Document:

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                                                                    Exhibit 10.5

                          CHESAPEAKE FINANCIAL SHARES
                              INCENTIVE STOCK PLAN

                                   ARTICLE I.
                      Establishment, Purpose, and Duration

     1.1  Establishment  of the  Plan.  Chesapeake  Financial  Shares,  Inc.,  a
Virginia  corporation,  hereby establishes an incentive  compensation plan to be
known as the  "Incentive  Stock  Plan",  as set forth in this  document.  Unless
otherwise  defined  herein,  all  capitalized  terms shall have the meanings set
forth in Section  2.1 herein.  The Plan  permits  the grant of  Incentive  Stock
Options, Non-qualified Stock Options, and Restricted Stock.

     The Plan was  adopted by the Board of  Directors  on,  January 11, 1996 and
shall become effective on April 5, 1996 (the "Effective  Date"),  subject to the
approval by vote of  shareholders  of the Company in accordance  with applicable
laws.

     1.2 Purpose of the Plan.  The purpose of the Plan is to promote the success
of the Company and its  Subsidiaries  by providing  incentives  to Key Employees
that  will  promote  the  identification  of their  personal  interest  with the
long-term financial success of the Company and with growth in shareholder value.
The Plan is  designed  to provide  flexibility  to the Company in its ability to
motivate, attract, and retain the services of Key Employees upon whose judgment,
interest,  and special effort the successful conduct of its operation is largely
dependent.

     1.3 Duration of the Plan. The Plan shall commence on the Effective Date, as
described  in Section 1.1  herein,  and shall  remain in effect,  subject to the
right of the Board of Directors to  terminate  the Plan at any time  pursuant to
Article 12 herein, until March 31, 2006, at which time it shall terminate except
with respect to Awards made prior to, and  outstanding on, that date which shall
remain valid in accordance with their terms.

                                  ARTICLE II.
                                  Definitions

     2.1  Definitions.  Except as otherwise  defined in the Plan,  the following
terms shall have the meanings set forth below:

     (a) "Affiliate" and "Associate" shall have the respective meanings ascribed
to such  terms in Rule  12b-2  under the  Securities  Exchange  Act of 1934,  as
amended (the "Exchange Act").

     (b) "Agreement"  means a written  agreement  implementing the grant of each
Award signed by an authorized officer of the Company and by the Participant.

     (c) "Award" means, individually or collectively, a grant under this Plan of
Incentive Stock Options, Non-qualified Stock Options, and Restricted Stock.
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     (d) "Award  Date" or "Grant  Date" means the date on which an Award is made
by the Committee under this Plan.

     (e) "Beneficial Owner" shall have the meaning ascribed to such term in Rule
13d-3 under the Exchange Act.

     (f) "Board" or "Board of  Directors"  means the Board of  Directors  of the
Company.

     (g) "Change in Control"  shall be deemed to have occurred if the conditions
set forth in any one of the following paragraphs shall have been satisfied:

     (i) any Person (other than the Company, any Subsidiary,  a trustee or other
     fiduciary holding securities under any employee benefit plan of the Company
     or its  Subsidiaries),  who or  which,  together  with all  Affiliates  and
     Associates of such Person, is or becomes the Beneficial Owner,  directly or
     indirectly,  of securities of the Company  representing  20% or more of the
     combined voting power of the Company's then outstanding securities; or

     (ii) if, at any time after the Effective Date, the composition of the Board
     of Directors shall change such that a majority of the Board shall no longer
     consist of Continuing Directors; or

     (iii) if at any time,  (1) the Company  shall  consolidate  with,  or merge
     with,  any other  Person and the  Company  shall not be the  continuing  or
     surviving corporation,  (2) any Person shall consolidate with or merge with
     the  Company,  and,  the  Company  shall  be the  continuing  or  surviving
     corporation  and in connection  therewith,  all or part of the  outstanding
     Stock shall be changed into or exchanged  for stock or other  securities of
     any other Person or cash or any other property,  (3) the Company shall be a
     party to a statutory  share  exchange with any other Person after which the
     Company is a subsidiary of any other Person,  or (4) the Company shall sell
     or  otherwise  transfer  50% or more of the assets or earning  power of the
     Company and its Subsidiaries (taken as a whole) to any Person or Persons.

     (h) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.

     (i)  "Committee"  means the committee of the Board  appointed to administer
the Plan  pursuant  to Article 3 herein,  all of the  members of which  shall be
"disinterested persons" as defined in Rule 16b-3, as amended, under the Exchange
Act or any similar or successor rule. Unless otherwise  determined by the Board,
the members of the committee responsible for executive  compensation who are not
employees of the Company or its Subsidiaries shall constitute the Committee.

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     (j) "Company" means  Chesapeake  Financial  Shares,  Inc., or any successor
thereto as provided in Article 13 herein.

     (k) "Continuing Director" means an individual who was a member of the Board
of Directors on the Effective Date or whose  subsequent  nomination for election
or  re-election  to the Board of Directors  was  recommended  or approved by the
affirmative vote of two-thirds of the Continuing Directors then in office.

     (1) "Exchange Act" means the Securities Exchange Act of 1934, as amended.

     (m) "Fair Market  Value" of a Share means the mean between the high and low
sales  price of the Stock on the  relevant  date if it is a trading  date or, if
not, on the most recent date on which the Stock was traded prior to such date as
reported  by NASDAQ or if,  in the  opinion  of the  Committee,  this  method is
inapplicable  or  inappropriate  for  any  reason,  the  fair  market  value  as
determined  pursuant to a  reasonable  method  adopted by the  Committee in good
faith for such purpose.

