Form S-4

As soon as practicable following the effective date of this Registration Statement.

If the only securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box: ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

The information in this prospectus is not complete and may be changed. 1^st Financial may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

The Boards of Directors of AB&T Financial Corporation and 1^st Financial Services Corporation have agreed to merge AB&T into 1^st Financial. This document is a combined Joint Proxy Statement/Prospectus being distributed by AB&T and 1^st Financial to their shareholders in connection with the meetings of their shareholders that have been called to vote on the merger. It contains important information, and you should read it carefully.

1^st Financial common stock currently is traded on The OTC Bulletin Board under the symbol “FFIS.” The most recent reported closing price of 1^st Financial common stock on , 2009, was $ . AB&T’s common stock currently is traded on the OTC Bulletin Board under the symbol “ABTO.” The most recent reported closing price of AB&T’s common stock on , 2009, was $ . Both companies’ common stocks are relatively thinly traded.

Some risk factors AB&T’s and 1^st Financial’s shareholders should consider before they decide how to vote on the merger are described in this document under the heading “Risk Factors,” which begins on page 18.

Neither the Securities and Exchange Commission nor any state securities regulator has approved of the 1^st Financial common stock to be issued in the merger or determined if this document is accurate or complete. It is a criminal offense to tell you otherwise.

The shares of 1^st Financial common stock to be issued to holders of AB&T common stock will represent equity interests in 1st Financial. They are not bank deposits or savings accounts, are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency or other person, and will be subject to investment risk, including the possible loss of principal.

This Joint Proxy Statement/Prospectus is dated , 2009, and is being mailed to both AB&T’s and 1^st Financial’s shareholders on or about , 2009.

The Special Meeting of shareholders of AB&T Financial Corporation will be held at on , 2009, at located at Street, in Gastonia, North Carolina.

At the Special Meeting, you may cast one vote for each share of AB&T common stock and each share of AB&T preferred stock you held of record on , 2009, which is the record date for the meeting.

AB&T’s Board of Directors recommends that holders of AB&T common stock and AB&T preferred stock vote “FOR” the Agreement and “FOR” the proposal to authorize management to adjourn the Special Meeting to allow additional time to solicit votes needed to approve the Agreement.

If the Agreement is approved and the merger is completed, holders of both AB&T common stock and AB&T preferred stock will have the right to dissent and demand payment of the fair value of their shares. Your right to dissent is conditioned on your strict compliance with the requirements of Article 13 of Chapter 55 of the North Carolina General Statutes. The full text of that statute is attached as Appendix B to the Joint Proxy Statement/Prospectus which accompanies this Notice.

You are invited to attend the meeting in person. However, even if you plan to attend, please complete, sign and date the enclosed appointment of proxy and return it to AB&T as soon as you can in the accompanying envelope. Doing that will help ensure that your shares of AB&T common stock are represented and that a quorum is present at the meeting. Even if you sign an appointment of proxy, you may still revoke it later or attend the meeting and vote in person.

A Special Meeting of shareholders of 1 ^st Financial Services Corporation will be held at .m. on , 2009, at the located at in , North Carolina.

At the Special Meeting, you may cast one vote for each share of 1^st Financial common stock you held of record on , 2009, which is the record date for the meeting.

1^st Financial’s Board of Directors recommends that holders of 1^st Financial common stock vote “FOR” the Agreement and “FOR” the proposal to authorize management to adjourn the Special Meeting to allow additional time to solicit votes needed to approve the Agreement.

You are invited to attend the meeting in person. However, even if you plan to attend, please complete, sign and date the enclosed appointment of proxy and return it to 1^st Financial as soon as you can in the accompanying envelope. Doing that will help ensure that your shares of 1^st Financial common stock are represented and that a quorum is present at the meeting. Even if you sign an appointment of proxy, you may still revoke it later or attend the meeting and vote in person.

SUMMARY

The following is a brief summary of the information in this document. The summary is not intended to be complete, and it may not contain all the information that is important to you. To better understand the Agreement that will be voted on by AB&T’s and 1^st Financial’s shareholders at their respective shareholder meetings, you should read this entire document carefully. Each item in this summary includes a page reference directing you to a more complete discussion of the information in that item.

General Information

AB&T and 1^st Financial propose to merge AB&T into 1^st Financial.

