<PAGE>
 
                            SCOTLAND BANCORP, INC.
                               STOCK OPTION PLAN


     THIS IS THE STOCK OPTION PLAN ("Plan") of  Scotland Bancorp, Inc. (the
"Corporation"), a North Carolina corporation, with its principal office in
Laurinburg, Scotland County, North Carolina, adopted by the Board of Directors
of the Corporation and effective upon the approval of the Plan by the
shareholders of the Corporation, under which options may be granted from time to
time to eligible directors and employees of the Corporation, Scotland Savings
Bank, Inc., SSB (the "Bank") and of any corporation or other entity of which
either the Corporation or the Bank owns, directly or indirectly, not less than
50% of any class of equity securities (a "Subsidiary"), to purchase shares of
common stock of the Corporation ("Common Stock"), subject to the provisions set
forth below:

     1.    PURPOSE OF THE PLAN.  The purpose of the Plan is to aid the
           -------------------                                        
Corporation, the Bank and any Subsidiary in attracting and retaining capable
directors and employees and to provide a long range incentive for directors and
employees to remain in the management of the Corporation, the Bank or any
Subsidiary, to perform at increasing levels of effectiveness and to acquire a
permanent stake in the Corporation with the interest and outlook of an owner.
These objectives will be promoted through the granting of options to acquire
shares of Common Stock pursuant to the terms of this Plan.

     2.    ADMINISTRATION.  The Plan shall be administered by a committee (the
           --------------                                                     
"Committee"), which shall consist of not less than two members of the Board of
Directors of the Corporation (the "Board") who are  "Non-Employee Directors" as
defined in Rule 16b-3(b)(3) of the Rules and Regulations under the Securities
Act of 1934 (the "Exchange Act").  Members of the Committee shall serve at the
pleasure of the Board.  In the absence at any time of a duly appointed
Committee, this Plan shall be administered by the Board.  The Committee may
designate any officers or employees of the Corporation, the Bank or any
Subsidiary to assist in the administration of the Plan and to execute documents
on behalf of the Committee and perform such other ministerial duties as may be
delegated to them by the Committee.

     Subject to the provisions of the Plan, the determinations or the
interpretation and construction of any provision of the Plan by the Committee
shall be final and conclusive upon all persons affected thereby.  By way of
illustration and not of limitation, the Committee shall have the discretion (a)
to construe and interpret the Plan and all options granted hereunder and to
determine the terms and provisions (and amendments thereof) of the options
granted under the Plan (which need not be identical); (b) to define the terms
used in the Plan and in the options granted hereunder; (c) to prescribe, amend
and rescind the rules and regulations relating to the Plan; (d) to determine the
individuals to whom and the time or times at which such options shall be
granted, the number of shares to be subject to each option, the option price,
and the determination of leaves of absence which may be granted to participants
without constituting a termination of their employment for the purposes of the
Plan; and (e) to make all other determinations necessary or advisable for the
administration of the Plan.

     It shall be in the discretion of the Committee to grant options which
qualify as "incentive stock options," as that term is defined in Section 422 of
the Internal Revenue Code of 1986, as amended (the 
<PAGE>
 
"Code") ("Incentive Stock Options") or which do not qualify as Incentive Stock
Options ("Nonqualified Stock Options") (herein referred to collectively as
"Options;" however, whenever reference is specifically made only to "Incentive
Stock Options" or "Nonqualified Stock Options," such reference shall be deemed
to be made to the exclusion of the other). Any options granted which fail to
satisfy the requirements for Incentive Stock Options shall become Nonqualified
Stock Options.

     3.    STOCK AVAILABLE FOR OPTIONS.  In the discretion of the Committee, the
           ---------------------------                                          
stock to be subject to Options under the Plan shall be authorized but unissued
shares of Common Stock which are issued directly to optionees upon exercise of
options and/or shares of Common Stock which are acquired by the Plan or the
Corporation in the open market.  The total number of shares of Common Stock for
which Options may be granted under the Plan is 184,000 shares, which is 10% of
the total number of shares of Common Stock issued by the Corporation in
connection with the conversion of the Bank from a North Carolina mutual savings
bank to a North Carolina stock savings bank on March 29, 1996 (the
"Conversion").  Such number of shares is subject to any capital adjustments as
provided in Section 16.  In the event that an Option granted under the Plan is
forfeited, released, expires or is terminated unexercised as to any shares
covered thereby, such shares thereafter shall be available for the granting of
Options under the Plan; however, if the forfeiture, expiration, release or
termination date of an Option is beyond the term of existence of the Plan as
described in Section 21, then any shares covered by forfeited, unexercised,
released or terminated options shall not reactivate the existence of the Plan
and therefore may not be available for additional grants under the Plan.  The
Corporation, during the term of the Plan, will reserve and keep available a
number of shares of Common Stock sufficient to satisfy the requirements of the
Plan.  In the discretion of the Committee, the shares of Common Stock necessary
to be delivered to satisfy exercised options may be from authorized and unissued
shares of Common Stock or may be purchased in the open market.