     (n)  "Incentive  Stock Option' or "ISO" means an option to purchase  Stock,
granted under Article 6 herein, which is designated as an incentive stock option
and is intended to meet the requirements of Section 422A of the Code.

     (o) "Key Employee" means an officer or other key employee of the Company or
its  Subsidiaries,  who,  in  the  opinion  of  the  Committee,  can  contribute
significantly to the growth and  profitability  of, or perform services of major
importance to, the Company and its Subsidiaries.

     (p)  "Non-qualified  Stock  Option" or "NQSO"  means an option to  purchase
Stock,  granted under Article 6 herein, which is not intended to be an Incentive
Stock Option.

     (q) "Option"  means an  Incentive  Stock  Option or a  Non-qualified  Stock
Option.

     (r)  "Participant"  means a Key  Employee who is granted an Award under the
Plan.

     (s) "Period of  Restriction"  means the period during which the transfer of
Shares of Restricted Stock is restricted, pursuant to Article 7 herein.

     (t)  "Person"  shall  have the  meaning  ascribed  to such term in  Section
3(a)(9)  of the  Exchange  Act and used in  Sections  13(d) and  14(d)  thereof,
including a "group" as defined in Section 13(d).

     (u) "Plan" means the Incentive Stock Plan of Chesapeake  Financial  Shares,
Inc., as described and as hereafter from time to time amended.

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     (v)  "Restricted  Stock" means an Award of Stock  granted to a  Participant
pursuant to Article 7 herein.

     (w) "Stock" or "Shares" means the common stock of the Company.

     (x)  "Subsidiary"  shall  mean a  corporation  at  least  50% of the  total
combined  voting power of all classes of stock of which is owned by the Company,
either directly or through one or more of its Subsidiaries.

                                  ARTICLE III.
                                 Administration

     3.1 The Committee.  The Plan shall be  administered  by the Committee which
shall  have all powers  necessary  or  desirable  for such  administration.  The
express grant in this Plan of any specific  power to the Committee  shall not be
construed as limiting any power or  authority of the  Committee.  In addition to
any other powers and, subject to the provisions of the Plan, the Committee shall
have the following  specific  powers:  (i) to determine the terms and conditions
upon which the Awards may be made and exercised; (ii) to determine all terms and
provisions of each Agreement, which need not be identical; (iii) to construe and
interpret the Agreements and the Plan;  (iv) to establish,  amend or waive rules
or   regulations   for  the  Plan's   administration;   (v)  to  accelerate  the
exercisability of any Award or the termination of any Period of Restriction; and
(vi) to make all other  determinations  and take all other actions  necessary or
advisable for the administration of the Plan.

     3.2 Selection of  Participants.  The Committee  shall have the authority to
grant Awards under the Plan,  from time to time, to such Key Employees as may be
selected by it. Each Award shall be evidenced by an Agreement.

     3.3 Decisions Binding,.  All determinations and decisions made by the Board
or the  Committee  pursuant  to the  provisions  of the  Plan  shall  be  final,
conclusive and binding.

     3.4 Rule 16b-3  Requirements.  Notwithstanding  any other  provision of the
Plan,  the Board or the Committee may impose such  conditions on any Award,  and
amend  the  Plan  in any  such  respects,  as may be  required  to  satisfy  the
requirements of Rule 16b-3, as amended (or any successor or similar rule), under
the Exchange Act.

     3.5  Indemnification  of  Committee.  In addition  to such other  rights of
indemnification  as they may have as directors  or as members of the  Committee,
the  members  of the  Committee  shall be  indemnified  by the  Company  against
reasonable expenses, including attorneys' fees, actually and reasonably incurred
in  connection  with  the  defense  of any  action,  suit or  proceeding,  or in
connection with any appeal therein,  to which they or any of them may be a party
by reason of any action taken or failure to act under or in connection  with the
Plan or any Award granted or made hereunder,  and against all amounts reasonably
paid by them in settlement thereof or paid by them in satisfaction of a judgment
in any such action, suit or proceeding,  if such members acted in good faith and
in a manner which they believed to be in, and not opposed to, the best interests
of the Company and its Subsidiaries.

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                                  ARTICLE IV.
                           Stock Subject to the Plan

     4.1 Number of Shares.  Subject to  adjustment  as  provided  in Section 4.3
herein,  the maximum  aggregate  number of Shares that may be issued pursuant to
Awards made under the Plan shall not exceed  45,000.  No more than  one-third of
the  aggregate  number  of such  Shares  shall  be  issued  in  connection  with
Restricted Stock Awards. Except as provided in Sections 4.2 herein, the issuance
of Shares in  connection  with the exercise of, or as other  payment for Awards,
under the Plan shall  reduce the number of Shares  available  for future  Awards
under the Plan.

     4.2 Lapsed Awards or Forfeited Shares. If any Award granted under this Plan
(for which no  material  benefits of  ownership  have been  received,  including
dividends) terminates, expires, or lapses for any reason other than by virtue of
exercise  of the Award,  or if Shares  issued  pursuant  to Awards (for which no
material  benefits of ownership  have been  received,  including  dividends) are
forfeited,  any Stock  subject to such Award  again shall be  available  for the
grant of an Award under the Plan.

     4.3  Capital  Adjustments.  The number and class of Shares  subject to each
outstanding Award, the Option Price and the aggregate number and class of Shares
for which Awards thereafter may be made shall be subject to such adjustment,  if
any, as the Committee in its sole discretion  deems  appropriate to reflect such
events  as  stock   dividends,   stock   splits,   recapitalizations,   mergers,
consolidations or reorganizations of or by the Company.

