<PAGE>
 
                 SECOND DIRECTORS' DEFERRED COMPENSATION PLAN
                                        
                                      OF
                                        
                              CITIZENS BANK, FSB
                                        



                       EFFECTIVE DATE: December 28, 1998
<PAGE>
 
                               TABLE OF CONTENTS
                  SECOND DIRECTORS' DEFERRED COMPENSATION PLAN
                             OF CITIZENS BANK, FSB
<TABLE>
<CAPTION>
 
                                                                 Page
                                                                 ----
<S>              <C>                                             <C>
Section 1.       Definitions                                        1
Section 2.       Credits to Deferred Compensation Account           3
Section 3.       Retirement; Termination of Service; Death          4
                 3.1   Normal retirement                            4
                 3.2   Delayed retirement                           5
                 3.3   Disability                                   5
                 3.4   Termination of service                       5
                 3.5   Payment of benefit by reason of retirement   5
                 3.6   Payment of benefit by reason of death        6
                 3.7   Prepayment                                   6
                 3.8   Hardship distributions                       7
                 3.9   Termination events                           8
Section 4.       Vesting                                            9
Section 5.       Adjustment of Accounts                             9
Section 6.       Administration by Committee                       10
Section 7.       No Funding                                        12
Section 8.       Allocation of Responsibilities                    13
Section 9.       Benefits Not Assignable; Facility of Payments     14
Section 10.      Beneficiary                                       14
Section 11.      Amendment and Termination of Plan                 15
Section 12.      Communication to Participants                     16
Section 13.      Claims Procedure                                  16
Section 14.      Miscellaneous Provisions                          18
</TABLE>
<PAGE>
 
                  SECOND DIRECTORS' DEFERRED COMPENSATION PLAN
                             OF CITIZENS BANK, FSB
                                        

Section 1.  Definitions:
---------   ----------- 

     As used in the plan, including this Section 1, references to one gender
shall include the other and, unless otherwise indicated by the context:

     1.1  "Accrued benefit" shall mean with respect to each participant the
balance credited to his deferred compensation account as of the applicable
adjustment date, following adjustment to such account as of such adjustment date
as provided in Section 5.

     1.2  "Adjustment date" shall mean each date as of which Directors' meeting
fees are paid during a plan year; and such other dates as the Committee may
select from time to time.  The last adjustment date occurring in each calendar
year shall be referred to herein as the "year-end adjustment date."

     1.3  "Beneficiary" shall mean the person, persons or entity designated or
determined pursuant to the provisions of Section 10 of the plan.

     1.4  "Board" shall mean the Board of Directors of the Corporation, or a
committee of such Board to whom the Board shall assign or delegate all or part
of its duties and powers under this plan.

     1.5  "Committee" shall mean the administrative committee provided for in
Section 6.

     1.6  "Compensation" shall mean for any participant the remuneration paid or
payable with respect to such participant by the Corporation during the plan year
for services actually rendered by the participant as a member of the Board of
Directors of the Corporation including, without limitation, meeting fees and
monthly retainer payments.

     1.7  "Corporation" shall mean shall mean Citizens Bank, FSB, a North
Carolina banking corporation with its principal office at Salisbury, North
Carolina, or any successor thereto by merger, consolidation or otherwise.


                                      -1-
<PAGE>
 
     1.8  "Deferred compensation account" shall mean a book reserve account to
which a Director's fee deferral amounts shall be credited.
     1.9  "Director" shall mean an individual in the service of the Corporation
as a member of the Board of Directors (including individuals who are also
employees of the Corporation).

     1.10  "Disability" shall mean the inability, by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long continued or indefinite duration, of a participant to
perform his regular duties as a director of the Corporation.

     1.11  "Effective date of the plan" shall be December 28, 1998.

     1.12  "Entry date" shall mean January 1 of each calendar year.

     1.13  "Fee deferral agreement" shall mean a written agreement entered into
by a participant pursuant to the provisions of Section 2.1 of the plan.

     1.14  "Normal retirement age" of a participant shall be age sixty-five.
The "normal retirement date" of a participant shall mean the first day of the
calendar month coincident with or next following attainment of his normal
retirement age.

