December
12, 2008

     

    Mr. Kim
S. Price

    President
and Chief Executive Officer
c/o Citizens South Banking Corporation
519
South New Hope Road
Gastonia, North Carolina 28054-4040

     

    Deal Mr.
Price:

     

    Citizens
South Banking Corporation (the “Company”) anticipates entering into a
Securities Purchase Agreement (the “Participation Agreement”) with the United States Department of
Treasury (“Treasury”) that provides for the Company’s
participation in the Treasury’s TARP Capital Purchase Program (the “CPP”). If the Company does not participate
or ceases at any time to participate in the CPP, this letter shall be of no
further force and effect.

     

    For the
Company to participate in the CPP and as a condition to the closing of the
investment contemplated by the Participation Agreement, the Company is required
to establish specified standards for incentive compensation to its senior
executive officers and to make changes to its compensation arrangements. To
comply with these requirements, and in consideration of the benefits that you
will receive as a result of the Company’s participation in the CPP, you agree as
follows:

     

    
      	
               
      

            	
              (1)

            	
              No Golden Parachute Payments.
      The Company is prohibiting any golden parachute payment to you
      during any “CPP
      Covered Period.”
      A “CPP Covered Period”
      is any period during which (A) you are a senior executive officer
      and (B) Treasury holds an equity or debt position acquired from the
      Company in the CPP.

            


    

     

    
      	
               
      

            	
              (2)

            	
              Recovery of Bonus and
      Incentive Compensation. Any bonus and incentive compensation paid
      to you during a CPP Covered Period is subject to recovery or “clawback”
      by the Company if the payments were based on materially inaccurate
      financial statements or any other materially inaccurate performance metric
      criteria.

            


    

     

    
      	
               
      

            	
              (3)

            	
              Compensation Program
      Amendments. Each of the Company’s compensation, bonus, incentive
      and other benefit plans, arrangements and agreements (including golden
      parachute, severance and employment agreements) either currently or
      hereinafter in effect and including all amendments thereto (collectively,
      “Benefit Plans”) with respect to you is hereby
      amended to the extent necessary to give effect to provisions (1) and
      (2).

            


    

     

    
      UST
Sequence No. 195

    

    
      
        

      

    

    
      
        
          	
                  519
      South New Hope Road

                	
                  Gastonia,
      North Carolina 28054-4040     (704) 
      868-5200

                	
                  Fax:
      (704) 868-2192

                


        

      

    

    Post
Office Box 2249   Gastonia,   North Carolina
28053-2249

    


    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

      

    

     

    Kim S.
Price

    December
12, 2008

    Page
2

     

    In
addition, the Company is required to review its Benefit Plans to ensure that
they do not encourage senior executive officers to take unnecessary and
excessive risks that threaten the value of the Company. To the extent any such
review requires revisions to any Benefit Plan with respect to you, you and the
Company agree to negotiate such changes promptly and in good faith.

     

    
      	
            	
              (4)

            	
              Definitions and
      Interpretation. This letter shall be interpreted as
      follows:

            


    

     

    
      	
               
      

            	
              •

            	
              
                “Senior
      executive officer”
      means the Company’s
      “senior
      executive officers”
      as defined in subsection 111(b)(3) of
  EESA.

              

            


    

     

    
      	
               
      

            	
              •

            	
              
                “Golden
      parachute payment”
      is used with same meaning as in Section 111(b)(2)(C) of
      EESA.

              

            


    

     

    
      	
               
      

            	
              •

            	
              
                “EESA”
      means the Emergency Economic Stabilization Act of 2008 as implemented by
      guidance or regulation issued by the Department of the Treasury and as
      published in the Federal Register on October 20,
    2008.

              

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “Company”
      includes any entities treated as a single employer with the Company under
      31 C.F.R. § 30.1(b) (as in effect on the Closing Date). You are also
      delivering a waiver pursuant to the Participation Agreement, and, as
      between the Company and you, the term “employer”
      in that waiver will be deemed to mean the Company as used in this
      letter.

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “CPP
      Covered Period”
      shall be limited by, and interpreted in a manner consistent with, 31
      C.F.R. § 30.11 (as in effect on the Closing
  Date).