                                   ARTICLE V.
                                  Eligibility

     Persons  eligible to  participate  in the Plan include all employees of the
Company  and its  Subsidiaries  who, in the  opinion of the  Committee,  are Key
Employees.  Key Employees  may not include  directors of the Company who are not
employees of the Company or its Subsidiaries.

                                  ARTICLE VI.
                                 Stock Options

     6.1 Grant of  Options.  Subject  to the terms and  provisions  of the Plan,
Options  may be  granted to Key  Employees  at any time and from time to time as
shall  be  determined  by the  Committee.  The  Committee  shall  have  complete
discretion in  determining  the number of Shares  subject to Options  granted to
each  Participant,  provided,  however,  that the  aggregate  Fair Market  Value
(determined  at the time the Award is made) of Shares with  respect to which any
Participant  may first  exercise ISOs granted under the Plan during any calendar
year may not exceed  $100,000  or such amount as shall be  specified  in Section
422A of the Code and rules and regulation thereunder.

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     6.2 Option Agreement.  Each Option grant shall be evidenced by an Agreement
that shall specify the type of Option granted,  the Option Price (as hereinafter
defined),  the duration of the Option,  the number of Shares to which the Option
pertains, any conditions imposed upon the exercisability of Options in the event
of retirement,  death,  disability or other termination of employment,  and such
other provisions as the Committee shall  determine.  The Agreement shall specify
whether  the Option is  intended  to be in  Incentive  Stock  Option  within the
meaning of Section 422A of the Code, or  Nonqualified  Stock Option not intended
to be within the provisions of Section 422A of the Code.

     6.3  Option  Price.  The  exercise  price per share of Stock  covered by an
Option  ("Option  Price") shall be  determined  by the Committee  subject to the
following limitations.  The Option Price shall not be less than 100% of the Fair
Market Value of such Stock on the Grant Date. An ISO granted to an employee who,
at the time of grant,  owns  (within the meaning of Section  425(d) of the Code)
Stock possessing more than 10% of the total combined voting power of all classes
of Stock of the  Company,  shall have an Option  Price which is at least 110% of
the Fair Market Value of the Stock.

     6.4  Duration of  Options.  Each  Option  shall  expire at such time as the
Committee shall determine at the time of grant  provided,  however,  that no ISO
shall be exercisable  later than the tenth (10th)  anniversary date of its Award
Date.

     6.5 Exercisability.  Options granted under the Plan shall be exercisable at
such times and be subject to such  restrictions  and conditions as the Committee
shall  determine,  which need not be the same for all  Participants.  No Option,
however,  shall be exercisable until the expiration of at least six months after
the Award Date, except that such limitation shall not apply in the case of death
or disability of the Participant.

     6.6 Method of  Exercise.  Options  shall be  exercised by the delivery of a
written  notice to the Company in the form  prescribed by the Committee  setting
forth the number of Shares with respect to which the Option is to be  exercised,
accompanied by full payment for the Shares. The Option Price shall be payable to
the  Company in full either in cash,  by  delivery of Shares of Stock  valued at
Fair Market Value at the time of exercise, or by a combination of the foregoing.
As soon as practicable, after receipt of written notice and payment, the Company
shall deliver to the Participant,  stock  certificates in an appropriate  amount
based upon the number of Options exercised, issued in the Participant's name. No
Participant who is awarded Options shall have rights as a shareholder  until the
date of exercise of the Options.

     6.7 Restrictions on Stock Transferability.  The Committee shall impose such
restrictions on any Shares acquired  pursuant to the exercise of an Option under
the Plan as it may deem advisable,  including, without limitation,  restrictions
under the  applicable  Federal  securities  law, under the  requirements  of the
National  Association  of Securities  Dealers,  Inc. or any stock  exchange upon
which  such  Shares are then  listed and under any blue sky or state  securities
laws applicable to such Shares.

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     6.8  Nontransferability of Options. No Option granted under the Plan may be
sold,  transferred,  pledged,  assigned, or otherwise alienated or hypothecated,
otherwise than by will or by the laws of descent and distribution.  Further, all
Options granted to a Participant under the Plan shall be exercisable  during his
lifetime only by such Participant or his guardian or legal representative.

                                  ARTICLE VII.
                                Restricted Stock

     7.1 Grant of Restricted  Stock.  Subject to the terms and provisions of the
Plan,  the  Committee,  at any time and from time to time,  may grant  shares of
Restricted  Stock under the Plan to such  Participants and in such amounts as it
shall determine. Participants receiving Restricted Stock Awards are not required
to the pay the Company therefor  (except for applicable tax  withholding)  other
than the rendering of services.

     7.2  Restricted  Stock  Agreement.  Each  Restricted  Stock  grant shall be
evidenced  by an Agreement  that shall  specify the Period of  Restriction,  the
number of  Restricted  Stock Shares  granted,  and such other  provisions as the
Committee shall determine.

     7.3  Transferability.  Except as provided in this  Article 7 and subject to
the  limitation in the next  sentence,  the Shares of  Restricted  Stock granted
hereunder  may  not  be  sold,  transferred,  pledged,  assigned,  or  otherwise
alienated or  hypothecated  until the  termination of the  applicable  Period of
Restriction or upon earlier satisfaction of other conditions as specified by the
Committee in its sole  discretion and set forth in the  Agreement.  No shares of
Restricted Stock shall be sold until the expiration of at least six months after
the Award Date, except that such limitation shall not apply in the case of death
or  disability  of the  Participant.  All rights with respect to the  Restricted
Stock granted to a Participant  under the Plan shall be  exercisable  during his
lifetime only by such Participant or his guardian or legal representative.

