<PAGE>

                              CITIZENS BANK, FSB
                             EMPLOYMENT AGREEMENT

     THIS AGREEMENT entered into as of December 28, 1999, by and between
Citizens Bank, FSB, a federally chartered stock savings bank (hereinafter
referred to as the "Bank") with its principal administrative office at 401 West
Innes Street, Salisbury, North Carolina, and Ronald E. Bostian (hereinafter
referred to as the "Officer").  Any reference to "Holding Company" herein shall
mean Innes Street Financial Corporation, the parent holding company of the Bank.

     WHEREAS, the Officer has heretofore been employed by the Bank as its
President and Chief Executive Officer; and

     WHEREAS, the Bank is a federally chartered, stock-owned savings
association, chartered under the provisions of the Home Owners' Loan Act of
1934, and the wholly-owned subsidiary of the Holding Company; and

     WHEREAS, the Bank desires to retain the services of the Officer as the
President and Chief Executive Officer of the Bank upon the terms and conditions
set forth herein; and

     WHEREAS, the services of the Officer, his experience and knowledge of the
affairs of the Bank, and his reputation and contacts in the industry and the
local community are extremely valuable to the Bank; and

     WHEREAS, the Bank wishes to attract and retain such well-qualified
executives and it is in the best interest of the Bank and of the Officer to
secure the continued services of the Officer; and

     WHEREAS, the Bank considers the establishment and maintenance of a sound
and vital management to be part of its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Bank and its
stockholders; and
<PAGE>

     WHEREAS, the parties desire to enter into this Agreement in order to set
forth the terms and conditions of the Officer's employment relationship with the
Bank.

     NOW, THEREFORE, for and in consideration of the premises and mutual
promises, covenants and conditions hereinafter set forth and other good and
valuable considerations, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby do agree as follows:

     1.   Employment.  The Bank hereby agrees to employ the Officer and the
          ----------
Officer hereby agrees to accept employment, upon the terms and conditions stated
herein, as the President and Chief Executive Officer of the Bank.  The Officer
shall render such administrative and management services to the Bank as are
customarily performed by persons situated in a similar executive capacity. The
Officer shall promote the business of the Bank and perform such other duties as
shall, from time to time, be reasonably prescribed by the Board of Directors of
the Bank (the "Board").  During the term of this Agreement, Officer also agrees
to serve, if elected, as an officer and director of the Holding Company or any
subsidiary of the Bank.

     2.   Compensation.  The Bank shall pay the Officer during the term of this
          ------------
Agreement, as compensation for all service rendered by him to the Bank, a base
salary at the rate of $147,528 per annum, payable in cash not less frequently
than monthly; provided that the rate of such salary shall be reviewed by the
Board not less often than annually.  Such rate of salary, or increased rate of
salary, as the case may be, may be further increased from time to time in such
amounts as the Board, in its discretion, may decide.  In determining salary
increases, the Board shall compensate the Officer for increases in the cost of
living and may also provide for performance or merit increases.  Participation
in incentive compensation, deferred compensation, discretionary bonus, profit-
sharing, retirement, stock option and other employee benefit plans that the Bank
or the

                                       2
<PAGE>

Holding Company have adopted, or may from time to time adopt, and participation
in any fringe benefits, shall not reduce the salary payable to the Officer under
this Section. Any compensation provided to the Officer for his service as a
member of the Board or the Board of Directors of the Holding Company shall not
reduce the salary payable to the Officer under this Section or any benefit
payable under any other section of this Agreement. The Officer will be entitled
to such customary fringe benefits, vacation and sick leave as are consistent
with the normal practices and established policies of the Bank.

     3.   Raises and Discretionary Bonuses.  During the term of this Agreement,
          --------------------------------
no later than in December or January of each annual period, the Officer shall be
evaluated by the non-employee members of the Board and such Board members shall
determine whether the Officer's base salary should be increased and whether
payment of a performance bonus is justified. The performance of the Officer
shall be evaluated by such Board members in the following areas: capital
adequacy, asset quality, liquidity risk, interest rate risk, earnings, strategic
planning and progress, and contributions to shareholder values.  The Board shall
also consider compensation provided for similarly situated officers at similarly
situated companies with the objective that the Officer will be compensated at or
above levels of compensation provided by peer companies for their chief
executive officers. No other compensation provided for in this Agreement shall
be deemed a substitute for the Officer's right to discretionary bonuses when and
as declared by the Board under this Section.