     1.15  "Participant" shall mean with respect to any plan year a director who
has entered the plan and any former director who has an accrued benefit under
the plan.  A director who has not otherwise entered the plan shall enter the
plan and become a participant as of the entry date (commencing on or after the
effective date of the plan) coincident with or next following the date he shall
first complete such terms and conditions as the Committee shall from time to
time establish.  A director who terminates service as a member of the Board and
later reenters such service shall immediately become a participant in the plan
upon his return to service.

     1.16  "Plan" shall mean the deferred compensation plan as herein set out or
as duly amended.


                                     -2-
<PAGE>
 
     1.17  "Plan year" shall mean the twelve calendar month period ending on
December 31 of each year.

     1.18  "Retire" or "retirement" shall mean retirement within the meaning of
Section 3.1, 3.2 or 3.3.

     1.19  "Service" shall mean service by an individual in behalf of the
Corporation as a director.

     1.20  "Spouse" or "surviving spouse" shall mean, except as otherwise
provided in the plan, the legally married spouse or surviving spouse of a
participant.

     1.21  "Termination adjustment date" shall mean the adjustment date
coincident with or next following the date as of which a participant terminates
service with the Corporation for any reason (including retirement or death).

Section 2.  Credits to Deferred Compensation Account:
---------   ---------------------------------------- 

     2.1  Fee deferral amounts: Each participant may elect, by entering into a
fee deferral agreement with the Corporation, to reduce his compensation from the
Corporation for services as a director (including meeting fees and monthly
retainer payments) by a whole number percentage from one to one hundred percent
(in increments of one percent).  The amount of the participant's compensation
deferral shall be credited by the Corporation to a deferred compensation account
maintained for the participant pursuant to Section 5.  On each adjustment date
as of which fees are payable to directors, the Corporation shall credit to the
participant's deferred compensation account an amount equal to the participant's
fees deferred for the period ending on such adjustment date.

                                     -3-
<PAGE>
 
          2.2  Administrative rules governing fee deferral agreements:

          2.2.1 An election pursuant to Section 2.1 shall be made by the
     participant by executing and delivering to the Corporation a fee deferral
     agreement. Such fee deferral agreement shall become effective with respect
     to such participant at the beginning of the first full fee period which
     commences immediately following the date of receipt by the Committee of
     such fee deferral agreement. Such election shall continue in effect, unless
     it is modified or revoked by the participant, until such time as the
     participant terminates his service with the Corporation.

          2.2.2 Fee deferral agreements may be modified by the unilateral action
     of the participant (either to increase or decrease the portion of his
     compensation which is subject to deferral within the percentage limits set
     forth in Section 2.1). Any such modification shall be made by executing and
     delivering to the Corporation an amended fee deferral agreement, which
     shall become effective as of the first full fee period which commences on
     or immediately following the entry next following the date of receipt by
     the Committee of the amended fee deferral agreement.

          2.2.3 A participant may unilaterally revoke a fee deferral agreement
     at any time by providing advance written notice to the Corporation. The
     revocation shall become effective at the beginning of the first full fee
     period which commences immediately following the date such written
     revocation is received by the Committee. In the event a participant revokes
     a fee deferral agreement, he shall be ineligible to elect for fee deferral
     credits to recommence until the first fee period which commences on or
     immediately following the entry date next following the date the revocation
     became effective.

     2.3   Transfer credits: As of the effective date of the plan, the
Corporation shall credit to each participant's deferred compensation account
under this plan such amount as the participant shall direct from his or her
accrued benefit under the Amended and Restated Directors' Deferred Compensation
Plan of Citizens Savings Bank, and as set forth in Exhibit A hereto.

Section 3.  Retirement; Termination of Service; Death:
---------   ----------------------------------------- 

     3.1  Normal retirement:  A participant who is in service shall be eligible
to retire from service at his normal retirement date and commence receiving
payment of his 


                                     -4-
<PAGE>
 
accrued benefit, determined as of his termination adjustment date. Payment of
such benefit shall be made by the Corporation pursuant to Section 3.5.

     3.2  Delayed retirement:  If a participant shall remain in service
following his normal retirement date, his retirement date shall be the date he
shall actually terminate service for reasons other than death, whereupon he
shall commence receiving payment of his accrued benefit, determined as his
termination adjustment date.  Payment of such benefit shall be made by the
Corporation pursuant to Section 3.5.  During the period that such participant
remains in service pursuant to this Section 3.2, he shall continue to be a
participant for and including each plan year in which he meets the requirements
therefor.  If a director not otherwise a participant becomes eligible to enter
the plan following his normal retirement date, the provisions of this Section
3.2 shall apply in determining his retirement date.

