entire agreement between the parties hereto and shall supersede
any prior agreement between the parties including the Employment Agreement
between the Employee and the Bank dated August 16, 1991 and any amendments
thereto.



                                       9

<PAGE>


         IN WITNESS WHEREOF, the parties have executed this Agreement on the day
and year first hereinabove written.

ATTEST:                                     COOPERATIVE BANKSHARES,INC.


/s/ Linda B. Garland                        By: /s/ James D. Hundley
---------------------------------               --------------------------------
Secretary


ATTEST:                                     COOPERATIVE BANK


/s/ Linda B. Garland                        By: /s/ James D. Hundley
---------------------------------               --------------------------------
Secretary




WITNESS:


/s/ Dare C. Rhodes                          /s/ Frederick Willetts, III
---------------------------------           ------------------------------------
                                            Frederick Willetts, III




                                       10
</TEXT>
</DOCUMENT>