The terms and conditions of the merger are provided for in the Agreement dated February 16, 2009 between AB&T and 1^st Financial. A copy of the Agreement is attached as Appendix A to this Joint Proxy Statement/Prospectus, and you should read it carefully. When the merger becomes effective:

•

AB&T will be merged into 1^st Financial, with 1^st Financial as the surviving company,

•

Outstanding shares of AB&T common stock will be converted into the right to receive shares of 1^st Financial common stock, and

•

Outstanding shares of AB&T preferred stock will be converted into the right to receive shares of 1^st Financial preferred stock. (See “The Merger” on page .)

Each share of AB&T common stock will be converted into the right to receive 1.175 shares of 1^st Financial common stock.

When the merger is completed, each outstanding share of AB&T common stock (except for shares held by AB&T’s shareholders who “dissent”) automatically will be converted into the right to receive 1.175 shares of 1^st Financial common stock, and cash for fractional shares. (See “The Merger — Conversion of AB&T Capital Stock” on page , “Rights of Dissenting AB&T Shareholders” on page , and “Capital Stock of 1^st Financial — Description of Capital Stock” on page .)

1^st Financial will pay cash instead of issuing fractional shares.

The conversion of shareholders’ AB&T common stock will result in fractional shares of 1^st Financial common stock in many cases. 1^stFinancial will pay cash, determined by multiplying the fraction by the closing price of 1^st Financial shares on the date the merger becomes effective, rather than issuing fractional shares. (See “The Merger — Treatment of Fractional Shares” on page .)

Each share of AB&T preferred stock will be converted into the right to receive a share of 1^st Financial preferred stock.

When the merger is completed, each outstanding share of AB&T Series A preferred stock (except for shares held by AB&T’s shareholders who “dissent”) automatically will be converted into the right to receive one share of 1^st Financial preferred stock. (See “The Merger — Conversion of AB&T Capital Stock” on page , and “Rights of Dissenting AB&T Shareholders” on page .)

AB&T’s financial advisor said the merger is fair to the AB&T’s shareholders.

FIG Partners, LLC has served as AB&T’s financial advisor in connection with the merger. It has given AB&T’s Board of Directors its written opinion that it believes the consideration to be received by AB&T’s sharehholders in the merger is fair from a financial point of view. A copy of the opinion is attached as Appendix C to this Joint Proxy Statement/Prospectus and AB&T’s shareholders should read it carefully. (See “The Merger — Opinion of AB&T’s Financial Advisor” on page .)

1^st Financial’s financial advisor said the merger is fair to 1^st Financial’s shareholders.

The Carson Medlin Company has served as 1^st Financial’s financial advisor in connection with the merger. It has given 1^st Financial’s Board of Directors its written opinion that the consideration to be paid to AB&T’s shareholders under the Agreement is fair from a financial point of view to 1^st Financial and its shareholders. A copy of the opinion is attached as Appendix D to this Joint Proxy Statement/Prospectus and 1^st Financial’s shareholders should read it carefully. (See “The Merger — Opinion of 1^st Financial’s Financial Advisor” on page .)

The merger will be treated as an “acquisition” for accounting purposes.

The merger will be accounted for using the acquisition method of accounting. Under the acquisition method of accounting, the assets and liabilities of AB&T as of the effective time will be recorded at their respective fair values and added to those of 1^st Financial. However, certain applications of the acquisition method have been changed significantly. (See “The Merger — Accounting Treatment” on page .)

The merger will be tax free to AB&T’s shareholders, other than for cash they receive for fractional shares or as “dissenting shareholders.”

AB&T and 1^st Financial have received a written opinion from Porter Keadle Moore, LLP to the effect that, for holders of AB&T common stock and AB&T preferred stock, the merger will be treated as a “tax-free reorganization” for federal income tax purposes. Also, cash received for fractional shares of 1^st Financial common stock or on the exercise of “dissenters’ rights” will not be treated as tax free. There are various qualifications and limitations to the tax opinion, and each AB&T shareholder’s individual circumstances may affect the tax consequences of the merger to that shareholder. AB&T’s shareholders should consult their own tax advisors in order to make an evaluation of the tax consequences of the merger based on their particular individual circumstances. (See “The Merger — Material Federal Income Tax Consequences” on page .)

AB&T’s shareholders have “dissenters’ rights” in the merger.

If the merger is completed, North Carolina law gives holders of AB&T common stock and AB&T preferred stock the right to dissent and to receive the “fair value” of their shares in cash. Holders of 1^st Financial stock do not have the right to dissent.