     3.3  Disability retirement:  If a participant shall suffer disability while
in service prior to his normal retirement date, he shall retire as of the date
of establishment of his disability, whereupon he shall commence receiving
payment of his accrued benefit, determined as of his termination adjustment
date.  Such benefit shall be paid by the Corporation as provided in Section 3.5,
treating for this purpose the date of the participant's disability retirement as
if it were his normal retirement date.

     3.4  Termination of service:  If the service of a participant with the
Corporation shall be terminated for any reason other than retirement or death,
his accrued benefit, determined as of his termination adjustment date, shall be
distributed to him by the Corporation in shares of common stock of Innes Street
Financial Corporation ("ISFC") as soon as practicable following his termination
adjustment date.

     3.5  Payment of benefit by reason of retirement: If a participant shall
retire, his accrued benefit, determined as of his termination adjustment date,
shall be distributed to him in a single distribution of shares of ISFC common
stock or in equal annual installments of shares of ISFC common stock over a term
certain of five, ten, fifteen or 



                                     -5-
<PAGE>
 
twenty years, as elected by the participant in his initial fee deferral
agreement, commencing as of the first day of the calendar quarter next following
such termination adjustment date, and on each anniversary of such date for the
remainder of the term certain. If the participant elects to receive distribution
of his accrued benefit in annual installments for a term certain, the number of
shares in each succeeding annual installment shall be adjusted, as of the
adjustment date immediately preceding the date as of which such annual
installment shall be distributed, for additions to the participant's accounts
pursuant to Section 5. Such adjustment shall be made by dividing the aggregate
number of shares in his account balances as of such date (following adjustment
as of such date) by the number of annual installments remaining to be
distributed hereunder; provided, that the last annual installment due hereunder
shall be all of the remaining shares credited to the participant's accounts on
the date of payment.

          3.6  Payment of benefit by reason of death:

          3.6.1 If the participant dies while in service, the participant's
     accrued benefit, determined as of his termination adjustment date, shall be
     distributed to his beneficiary in the manner elected by the participant in
     his initial fee deferral election, commencing as soon as practicable (but
     no later than thirty days) following such adjustment date. Distributions
     shall be made in shares of ISFC common stock.

          3.6.2 If the participant dies following his termination of service and
     before all distributions to him under the plan have been made, the balance
     of the participant's accrued benefit, determined as of the adjustment date
     coincident with or next following the date such death occurs, shall be
     distributed to the participant's beneficiary in the manner elected by the
     participant in his initial fee deferral election, treating the beneficiary
     for this purpose as the participant. Distributions shall be made in shares
     of ISFC common stock.

     3.7 Prepayment: Notwithstanding any other provisions of this plan, if
a participant or any other person (a "recipient") is entitled to receive
distributions under the plan, the Committee in its sole discretion may direct
the prepayment of all or any part of the distributions remaining to be made to
or in behalf of the recipient, or to shorten the distribution period. The amount
of such prepayment shall be in full satisfaction of the 



                                     -6-
<PAGE>
 
Employer's obligations hereunder to the recipient and to all persons claiming
under or through the recipient with respect to the distributions being prepaid.
In the event of a partial prepayment, the Committee shall designate which
installments are being prepaid. The Committee's determinations under this
Section 3.7 shall be final and conclusive upon all parties claiming benefits
under this plan.

          3.8  Hardship distributions:

          3.8.1  A participant may, at any time prior to the commencement of
     distributions hereunder, make application to the Committee to receive a
     payment in a lump sum of all or a portion of the balance credited to his
     deferred compensation account by reason of a hardship affecting the
     participant.  The amount of a distribution on account of hardship shall not
     exceed the amount required to meet the immediate financial need created by
     the hardship and not otherwise available from other resources of the
     participant.  For this purpose, a "hardship" shall mean an "unforeseeable
     emergency," which shall mean a severe financial hardship to the participant
     resulting from a sudden and unexpected illness or accident of the
     participant or a dependent, loss of the participant's property due to
     casualty, or other similar extraordinary and unforeseeable circumstance
     arising as a result of events beyond the participant's control.  The
     determination of whether a financial need constitutes an "unforeseeable
     emergency" within the scope of this Section 3.8.1 shall be made by the
     Committee in its sole and absolute discretion, and its decision to grant or
     deny a distribution on account of hardship shall be final.  The Committee
     shall apply uniform and nondiscriminatory standards in making its decision.