     4.   Participation in Retirement and Employee Benefit Plans; Fringe
          --------------------------------------------------------------
Benefits.
--------

     (a)  The Officer shall be entitled to participate in any plan relating to
deferred compensation, stock awards, stock options, stock purchases, pension,
thrift, profit sharing, group life insurance, medical coverage, disability
coverage, education, or other retirement or employee benefits

                                       3
<PAGE>

that the Bank or the Holding Company have adopted, or may, from time to time
adopt, for the benefit of their executive employees and for employees generally,
whether such plans are qualified or non-qualified, subject to the eligibility
rules of such plans.

     (b)  The Officer shall also be entitled to participate in any other fringe
benefits which are now or may be or become applicable to the Officer or the
Bank's other executive employees, including the payment of reasonable expenses
for attending annual and periodic meetings of trade associations, and any other
benefits which are commensurate with the duties and responsibilities to be
performed by the Officer under this Agreement.  Additionally, the Officer shall
be entitled to such vacation and sick leave as shall be established under
uniform employee policies promulgated by the Board.  The Bank shall reimburse
the Officer for all out-of-pocket reasonable and necessary business expenses
which the Officer may incur in connection with his services on behalf of the
Bank.

     (c)  The Bank agrees to provide the Officer with one automobile of an
appropriate class and quality owned or leased by the Bank for use in connection
with the Officer's duties hereunder.

     (d)  The Bank agrees to provide at the Bank's expense a membership in the
Country Club of Salisbury for the use of the Officer and his family.

     5.   Term.  The initial term of employment under this Agreement shall be
          ----
for a period of three years commencing as of the date of this Agreement (the
"Effective Date") subject to earlier termination as provided herein.  Beginning
on the first anniversary of the Effective Date, and continuing at each
anniversary date thereafter, subject to the Board's review of the Officer's
performance, the term of this Agreement shall be extended for an additional year
such that the remaining term shall be three years, unless the Board has given
sixty (60) days prior written notice to the Officer that the term of this
Agreement shall not be extended further.  Prior to the sixty (60)

                                       4
<PAGE>

day notice period the Board shall conduct a comprehensive performance evaluation
and review of the officer for the purpose of determining whether to extend the
Agreement. The results of the Board's consideration shall be included in the
minutes of the Board's meeting. Reference herein to the term of this Agreement
shall refer to both such initial term and any such extended terms.

     6.   Loyalty.
          -------

     (a)  The Officer shall devote his full efforts and entire business time to
the performance of his duties and responsibilities under this Agreement.

     (b)  The Officer agrees that he will hold in confidence all knowledge or
information of a confidential nature with respect to the respective businesses
of the Holding Company, the Bank or of their subsidiaries, if any, received by
him during the term of this Agreement and will not disclose or make use of such
information without the prior written consent of the Holding Company or the
Bank.

     7.   Standards.  The Officer shall perform his duties and responsibilities
          ---------
under this Agreement in accordance with such reasonable standards expected of
employees with comparable positions in comparable organizations and as may be
established from time to time by the Board. The Bank will provide the Officer
with the working facilities and staff customary for similar executives and
necessary for him to perform his duties.

     8.   Termination and Termination Pay.
          -------------------------------

     The Officer's employment hereunder may be terminated under the following
circumstances:

     (a)  Death.  The Officer's employment under this Agreement shall terminate
          -----
upon his death during the term of this Agreement, in which event the Officer's
estate shall be entitled to

                                       5
<PAGE>

receive the compensation due the Officer through the last day of the calendar
month in which his death occurred and for a period of one month thereafter.

     (b)  Disability.  In the event the Officer is unable to perform his duties
          ----------
under this Agreement on a full-time basis for a period of six (6) consecutive
months by reason of illness or other physical or mental disability, the Bank may
terminate this Agreement, provided that the Bank shall continue to be obligated
to pay the Officer his then-current salary for the remaining term of the
Agreement, or one year, whichever is the longer period of time, and provided
further that any amounts actually paid to the Officer pursuant to any disability
insurance or other similar such program which the Bank has provided or may
provide on behalf of its employees or pursuant to any workman's or social
security disability program shall reduce the compensation to be paid to the
Officer pursuant to this Section 8(b).