     7.4 Other Restrictions.  The Committee shall impose such other restrictions
on any Shares of Restricted  Stock  granted  pursuant to the Plan as it may deem
advisable including,  without limitation,  restrictions under applicable Federal
or  state  securities  laws,  and  may  legend  the  certificates   representing
Restricted Stock to give appropriate notice of such restrictions.

     7.5 Certificate  Legend.  In addition to any legends placed on certificates
pursuant  to  Section  7.4  herein,  each  certificate  representing  shares  of
Restricted Stock granted pursuant to the Plan shall bear the following legend:

     The sale or other transfer of the Shares of Stock represented by this
     certificate, whether voluntary, involuntary, or by operation of law, is
     subject to certain restrictions on transfer set forth in the Incentive
     Stock Plan of Chesapeake Financial Shares, Inc., in the rules and
     administrative procedures adopted pursuant to such Plan, and in an
     Agreement dated __________________.  A copy of the Plan, such rules and
     procedures, and such Restricted Stock Agreement may be obtained from the
     Secretary of Chesapeake Financial Shares, Inc.

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     7.6 Removal of Restrictions.  Except as otherwise provided in this Article,
Shares of Restricted Stock covered by each Restricted Stock Award made under the
Plan shall become freely  transferable by the Participant  after the last day of
the Period of Restriction.  Once the Shares are released from the  restrictions,
the  Participant  shall be entitled  to have the legend  required by Section 7.5
herein removed from his Stock certificate.

     7.7 Voting Rights.  During the Period of Restriction,  Participants holding
Shares of  Restricted  Stock  granted  hereunder may exercise full voting rights
with respect to those Shares.

     7.8 Dividends and Other  Distributions.  During the Period of  Restriction,
Participants  holding  shares of  Restricted  Stock granted  hereunder  shall be
entitled to receive all dividends and other  distributions  paid with respect to
those shares while they are so held. If any such dividends or distributions  are
paid in  Shares,  the  Shares  shall  be  subject  to the same  restrictions  on
transferability  as the Shares of  Restricted  Stock with  respect to which they
were distributed.

     7.9 Termination of Employment Due to Retirement.  Unless otherwise provided
in the Agreement, in the event that a Participant terminates his employment with
the Company or one of its Subsidiaries  because of normal retirement (as defined
in the rules of the  Company in effect at the  time),  any  remaining  Period of
Restriction  applicable to the Restricted  Stock Shares  pursuant to Section 8.3
herein  shall  automatically  terminate  and,  except as  otherwise  provided in
Section  7.4 herein  the Shares of  Restricted  Stock  shall  thereby be free of
restrictions  and  freely   transferable.   Unless  otherwise  provided  in  the
Agreement,  in the event that a Participant  terminates his employment  with the
Company  because of early  retirement (as defined in the rules of the Company in
effect  at the  time),  the  Committee,  in its sole  discretion,  may waive the
restrictions  remaining  on any or all Shares of  Restricted  Stock  pursuant to
Section 7.3 herein and add such new  restrictions  to those Shares of Restricted
Stock as it deems appropriate.

     7.10  Termination of Employment Due to Death or Disability.  In the event a
Participant's employment is terminated because of death or disability during the
Period of  Restriction,  any remaining  Period of Restriction  applicable to the
Restricted  Stock pursuant to Section 7.3 herein shall  automatically  terminate
and, except as otherwise provided in Section 7.4 herein the shares of Restricted
Stock shall thereby be free of restrictions and fully transferable.

     7.11  Termination of Employment for Other Reasons.  Unless otherwise
provided in the Agreement, in the event that a Participant terminates his
employment with the Company for any reason other than for death, disability, or
retirement, as set forth in Sections 7.9 and 7.10 herein, during the Period of
Restriction, then any shares of Restricted Stock still subject to restrictions
as of the date of such termination shall automatically be forfeited and returned
to the Company.

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                                 ARTICLE VIII.
                               Change in Control

     In the event of a Change in Control of the Company, the Committee, as
constituted before such Change in Control, in its sole discretion may, as to any
outstanding Award, either at the time the Award is made or any time thereafter,
take any one or more of the following actions: (i) provide for the acceleration
of any time periods relating to the exercise or realization of any such Award so
that such Award may be exercised or realized in full on or before a date
initially fixed by the Committee; (ii) provide for the purchase or settlement of
any such Award by the Company, upon a Participant's request, for an amount of
cash equal to the amount which could have been obtained upon the exercise of
such Award or realization of such Participant's rights had such Award been
currently exercisable or payable; (iii) make such adjustment to any such Award
then outstanding as the Committee deems appropriate to reflect such Change in
Control; or (iv) cause any such Award then outstanding to be assumed, or new
rights substituted therefor, by the acquiring or surviving corporation in such
Change in Control.

                                  ARTICLE IX.
                 Modification, Extension and Renewals of Awards

     Subject to the terms and conditions and within the limitations of the Plan,
the Committee may modify, extend or renew outstanding Awards, or, if authorized
by the Board, accept the surrender of outstanding Awards (to the extent not yet
exercised) granted under the Plan and authorize the granting of new Awards
pursuant to the Plan in substitution therefor, and the substituted Awards may
specify a lower exercise price than the surrendered Awards, a longer term than
the surrendered Awards or may contain any other provisions that are authorized
by the Plan.  The Committee may also modify the terms of any outstanding
Agreement.  Notwithstanding the foregoing, however, no modification of an Award,
shall, without the consent of the Participant, adversely affect the rights or
obligations of the Participant.