          3.8.2 The participant's request for a distribution on account of
     hardship must be made in writing to the Committee. The request must specify
     the nature of the hardship, the total amount to be distributed and the
     total amount of the actual expense incurred or to be incurred on account of
     hardship.

          3.8.3 If a distribution under this Section 3.8 is approved, such
     distribution shall be made as of the next following adjustment date. The
     processing of the request shall be completed as soon as practicable after
     the date on which the Committee receives the properly completed written
     request for a distribution on account of financial hardship. If a
     participant terminates service after a request is approved in accordance
     with this Section 3.8 but prior to distribution of the full amount
     approved, the approval of his request shall be automatically void and the
     benefits he is entitled to receive under the plan shall be distributed in
     accordance with the applicable payment provisions of the plan. Only one
     distribution because of financial hardship shall be made within any plan
     year.


                                     -7-
<PAGE>
 
          3.8.4 The Committee may from time to time adopt additional policies or
     rules governing the manner in which such payments because of financial
     hardship may be made so that the plan may be conveniently administered.

         3.9  Termination events:

         3.9.1 Notwithstanding any other provision of this plan, this plan shall
     be terminated as of the date on which first occurs either of the following
     events (a "Termination Event"):

               (i) There shall be a change in control of the Corporation. For
          purposes of this subsection (iii), a "change in control of the
          Corporation" shall be deemed to have occurred if: (1) any person (as
          such term is used in Sections 13(d) and 14(d)(2) of the Securities
          Exchange Act of 1934) acquires or becomes the beneficial owner,
          directly or indirectly, of securities of the Employer representing
          twenty-five percent or more of the combined voting power of the
          Corporation's then outstanding securities and thereafter, the
          membership of the Board of Directors of the Corporation becomes such
          that a majority are persons who were not members of the Board at the
          time of the acquisition of securities; or (2) the Corporation, or its
          assets, are acquired by or combined with another corporation and less
          than a majority of the outstanding voting shares of the parent or
          surviving corporation after such acquisition or combination are owned,
          immediately after such acquisition or combination, by the owners of
          voting shares of the Corporation outstanding immediately prior to such
          acquisition or combination; or

               (ii) The Corporation shall terminate the plan pursuant to Section
          11.

          3.9.2 If a Termination Event shall occur prior to the date
     distribution of benefits is made or commences under this plan, the
     participant's accrued benefit (as adjusted) as of the date such Termination
     Event occurs shall be distributed to the participant (or his beneficiary)
     in a single distribution of shares of ISFC common stock within thirty days
     of the occurrence of such event.

          3.9.3  If a Termination Event shall occur after the date installment
     distributions under this plan have commenced, the remaining installment
     payments to be made shall be paid to the participant (or his beneficiary)
     in a 

                                      -8-
<PAGE>
 
     single distribution of shares of ISFC common stock within thirty days of
     the date of the Termination Event.

          3.9.4 Notwithstanding the provisions of Sections 3.9.2 and 3.9.3, in
     the event that a "change in control of the Corporation" (as defined in
     Section 3.9.1(i)) occurs, and if, prior to the effective date of such
     change in control, the Corporation and the participant shall agree in
     writing, such change in control shall not be deemed a Termination Event
     with respect to such participant, and subject to the provisions of Section
     14.7, the plan shall continue in effect pursuant to the terms thereof.

Section 4.  Vesting:
---------   ------- 
     The accrued benefit of each participant under the plan shall be fully
vested (that is, nonforfeitable) in him at all times.

Section 5.  Adjustment of Accounts:
---------   ---------------------- 

     5.1  Accounts:  The Committee shall establish a book reserve accounts,
entitled the "deferred compensation account," in behalf of each participant.
Each such account shall be adjusted as of each adjustment date pursuant to the
provisions of Section 5.3.

     5.2  Deemed investment  : The deferred compensation account of a
participant shall be deemed to be invested in shares of ISFC common stock.  The
number of shares of common stock credited to a participant's account as of each
adjustment date shall be determined by dividing the amount to be credited to
such account as of the adjustment date (including fee deferral credits and
dividends, if any, deemed to be paid on shares of ISFC common stock held in such
account) by the fair market value of the ISFC common stock as of such adjustment
date.