     4.    ELIGIBILITY.  Options shall be granted only to individuals who meet
           -----------                                                        
all of the following eligibility requirements:

     (a)  Such individual must be an employee or a member of the Board of
Directors of the Corporation, the Bank or a Subsidiary.  For this purpose, an
individual shall be considered to be an "employee" only if there exists between
the Corporation, the Bank or a Subsidiary and the individual the legal and bona
fide relationship of employer and employee. In determining whether such
relationship exists, the regulations of the United States Treasury Department
relating to the determination of such relationship for the purpose of collection
of income tax at the source on wages shall be applied.

     (b)  Such individual must have such knowledge and experience in financial
and business matters that he or she is capable of evaluating the merits and
risks of the investment involved in the exercise of the Options.

     (c)  Such individual, being otherwise eligible under this Section 4, shall
have been selected by the Committee as a person to whom an Option shall be
granted under the Plan.

     In determining the directors and employees to whom Options shall be granted
and the number of shares to be covered by each Option, the Committee shall take
into account the nature of the services rendered by respective directors and
employees, their present and potential contributions to 


                                       2
<PAGE>
 
the success of the Corporation, the Bank and any Subsidiary and such other
factors as the Committee shall deem relevant. A director or employee who has
been granted an Option under the Plan may be granted an additional Option or
Options under the Plan if the Committee shall so determine.

     If, pursuant to the terms of the Plan, it is necessary that the percentage
of stock ownership of any individual be determined, stock ownership in the
Corporation or of a related corporation which is owned (directly or indirectly)
by or for such individual's brothers and sisters (whether by the whole or half
blood), spouse, ancestors, and lineal descendants or by or for any corporation,
partnership, estate or trust of which such employee is a shareholder, partner or
beneficiary shall be considered as owned by such director or employee.

     5.    OPTION GRANTS.  Subject to the provisions of this Plan, Options shall
           -------------                                                        
be awarded to the directors and employees in such amounts as are determined by
the Committee.  The proper officers on behalf of the Corporation and each
Optionee shall execute a Stock Option Grant and Agreement (the "Option
Agreement") which shall set forth the total number of shares of Common Stock to
which it pertains, the exercise price, whether it is a Nonqualified Stock Option
or an Incentive Stock Option, and such other terms, conditions, restrictions and
privileges as the Committee in each instance shall deem appropriate, provided
they are not inconsistent with the terms, conditions and provisions of this
Plan.  Each Optionee shall receive a copy of his executed Option Agreement.  Any
Option granted with the intention that it will be an Incentive Stock Option but
which fails to satisfy a requirement for Incentive Stock Options shall continue
to be valid and shall be treated as a Nonqualified Stock Option.

     6.    OPTION PRICE.
           ------------ 

     (a)  The option price of each Option granted under the Plan shall be not
less than 100% of the market value of the stock on the date of grant of the
Option.  In the case of incentive stock options granted to a shareholder who
owns stock possessing more than 10% of the total combined voting power of all
classes of stock of the Corporation, the Bank or a Subsidiary (a "ten percent
shareholder"), the option price of each Option granted under the Plan shall not
be less than 110% of the market value of the stock on the date of grant of the
Option.  If the Common Stock is listed on a national securities exchange
(including for this purpose the Nasdaq Stock Market, Inc. National Market) on
the date in question, then the market value per share shall be not less than the
average of the highest and lowest selling price on such exchange on such date,
or if there were no sales on such date, then the market price per share shall be
equal to the average between the bid and asked price on such date. If the Common
Stock is traded otherwise than on a national securities exchange (including for
this purpose the Nasdaq Stock Market, Inc. National Market) on the date in
question, then the market price per share shall be equal to the average between
the bid and asked price on such date, or, if there is no bid and asked price on
such date, then on the next prior business day on which there was a bid and
asked price. If no such bid and asked price is available, then the market value
per share shall be its fair market value as determined by the Committee, in its
sole and absolute discretion. The Committee shall maintain a written record of
its method of determining such value.


                                       3
<PAGE>
 
     (b)  The option price shall be payable to the Corporation either (i) in
     cash or by check, bank draft or money order payable to the order of the
     Corporation, or (ii) at the discretion of the Committee, through the
     delivery of shares of the common stock of the Corporation owned by the
     optionee with a market value (determined in a manner consistent with (i)
     above) equal to the option price, or (iii) at the discretion of the
     Committee by a combination of (i) and (ii) above. No shares shall be
     delivered until full payment has been made.

     7.    EXPIRATION OF OPTIONS.  The Committee shall determine the expiration
           ---------------------                                               
date or dates of each Option, but such expiration date shall be not later than
10 years after the date such Option is granted.  In the event an Incentive Stock
Option is granted to a ten percent shareholder, the expiration date or dates of
each Option shall be not later than 5 years after the date such Option is
granted.  The Committee, in its discretion, may extend the expiration date or
dates of an Option after such date was originally set; however, such expiration
date may not exceed the maximum expiration date described in this Section 7.