                                   ARTICLE X.
              Amendment, Modification and Termination of the Plan

     11.1 Amendment,  Modification and Termination. At any time and from time to
time,  the Board may  terminate,  amend,  or modify the Plan.  Such amendment or
modification may be without shareholder  approval except to the extent that such
approval is required by the Code,  pursuant to the rules under Section 16 of the
Exchange Act, by any national  securities  exchange or system on which the Stock
is then listed or reported,  by any  regulatory  body having  jurisdiction  with
respect thereto or under any other applicable laws, rules or regulations.

     11.2 Awards Previously Granted.  No termination,  amendment or modification
of the Plan  other than  pursuant  to  Section  4.4  herein  shall in any manner
adversely  affect any Award  theretofore  granted  under the Plan,  without  the
written consent of the Participant.

                                  ARTICLE XI.
                                  Withholding

     12.1 Tax  Withholding.  The  Company  shall have the power and the right to
deduct or withhold,  or require a Participant to remit to the Company, an amount
sufficient  to  satisfy   Federal,   State  and  local  taxes   (including   the
Participant's  FICA  obligation)  required by law to be withheld with respect to
any grant, exercise, or payment made under or as a result of this Plan.

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     12.2 Stock  Withholding.  With  respect to  withholding  required  upon the
exercise of  Nonqualified  Stock Options,  or upon the lapse of  restrictions on
Restricted  Stock,  or upon the  occurrence of any other similar  taxable event,
participants may elect, subject to the approval of the Committee, to satisfy the
withholding  requirement,  in whole or in part,  by having the Company  withhold
Shares of Stock  having a Fair Market  Value equal to the amount  required to be
withheld.  The value of the Shares to be withheld  shall be based on Fair Market
Value of the Shares on the date that the amount of tax to be  withheld  is to be
determined. All elections shall be irrevocable and be made in writing, signed by
the  Participant  on forms  approved by the Committee in advance of the day that
the transaction becomes taxable.

                                  ARTICLE XII.
                                   Successors

     All  obligations  of the  Company  under the Plan,  with  respect to Awards
granted hereunder, shall be binding on any successor to the Company, whether the
existence  of such  successor  is the result of a direct or  indirect  purchase,
merger,  consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.

                                 ARTICLE XIII.
                                    General

     14.1 Requirements of Law. The granting of Awards and the issuance of Shares
of Stock under this Plan shall be subject to all  applicable  laws,  rules,  and
regulations,  and to  such  approvals  by any  governmental  agencies  or  self-
regulatory organizations as may be required.

     14.2 Effect of Plan.  The  establishment  of the Plan shall not confer upon
any Key Employee any legal or equitable right against the Company,  a Subsidiary
or the  Committee,  except as expressly  provided in the Plan. The Plan does not
constitute  an  inducement  or  consideration  for  the  employment  of any  Key
Employee,  nor is it a contract  between the Company or any of its  Subsidiaries
and any Key Employee.  Participation in the Plan shall not give any Key Employee
any  right  to be  retained  in  the  service  of  the  Company  or  any  of its
Subsidiaries.

     14.3  Creditors.  The  interests of any  Participant  under the Plan or any
Agreement are not subject to the claims of creditors and may not, in any way, be
assigned, alienated or encumbered.

     14.4  Governing  Law.  The Plan,  and all  Agreements  hereunder,  shall be
governed, construed and administered in accordance with and governed by the laws
of the  Commonwealth  of Virginia and the  intention of the Company is that ISOs
granted under the Plan qualify as such under Section 422A of the Code.

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     14.5  Severability.  In the event any  provision  of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.

                                       11<PAGE>

STATE OF NORTH CAROLINA

COUNTY OF CATAWBA

                                                    EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT ("Agreement"), made as of the 1st day of
December, 1999, by and between PEOPLES BANK, Newton, North Carolina, a North
Carolina banking institution (the "Bank"), and TONY W. WOLFE (the "Employee")and
is joined in by PEOPLES BANCORP OF NORTH CAROLINA, INC., a North Carolina
corporation (the "Holding Company");

                             W I T N E S S E T H:

     WHEREAS the Employee has heretofore been employed and currently is
rendering services to the Bank as President and Chief Executive Officer; and,

     WHEREAS the Bank is a North Carolina banking corporation and the Holding
Company is a North Carolina bank holding company and the sole shareholder of the
Bank; and,

     WHEREAS the Bank considers the continued availability of the Employee's
services to be important to the management and conduct of the Bank's and Holding
Company's business, and desires to secure for the Bank and Holding Company the
continued availability of the Employee's services; and,

     WHEREAS the Employee is willing to make his services available to the Bank
on the terms and subject to the conditions set forth herein.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:

     1.   Employment.  The Employee is employed as the President and Chief
     ---------------
Executive Officer of the Bank. The Employee shall render administrative and
management services to the Bank, such as are customarily performed by persons
situated in a similar executive capacity. He shall promote the business of the
Bank and Holding Company and perform such other duties as shall from
<PAGE>

time-to-time be reasonably described by the Board of Directors of the Bank (the
"Directors").