            


    

     

    
      	
               
      

            	
              •

            	
              Provisions
      (1) and (2) of this letter are intended to, and will be interpreted,
      administered and construed to, comply with Section 111 of EESA (and, to
      the maximum extent consistent with the preceding, to permit operation of
      the Benefit Plans in accordance with their terms before giving effect
      to this letter).

            


    

     

    
      
        	
              	
                (5)

              	
                
                  Miscellaneous. To
      the extent not subject to federal law, this letter will be governed by and
      construed in accordance with the laws of North Carolina. This letter may
      be executed in two or more counterparts, each of which will be deemed to
      be an original. A signature transmitted by facsimile will be deemed an
      original signature.

                

              


      

    

     

    UST
Sequence No.195

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    Kim S.
Price

    December
12, 2008

    Page
3

    


    The Board
appreciates the concessions you are making and looks forward to your continued
leadership during these financially turbulent times.

    


    
      
        
          
            	
                    Yours
      sincerely,

                  
	 
      
	
                    CITIZENS
      SOUTH BANKING CORPORATION

                  
	 
      	 
      
	
                    By:

                  	
                    /s/
      Paul L. Teem, Jr.

                  
	
                    Name:

                  	
                    Paul
      L. Teem, Jr.

                  
	
                    Title:

                  	
                    Executive
      Vice President, Chief

                  
	 
      	
                    Administrative
      Officer and
Secretary

                  


          

        

      

    

    


    
      
        
          
            	
                    Intending
      to be legally bound, I agree with and accept the foregoing terms on the
      date set forth below.

                  
	 
	
                    /s/
      Kim S. Price

                  
	
                    Kim
      S. Price

                  
	
                    Date:
      December 12, 2008

                  


          

        

      

    

     

    UST
Sequence No.195

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    

     

    December
12, 2008

     

    Gary F.
Hoskins

    Executive
Vice President, Treasurer

    and Chief
Financial Officer

    c/o
Citizens South Banking Corporation

    519 South
New Hope Road

    Gastonia,
North Carolina 28054-4040

     

    Dear
Gary,

     

    Citizens
South Banking Corporation (the “Company”) anticipates entering into a
Securities Purchase Agreement (the “Participation Agreement”) with the United States Department of
Treasury (“Treasury”) that provides for the Company’s
participation in the Treasury’s TARP Capital Purchase Program (the “CPP”). If the Company does not participate
or ceases at any time to participate in the CPP, this letter shall be of no
further force and effect.

     

    For the
Company to participate in the CPP and as a condition to the closing of the
investment contemplated by the Participation Agreement, the Company is required
to establish specified standards for incentive compensation to its senior
executive officers and to make changes to its compensation arrangements. To
comply with these requirements, and in consideration of the benefits that you
will receive as a result of the Company’s participation in the CPP, you agree as
follows:

     

    
      	
               
      

            	
              (1)

            	
              No Golden Parachute Payments.
      The Company is prohibiting any golden parachute payment to you
      during any “CPP
      Covered Period.”
      A “CPP Covered Period”
      is any period during which (A) you are a senior executive officer
      and (B) Treasury holds an equity or debt position acquired from the
      Company in the CPP.

            


    

     

    
      	
               
      

            	
              (2)

            	
              Recovery of Bonus and
      Incentive Compensation. Any bonus and incentive compensation paid
      to you during a CPP Covered Period is subject to recovery or “clawback”
      by the Company if the payments were based on materially inaccurate
      financial statements or any other materially inaccurate performance metric
      criteria.

            


    

     

    
      	
               
      

            	
              (3)

            	
              Compensation Program
      Amendments. Each of the Company’s compensation, bonus, incentive
      and other benefit plans, arrangements and agreements (including golden
      parachute, severance and employment agreements) either currently or
      hereinafter in effect and including all amendments thereto (collectively,
      “Benefit Plans”) with respect to you is hereby
      amended to the extent necessary to give effect to provisions (1) and
      (2).

            


    

     

    UST
Sequence No. 195

    
      

    

    
      
        
          
            
              	
                      519
      South New Hope Road

                    	
                      Gastonia,
      North Carolina 28054-4040     (704) 
      868-5200

                    	
                      Fax:
      (704) 868-2192

                    


            

          

        

        Post
Office Box 2249   Gastonia,   North Carolina
28053-2249

      

       

    

    
      
         


      

      
         


        
          

        

      

      
         


      

    


    Gary F.
Hoskins

    December
12, 2008

    Page
2

     

    In
addition, the Company is required to review its Benefit Plans to ensure that
they do not encourage senior executive officers to take unnecessary and
excessive risks that threaten the value of the Company. To the extent any such
review requires revisions to any Benefit Plan with respect to you, you and the
Company agree to negotiate such changes promptly and in good faith.