Having dissenters’ rights means that an AB&T shareholder may “dissent” and receive the “fair value” of his or her AB&T stock in cash instead of accepting the consideration offered in the merger. For an AB&T shareholder to dissent, the shareholder must, among other things:

•

Give to AB&T, before the vote on the Agreement is taken at the AB&T Special Meeting, timely written notice of the

shareholder’s intent to dissent and demand payment for his or her shares if the merger is completed;

•

Not vote in favor of the Agreement;

•

Demand payment and deposit his or her share certificates by the date set forth in, and in accordance with the terms and conditions of, a “dissenters’ notice” that will be sent to the shareholder by AB&T; and

•

Otherwise satisfy the requirements of the North Carolina statutes which are attached as Appendix B to this Joint Proxy Statement/Prospectus.

To dissent, an AB&T shareholder must follow the requirements of the North Carolina statutes, including giving the required written notice before the vote on the Agreement is taken at the AB&T Special Meeting. Those steps are summarized under the caption “Rights of Dissenting AB&T Shareholders” on page , and a copy of the North Carolina dissenter’s rights statutes are attached as Appendix B to this Joint Proxy Statement/Prospectus. AB&T’s shareholders who intend to exercise dissenters’ rights should read the appropriate statutes carefully and consult with their own legal counsel. AB&T’s shareholders also should remember that if they return signed appointments of proxy but fail to provide instructions as to how their shares of AB&T common stock are to be voted, they will be considered to have voted “FOR” the Agreement and will not be able to assert dissenters’ rights. Also, AB&T’s shareholders who exercise dissenters’ rights may have taxable income as a result, so shareholders who intend to dissent also should consult with their own tax advisors. (See “Rights of Dissenting AB&T Shareholders” on page , and “The Merger — Material Federal Income Tax Consequences” on page .)

The rights of holders of AB&T common stock are different from the rights of 1^st Financial shareholders.

When AB&T shareholders receive 1^st Financial common stock for their AB&T common stock, they will become shareholders of 1^st Financial. There are certain differences that AB&T’s shareholders should be aware of between the rights of holders of AB&T common stock and the rights of holders of 1st Financial common stock. (See “Capital Stock of 1^st Financial — Differences in Capital Stock of 1^stFinancial and AB&T” on page .) Those differences include:

•

AB&T’s shareholders have dissenters’ rights in connection with various types of corporate transactions, including mergers, while 1^st Financial’s shareholders do not have dissenters’ rights because 1^st Financial has at least 2,000 shareholders of record.

•

AB&T’s charter requires a two-thirds vote of shareholders to approve any merger or similar transaction when that transaction has not been recommended by a majority of AB&T’s directors who are unaffiliated with any other party to that transaction. 1^st Financial’s charter has no such provision.

•

1^st Financial’s charter permits, but does not require, directors to consider:

•

in addition to the interests of shareholders, the social and economic effects of decisions they make and the interests of employees, depositors, customers, creditors, and communities served,

•

in any change of control proposal, in addition to profits to shareholders, factors that affect the viability and integrity of the surviving company.

AB&T’s charter contains no such provision.

•

1^st Financial’s charter authorizes the Board to issue more shares of its two classes of stock than AB&T’s board may issue of its two classes of stock.

AB&T’s officers and directors have special interests in the merger that are different from AB&T’s shareholders.

Some of AB&T’s officers and directors will receive payments or other benefits as a result of the merger that give them interests in the merger that are not shared by all AB&T shareholders. The most significant of those payments and benefits are described below.

•

AB&T’s President and Chief Executive Officer, Daniel C. Ayscue, will receive a new employment agreement which provides, among other things, for severance compensation and a change of control payment under certain circumstances. He also will become vested in benefits under AB&T’s existing incentive stock option plan.

•

Stock options held by AB&T’s directors, officers, and employees will be converted into options to purchase shares of 1^st Financial common stock which, on 2009, would have amounted to shares for Mr. Ayscue, and an aggregate of approximately shares for all AB&T’s directors and executive officers as a group.

•

Two of AB&T’s current directors, one of whom shall be Mr. Wayne F. Shovelin, will be selected to serve as members of 1^st Financial’s Board, and they will receive fees for their services.

(See “The Merger — Special Interests of AB&T’s Directors and Officers” on page .)

1^st Financial’s directors and executive officers will continue to serve in their current positions.

1^st Financial’s current directors and executive officers will continue to serve in their current positions with 1^st Financial following the merger. (See “Information About 1^st Financial — Board of Directors” on page and “— Executive Officers” on page , and “Information About AB&T — Executive Officers” on page .)