     8.    TERMS AND CONDITIONS OF OPTIONS.
           ------------------------------- 

         (a) All Options must be granted within 10 years of the Effective Date
     of this Plan as defined in Section 20.

         (b) The Committee may grant Options which are intended to be Incentive
     Stock Options and Nonqualified Stock Options, either separately or jointly,
     to an eligible employee.

         (c) The grant of Options shall be evidenced by a written instrument (an
     Option Agreement) containing terms and conditions established by the
     Committee consistent with the provisions of this Plan.

         (d) Not less than 100 shares may be purchased at any one time unless
     the number purchased is the total number at that time purchasable under the
     Plan.

         (e) The recipient of an Option shall have no rights as a shareholder
     with respect to any shares covered by his Option until payment in full by
     him for the shares being purchased. No adjustment shall be made for
     dividends (ordinary or extraordinary, whether in cash, securities or other
     property) or distributions or other rights for which the record date is
     prior to the date such stock is fully paid for, except as provided in
     Section 16.

                                       4
<PAGE>
 
     (f)  The aggregate fair market value of the stock (determined as of the
time the Option is granted) with respect to which Incentive Stock Options are
exercisable for the first time by any participant during any calendar year
(under all benefit plans of the Corporation, the Bank or any Subsidiary, if
applicable) shall not exceed $100,000; provided, however, that such $100,000
limit of this subsection (f) shall not apply to the grant of Nonqualified Stock
Options.  The Committee may grant Options which are exercisable in excess of the
foregoing limitations, in which case Options granted which are exercisable in
excess of such limitation shall be Nonqualified Stock Options.

     (g)  All stock obtained pursuant to an option which qualifies as an
Incentive Stock Option shall be held in escrow for a period which ends on the
later of (i) two (2) years from the date of the granting of the Option or (ii)
one (1) year after the transfer of the stock pursuant to the exercise of the
Option.  The stock shall be held by the Corporation or its designee.  The
employee who has exercised the Option shall during such holding period have all
rights of a shareholder, including but not limited to the rights to vote,
receive dividends and sell the stock.  The sole purpose of the escrow is to
inform the Corporation of a disqualifying disposition of the stock within the
meaning of Section 422 of the Code, as amended, and it shall be administered
solely for that purpose.

9.      EXERCISE OF OPTIONS.
        ------------------- 

     (a) Options granted to an optionee by virtue of his position as a
nonemployee director of the Corporation or the Bank (as stated in the Option
Agreement) or to an employee by virtue of his position as an employee (as stated
in the Option Agreement) shall become vested and exercisable at the times, at
the rate and subject to such limitations as may be set forth in the Option
Agreement executed in connection therewith; provided, however, that all
outstanding and nonforfeited options shall be exercisable, if not sooner, on the
day prior to the expiration date thereof.

     (b) Unless the Committee shall specifically state otherwise at the time an
Option is granted, all Options granted hereunder shall become vested and
exercisable upon the optionee's death, retirement or disability within the
meaning of Section 22(e)(3) of the Code, and in the event of a change in control
as set forth in Section 13 of this Plan.

     (c) The exercise of any Option must be evidenced by written notice to the
Corporation that the optionee intends to exercise his Option.  In no event shall
an Option be deemed granted by the Corporation or exercisable by a recipient
prior to the mutual execution by the Corporation and the recipient of an Option
Agreement which comports with the requirements of Section 5 and Section 8(c).

     (d) Any right to exercise Options in annual installments shall be
cumulative and any vested installments may be exercised, in whole or in part, at
the election of the optionee.


                                       5
<PAGE>
 
     (e) The inability of the Corporation or Bank to obtain approval from any
regulatory body or authority deemed by counsel to be necessary to the lawful
issuance and sale of any shares of Common Stock hereunder shall relieve the
Corporation and the Bank of any liability in respect of the non-issuance or sale
of such shares.  As a condition to the exercise of an option, the Corporation
may require the person exercising the Option to make such representations and
warranties as may be necessary to assure the availability of an exemption from
the registration requirements of federal or state securities laws.

     (f) The Committee shall have the discretionary authority to impose in the
Option Agreements such restrictions on shares of Common Stock as it may deem
appropriate or desirable, including but not limited to the authority to impose a
right of first refusal or to establish repurchase rights or both of these
restrictions.

     (g) Notwithstanding anything to the contrary herein, an optionee receiving
the grant of an Option by virtue of his or her position as a director or as an
employee of the Corporation, the Bank or a Subsidiary (as stated in the Option
Agreement), shall be required to exercise his or her Options within the periods
set forth in Sections 10, 11 and 12 below.