     5.3  Adjustments to deferred compensation accounts:  With respect to each
participant who has a deferred compensation account under the plan, the amount



                                     -9-
<PAGE>
 
credited to such account as of each adjustment date shall be adjusted as of each
succeeding adjustment date by the following debits and credits, in the order
stated:

          5.3.1 The deferred compensation account shall be debited with the
     total number of shares distributed from such account since the last
     preceding adjustment date to him or for his benefit.

          5.3.2 The deferred compensation account shall be credited with the
     total number of shares (including fractional shares) determined pursuant to
     Section 5.2.

          5.3.3 The deferred compensation account shall be credited or debited,
     as the case may be, with the amount of any deemed investment gain or loss
     attributable to the shares held in the account since the immediately
     preceding adjustment date.

Section 6.  Administration by Committee:
---------   --------------------------- 

     6.1  The Committee shall consist of not fewer than three nor more than five
individuals who shall be appointed by the Board to serve at the pleasure of the
Board.  Any member of the Committee may resign, and his successor, if any, shall
be appointed by the Board.  The Committee shall be responsible for the general
administration and interpretation of the plan and for carrying out its
provisions, except to the extent all or any of such obligations are specifically
imposed on the Board.

     6.2  The members of the Committee shall elect a Chairman and may elect an
acting Chairman.  They shall also elect a Secretary and may elect an acting
Secretary, either of whom may be but need not be a member of the Committee.  The
Committee may appoint from its membership such subcommittees with such powers as
the Committee shall determine, and may authorize one or more of its members or
any agent to execute or deliver any instruments or to make any payment in behalf
of the Committee.  The Committee shall appoint the plan administrator.

     6.3  The Committee shall hold such meetings upon such notice, at such
places and at such intervals as it may from time to time determine.  Notice of
meetings shall 


                                     -10-
<PAGE>
 
not be required if notice is waived in writing by all the members of the
Committee at the time in office, or if all such members are present at the
meeting.

     6.4  A majority of the members of the Committee at the time in office shall
constitute a quorum for the transaction of business.  All resolutions or other
actions taken by the Committee at any meeting shall be by vote of a majority of
those present at any such meeting and entitled to vote.  Resolutions may be
adopted or other action taken without a meeting upon written consent thereto
signed by all of the members of the Committee.

     6.5  The Committee shall maintain full and complete records of its
deliberations and decisions.  The minutes of its proceedings shall be conclusive
proof of the facts of the operation of the plan.  The records of the Committee
shall contain all relevant data pertaining to individual participants and their
rights under the plan.

     6.6  Subject to the limitations of the plan, the Committee may from time to
time establish rules or by-laws for the administration of the plan and the
transaction of its business.

     6.7  No individual member of the Committee shall have any right to vote or
decide upon any matter relating solely to himself or to any of his rights or
benefits under the plan (except that such member may sign unanimous written
consent to resolutions adopted or other action taken without a meeting).

     6.8  The Committee may correct errors and, so far as practicable, may
adjust any benefit or credit or payment accordingly.  The Committee may in its
discretion waive any notice requirements in the plan; provided, that a waiver of
notice in one or more cases shall not be deemed to constitute a waiver of notice
in any other case.  With respect to any power or authority which the Committee
has discretion to exercise under the plan, such discretion shall be exercised in
a nondiscriminatory manner.

     6.9  Subject to the claims procedure set forth in Section 13, the Committee
shall have the duty and authority to interpret and construe the provisions of
the 


                                     -11-
<PAGE>
 
plan and to decide any dispute which may arise regarding the rights of
participants hereunder, which determinations shall be binding and conclusive
upon all interested persons.

     6.10  The Committee may engage an attorney, accountant or any other
technical advisor on matters regarding the operation of the plan and to perform
such other duties as shall be required in connection therewith, and may employ
such clerical and related personnel as the Committee shall deem requisite or
desirable in carrying out the provisions of the plan.  The Committee shall from
time to time, but no less frequently than annually, review the financial
condition of the plan and determine the financial and liquidity needs of the
plan.  The Committee shall communicate such needs to the Corporation so that its
policies may be appropriately coordinated to meet such needs.