1^st Financial’s current directors and executive officers beneficially own an aggregate of 1,386,441 shares of 1^st Financial’s outstanding common stock (including shares covered by exercisable stock options

they hold) which amounts to approximately 24.68% of 1^st Financial’s outstanding shares. Following the merger, it is expected that those shares will amount to approximately 17.02% of 1^st Financial’s outstanding common stock. (See “Information About 1^st Financial — Beneficial Ownership of Common Stock” on page .)

The Agreement will be voted on at the AB&T Special Meeting. AB&T’s Board of Directors recommends that AB&T’s shareholders vote “FOR” the Agreement.

AB&T will hold its Special Meeting on , 2009, at at located at in Gastonia, North Carolina. At the meeting, AB&T’s shareholders will vote on a proposal to approve the Agreement that provides for the merger and on a proposal to authorize AB&T’s management to adjourn the meeting, if necessary, to allow additional time to solicit votes needed to approve the Agreement.

AB&T’s Board of Directors has approved the Agreement and recommends that AB&T’s shareholders vote “FOR” its approval. (See “The Merger — Recommendations of Boards of Directors and Reasons for the Merger” on page .) AB&T’s Board of Directors also recommends that AB&T’s shareholders vote “FOR” the proposal to authorize management to adjourn the meeting to allow additional time to solicit votes needed to approve the Agreement. (See “Information About AB&T — Proposal to Authorize Management to Adjourn the AB&T Special Meeting” on page .)

To complete the merger, the Agreement must be approved by the affirmative vote of a majority of the outstanding shares of AB&T common stock and by the affirmative vote of a majority of the outstanding shares of the AB&T preferred stock. Accordingly, if a holder of AB&T common stock or AB&T preferred stock fails to vote on the merger at the AB&T Special Meeting, it will have the same effect as a vote against the merger. (See “The Merger — Required Shareholder Approvals” on page .) AB&T’s directors and executive officers and their affiliates have the right to vote an aggregate of 203,183 shares of AB&T common stock, or approximately 8.90% of the outstanding shares of AB&T common stock that can be voted at the AB&T Special Meeting. (See “Information About AB&T — Beneficial Ownership of Capital Stock” on page .)

You can vote at the AB&T Special Meeting if you were a record owner of AB&T common stock or AB&T preferred stock at the close of business on , 2009. On that date, there were outstanding shares of AB&T common stock and 3,500 outstanding shares of AB&T preferred stock. You may cast one vote for each share of AB&T common stock and for each share of preferred stock that you owned of record on the record date. (See “The Shareholders’ Meetings—Special Meeting of AB&T’s Shareholders” on page .)

There will be a Special Meeting of 1^st Financial’s shareholders to vote on the Agreement. 1^st Financial’s Board of Directors recommends that 1 ^st Financial’s shareholders vote “FOR” the Agreement.

1^st Financial will hold its Special Meeting on , 2009, at .m., at the located at in , North Carolina. At the meeting, holders of 1^st Financial common stock will vote on a proposal to approve the Agreement that provides for the merger and on a proposal to authorize 1^st Financial’s management to adjourn the meeting, if necessary, to allow additional time to solicit votes needed to approve the Agreement.

1^st Financial’s Board of Directors also has approved the Agreement and recommends that 1^st Financial’s shareholders vote “FOR” its approval. (See “The Merger — Recommendations of Boards of Directors and Reasons for the Merger” on page ). 1^st Financial’s Board of Directors also recommends that 1^st Financial’s shareholders vote “FOR” the proposal to authorize management to adjourn the meeting to allow additional time to solicit votes needed to approve the Agreement. (See “Information About 1^st Financial — Proposal to Authorize Management to Adjourn the 1^st Financial Special Meeting” on page .)

To complete the merger, the Agreement must be approved by the affirmative vote of a majority of the outstanding shares of 1^st Financial common stock. Accordingly, if a holder of 1^st Financial common stock fails to vote on the merger at the 1^st Financial Special Meeting, it will have the same effect as a vote against the merger. (See “The Merger — Required Shareholder Approvals” on page .) 1^st Financial’s directors and executive officers and their affiliates have the right to vote an aggregate of 767,682 shares of 1^st Financial common stock, or approximately 15.36% of the outstanding shares that can be voted at the 1^st Financial Special Meeting. 1^st Financial expects that those shares will be voted for approval of the Agreement. (See “Information About 1^st Financial — Beneficial Ownership of Common Stock” on page .)