     10.    TERMINATION OF EMPLOYMENT - EXCEPT BY DISABILITY, RETIREMENT OR
            ---------------------------------------------------------------
DEATH.  If any optionee receiving the grant of an Option by virtue of his
-----                                                                    
position as a director (as stated in the Option Agreement) ceases to be a
director of the Corporation, the Bank or any Subsidiary for any reason other
than death, retirement (as defined in Section 11) or disability (as defined in
Section 11) or if any optionee receiving the grant of an Option by virtue of his
position as an employee (as stated in the Option Agreement) ceases to be an
employee of the Corporation, the Bank or any Subsidiary for any reason other
than death, retirement (as defined in Section 11) or disability (as defined in
Section 11), he may, (i) at any time within three (3) months after his date of
termination, but not later than the date of expiration of the Option, exercise
any Option designated in the Option Agreement as an Incentive Stock Option and
(ii) at any time prior to the date of expiration of the Option, exercise any
option designated in the Option Agreement as a Nonqualified Stock Option.
However, in either such event the optionee may exercise any Option only to the
extent it was vested and he or she was entitled to exercise the Option on the
date of termination.  Any Options or portions of Options of terminated optionees
not so exercised shall terminate and be forfeited.

     11.    TERMINATION OF EMPLOYMENT - DISABILITY OR RETIREMENT.  If any
            ----------------------------------------------------         
optionee receiving the grant of an Option by virtue of his position as a
director (as stated in the Option Agreement) ceases to be a director of the
Corporation, the Bank or any Subsidiary due to his becoming disabled within the
meaning of Section 22(e)(3) of the Code, or if any employee receiving the grant
of an Option by virtue of his position as an employee (as stated in the Option
Agreement) ceases to be employed by the Corporation, the Bank or any Subsidiary
due to his becoming disabled within the meaning of Section 22(e)(3) of the Code,
all unvested and forfeitable Options of such optionee shall immediately become
vested and nonforfeitable and he may, (i) at any time within 12 months after his
date of termination, but not later than the date of expiration of the Option,
exercise any option designated in the Option Agreement as an Incentive Stock
Option with respect to all shares subject thereto and (ii) at any time prior to
the date of expiration of the Option, exercise any Option designated in the
Option Agreement as a Nonqualified Stock Option with 

                                       6
<PAGE>
 
respect to all shares subject thereto. Any portions of Options of optionees who
are terminated because they become disabled which are not so exercised shall
terminate.

     If any optionee receiving the grant of an Option by virtue of his position
as a director (as stated in the Option Agreement) ceases to be a director of the
Corporation, the Bank or any Subsidiary due to his retirement, or if any
employee receiving the grant of an Option by virtue of his position as an
employee (as stated in the Option Agreement) ceases to be employed by the
Corporation, the Bank or any Subsidiary due to his retirement, all unvested and
forfeitable Options of such optionee shall immediately become vested and
nonforfeitable and he may at any time prior to the date of expiration of the
Option, exercise such Option, provided, however, that if the Option is exercised
more than three (3) months after such retirement, the Option may be treated as a
Nonqualified Stock Option.  Any portions of Options of retired directors or
employees not so exercised shall terminate.  For purposes of this Plan, the term
"retirement," as it relates to any optionee receiving a grant of an Option as a
result of his or her position as an employee of the Corporation, the Bank or any
Subsidiary, shall mean (i) the termination of the optionee's employment under
conditions which would constitute retirement under any tax qualified retirement
plan maintained by the Corporation, the Bank or a Subsidiary, or (ii)
termination of employment after attaining age 65.  The term "retirement," as it
relates to any optionee receiving a grant of an Option as a result of his or her
position as a director, shall mean the cessation of membership on such board of
directors (i) with the approval of such board of directors, at any time after
such optionee reaches age 65, or (ii) at the election of the optionee at any
time after not less than 25 years of service as a member of the such board of
directors, as applicable.

     12.    TERMINATION OF EMPLOYMENT - DEATH.  If an optionee receiving the
            ---------------------------------                               
grant of an option by virtue of his position as a director (as stated in the
Option Agreement) dies while a director of the Corporation, the Bank or any
Subsidiary or if any employee receiving the grant of an option by virtue of his
position as an employee (as stated in the Option Agreement) dies while in the
employment of the Corporation, the Bank or a Subsidiary, all unvested and
forfeitable Options of such optionee shall immediately become vested and
nonforfeitable and the person or persons to whom the Option is transferred by
will or by the laws of descent and distribution may exercise the Option at any
time until the term of the Option has expired, with respect to all shares
subject thereto, to the same extent and upon the same terms and conditions the
optionee would have been entitled to do so had he lived.  Any Options or
portions of options of deceased directors or employees not so exercised shall
terminate.