     6.11  No fee or compensation shall be paid to any member of the Committee
for his service as such.

     6.12  The Committee shall be entitled to reimbursement by the Corporation
for its reasonable expenses properly and actually incurred in the performance of
its duties in the administration of the plan.

     6.13  No member of the Committee shall be personally liable by reason of
any contract or other instrument executed by him or on his behalf as a member of
the Committee nor for any mistake of judgment made in good faith, and the
Corporation shall indemnify and hold harmless, directly from its own assets
(including the proceeds of any insurance policy the premiums for which are paid
from the Corporation's own assets), each member of the Committee and each other
officer, employee, or director of the Corporation to whom any duty or power
relating to the administration or interpretation of the plan may be delegated or
allocated, against any unreimbursed or uninsured cost or expense (including any
sum paid in settlement of a claim with the prior written approval of the Board)
arising out of any act or omission to act in connection with the plan unless
arising out of such person's own fraud, bad faith, willful misconduct or gross
negligence.


                                     -12-
<PAGE>
 
Section 7.  No Funding:
---------   ---------- 

     The obligation of the Corporation to make payments hereunder shall
constitute a liability of the Corporation to the participant.  Such payments
shall be made from the general funds of the Corporation, and the Corporation
shall not be required to establish or maintain any special or separate fund, or
otherwise to segregate assets to assure that such payments shall be made, and
the participant shall not have any interest in any particular assets of the
Corporation by reason of its obligations hereunder.  Nothing contained in this
plan shall create or be construed as creating a trust of any kind or any other
fiduciary relationship between the Corporation and the participant or any other
person.  To the extent that any person acquires a right to receive payment from
the Corporation, such right shall be no greater than the right of an unsecured
creditor of the Corporation.  Notwithstanding the foregoing, the Employer may
establish a grantor trust in substantially the form provided for by IRS Revenue
Procedure 92-62 with one or more participants in the plan with respect to the
payment of such participants' benefit under the plan.

Section 8.  Allocation of Responsibilities:
---------   ------------------------------ 
     The persons responsible for the plan and the duties and responsibilities
allocated to each are as follows:

     8.1.  Board:

          (i)  To amend the plan;
          (ii) To appoint and remove members of the Committee; and

          (iii)  To terminate the plan.

     8.2  Committee:

          (i) To interpret the provisions of the plan and to determine the
     rights of the participants under the plan, except to the extent otherwise
     provided in Section 13 relating to claims procedure;



                                     -13-
<PAGE>
 
               (ii) To administer the plan in accordance with its terms, except
          to the extent powers to administer the plan are specifically delegated
          to another person or persons as provided in the plan;

               (iii)  To account for the accrued benefits of participants; and

               (iv) To direct the Corporation in the distribution of benefits.

     8.3  Plan Administrator:

               (i) To file such reports as may be required with the United
          States Department of Labor, the Internal Revenue Service and any other
          government agencies to which reports may be required to be submitted
          from time to time;

               (ii) To provide for disclosure of plan provisions and other
          information relating to the plan to participants and other interested
          parties; and

              (iii) To administer the claims procedure to the extent provided in
          Section 13.

Section 9.  Benefits Not Assignable; Facility of Payments:
---------   --------------------------------------------- 

     9.1  No portion of any benefit held or paid under the plan with respect to
any participant shall be subject in any manner to anticipation, alienation,
sale, transfer, assignment, pledge, encumbrance or charge, and any attempt so to
anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the
same shall be void, nor shall any portion of such benefit be in any manner
payable to any assignee, receiver or any one trustee, or be liable for his
debts, contracts, liabilities, engagements or torts, or be subject to any legal
process to levy upon or attach.

     9.2  If any individual entitled to receive a payment under the plan shall
be physically, mentally or legally incapable of receiving or acknowledging
receipt of such payment, the Committee, upon the receipt of satisfactory
evidence of his incapacity and satisfactory evidence that another person or
institution is maintaining him and that no 


                                     -14-
<PAGE>
 
guardian or committee has been appointed for him, may cause any payment
otherwise payable to him to be made to such person or institution so maintaining
him. Payment to such person or institution shall be in full satisfaction of all
claims by or through the participant to the extent of the amount thereof.