You can vote at the 1^st Financial Special Meeting if you were a record owner of 1^st Financial common stock at the close of business on , 2009. On that date, there were outstanding shares of 1^st Financial common stock. You may cast one vote for each share of 1^st Financial common stock that you owned of record on the record date. (See “The Shareholders’ Meetings—Special Meeting of 1st Financial’s Shareholders” on page .)

A federal banking regulator also must approve the merger.

The merger also is subject to approval by the Federal Reserve Bank of Richmond.

1^st Financial and AB&T are awaiting approval from the Federal Reserve Bank of Richmond. (See “The Merger — Required Regulatory Approval” on page .)

There are various other conditions to the merger.

In addition to required shareholder and regulatory approvals, and receipt of the fairness opinions and a tax opinion, the Agreement contains various other conditions which are customary in merger transactions that must be satisfied for the merger to be completed.

Those other conditions include performance by 1^st Financial and AB&T of their respective agreements, the absence of material adverse changes in either company’s business, receipt of opinions from their respective legal counsel, compliance with laws that apply to the merger, and the absence of any legal or regulatory proceeding that challenges the merger or that otherwise adversely affects the merger or either company. (See “The Merger — Conditions to the Merger” on page .)

There are ways in which the Agreement could be terminated before the merger is completed.

Before the merger is completed, the Agreement may be terminated by the mutual agreement of AB&T and 1^st Financial and, under conditions described in the Agreement, it also may be terminated by either AB&T or 1^st Financial alone. (See “The Merger — Termination of the Agreement” on page .)

The merger is expected to be completed during the second or third quarter of 2009.

Subject to approval by the Federal Reserve Bank of Richmond and AB&T’s and 1^st Financial’s shareholders, AB&T and 1^st Financial expect that the merger will become effective during the second or third quarter of 2009. (See “The Merger — Closing Date and Effective Time” on page .)

AB&T and 1^st Financial are bank holding companies; Alliance and Mountain 1^st are banks.

AB&T. AB&T is a North Carolina business corporation registered with the Federal Reserve Board as a bank holding company and is the parent company of Alliance Bank & Trust Company. The mailing address of AB&T’s executive office is 292 West Main Avenue, Gastonia, NC 28052, and its telephone number is (704) 867-5828. It has no separate operations and conducts no business on its own other than owning Alliance and supporting its business. AB&T’s consolidated financial statements for December 31, 2008, reflected total assets of $170.3 million and an accumulated deficit of $514 thousand.

Alliance is an FDIC-insured North Carolina banking corporation that engages in a general commercial banking business and is a wholly-owned subsidiary of AB&T. Alliance’s principal office address is 292 West Main Avenue, Gastonia, NC 28052, and its telephone number is (704) 867-5828. Its principal activities include soliciting deposits from, and making loans to, individuals and small- and medium-sized businesses in its banking market which includes Cleveland and Gaston Counties, North Carolina. Alliance engages in all types of commercial lending, but has significant concentrations in real estate mortgage and commercial and industrial loans. Approximately 70.51% of its loans are variable rate loans and 29.49% are fixed rate loans. Alliance offers all types of deposit products to its customers, with savings and time deposits comprising a significant portion of its deposits. See “Information About AB&T — Business” on page .

1^st Financial. 1^st Financial is a North Carolina business corporation registered with the Federal Reserve Board as a bank holding company and is the parent company of Mountain 1 ^st Bank & Trust Company.

The mailing address of 1^st Financial’s executive office is 101 Jack Street, Hendersonville, NC 28792, and its telephone number is (828) 697-3100. 1^st Financial has no separate operations and conducts no business on its own other than owning Mountain 1^st and supporting its business. 1^st Financial’s consolidated financial statements for the year ended December 31, 2008, reflected total assets of $707.7 million and net income of $339 thousand.

Mountain 1^st is an FDIC-insured North Carolina banking corporation that engages in a general commercial banking business and is a wholly-owned subsidiary of 1^st Financial. Mountain 1^st’s principal office and telephone number are the same as those of 1^st Financial. Its principal activities include soliciting deposits from, and making loans to, individuals and small- and medium-sized businesses in its banking market which includes the ten counties in western North Carolina where its 15 banking offices are located. Mountain 1^st engages in all types of commercial lending, but has significant concentrations in real estate and commercial loans. Approximately 73.54% of its loans are variable rate loans and 26.46% are fixed rate loans. Mountain 1^st offers all types of deposit products to its customers. (See “Information About 1^st Financial — Business” on page .)

1^st Financial common stock and AB&T common stock are both traded on the Over-the-Counter Bulletin Board.