     13.    CHANGE IN CONTROL.  In the event that an optionee ceases to be an
            -----------------                                                
employee or a director of the Corporation, the Bank or a Subsidiary (which
position resulted in his or her receipt of an option pursuant to this Plan) for
any reason after the occurrence of a "change in control" and prior to the time
that all shares allocated to him or her would be 100% vested, nonforfeitable and
exercisable in accordance with Sections 9 and 10 above, then, notwithstanding
Sections 9 and 10 above, all Options granted to such optionee shall immediately
become fully vested and nonforfeitable. For purposes of this Plan, a "change in
control" shall mean (i) a change in control of a nature that would be required
to be reported by the Corporation in response to Item 1 of the Current Report on
Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of
the Exchange Act; (ii) such time as any "person" (as such term is used in
Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Corporation or Bank representing 25% or more of
the

                                       7
<PAGE>
 
combined voting power of the outstanding Common Stock of the Corporation or
outstanding common stock of the Bank, as applicable; or (iii) individuals who
constitute the Board or the board of directors of the Bank on the date hereof
(the "Incumbent Board" and "Incumbent Bank Board," respectively) cease for any
reason to constitute at least a majority thereof, provided that any person
becoming a director subsequent to the date hereof whose election was approved by
a vote of at least three-quarters of the directors comprising the Incumbent
Board or Incumbent Bank Board, as applicable, or whose nomination for election
by the Corporation's or Bank's shareholders was approved by the Corporation's or
Bank's Board of Directors or Nominating Committee, shall be considered as though
he or she were a member of the Incumbent Board or Incumbent Bank Board, as
applicable; or (iv) either the Corporation or the Bank consolidates or merges
with or into another corporation, association or entity or is otherwise
reorganized, where neither the Corporation nor the Bank, respectively, is the
surviving corporation in such transaction; or (v) all or substantially all of
the assets of either the Corporation or the Bank are sold or otherwise
transferred to or are acquired by any other entity or group.

     As set forth in Section 10, in the event of such a termination after a
change in control, the Optionee must exercise any Incentive Stock Options within
three (3) months after his date of termination, but in no event later than the
date of expiration of the Option and may exercise any Nonqualified Stock Options
at any time prior to the date of expiration of the Option.

     14.    OPTIONAL CASH PAYMENT.   Upon the exercise of an Option, at the
            ---------------------                                          
written request of the optionee, the Committee, in its sole and absolute
discretion, may make a cash payment to the optionee, in whole or in part, in
lieu of the delivery of shares of Common Stock.  Such cash payment to be paid in
lieu of delivery of Common Stock shall be equal to the difference between the
market value per share (determined as set forth in Section 6 above) of Common
Stock on the date of the Option exercise and the exercise price per share of the
Option.  Such cash payment shall be in exchange for the cancellation of such
Option.  Notwithstanding the above, such cash payment shall not be made in the
event that such transaction would result in liability to the optionee and the
Company under Section 16(b) of the Exchange Act, and the regulations promulgated
thereunder.

     15.    RESTRICTIONS ON TRANSFER.  An Option granted under this Plan may not
            ------------------------                                            
be transferred except by will or the laws of descent and distribution and,
during the lifetime of the optionee to whom it was granted, may be exercised
only by such optionee.

     16.    CAPITAL ADJUSTMENTS AFFECTING COMMON STOCK.
            ------------------------------------------ 

     (a)  If the outstanding shares of Common Stock of the Corporation are
increased, decreased, changed into or exchanged for a different number or kind
of shares or other securities of the Corporation or another entity as a result
of a recapitalization, reclassification, stock dividend, stock split, amendment
to the Corporation's Certificate of Incorporation, reverse stock split, merger
or consolidation, an appropriate adjustment shall be made in the number and/or
kind of securities allocated to the Options previously and subsequently granted
under the Plan, without change in the aggregate purchase price applicable to the
unexercised portion of the outstanding Options but with a corresponding
adjustment in the price for each share or other unit of any security covered by
the Options.


                                       8
<PAGE>
 
     (b) In the event that the Corporation shall declare and pay any dividend
with respect to the Common Stock (other than a dividend payable in shares of the
Corporation's Common Stock or a regular quarterly cash dividend), including a
dividend which results in a nontaxable return of capital to the holders of
shares of Common Stock for federal income tax purposes, or otherwise than by
dividend makes distribution of property to the holders of its shares of Common
Stock, the Committee, in its discretion applied uniformly to all outstanding
Options, may adjust the exercise price per share of outstanding Options in such
a manner as the Committee may determine to be necessary to reflect the effect of
the dividend or other distribution on the fair market value of a share of Common
Stock.

     (c) To the extent that the foregoing adjustments described in Sections
16(a) and (b) above relate to particular Options or to particular stock or
securities of the Corporation subject to Option under this Plan, such
adjustments shall be made by the Committee, whose determination in that respect
shall be final and conclusive.

     (d) The grant of an Option pursuant to this Plan shall not affect in any
way the right or power of the Corporation to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.

     (e) No fractional shares of stock shall be issued under the Plan for any
such adjustment.

     (f) Any adjustment made pursuant to this Section 16, shall be made, to the
extent practicable, in such manner as not to constitute a modification of any
outstanding Incentive Stock Options within the meaning of Section 424(h) of the
Code.