     2.   Compensation.
     -----------------

          A.  Base Salary.  The Bank shall pay the Employee during the term of
          ---------------
     this Agreement a base salary at the rate of $167,306 per annum, payable in
     cash in equal monthly installments or otherwise as agreed by the parties,
     provided that the rate of such salary shall be reviewed by the Directors
     not less often than annually. Such rate of salary, or increased rate of
     salary, as the case may be, may be further increased (but not decreased)
     from time-to-time in such amounts as the Directors, in their discretion,
     may decide.

          B.  Management Incentive Plan.  The Employee shall be entitled to
          -----------------------------
     participate in an equitable manner with other key management personnel of
     the Bank in the Bank's management incentive plan adopted in 1998.

     3.   Discretionary Bonuses. The Employee shall be entitled to participate
     --------------------------
in an equitable manner with all other key management personnel of the Bank in
discretionary bonuses authorized and declared by the Directors of the Bank. No
other compensation provided for in this Agreement shall be deemed a substitute
for the Employee's right to participate in such discretionary bonuses when and
as are declared by the Board of Directors.

     4.   Additional Benefits.
     ------------------------

          A.   Participation in Retirement and Medical Plan.
          -------------------------------------------------
     The Employee shall be entitled to participate in any plan of the
     Bank relating to pension, profit sharing or other retirement
     benefits and medical and disability coverage, or reimbursement
     plans that the Bank may adopt for the benefit of its employees
     subject to the eligibility rules of such plan.

          B.   Officer Benefits/Expenses.  The Employee shall be
          ------------------------------
     eligible to participate in any fringe benefits which may be or
     become applicable to the Bank's executive employees, commensurate
     with the responsibilities and functions to be performed by the
     Employee under this Agreement. Additionally, the Employee shall
     be entitled to such vacation and sick
<PAGE>

     leave as shall be established under uniform employee policies
     promulgated by the Directors. The Bank shall reimburse the
     Employee for all out-of-pocket reasonable and necessary business
     expenses which the Employee shall incur in connection with his
     services on behalf of the Bank.

          Additionally, the Employee shall be entitled to four (4)
     weeks vacation and sick leave as shall be established.

     5.   Term.  The initial term of employment under this Agreement shall be
     ---------
for the period commencing December 1, 1999 and ending three (3) calendar years
after such date. At the end of each one-year period following such commencing
date, this Agreement shall automatically be extended for an additional one (1)
year period beyond the then-effective expiration date, unless written notice
from the Bank or the Employee is received sixty (60) days prior to an
anniversary date advising the other party that this Agreement shall not be
further extended.

     6.   Other Compensation. The Bank shall provide to the Employee an
     -----------------------
automobile for use by the employee during his employment with the Bank. The
Employee shall select the make of the automobile, subject to the approval of the
Board of Directors, and the Employee shall assume and be responsible for all tax
consequences as same shall be determined by the accountants for the Bank with
regard to personal use, business use, and taxability of such benefit to the
employee. The Employee shall be compensated for maintenance, gas expense, and
other expenses associated with said automobile as same shall pertain to business
use only, and shall submit to the Bank a written summary with respect to the use
of said vehicle and the business expenses associated with same on a monthly
basis.

     7.   Loyalty/Non-Competition.
     ----------------------------

          A.   The Employee shall devote his full efforts and entire
     business time to the performance of his duties under this
     Agreement.

          B.   During the term of this Agreement, or any renewals or
     extensions thereof, and for a period of one (1) year after
     termination, the Employee shall not, within Catawba, Alexander,
     Iredell or Lincoln Counties, North Carolina, directly or
     indirectly, own, manage, operate, join, control or participate in
     the
<PAGE>

     management, operation or control of or be employed by or
     connected in any manner with any depository institution or
     financial services business which competes with the Bank or the
     Holding Company without the prior written consent of the Bank.
     Notwithstanding the foregoing, the Employee shall be free without
     such consent to purchase or hold as an investment or otherwise up
     to 5% of the outstanding stock or other securities of any
     corporation which has its securities publicly traded on any
     recognized securities exchange or in any over-the-counter market.

          The Employee shall hold in confidence all knowledge or
     information of a confidential nature with respect to the business
     of the Bank or the Holding Company, received by him during the
     term of this Agreement, and will not disclose or make use of such
     information without the prior written consent of the Bank.

          The Employee acknowledges that it would not be possible to
     ascertain the amount of monetary damages in the event of a breach
     by the Employee under the provisions of this Paragraph 7. The
     Employee agrees that in the event of the breach of this
     Paragraph, injunctive relief enforcing the terms of this
     Paragraph is an appropriate remedy.

          The Bank and Employee further agree that in the event the
     Bank shall terminate the employment of the Employee for cause or
     should the Employee resign his employment during any period of
     the term of his employment contract, then and in that event, the
     non-competition provisions of this Agreement shall be applicable.
     If, however, the Bank should terminate the employment of the
     Employee without cause during the last year of said Agreement,
     the non-competition provisions of this Agreement shall not be
     applicable, and the Bank shall not proceed with respect to the
     remedies as set forth above.

     8.   Standards. The Employee shall perform his duties under this Agreement
     --------------
in accordance with such reasonable standards expected of employees with
comparable positions in comparable organizations and as may be established from
time-to-time by the Board of Directors. The Bank shall provide the Employee with
<PAGE>

the working facilities and staff customary for similar executives and necessary
for him to perform his duties.

     9.   Termination and Termination Pay.
     ------------------------------------

          A.   The Employee's employment under this Agreement shall be
     terminated upon the following occurrences:

               (1)  The death of the Employee during the term of this
          Agreement, in which the Employee's estate shall be entitled
          to receive the compensation due the Employee through the
          last day of the calendar month in which his death shall have
          occurred and for a period of three (3) months thereafter.