     

    
      	
            	
              (4)

            	
              Definitions and
      Interpretation. This letter shall be interpreted as
      follows:

            


    

     

    
      	
               
      

            	
              •

            	
              
                “Senior
      executive officer”
      means the Company’s “senior
      executive officers”
      as defined in subsection 111(b)(3) of
  EESA.

              

            


    

     

    
      	
               
      

            	
              •

            	
              
                “Golden
      parachute payment”
      is used with same meaning as in Section 111(b)(2)(C) of
      EESA.

              

            


    

     

    
      	
               
      

            	
              •

            	
              
                “EESA”
      means the Emergency Economic Stabilization Act of 2008 as implemented by
      guidance or regulation issued by the Department of the Treasury and as
      published in the Federal Register on October 20,
    2008.

              

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “Company”
      includes any entities treated as a single employer with the Company under
      31 C.F.R. § 30.1(b) (as in effect on the Closing Date). You are also
      delivering a waiver pursuant to the Participation Agreement, and, as
      between the Company and you, the term “employer”
      in that waiver will be deemed to mean the Company as used in this
      letter.

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “CPP
      Covered Period”
      shall be limited by, and interpreted in a manner consistent with, 31
      C.F.R. § 30.11 (as in effect on the Closing
  Date).

            


    

     

    
      	
               
      

            	
              •

            	
              Provisions
      (1) and (2) of this letter are intended to, and will be interpreted,
      administered and construed to, comply with Section 111 of EESA (and, to
      the maximum extent consistent with the preceding, to permit operation of
      the Benefit Plans in accordance with their terms before giving effect to
      this letter).

            


    

     

    
      	
               
      

            	
              (5)

            	
              Miscellaneous.
      To the extent not subject to federal law, this letter will be governed by
      and
      construed in accordance with the laws of North Carolina. This letter may
      be executed
      in two or more counterparts, each of which will be deemed to be an
      original. A
      signature transmitted by facsimile will be deemed an original
      signature.

            


    

     

    UST
Sequence No. 195

    
      
         


      

      
         


        
          

        

      

      
         


      

    

    


    Gary F.
Hoskins

    December
12, 2008

    Page
3

    


    The Board
appreciates the concessions you are making and looks forward to your continued
leadership during these financially turbulent times.

    


    
      
        
          
            	
                    Yours
      sincerely,

                  
	 
      
	
                    CITIZENS
      SOUTH BANKING CORPORATION

                  
	 
      	 
      
	
                    By:

                  	
                    /s/
      Kim S. Price

                  
	
                    Name:

                  	
                    Kim
      S. Price

                  
	
                    Title:

                  	
                    President
      and Chief Executive
Officer

                  


          

        

      

    

    


    
      
        
          
            	
                    Intending
      to be legally bound, I agree with and accept the foregoing terms on the
      date set forth below.

                  
	 
	
                    /s/
      Gary F. Hoskins

                  
	
                    Gary
      F. Hoskins

                  
	
                    Date:
      December 12, 2008

                  


          

        

      

    

     

    UST
Sequence No. 195

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    

     

    December
12, 2008

     

    Daniel M.
Boyd, IV

    Executive
Vice President and Chief Operating Officer

    c/o
Citizens South Banking Corporation

    519 South
New Hope Road

    Gastonia,
North Carolina 28054-4040

     

    Dear
Daniel,

     

    Citizens
South Banking Corporation (the “Company”) anticipates entering into a
Securities Purchase Agreement (the “Participation Agreement”) with the United States Department of
Treasury (“Treasury”) that provides for the Company’s
participation in the Treasury’s TARP Capital Purchase Program (the “CPP”). If the Company does not participate
or ceases at any time to participate in the CPP, this letter shall be of no
further force and effect.