     17.    INVESTMENT PURPOSE.  At the discretion of the Committee, any Option
            ------------------                                                 
Agreement may provide that the optionee shall, by accepting the Option,
represent and agree, for himself and his transferees by will or the laws of
descent and distribution, that all shares of stock purchased upon the exercise
of the Option will be acquired for investment and not for resale or
distribution, and that upon each exercise of any portion of an Option, the
person entitled to exercise the same shall furnish evidence of such facts which
is satisfactory to the Corporation.  Certificates for shares of stock acquired
under the Plan may be issued bearing such restrictive legends as the Corporation
and its counsel may deem necessary to ensure that the optionee is not an
"underwriter" within the meaning of the regulations of the Securities Exchange
Commission.

     18.    APPLICATION OF FUNDS.  The proceeds received by the Corporation from
            --------------------                                                
the sale of Common Stock pursuant to Options will be used for general corporate
purposes.


     19.    NO OBLIGATION TO EXERCISE.  The granting of an Option shall impose
            -------------------------                                         
no obligation upon the optionee to exercise such Option.

     20.    EFFECTIVE DATE OF PLAN.  The Plan will become effective upon the
            ----------------------                                          
approval of the Plan by the shareholders of the Corporation and receipt of any
necessary regulatory approvals.

                                       9
<PAGE>
 
     21.    TERM OF PLAN.  Options and may be granted pursuant to this Plan from
            ------------                                                        
time to time within ten (10) years from the effective date of the Plan.

     22.    TIME OF GRANTING OF OPTIONS.  Nothing contained in the Plan or in
            ---------------------------                                      
any resolution adopted or to be adopted by the Committee or the shareholders of
the Corporation and no action taken by the Committee shall constitute the
granting of any Option hereunder.  The granting of an Option pursuant to the
Plan shall take place only when an Option Agreement shall have been duly
executed and delivered by and on behalf of the Corporation at the direction of
the Committee.

     23.    WITHHOLDING TAXES.  Whenever the Corporation proposes or is required
            -----------------                                                   
to cause to be issued or transferred shares of stock, cash or other assets
pursuant to this Plan, the Corporation shall have the right to require the
optionee to remit to the Corporation an amount sufficient to satisfy any
federal, state and/or local withholding tax requirements prior to the issuance
of any certificate or certificates for such shares or delivery of  such cash or
other assets. Alternatively, the Corporation may issue or transfer such shares
of stock or make other distributions of cash or other assets net of the number
of shares or other amounts sufficient to satisfy the withholding tax
requirements.  For withholding tax purposes, the shares of stock, cash and other
assets to be distributed shall be valued on the date the withholding obligation
is incurred.

     24.    TERMINATION AND AMENDMENT.  The Board may at any time alter,
            -------------------------                                   
suspend, terminate or discontinue the Plan, subject to any applicable regulatory
requirements and any required stockholder approval or any stockholder approval
which the Board may deem advisable for any reason, such as for the purpose of
obtaining or retaining any statutory or regulatory benefits under tax,
securities or other laws or satisfying applicable stock exchange or quotation
system listing requirements.  The Board may not, without the consent of the
holder of an Option previously granted, make any alteration which would deprive
the optionee of his rights with respect thereto.

     25.    CAPTIONS AND HEADINGS; GENDER AND NUMBER.  Captions and paragraph
            ----------------------------------------                         
headings used herein are for convenience only, do not modify or affect the
meaning of any provision herein, are not a part, and shall not serve as a basis
for interpretation or construction of, this Plan.  As used herein, the masculine
gender shall include the feminine and neuter, and the singular number shall
include the plural, and vice versa, whenever such meanings are appropriate.

                                      10
<PAGE>
 
     26.    COST OF PLAN; EXCULPATION AND INDEMNIFICATION.  All costs and
            ---------------------------------------------                
expenses incurred in the operation and administration of the Plan shall be borne
by the Corporation, the Bank and the Subsidiaries.  In connection with this
Plan, no member of the Board, no member of the Board of Directors of the Bank,
and no member of the Board of Directors of any Subsidiary, and no member of the
Committee shall be personally liable for any act or omission to act, nor for any
mistake in judgment made in good faith, unless arising out of, or resulting
from, such person's own bad faith, willful misconduct or criminal acts.  To the
extent permitted by applicable law and regulation, the Corporation shall
indemnify, defend and hold harmless the members of the Board, the members of the
Board of Directors of the Bank and the members of the Board of Directors of any
Subsidiary, and members of the Committee, and each other officer or employee of
the Bank, the Corporation or of any Subsidiary to whom any power or duty
relating to the administration or interpretation of this Plan may be assigned or
delegated, from and against any and all liabilities (including any amount paid
in settlement of a claim with the approval of the Board), and any costs or
expenses (including counsel fees) incurred by such persons arising out of or as
a result of, any act or omission to act, in connection with the performance of
such person's duties, responsibilities and obligations under this Plan, other
than such liabilities, costs, and expenses as may arise out of, or result from
the bad faith, willful misconduct or criminal acts of such persons.

     27.    GOVERNING LAW.  Without regard to the principles of conflicts of
            -------------                                                   
laws, the laws of the State of North Carolina shall govern and control the
validity, interpretation, performance, and enforcement of this Plan.