     (c)  For Just Cause.  The Board may, by written notice to the Officer,
          --------------
immediately terminate his employment at any time, for Just Cause.  The Officer
shall have no right to receive compensation or other benefits for any period
after termination for Just Cause.  Termination for "Just Cause" shall mean
termination because of, in the good faith determination of the Board, the
Officer's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule, regulation (other than traffic
violations or similar offenses) or final cease-and-desist order, or material
breach of any provisions of this Agreement.  Notwithstanding the foregoing, the
Officer shall not be deemed to have been terminated for Just Cause unless there
shall have been delivered to the Officer a copy of the resolution duly adopted
by the affirmative vote of not less than three-fourths of the entire membership
of the Board (excluding the Officer if a member of the Board) at a meeting of
the Board

                                       6
<PAGE>

called and held for that purpose (after reasonable notice to the Officer and an
opportunity for the Officer (together with counsel) to be heard before the
Board), finding that in the good faith opinion of the Board the Officer was
guilty of conduct justifying termination for Just Cause and specifying the
particulars thereof in detail.

     (d)  Without Just Cause.  The Board may, by written notice to the Officer,
          ------------------
immediately terminate his employment at any time for any reason; provided that,
if such termination is for any reason other than pursuant to Sections 8(a), (b)
or (c) above, the Officer shall be entitled to receive the following
compensation and benefits: (i) the salary provided pursuant to Section 2 hereof,
up to the date of expiration of the term (including any renewal term then in
effect) of this Agreement (the "Termination Date") and (ii) the cost to the
Officer of obtaining all health, life, disability and other benefits (excluding
any bonus, stock option or other compensation benefits) in which the Officer
would have been eligible to participate through the Termination Date based upon
the benefit levels substantially equal to those that the Bank provided for the
Officer at the date of termination of employment.  Said sum shall be paid, at
the option of the Officer, either (I) in periodic payments over the remaining
term of this Agreement, as if the Officer's employment had not terminated, or
(II) in one lump sum within ten (10) days of such termination.

     (e)  For Good Reason.  The Officer may terminate his employment for Good
          ---------------
Reason upon not less than thirty (30) days advance written notice to the Bank
(the "Termination Notice") and the Officer shall be entitled to receive the same
compensation and benefits for the same period and on the same terms and
conditions as provided in (d) above.  "Good Reason" shall mean termination by
the Officer based on:

                                       7
<PAGE>

          (i)    Without the Officer's express written consent, failing to elect
          or re-elect or appoint or re-appoint the Officer to the offices of
          President and Chief Executive Officer of the Bank or a material
          adverse change made by the Bank or the Holding Company in the
          Officer's functions, duties or responsibilities as President and Chief
          Executive Officer of the Bank; or

          (ii)   Without the Officer's express written consent, reducing the
          Officer's base salary as the same may be increased from time to time;
          or

          (iii)  Without the Officer's express written consent, reducing in
          level, scope or coverage or eliminating Officer's life insurance,
          medical or hospitalization insurance, disability insurance, profit
          sharing plans, stock option plans, stock purchase plans, deferred
          compensation plans, management retention plans, retirement plans or
          similar plans or benefits being provided by the Bank or the Holding
          Company to the Officer in effect on the date of the Termination
          Notice; or

          (iv)   Without the Officer's express written consent, transferring the
          Officer to a location which   is greater than thirty-five (35) miles
          from his principal work location at the Effective Date; or

          (v)    The liquidation or dissolution of the Bank or Company other
          than liquidations or dissolutions that are caused by reorganizations
          that do not affect the status of the Officer; or

          (vi)   Any breach of this Agreement by the Bank or the Holding
          Company.

     (f)  In the event any dispute shall arise between the Officer and the Bank
as to the terms or interpretation of this Agreement, including this Section 8,
whether instituted by formal legal proceedings or otherwise, including any
action taken by the Bank, the Bank shall reimburse the Officer for all costs and
expenses incurred in such proceedings or actions, including attorney's fees, in
the event the Officer prevails in any such action.