The trading symbol for 1^st Financial common stock is “FFIS.” On February 16, 2009 (the day before the merger was publicly announced), and , 2009, the most recent reported closing prices of 1^st Financial common stock were $5.50 and $ , respectively. The trading symbol for AB&T common stock is “ABTO.” On February 16, 2009 (the day before the merger was publicly announced), and , 2009, the most recent reported closing prices of AB&T common stock were $6.75 and $ , respectively. (See “Market and Dividend Information” on page .)

The merger involves some risks for AB&T’s shareholders.

In deciding how to vote on the Agreement and merger, holders of AB&T’s common stock will be making an investment decision on whether to take 1^st Financial common stock in exchange for their AB&T common stock. There are some special factors AB&T’s shareholders should consider before they decide how to vote on the Agreement. (See “Risk Factors” on page .)

Selected Financial Information

1^st Financial. The following table contains selected historical consolidated financial information for 1^stFinancial on the dates and for the periods indicated. This selected financial information has been derived from, and you should read it in conjunction with, 1^st Financial’s audited consolidated financial statements and unaudited interim consolidated financial statements, together with related financial statement footnotes, which are included in this Joint Proxy Statement/Prospectus. 1^st Financial became the parent holding company of Mountain 1^st on May 24, 2008. Financial information for prior periods is for Mountain 1^st alone. (See “Consolidated Financial Statements of 1^st Financial Services Corporation” on page F-1.)


	As of and for the Years Ended December 31,
	2008			2007			2006			2005			2004*
	(dollars in thousands, except per share data)
Summary Balance Sheet Data
Assets	$	707,136		$	606,491		$	476,414		$	322,777		$	159,173
Loans, net		575,020			514,372			373,433			239,357			123,245
Deposits		591,014			529,105			424,482			279,953			141,952
Stockholders’ equity		62,570			46,212			42,995			39,871			16,011

Summary Results of Operations Data:
Total interest income	$	38,550		$	40,740		$	29,288		$	14,480		$	3,306
Total interest expense		17,905			19,675			13,429			5,616			1,257

Net interest income		20,645			21,065			15,859			8,864			2,049
Provision for loan losses		6,520			3,390			2,396			1,812			1,840

Net interest income after provision for loan losses		14,125			17,675			13,463			7,052			209
Total other income		4,824			4,294			3,505			2,528			789
Total other expense		18,512			16,211			12,679			11,204			2,126

Income before income taxes		437			5,758			4,289			(1,624	)		(1,128	)
Income taxes		98			2,218			1,509			(553	)		—

Net income	$	339		$	3,540		$	2,780		$	(1,071	)	$	(1,128	)

Net income per share information:
Basic	$	0.04		$	0.71		$	0.56		$	(0.25	)	$	(0.44	)
Diluted		0.04			0.66			0.51			(0.25	)		(0.44	)
Cash dividends		—			0.10			—			—			—

Weighted Average Number of Shares Outstanding
Basic		4,997,027			4,988,604			4,977,795			4,295,894			2,539,428
Diluted		5,234,295			5,381,687			5,442,835			4,295,894			2,539,428

Selected Ratios
Return on average assets		0.05	%		0.65	%		0.68	%		-0.44	%		-1.14	%
Return on average equity		0.69	%		7.85	%		6.67	%		-3.43	%		-6.99	%
Net interest margin		3.24	%		4.01	%		4.02	%		3.79	%		3.15	%

Asset Quality Ratios
Nonperforming loans to period-end loans		1.86	%		0.26	%		0.16	%		n/a			n/a
Allowance for loan losses to period-end loans		1.55	%		1.46	%		1.54	%		1.53	%		1.50	%
Allowance for loan losses to nonperforming loans		83.41	%		564.16	%		943.54	%		n/a			n/a
Nonperforming assets to total assets		1.82	%		0.22	%		0.13	%		n/a			n/a
Net charge-offs to average loans		0.89	%		0.35	%		0.09	%		n/a			n/a

Capital Ratios
Total risk-based capital		12.67	%		10.44	%		12.26	%		16.88	%		14.70	%
Tier 1 risk-based capital		11.41	%		9.18	%		11.01	%		15.62	%		13.45	%
Leverage ratio		9.12	%		7.85	%		9.18	%		13.22	%		11.26	%
Equity to Assets		8.85	%		7.62	%		9.02	%		12.35	%		10.06	%

*	As of and for the period from May 14, 2004 (inception) through December 31, 2004

AB&T. The following table contains selected historical consolidated financial information for AB&T on the dates and for the periods indicated. This selected financial information has been derived from, and you should read it in conjunction with, AB&T’s audited consolidated financial statements and unaudited interim consolidated financial statements, together with related financial statement footnotes, which are included in this Joint Proxy Statement/Prospectus. AB&T became the parent holding company of Alliance on , 2008. Financial information for prior periods is for Alliance alone. (See “Consolidated Financial Statements of AB&T Financial Corporation” on page F- .)