     28.    INSPECTION OF PLAN.  A copy of this Plan, and any amendments
            ------------------                                          
thereto, shall be maintained by the Secretary of the Corporation and shall be
shown to any proper person making inquiry about it.

     29.    OTHER PROVISIONS.  The Option Agreements authorized under this Plan
            ----------------                                                   
shall contain such other provisions not inconsistent with the foregoing,
including, without limitation, increased restrictions upon the exercise of
options, as the Committee may deem advisable.


                                      11
<PAGE>
 
                        STOCK OPTION GRANT AND AGREEMENT

     THIS STOCK OPTION GRANT AND AGREEMENT ("Agreement"), being made according
to and subject to the terms and conditions of the STOCK OPTION PLAN  of Scotland
Bancorp, Inc. ("Plan"), a copy of which is attached hereto as Annex A and is
hereby incorporated by reference and made a part of this Agreement, is herein
executed and effective the ____ day of _______________, _____, between Scotland
Bancorp, Inc. (the "Corporation") and ____________________ ("Optionee"):

    1.            Grant. As of the above date, the Corporation hereby grants to
                  -----
                  the Optionee (applicable provisions are marked):

          [_] an Incentive Stock Option [as that term is defined in Section 422
          of the Internal Revenue Code of 1986, as amended (the "Code")] to
          purchase ________ shares of Common Stock of the Corporation at the
          price stated in this Agreement;

          [_] a Nonqualified Stock Option to purchase __________ shares of
          Common Stock of the Corporation at the price stated in this Agreement.

          The Option(s) granted under this section and as described in this
          Agreement is (are) in all respects subject to and conditioned by the
          terms, definitions, and provisions of this Agreement and of the Plan.
          Capitalized terms in this Agreement which are not otherwise defined
          but which are defined in the Plan shall have the same meaning given to
          those terms in the Plan.

          The Optionee has been granted Options under the Plan as a result of
          the Optionee's position as a [_] director [_] employee of the
          Corporation or the Bank.

    2.            Price.  The Option price is $_____________ for each share.
                  -----                                                     

    3.            Exercise of Option. The Option(s) granted under this Agreement
                  ------------------
                  shall be exercisable pursuant to the terms and conditions of
                  the Plan and as set forth below:

          (a)     Right to Exercise:  In addition to the terms and conditions
                  -----------------
          imposed on the Optionee's right to exercise his Options imposed in the
          Plan, the following terms and conditions are applicable:

          ----------------------------------------------------------------------

          ----------------------------------------------------------------------

                                       12
<PAGE>
 
          (b)     [_] (Marked if applicable) Annual Installments: Subject to the
                                             -------------------
          terms and conditions of the Plan, the Incentive Stock Options can be
          exercised in annual installments as follows:

          __________________ shares beginning on ______________, 19__
          __________________ shares beginning on ______________, 19__
          __________________ shares beginning on ______________, 19__
          __________________ shares beginning on ______________, 20__

          Subject to the terms and conditions of the Plan, the Nonqualified
          Options can be exercised in annual installments as follows:

          __________________ shares beginning on ______________, 19__
          __________________ shares beginning on ______________, 19__
          __________________ shares beginning on ______________, 19__
          __________________ shares beginning on ______________, 20__

          The right to exercise the Option(s) in annual installments shall be
          cumulative.  In addition, the option(s) shall be exercisable upon
          disability, death, retirement and a change in control as set forth in
          the Plan.

          (c)     [_] (Marked if applicable) Immediate Vesting: Subject to the
                                             -----------------
          terms and conditions of the Plan, all of the Options are vested,
          nonforfeitable and exercisable.

          (d)     Method of Exercise:  The Options granted under this Agreement
                  ------------------                                           
          shall be exercisable by a written notice to the Secretary of the
          Corporation which shall:

                  (1)   State the election to exercise the Option, the number of
                  shares in respect of which the Option is being exercised, the
                  person in whose name any stock certificate or certificates for
                  such shares of Common Stock is to be registered or to whom any
                  cash is to be paid, his or her address, and social security
                  number;

                  (2)   Contain any such representation and agreements as to
                  Optionee's investment intent with respect to shares of Common
                  Stock as may be required by the Committee;

                  (3)   Be signed by the person entitled to exercise the Option
                  and, if the Option is being exercised by any person or persons
                  other than the Optionee, be accompanied by proof, satisfactory
                  to the 

                                       13
<PAGE>
 
                  Corporation, of the right of such person or persons to
                  exercise the Option in accordance with the Plan; and

                  (4)   Be accompanied by payment of the purchase price of any
                  shares with respect to which the Option is being exercised
                  which payment shall be in form acceptable to the Committee
                  pursuant to Section 6(b) of the Plan.

          (e)     Representations and Warranties: In order to exercise an
                  ------------------------------
          Option, the person exercising the Option must make the representations
          and warranties to the Corporation as may be required by any applicable
          law or regulation, or as may otherwise be required pursuant to the
          Plan.