     

    For the
Company to participate in the CPP and as a condition to the closing of the
investment contemplated by the Participation Agreement, the Company is required
to establish specified standards for incentive compensation to its senior
executive officers and to make changes to its compensation arrangements. To
comply with these requirements, and in consideration of the benefits that you
will receive as a result of the Company’s participation in the CPP, you agree as
follows:

     

    
      	
               
      

            	
              (1)

            	
              No Golden Parachute Payments.
      The Company is prohibiting any golden parachute payment to you
      during any “CPP
      Covered Period.”
      A “CPP Covered Period”
      is any period during which (A) you are a senior executive officer
      and (B) Treasury holds an equity or debt position acquired from the
      Company in the CPP.

            


    

     

    
      	
               
      

            	
              (2)

            	
              Recovery of Bonus and
      Incentive Compensation. Any bonus and incentive compensation paid
      to you during a CPP Covered Period is subject to recovery or “clawback”
      by the Company if the payments were based on materially inaccurate
      financial statements or any other materially inaccurate performance metric
      criteria.

            


    

     

    
      	
               
      

            	
              (3)

            	
              Compensation Program
      Amendments. Each of the Company’s compensation, bonus, incentive
      and other benefit plans, arrangements and agreements (including golden
      parachute, severance and employment agreements) either currently or
      hereinafter in effect and including all amendments thereto (collectively,
      “Benefit Plans”) with respect to you is hereby
      amended to the extent necessary to give effect to provisions (l) and
      (2).

            


    

     

    UST
Sequence No. 195 

      
        

      

    

    
      
        
          
            
              	
                      519
      South New Hope Road

                    	
                      Gastonia,
      North Carolina 28054-4040     (704) 
      868-5200

                    	
                      Fax:
      (704) 868-2192

                    


            

          

        

        Post
Office Box 2249   Gastonia,   North Carolina
28053-2249

         

      

    

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    Daniel M.
Boyd, IV

    December
12, 2008

    Page
2

     

    In
addition, the Company is required to review its Benefit Plans to ensure that
they do not encourage senior executive officers to take unnecessary and
excessive risks that threaten the value of the Company. To the extent any such
review requires revisions to any Benefit Plan with respect to you, you and the
Company agree to negotiate such changes promptly and in good faith.

     

    
      	
            	
              (4)

            	
              Definitions and
      Interpretation. This letter shall be interpreted as
      follows:

            


    

     

    
      	
               
      

            	
              •

            	
              
                “Senior
      executive officer”
      means the Company’s “senior
      executive officers”
      as defined in subsection 111(b)(3) of
  EESA.

              

            


    

     

    
      	
               
      

            	
              •

            	
              
                “Golden
      parachute payment”
      is used with same meaning as in Section 111(b)(2)(C) of
      EESA.

              

            


    

     

    
      	
               
      

            	
              •

            	
              
                “EESA”
      means the Emergency Economic Stabilization Act of 2008 as implemented by
      guidance or regulation issued by the Department of the Treasury and as
      published in the Federal Register on October 20,
    2008.

              

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “Company”
      includes any entities treated as a single employer with the Company under
      31 C.F.R. § 30.1(b) (as in effect on the Closing Date). You are also
      delivering a waiver pursuant to the Participation Agreement, and, as
      between the Company and you, the term “employer”
      in that waiver will be deemed to mean the Company as used in this
      letter.

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “CPP
      Covered Period”
      shall be limited by, and interpreted in a manner consistent with, 31
      C.F.R. § 30.11 (as in effect on the Closing
  Date).

            


    

     

    
      	
               
      

            	
              •

            	
              Provisions
      (1) and (2) of this letter are intended to, and will be interpreted,
      administered and construed to, comply with Section 111 of EESA (and, to
      the maximum extent consistent with the preceding, to permit operation of
      the Benefit Plans in accordance with their terms before giving effect to
      this letter).

            


    

     

    
      	
               
      

            	
              (5)

            	
              Miscellaneous.
      To the extent not subject to federal law, this letter will be governed by
      and
      construed in accordance with the laws of North Carolina. This letter may
      be executed
      in two or more counterparts, each of which will be deemed to be an
      original. A
      signature transmitted by facsimile will be deemed an original
      signature.

            


    

     

    UST
Sequence No. 195

    
      
         


      

      
         


        
          

        

      

      
         


      

    


    Daniel M.
Boyd, IV

    December
12, 2008

    Page
3

    


    The Board
appreciates the concessions you are making and looks forward to your continued
leadership during these financially turbulent times.