               (2)  The Employee's employment under this Agreement may
          be terminated at any time by a majority vote of the
          Directors or by the Employee upon sixty (60) days written
          notice to the Employee or the Bank, as the case may be. Upon
          such termination by the Employee or by the Directors "for
          cause," the Employee shall be entitled to receive
          compensation under this Agreement through the effective date
          of such termination and such other benefits, if any, as may
          be provided by the terms of other plans and programs of the
          Bank in the event of termination.

          Any such termination by the Directors other than termination
          "for cause" shall not prejudice the Employee's right to
          compensation or benefits under this Agreement. The Employee
          shall have no right to receive compensation or benefits for
          any period after termination "for cause." Termination "for
          cause" shall include termination because of the Employee's
          personal dishonesty, incompetence, willful misconduct,
          breach of fiduciary duty involving personal profit,
          intentional failure to perform stated duties, willful
          violation of any law, rule or regulation (other than traffic
          violations or similar
<PAGE>

          offenses), or final cease and desist order, or any material
          breach of any provision of this Agreement.

               (3)  If the Employee is removed or permanently
          prohibited from participating in the conduct of the Bank's
          affairs by any order issued by any regulatory agency all
          obligations of the Bank under this Agreement shall terminate
          as of the effective date of the order. The rights of the
          Employee vested prior to the date of such order shall not be
          affected.

               (4)  All obligations under this Agreement may be
          terminated:

                    (a)  by the Federal Deposit Insurance
               Corporation at the time it enters into an
               agreement to provide assistance to or on
               behalf of the Bank under the authority
               contained in its Rules and Regulations; and,

                    (b)  by any regulatory or supervisory
               agency which enters any orders to resolve
               problems related to the operation of the
               Bank, or when the Bank is determined to be in
               an unsafe or unsound condition. Any rights of
               the Employee vested prior to such time shall
               not be affected by any such determination or
               order.

     10.  Suspension of Employment.
     -----------------------------

     A.   The suspension of the Employee from office or temporary prohibition
from participation by the Employee in the conduct of the affairs of the Bank
pursuant to notice served by any supervisory or regulatory agency, unless stayed
by appropriate proceedings, shall suspend, as of the date of such service, all
obligations of the Bank under the terms of this Agreement.

<PAGE>

     B.   In the event the charges specified in a notice served as provided in
Subparagraph A of this Section shall be dismissed, the Bank shall:

               (1)  pay the Employee the compensation withheld from
          such Employee pursuant to the suspension of the Bank's
          obligation as required in Subparagraph A of this Section;
          and,

               (2)  reinstate the obligations suspended as required in
          Subparagraph A of this section.

     11.  Change in Control.
     ----------------------

          A.   In the event of a "Change in Control" (as defined in
     Subparagraph (C) below), the term of employment under this Agreement
     automatically shall be extended to a period of three (3) years
     beginning on the date of the Change in Control, and the Bank or its
     successor shall be bound by the terms of this Agreement and shall be
     prohibited, during the remainder of such term, from:

               (1)  Assigning Employee any duties and/or
          responsibilities that are inconsistent with his position,
          duties, responsibilities or status at the time of the
          Change in Control, or requiring that he report to any
          person or body other than the Board of Directors of the
          Bank and Holding Company; or

               (2)  Adjusting Employee's annual base salary rate
          other than in accordance with the provisions of
          Subparagraph (B) below; or

               (3)  Reducing in level, scope or coverage or
          eliminating Employee's life insurance, medical or
          hospitalization insurance, disability insurance, profit
          sharing plans, stock option plans, stock purchase plans,
          deferred compensation plans, management retention plans,
          retirement plans, stock ownership plans or similar plans
          or benefits being provided by the Bank
<PAGE>

          or the Holding Company to the Employee other than those
          arising from the Bank's management incentive plan as of
          the effective date of the Change in Control; or

               (4)  Transferring Employee to a location which is an
          unreasonable distance from his current principal work
          location, without the Employee's express written consent.

          B.   In the event of a Change in Control, the Employee's base
     salary shall be adjusted to include an amount equal to the average
     of the two previous years" bonuses arising from the Bank's
     management incentive plan, and/or discretionary bonuses, if any, and
     such adjusted base salary shall be increased by not less than six
     percent (6%) annually beginning at the date of the Change in Control
     and continuing each year for the three-year term thereafter.

          C.   For the purposes of this Agreement, the term "Change in
     Control" shall mean any of the following events:

          (1)  a change in control of a nature that would be
          required to be reported 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 Securities
          Exchange Act of 1934, as amended (the "Exchange Act"); or

          (2)  such time as any "person" (as such term is used in
          Sections 13(d) and 14(d) of the Exchange Act), other than
          a person who beneficially owned as of January 1, 1998,
          more than 5% of the Bank's securities, is or becomes the
          "beneficial owner" (as defined in Rule 13d-3 under the
          Exchange Act), directly or indirectly, of securities of
          the Holding Company or Bank representing 20 percent or
          more of the combined voting power of the outstanding
          Common Stock of the Holding Company or Common Stock of the
          Bank, as applicable; or
<PAGE>

               (3)  individuals who constitute the Board or board of
          directors of the Holding Company on the date hereof (the
          "Incumbent Board" and "Incumbent Holding Company 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
          Holding Company Board, as applicable, or whose nomination
          for election by the Bank's or Holding Company's
          shareholders was approved by the Bank's or Holding
          Company's Board of Directors or Nominating Committee, as
          applicable, shall be considered as though he or she were a
          member of the Incumbent Board or Incumbent Holding Company
          Board, as applicable; or

               (4)  either the Holding Company or the Bank
          consolidates or merges with or into another corporation,
          association or entity or is otherwise reorganized, where
          neither the Holding Company nor the Bank, respectively, is
          the surviving corporation in such transaction; or

               (5)  all or substantially all of the assets of either
          the Holding Company or the Bank are sold or otherwise
          transferred to or are acquired by any other entity or
          group.