     9.   Additional Regulatory Requirements.
          ----------------------------------

                                       8
<PAGE>

     (a)  If the Officer is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or Section 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. 1818(e)(3) and (g)(1)), the Bank's obligations under this Agreement shall
be suspended as of the date of service, unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the Bank may, in its
discretion, (i) pay the Officer 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.

     (b)  If the Officer is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) of Section 8(g)(1) of the Federal Deposit Insurance Act (12
U.S.C. 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
contracting parties shall not be affected.

     (c)  If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act (12 U.S.C. (S) 1818(x)(1)), all obligations under this
Agreement shall terminate as of the date of default, but this paragraph shall
not affect any vested rights of the contracting parties.

     (d)  All obligations under this Agreement shall be terminated, except to
the extent determined that continuation of the Agreement is necessary for the
continued operation of the Bank, (i) by the Director of the Office of Thrift
Supervision ("Director") or the Director's designee, at the time the Federal
Deposit Insurance Corporation (the "Corporation") enters into an agreement to
provide assistance to or on behalf of the Bank under the authority contained in
Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. (S) 1818(c)); or
(ii) by the Director, or the Director's designee, at the time the Director or
such designee approves a supervisory merger to resolve

                                       9
<PAGE>

problems related to operation of the Bank or when the Bank is determined by the
Director to be in an unsafe or unsound condition. Any rights of the parties that
have already vested, however, shall not be affected by such action.

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

     (f)  If any of the provisions of this Agreement conflict with the
requirements of 12 C.F.R. (S) 563.39, the latter shall control.

     10.  No Mitigation.  The Officer 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 Officer in any subsequent
employment.

     11.  Successors and Assigns.
          ----------------------

     (a)  This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank which shall acquire, directly or
indirectly, by conversion, merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Holding Company or the Bank, and the Bank
shall require any successor or assignee, whether direct or indirect, by
purchase, merger, consolidation or otherwise, to all or substantially all the
business or assets of the Bank or the Holding Company, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such succession or assignment had taken place.

                                       10
<PAGE>

     (b)  Since the Bank is contracting for the unique and personal skills of
the Officer, the Officer shall be precluded from assigning or delegating his
rights or duties hereunder without first obtaining the written consent of the
Bank.

     12.  Indemnification.
          ---------------

     (a)  The Bank and the Holding Company shall provide the Officer (including
his heirs, executors and administrators) with coverage under a standard
directors' and officers' liability insurance policy at its expense and shall
indemnify the Officer (and his heirs, executors and administrators) as permitted
under federal law against all expenses and liabilities reasonably incurred by
him in connection with or arising out of any action, suit or proceeding in which
he may be involved by reason of his having been a director or officer of the
Bank (whether or not he continues to be a director or officer at the time of
incurring such expenses or liabilities), such expenses and liabilities to
include, but not be limited to, judgments, court costs and attorneys' fees and
the cost of reasonable settlements.

     (b)  Any payments made to the Officer pursuant to this Section are subject
to and conditioned upon compliance with 12 U.S.C. Section 1828(k), 12 C.F.R.
Part 359 and 12 C.F.R. Section 545.121 and any rules or regulations promulgated
thereunder.

     13.  Modification; Waiver; Amendments.  No provision of this Agreement may
          --------------------------------
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing, signed by the Officer and on behalf of the Bank by such
officer as may be specifically designated by the Board.  No waiver by either
party hereto, at any time, of any breach by the other party hereto of, or
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any

                                       11
<PAGE>

prior or subsequent time. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided.

     14.  Applicable Law.  This Agreement shall be governed in all respects
          --------------
whether as to validity, construction, capacity, performance or otherwise, by the
laws of North Carolina, except to the extent that federal law shall be deemed to
apply.

     15.  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.

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

                                   CITIZENS BANK, FSB

                                   By:__________________________________

                                        Authorized Member of the Board

[Corporate Seal]


                                   S/S
                                   -------------------------------------
(SEAL)
                                        Ronald E. Bostian

                                       12