    


    
      
        
          
            
              	
                      Yours
      sincerely,

                    
	 
      
	
                      CITIZENS
      SOUTH BANKING CORPORATION

                    
	 
      	 
      
	
                      By:

                    	
                      /s/
      Kim S. Price

                    
	
                      Name:

                    	
                      Kim
      S. Price

                    
	
                      Title:

                    	
                      President
      and Chief Executive
Officer

                    


            

          

        

      

    

    


    
      
        
          
            	
                    Intending
      to be legally bound, I agree with and accept the foregoing terms on the
      date set forth below.

                  
	 
	
                    /s/
      Daniel M. Boyd, IV

                  
	
                    Daniel
      M. Boyd, IV

                  
	
                    Date:
      December 12, 2008

                  


          

        

      

    

     

    UST
Sequence No. 195

    
      
         


      

      
         


        
          

        

      

      
         


      

    


    

    


     

    December
12, 2008

     

    Ira M.
Flowe, Jr.

    Senior
Vice President

    c/o
Citizens South Banking Corporation

    519 South
New Hope Road

    Gastonia,
North Carolina 28054-4040

     

    Dear
Ira,

     

    Citizens
South Banking Corporation (the “Company”) anticipates entering into a
Securities Purchase Agreement (the “Participation
Agreement”) with the United States Department of
Treasury (“Treasury”) that provides for the Company’s
participation in the Treasury’s TARP Capital Purchase Program (the “CPP”). If the Company does not participate
or ceases at any time to participate in the CPP, this letter shall be of no
further force and effect.

     

    For the
Company to participate in the CPP and as a condition to the closing of the
investment contemplated by the Participation Agreement, the Company is required
to establish specified standards for incentive compensation to its senior
executive officers and to make changes to its compensation arrangements. To
comply with these requirements, and in consideration of the benefits that you
will receive as a result of the Company’s participation in the CPP, you agree as
follows:

     

    
      	
               
      

            	
              (1)

            	
              No Golden Parachute Payments.
      The Company is prohibiting any golden parachute payment to you
      during any “CPP
      Covered Period.”
      A “CPP Covered Period”
      is any period during which (A) you are a senior executive officer
      and (B) Treasury holds an equity or debt position acquired from the
      Company in the CPP.

            


    

     

    
      	
               
      

            	
              (2)

            	
              Recovery of Bonus and
      Incentive Compensation. Any bonus and incentive compensation paid
      to you during a CPP Covered Period is subject to recovery or “clawback”
      by the Company if the payments were based on materially inaccurate
      financial statements or any other materially inaccurate performance metric
      criteria.

            


    

     

    
      	
               
      

            	
              (3)

            	
              Compensation Program
      Amendments. Each of the Company’s compensation, bonus, incentive
      and other benefit plans, arrangements and agreements (including golden
      parachute, severance and employment agreements) either currently or
      hereinafter in effect and including all amendments thereto (collectively,
      “Benefit Plans”) with respect to you is hereby
      amended to the extent necessary to give effect to provisions (1) and
      (2).

            


    

     

    UST
Sequence No. 195 

      
        

      

    

    
      
        
          
            	
                    519
      South New Hope Road

                  	
                    Gastonia,
      North Carolina 28054-4040     (704) 
      868-5200

                  	
                    Fax:
      (704) 868-2192

                  


          

        

      

      Post
Office Box 2249   Gastonia,   North Carolina
28053-2249


      
        
           


        

        
           


          
            

          

        

        
           


        

      

    

     

    Ira M.
Flowe, Jr.

    December
12, 2008

    Page
2

     

    In
addition, the Company is required to review its Benefit Plans to ensure that
they do not encourage senior executive officers to take unnecessary and
excessive risks that threaten the value of the Company. To the extent any such
review requires revisions to any Benefit Plan with respect to you, you and the
Company agree to negotiate such changes promptly and in good faith.

     

    
      	
            	
              (4)

            	
              Definitions and
      Interpretation. This letter shall be interpreted as
      follows:

            


    

     

    
      	
               
      

            	
              •

            	
              
                “Senior
      executive officer”
      means the Company’s “senior
      executive officers”
      as defined in subsection 111(b)(3) of
  EESA.

              

            


    

     

    
      	
               
      

            	
              •

            	
              
                “Golden
      parachute payment”
      is used with same meaning as in Section 111(b)(2)(C) of
      EESA.