Section 10.  Beneficiary:
----------   ----------- 

     The participant's beneficiary shall be his surviving spouse, if any;
provided, that if he leaves no surviving spouse, or if he files a written
election with the Committee, the participant's beneficiary (which may include
more than one person, natural or otherwise, and one or more secondary or
contingent beneficiaries) shall be the beneficiary designated in the beneficiary
designation form provided by the Committee.  The election of a beneficiary may
be revoked at any time by a writing of the participant, in which event the
surviving spouse, if any, shall be the beneficiary.  Any other change in
beneficiary shall be made only by the filing of a revised written election.  If
the participant's beneficiary dies prior to asserting a written claim for any
death benefit payable under the plan, or if such participant fails to designate
a beneficiary then and in any of such events, such benefit shall be payable to
his estate.  If a beneficiary is receiving or is entitled to receive payments
under the plan and dies before receiving all of the payments due him, the
balance to which he is entitled shall be paid to the contingent beneficiary, if
any, named pursuant to an election.  If there is no contingent beneficiary, the
balance shall be paid to the estate of the beneficiary as of the adjustment date
coincident with or next following the date of his death.  Any beneficiary may
disclaim all or any part of any benefit to which such beneficiary shall be
entitled hereunder by filing a written disclaimer with the Committee at least
ten days before payment of such benefit is to be made.  Such a disclaimer shall
be made in form satisfactory to the Committee and shall be irrevocable when
filed.  Any benefit disclaimed shall be payable from the plan in the same manner
as if the beneficiary who filed the disclaimer had died on the date of such
filing.

Section 11.  Amendment and Termination of Plan:
----------   --------------------------------- 



                                     -15-
<PAGE>
 
     The Board may amend any provision of the plan, including the provisions of
Section 3.7, or may terminate the plan at any time; provided, that in no event
shall such amendment or termination reduce any participant's accrued benefit as
of the date of such amendment or termination, nor shall any such amendment
affect the terms of the plan relating to the payment of such accrued benefit
(other than the provisions of Section 3.7) without the participant's written
consent.

Section 12.  Communication to Participants:
----------   ----------------------------- 

     The Corporation shall make a copy of the plan available for inspection by
participants and their beneficiaries during reasonable hours, at the principal
office of the Corporation.

Section 13.  Claims Procedure:
----------   ---------------- 
     The following claims procedure shall apply with respect to the plan:

     13.1  Filing of a claim for benefits: If a participant or beneficiary (the
"claimant") believes that he is entitled to benefits under the plan which are
not being paid to him or which are not being accrued for his benefit, he shall
file a written claim therefor with the plan administrator.  In the event the
plan administrator shall be the claimant, all actions which are required to be
taken by the plan administrator pursuant to this Section 13 shall be taken
instead by another member of the Committee designated by the Committee.

     13.2  Notification to claimant of decision: Within 90 days after receipt of
a claim by the plan administrator (or within 180 days if special circumstances
require an extension of time), the plan administrator shall notify the claimant
of his decision with regard to the claim.  In the event of such special
circumstances requiring an extension of time, there shall be furnished to the
claimant prior to expiration of the initial 90-day period written notice of the
extension, which notice shall set forth the special circumstances and the date
by which the decision shall be furnished.  If such claim shall be wholly or
partially denied, notice thereof shall be in writing and worded in a manner
calculated to be understood by the claimant, and shall set forth:  (i) the
specific reason or reasons for the denial; 



                                     -16-
<PAGE>
 
(ii) specific reference to pertinent provisions of the plan on which the denial
is based; (iii) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why such
material or information :is necessary; and (iv) an explanation of the procedure
for review of the denial. If the plan administrator fails to notify the claimant
of the decision in timely manner, the claim shall be deemed denied as of the
close of the initial 90-day period (or the close of the extension period, if
applicable).

     13.3  Procedure for review: Within 60 days following receipt by the
claimant of notice denying his claim, in whole or in part, or, if such notice
shall not be given, within 60 days following the latest date on which such
notice could have been timely given, the claimant shall appeal denial of the
claim by filing a written application for review with the Committee.  Following
such request for review, the Committee shall fully and fairly review the
decision denying the claim.  Prior to the decision of the Committee, the
claimant shall be given an opportunity to review pertinent documents and to
submit issues and comments in writing.