	As of and for the Years Ended December 31,
	2008			2007			2006			2005			2004*
	(dollars in thousands, except per share data)
Summary Balance Sheet Data
Assets	$	170,310		$	147,216		$	112,144		$	72,455		$	21,678
Loans, net		137,734			118,153			90,302			60,094			16,602
Deposits		121,318			103,785			97,546			57,391			10,774
Stockholders’ equity		24,194			24,474			11,226			10,633			10,809

Summary Results of Operations Data:
Total interest income	$	8,810		$	9,866		$	7,574		$	3,310		$	325
Total interest expense		4,567			4,935			3,757			1,196			61

Net interest income		4,243			4,931			3,817			2,114			264
Provision for loan losses		1,313			573			501			554			210

Net interest income after provision for loan losses		2,930			4,358			3,316			1,560			54
Total other income		147			248			166			64			7
Total other expense		3,866			3,248			2,645			1,973			1,208

Income before income taxes		(789	)		1,358			837			(349	)		(1,147	)
Income taxes		(275	)		529			335			(131	)		(390	)

Net income	$	(514	)	$	829		$	502		$	(218	)	$	(757	)

Net income per share information:
Basic	$	(0.19	)	$	0.32		$	0.37		$	(0.16	)	$	(0.71	)
Diluted		(0.19	)		0.32			0.37			(0.16	)		(0.71	)
Cash dividends		—			—			—			—			—

Weighted Average Number of Shares Outstanding
Basic		2,678,205			2,564,472			1,339,105			1,071,264			1,065,030
Diluted		2,678,205			2,564,472			1,339,105			1,071,264			1,065,030

Selected Ratios
Return on average assets		-0.32	%		0.65	%		0.54	%		-0.46	%		-23.61	%
Return on average equity		-2.09	%		3.85	%		4.63	%		-2.04	%		-29.19	%
Net interest margin		2.76	%		4.07	%		4.20	%		4.67	%		4.96	%

Asset Quality Ratios
Nonperforming loans to period-end loans		1.93	%		0.72	%		1.17	%		n/a			n/a
Allowance for loan losses to period-end loans		1.39	%		1.15	%		1.30	%		1.24	%		1.25	%
Allowance for loan losses to nonperforming loans		71.85	%		157.64	%		110.79	%		n/a			n/a
Nonperforming assets to total assets		1.58	%		0.59	%		0.95	%		n/a			n/a
Net charge-offs to average loans		0.56	%		0.38	%		0.08	%		0.03	%		n/a

Capital Ratios
Total risk-based capital		18.04	%		21.21	%		12.59	%		18.06	%		67.92	%
Tier 1 risk-based capital		19.21	%		22.39	%		13.79	%		16.87	%		66.67	%
Leverage ratio		14.01	%		17.28	%		10.16	%		16.68	%		59.55	%
Equity to Assets		14.21	%		16.62	%		10.01	%		14.67	%		49.86	%

*	As of and for the period from September 8, 2004 (inception) through December 31, 2004

Selected Unaudited Pro Forma Combined Financial Information

The following table contains selected historical combined financial information for 1^st Financial and AB&T on a pro forma basis on the dates and for the periods indicated. The pro forma information has been prepared assuming that the merger had been completed on December 31, 2008, for balance sheet data, and on January 1, 2008, for results of operations data, using the “acquisition” method of accounting.

Under the acquisition method of accounting, 1^st Financial will record the assets and liabilities of AB&T at their fair values on the closing date of the merger. The selected unaudited pro forma condensed consolidated balance sheets as of December 31, 2008, and the selected unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2008, have been prepared under the assumption that the merger was completed on December 31, 2008 for balance sheet data, and January 1, 2008 for results of operations data. The pro forma calculations, shown below, assume a closing price of $6.50, which represents the closing price of 1 ^st Financial’s common stock on December 31, 2008.