              

            


    

     

    
      	
               
      

            	
              •

            	
              
                “EESA”
      means the Emergency Economic Stabilization Act of 2008 as implemented by
      guidance or regulation issued by the Department of the Treasury and as
      published in the Federal Register on October 20,
    2008.

              

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “Company”
      includes any entities treated as a single employer with the Company under
      31 C.F.R. § 30.1(b) (as in effect on the Closing Date). You are also
      delivering a waiver pursuant to the Participation Agreement, and, as
      between the Company and you, the term “employer”
      in that waiver will be deemed to mean the Company as used in this
      letter.

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “CPP
      Covered Period”
      shall be limited by, and interpreted in a manner consistent with, 31
      C.F.R. § 30.11 (as in effect on the Closing
  Date).

            


    

     

    
      	
               
      

            	
              •

            	
              Provisions
      (1) and (2) of this letter are intended to, and will be interpreted,
      administered and construed to, comply with Section 111 of EESA (and, to
      the maximum extent consistent with the preceding, to permit operation of
      the Benefit Plans in accordance with their terms before giving effect to
      this letter).

            


    

     

    
      	
               
      

            	
              (5)

            	
              Miscellaneous.
      To the extent not subject to federal law, this letter will be governed by
      and
      construed in accordance with the laws of North Carolina. This letter may
      be executed
      in two or more counterparts, each of which will be deemed to be an
      original. A
      signature transmitted by facsimile will be deemed an original
      signature.

            


    

     

    UST
Sequence No. 195

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    Ira M.
Flowe, Jr.

    December
12, 2008

    Page
3

    


    The Board
appreciates the concessions you are making and looks forward to your continued
leadership during these financially turbulent times.

    


    
      
        
          	
                  Yours
      sincerely,

                
	 
      
	
                  CITIZENS
      SOUTH BANKING CORPORATION

                
	 
      	 
      
	
                  By:

                	
                  /s/
      Kim S. Price

                
	
                  Name:

                	
                  Kim
      S. Price

                
	
                  Title:

                	
                  President
      and Chief Executive
Officer

                


        

      

    

    


    
      
        
          
            	
                    Intending
      to be legally bound, I agree with and accept the foregoing terms on the
      date set forth below.

                  
	 
	
                    /s/
      Ira M. Flowe, Jr.

                  
	
                    Ira
      M. Flowe, Jr.

                  
	
                    Date:
      December 12, 2008

                  


          

        

      

    

     

    UST
Sequence No. 195

    
      
         


      

      
         


        
          

        

      

      
         


      

    


    

     

    December
12, 2008

     

    Paul L.
Teem, Jr.

    Executive
Vice President, Chief

    Administrative
Officer and Secretary

    c/o
Citizens South Banking Corporation

    519 South
New Hope Road

    Gastonia,
North Carolina 28054-4040

     

    Dear
Paul,

     

    Citizens
South Banking Corporation (the “Company”) anticipates entering into a
Securities Purchase Agreement (the “Participation Agreement”)
with the United States Department of Treasury (“Treasury”)
that provides for the Company’s participation in the Treasury’s TARP
Capital Purchase Program (the “CPP”).
If the Company does not participate or ceases at any time to participate
in the CPP, this letter shall be of no further force and effect.

     

    For the
Company to participate in the CPP and as a condition to the closing of the
investment contemplated by the Participation Agreement, the Company is required
to establish specified standards for incentive compensation to its senior
executive officers and to make changes to its compensation arrangements. To
comply with these requirements, and in consideration of the benefits that you
will receive as a result of the Company’s participation in the CPP, you agree as
follows:

     

    
      	
               
      

            	
              (1)

            	
              No Golden Parachute Payments.
      The Company is prohibiting any golden parachute payment to you
      during any “CPP Covered Period.” A “CPP Covered Period” is any period during which (A)
      you are a senior executive officer and (B) Treasury holds an equity or
      debt position acquired from the Company in the
  CPP.

            


    

     

    
      	
               
      

            	
              (2)

            	
              Recovery of Bonus and
      Incentive Compensation. Any bonus and incentive compensation paid
      to you during a CPP Covered Period is subject to recovery or
      “clawback” by the Company if the payments
      were based on materially inaccurate financial statements or any other
      materially inaccurate performance metric
  criteria.