     13.4  Decision on review: The decision on review of a claim denied in whole
or in part by the plan administrator shall be made in the following manner:

     13.4.1 Within 60 days following receipt by the Committee of the request for
  review (or within 120 days if special circumstances require an extension of
  time), the Committee shall notify the claimant in writing of its decision with
  regard to the claim. In the event of such special circumstances requiring an
  extension of time, written notice of the extension shall be furnished to the
  claimant prior to the commencement of the extension. If the decision on review
  is not furnished in a timely manner, the claim shall be deemed denied as of
  the close of the initial 60-day period (or the close of the extension period,
  if applicable).

     13.4.2 With respect to a claim that is denied in whole or in part, the
  decision on review shall set forth specific reasons for the decision, shall be
  written in a manner calculated to be understood by the claimant, and shall
  cite specific references to the pertinent plan provisions on which the
  decision is based.

     13.4.3  The decision of the Committee shall be final and conclusive.



                                     -17-
<PAGE>
 
     13.5  Action by authorized representative of claimant: All actions set
forth in this Section 13 to be taken by the claimant may likewise be taken by a
representative of the claimant duly authorized by him to act in his behalf on
such matters.  The plan administrator and the Committee may require such
evidence as either may reasonably deem necessary or advisable of the authority
to act of any such representative.


Section 14.  Miscellaneous Provisions:
----------   ------------------------ 

     14.1  Notices: Each participant who is not in service and each beneficiary
shall be responsible for furnishing the plan administrator with his current
address for the mailing of notices, reports, and benefit payments.  Any notice
required or permitted to be given to such participant or beneficiary shall be
deemed given if directed to such address and mailed by regular United States
mail, first class, postage prepaid.  If any check mailed to such address is
returned as undeliverable to the addressee, mailing of checks will be suspended
until the participant or beneficiary furnishes the proper address.  This
provision shall not be construed as requiring the mailing of any notice or
notification otherwise permitted to be given by posting or by other publication.

     14.2  Lost distributees:  A benefit shall be deemed forfeited if the
Committee is unable to locate the participant or beneficiary to whom payment is
due on or before the fifth anniversary of the date payment is to be made or
commence; provided, that the participant's account shall cease to be adjusted
pursuant to Section 5 following the first anniversary of such date; provided
further, however, that such benefit shall be reinstated if a valid claim is made
by or on behalf of the participant or beneficiary for all or part of the
forfeited benefit. 

     14.3  Reliance on data: The Corporation, the Committee and the plan
administrator shall have the right to rely on any data provided by the
participant or by any beneficiary.  Representations of such data shall be
binding upon any party seeking to claim a 



                                     -18-
<PAGE>
 
benefit through a participant, and the Corporation, the Committee and the plan
administrator shall have no obligation to inquire into the accuracy of any
representation made at any time by a participant or beneficiary.

     14.4  Receipt and release for payments: Any payment made from the plan to
or with respect to any participant or beneficiary, or pursuant to a disclaimer
by a beneficiary, shall, to the extent thereof, be in full satisfaction of all
claims hereunder against the plan and the Corporation with respect to the plan.
The recipient of any payment from the plan may be required by the Committee, as
a condition precedent to such payment, to execute a receipt and release with
respect thereto in such form as shall be acceptable to the Committee.

     14.5  Headings: The headings and subheadings of the plan have been inserted
for convenience of reference and are to be ignored in any construction of the
provisions hereof.

     14.6  Continuation of service: The establishment of the plan shall not be
construed as conferring any legal or other rights upon any participant or any
persons for continuation of service as a director, nor shall it interfere with
the right of the Corporation to discharge any person from service as a director
or to deal with him without regard to the effect thereof under the plan.

     14.7  Merger or consolidation  The Corporation shall not consolidate or
merge into or with another corporation or entity, or transfer all or
substantially all of its assets to another corporation, partnership, trust or
other entity (a "Successor Entity") unless such Successor Entity shall assume
the rights, obligations and liabilities of the Corporation under the plan, and
upon such assumption, the Successor Entity shall become obligated to carry out
the terms and conditions of the plan.

     14.8  Construction: The provisions of the plan shall be construed and
enforced according to the laws of the State of North Carolina.

                                     -19-
<PAGE>
 
     IN WITNESS WHEREOF, this directors' deferred compensation plan is executed
in behalf of the Corporation as of the 28th day of December, 1998.

                                                CITIZENS BANK, FSB


                                                By:  /s/Ronald E. Bostian
                                                   -----------------------------
                                                        President

     /s/Raphelle Butler
     --------------------
     Secretary

     [Corporate Seal]




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