          Notwithstanding the other provisions of this Paragraph 11, a
     transaction or event shall not be considered a Change in Control if,
     prior to the consummation or occurrence of such transaction or
     event, Employee, Bank and Holding Company agree in writing that the
     same shall not be treated as a Change in Control for purposes of
     this Agreement.

          D.   In the event any dispute shall arise between the Employee
     and the Bank or Holding Company (or any successor) as to the terms
     or interpretation of this Agreement, including this Paragraph 11,
     whether instituted by formal legal proceedings or otherwise,
<PAGE>

     including any action taken by the Employee to enforce the terms of
     this Paragraph 11 or in defending against any action taken by the
     Holding Company or the Bank, the Bank shall reimburse the Employee
     for all costs and expenses incurred in such proceedings or actions,
     including attorney's fees, in the event the Employee prevails in any
     such action.

     12.  Disability.  If, by reason of physical or mental disability during the
     ---------------
term hereof, Employee is unable to carry out the normal and usual duties of his
employment hereunder, the Employee shall receive his full salary from the Bank
for up to twenty (20) working days for which he is unable to work. Medical
disability shall require a doctor's statement indicating the date the Employee
became disabled as well as a statement that he is medically able to return to
work before he can resume his duties. If, after thirty (30) consecutive days (1
month), he is still unable to return to work, he will be covered by the
disability insurance policy of the Bank. The disability insurance policy of the
Bank shall pay 66-2/3% of full salary to a maximum of $7,500.00 per month. In
the event of total disability, hospitalization insurance as carried by the Bank
for the Employee shall continue for two (2) years, or until the Employee
qualifies under Social Security Health Insurance. While disabled, the Employee
will keep his original date of employment and all seniority benefits for up to
twelve (12) weeks. Group insurance will be kept in force (Employee will continue
to pay for dependent insurance); however, if the Employee does not return to
work from medical leave after twelve (12) weeks, the Bank may recover the
premiums paid to maintain the coverage. A "return to work" occurs when an
Employee returns to work for at least thirty (30) days. Upon returning to work
from such disability, the Employee shall be restored to his previous position or
to an equivalent position with equivalent benefits, pay, and other conditions of
employment.

     13.  Successors and Assigns.
     ----------------------------

          A.   This Employment Agreement shall enure to the benefit of
     and be binding upon any corporate or other successor of the Bank
     which shall acquire, directly or indirectly, by conversion, merger,
     consolidation, purchase or otherwise, all or substantially all of
     the assets of the Bank.
<PAGE>

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

     14.  Amendments.  No amendments or additions to this Agreement shall be
     ---------------
binding unless in writing by both parties, except as herein otherwise provided.

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

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

     17.  Entire Agreement; Counterparts.
     -----------------------------------

     A.   This Agreement constitutes the entire agreement between the
     Employee and the Bank with respect to the subject matter hereof and
     supersedes all prior agreements with respect thereto. This Agreement
     may be executed in one or more counterparts, all of which taken
     together shall constitute one and the same instrument.

     B.   This Agreement replaces the Agreement between the parties dated
     February 22, 1994 and the Addendum to the original agreement and all
     other agreements between the parties prior to the date hereof
     respecting the subject matter hereof. Any and all prior agreements
     shall be cancelled and have no further force or effect when this
     Agreement becomes effective.

     18.  Notices.  Any notice or other communication required or permitted
     ------------
under this Agreement shall be effective only if it is writing, delivered in
person or by reliable overnight courier service or deposited in the mail,
postage prepaid, return receipt requested and addressed as follows:
<PAGE>

     Address of the Bank: Peoples Bank, Post Office Box 467, Newton, North
     Carolina, 28658.

     Address of the Holding Company: Peoples Bancorp of North Carolina, Inc.,
     Post Office Box 467, Newton, North Carolina, 28658.

     Address(es) of the Employee:  Tony W. Wolfe, 3291 Blackburn Bridge Road,
     Lincolnton, North Carolina 28092, with a duplicate copy to Tony W. Wolfe,
     P.O. Box 204, Newton, North Carolina, 28658.

     Notices given in person or by overnight courier service shall be deemed
given when delivered to the address required by this section, and notices given
by mail shall be deemed given three (3) days after deposit in the mail. Any
party hereto may designate, by written notice to the other party in accordance
herewith, any other address to which notices addressed to him shall be sent.

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

                                   PEOPLES BANK, a North Carolina banking
                                   Corporation

                                   By: /s/  Robert C. Abernethy
                                      -------------------------------------
                                       Robert C. Abernethy, Chairman
                                       Board of Directors

                                        /s/ Tony W. Wolfe
                                      -------------------------------------
                                        Tony W. Wolfe

The Foregoing Agreement is joined in and agreed to by Peoples Bancorp of North
Carolina, Inc.

                                   PEOPLES BANCORP OF NORTH CAROLINA, INC.,
                                   a North Carolina  Corporation

                                   by: /s/ Robert C. Abernethy
                                     ---------------------------------------
                                      Robert C. Abernethy, Chairman
                                      Board of Directors

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