            


    

     

    
      	
               
      

            	
              (3)

            	
              Compensation Program
      Amendments. Each of the Company’s compensation, bonus, incentive
      and other benefit plans, arrangements and agreements (including golden
      parachute, severance and employment agreements) either currently or
      hereinafter in effect and including all amendments thereto (collectively,
      “Benefit Plans”) with respect to you is hereby
      amended to the extent necessary to give effect to provisions (I) and
      (2).

            


    

     

    UST
Sequence No. 195 

      
        

      

    

    
      
        
          
            
              	
                      519
      South New Hope Road

                    	
                      Gastonia,
      North Carolina 28054-4040     (704) 
      868-5200

                    	
                      Fax:
      (704) 868-2192

                    


            

          

        

        Post
Office Box 2249   Gastonia,   North Carolina
28053-2249


        
          
             


          

          
             


            
              

            

          

          
             


          

        

      

    

     

    Paul L.
Teem, Jr.

    December
12, 2008

    Page
2

     

    In
addition, the Company is required to review its Benefit Plans to ensure that
they do not encourage senior executive officers to take unnecessary and
excessive risks that threaten the value of the Company. To the extent any such
review requires revisions to any Benefit Plan with respect to you, you and the
Company agree to negotiate such changes promptly and in good faith.

     

    
      	
            	
              (4)

            	
              Definitions and
      Interpretation. This letter shall be interpreted as
      follows:

            


    

     

    
      	
               
      

            	
              •

            	
              “Senior
      executive officer” means the Company’s “senior executive officers” as
      defined in subsection 111(b)(3) of
  EESA.

            


    

     

    
      	
               
      

            	
              •

            	
              “Golden
      parachute payment” is used with same meaning as in Section 111(b)(2)(C) of
      EESA.

            


    

     

    
      	
               
      

            	
              •

            	
              “EESA”
      means the Emergency Economic Stabilization Act of 2008 as implemented by
      guidance or regulation issued by the Department of the Treasury and as
      published in the Federal Register on October 20,
  2008.

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “Company” includes any entities treated as a single employer with the
      Company under 31 C.F.R. § 30.1(b) (as in effect on the Closing Date). You
      are also delivering a waiver pursuant to the Participation Agreement, and,
      as between the Company and you, the term “employer” in that waiver will be
      deemed to mean the Company as used in this
  letter.

            


    

     

    
      	
               
      

            	
              •

            	
              The
      term “CPP Covered Period” shall be limited by, and interpreted in a manner
      consistent with, 31 C.F.R. § 30.11 (as in effect on the Closing
      Date).

            


    

     

    
      	
               
      

            	
              •

            	
              Provisions
      (1) and (2) of this letter are intended to, and will be interpreted,
      administered and construed to, comply with Section 111 of EESA (and, to
      the maximum extent consistent with the preceding, to permit operation of
      the Benefit Plans in accordance with their terms before giving effect to
      this letter).

            


    

     

    
      	
               
      

            	
              (5)

            	
              Miscellaneous.
      To the extent not subject to federal law, this letter will be governed by
      and construed in accordance with the laws of North Carolina. This letter
      may be executed in two or more counterparts, each of which will be deemed
      to be an original. A signature transmitted by facsimile will be deemed an
      original signature.

            


    

     

    UST
Sequence No. 195

    
      
         


      

      
         


        
          

        

      

      
         


      

    

     

    Paul L.
Teem, Jr.

    December
12,2008

    Page
3

     

    The Board appreciates the
concessions you are making and looks forward to your continued leadership during
these financially turbulent times.

     

    
      
        
          
            	
                    Yours
      sincerely,

                  
	 
      
	
                    CITIZENS
      SOUTH BANKING CORPORATION

                  
	 
      	 
      
	
                    By:

                  	
                    /s/
      Kim S. Price

                  
	
                    Name:

                  	
                    Kim
      S. Price

                  
	
                    Title:

                  	
                    President
      and Chief Executive
Officer

                  


          

        

      

    

    


    
      
        
          
            	
                    Intending
      to be legally bound, I agree with and accept the foregoing terms on the
      date set forth below.

                  
	 
	
                    /s/
      Paul L. Teem, Jr.

                  
	
                    Paul
      L. Teem, Jr.

                  
	
                    Date:
      December 12, 2008

                  


          

        

      

    

     

    UST
Sequence No. 195