          (f)     Approvals. In order for an Option to be exercised, all filings
                  ---------
          and approvals required by applicable law and regulations or pursuant
          to the Plan must have been made and obtained.

    4.    Non-transferability.  This Option may not be transferred in any
          -------------------
          manner otherwise than by will or the laws of descent and distribution
          and such Option may be exercised during the life of the Optionee only
          by him or her.

    5.    Investment Purpose. This Option may not be exercised if the issuance
          ------------------
          of shares or payment of cash upon such exercise would constitute a
          violation of any applicable federal or state securities law or other
          law or valid regulation.

    6.    Expiration.  This Option shall expire on _____________, _________.
          ----------                                                        

    7.    Escrow.  All stock purchased pursuant to an Incentive Stock Option
          ------                                                            
          shall be held in escrow for a period which ends on the later of (i)
          two (2) years from the date of the granting of the option or (ii) one
          (1) year after the transfer of the stock pursuant to the exercise of
          the Option. The stock shall be held by the Corporation or its
          designee. The Optionee who has exercised the Option shall have all
          rights of a stockholder, including, but not limited to, the rights to
          vote, receive dividends and sell the stock. The sole purpose of the
          escrow is to inform the Corporation of a disqualifying disposition of
          the stock within the meaning of Section 422 of the Code, and it shall
          be administered solely for this purpose.

                                       14
<PAGE>
 
     8.   Tax Withholding. All stock, cash and other assets distributed pursuant
          ---------------
          to this Agreement shall be subject to applicable federal, state and
          local withholding for taxes. The Optionee expressly acknowledges and
          agrees to such withholding. The Optionee acknowledges and agrees to
          the tax withholding provisions which are set forth in the Plan.

     9.   Resolution of Disputes. Any dispute or disagreement which should arise
          ----------------------
          under, or as a result of, or in any way relate to, the interpretation,
          construction, or application of this Agreement or the Plan will be
          determined by the Committee designated in Section 2 of the Plan. Any
          determination made by such Committee shall be final, binding, and
          conclusive for all purposes.

     10.  Construction Controlled by Plan. The Options evidenced hereby shall be
          -------------------------------
          subject to all of the requirements, conditions and provisions of the
          Plan. This Agreement shall be construed so as to be consistent with
          the Plan; and the provisions of the Plan shall be deemed to be
          controlling in the event that any provision should appear to be
          inconsistent therewith.

     11.  Severability. Whenever possible, each provision of this Agreement
          ------------
          shall be interpreted in such a manner as to be valid and enforceable
          under applicable law, but if any provision of this Agreement is
          determined to be unenforceable, invalid or illegal, the validity of
          any other provision or part thereof shall not be affected thereby and
          this Agreement shall continue to be binding on the parties hereto as
          if such unenforceable, invalid or illegal provision or part thereof
          had not been included herein.

     12.  Modification of Agreement; Waiver. This Agreement may be modified,
          ---------------------------------
          amended, suspended or terminated, and any terms, representations or
          conditions may be waived, but only by a written instrument signed by
          each of the parties hereto and only subject to the limitations set
          forth in the Plan. No waiver hereunder shall constitute a waiver with
          respect to any subsequent occurrence or other transaction hereunder or
          of any other provision.

     13.  Captions and Headings; Gender and Number. Captions and paragraph
          ----------------------------------------
          headings used herein are for convenience only, do not modify or affect
          the meaning of any provision herein, are not a part, and shall not
          serve as a basis for interpretation or construction, of this
          Agreement. As used herein, the masculine gender shall include the
          feminine and neuter, and the singular number shall include the plural,
          and vice versa, whenever such meanings are appropriate.

                                       15
<PAGE>
 
     14.  Governing Law; Venue and Jurisdiction. Without regard to the
          -------------------------------------
          principles of conflicts of laws, the laws of the State of North
          Carolina shall govern and control the validity, interpretation,
          performance, and enforcement of this Agreement.

     15.  Binding Effect. This Agreement shall be binding upon and shall inure
          --------------
          to the benefit of the Corporation, and its successors and assigns, and
          shall be binding upon and inure to the benefit of the Optionee, and
          his or her heirs, legatees, personal representative, executor,
          administrator and permitted assigns.

     16.  Entire Agreement. This Agreement and the Plan constitute and embody
          ----------------
          the entire understanding and agreement of the parties hereto and,
          except as otherwise provided hereunder, there are no other agreements
          or understandings, written or oral, in effect between the parties
          hereto relating to the matters addressed herein.

     17.  Counterparts. This Agreement may be executed in any number of
          ------------
          counterparts, each of which when executed and delivered shall be
          deemed an original, but all of which taken together shall constitute
          one and the same instrument.

     IN WITNESS WHEREOF, the parties have set their hands and seals the day and
year first above written.

ATTEST:                                SCOTLAND BANCORP, INC.


                                       By:
----------------------------------        ------------------------------------
(Corporate Seal)                                                 President
                                          ----------------------



                                       OPTIONEE:

                                                                         (SEAL)
                                       ----------------------------------

                                       16