The selected unaudited pro forma condensed consolidated financial information is presented for illustrative purposes only, and does not indicate either the operating results that would have occurred had the merger been consummated on January 1, 2008, or future results of operations or financial condition. The selected unaudited pro forma condensed consolidated financial information is based upon assumptions and adjustments that 1^st Financial believes are reasonable. No assumptions have been applied to the selected pro forma condensed consolidated financial statements regarding possible revenue enhancements, or asset dispositions. The selected unaudited pro forma condensed consolidated financial statements should be read in conjunction with 1^st Financial’s consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operation” for AB&T and for 1^st Financial, which are both included in this Joint Proxy Statement / Prospectus.

1^st Financial is required to apply Statement on Financial Accounting Standards No. 141 Revised Business Combinations (“SFAS 141 (R)”) which became effective on January 1, 2009. As of the date of merger, AB&T’s assets and liabilities will be recorded at their estimated fair values. To the extent that the purchase price exceeds the estimated fair value of the net assets acquired, the excess will be allocated to goodwill. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the goodwill resulting from the merger will not be amortized to expense, but instead will be reviewed for impairment at least annually. To the extent goodwill is impaired, its carrying value would be written down to its implied fair value and a charge would be made to earnings. To the extent the fair value of the net assets of AB&T exceed the fair value of 1^st Financial’s shares received (measured on the closing date of the transaction), negative goodwill will be recognized in the combined statement of operations. Core deposit and other intangibles with definite useful lives will be amortized to expense over their useful lives. Adjustments subsequently made to the provisional amounts recorded on the acquisition date will be made retroactively during a measurement period not to exceed one year; acquisition-related restructuring costs that do not meet the criteria in SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” will be expensed as incurred; transaction costs will be expensed as incurred; reversals of deferred income tax valuation allowances and income tax contingencies will be recognized in earnings subsequent to the measurement period; and the allowance for loan losses of an acquiree will not be permitted to be recognized by the acquirer.


	As of and For the Year Ended December 31, 2008
	(dollars in thousands except per share data)
Selected balance sheet data:
Gross loans	$	718,796
Securities		97,134
Total assets		877,346
Deposits		791,422
Shareholders’ equity		85,924
Selected results of operations:
Net interest income	$	25,915
Provision for loan losses		7,833
Non-interest income		4,971
Non-interest expense		24,148
Income taxes		93
Net income (loss)		(653	)
Accretion of preferred stock to redemption value		256
Preferred stock dividends declared		993
Net income (loss) available to common shareholders		(1,903	)
Per share:
Net income (loss)
Basic	$	(0.23	)
Diluted		(0.23	)
Book value per common share		8.26
Tangible book value per common share		8.23
Selected ratios:
Return on average assets		(0.23	)%
Return on average shareholders’ equity		-2.58
Average shareholders’ equity to average total assets		8.79

Comparative Per Share Data

The following table contains data relating to 1^st Financial common stock and AB&T common stock, including book values, cash dividends declared and net income per share, on the dates and for the periods indicated:

•

for 1^st Financial and AB&T on a historical basis;

•

for 1^st Financial on a pro forma combined basis; and

•

on an equivalent per share of AB&T common stock basis.

The pro forma combined and equivalent per share information combines the 1^st Financial information together with the proposed merger with AB&T as though the merger had occurred , 200 , and , 200 , in the case of book value per share, and on , 200 , in the case of net income. The pro forma data in the table assumes that the merger is accounted for using the “acquisition” method of accounting. (See “The Merger — Accounting Treatment” on page .)

The pro forma data does not indicate the results of future operations or the actual results that would have occurred had the merger been completed at the beginning of the periods presented. You should read the information below in conjunction with 1^st Financial’s and AB&T’s audited consolidated financial statements and unaudited interim consolidated financial statements, together with the related financial statement footnotes, which are included in this Joint Proxy Statement/Prospectus. (See “Consolidated Financial Statements of 1^st Financial Services Corporation” on page F-1, and “Consolidated Financial Statements of AB&T Financial Corporation” on page F- .) You also should read the notes and assumptions used to prepare the “Pro Forma Selected Combined Consolidated Financial Statements” that appear in this Joint Proxy Statement/Prospectus beginning on page F- .


	As of and For the Year Ended December 31, 2008
Book value per share:
1^st Financial (1)	$	9.44
AB&T (1)		9.03
Pro forma combined (2)		8.26
Pro forma equivalent per share for AB&T (3)		9.71
Cash dividends per share:
1^st Financial	$	—
AB&T		—
Pro forma combined (common stock)		—
Pro forma equivalent per share for AB&T (3)		—
Net income(loss) per share (basic):
1^st Financial	$	0.04
AB&T		(0.19	)
Pro forma combined (4)		(0.23	)
Pro forma equivalent per share for AB&T (3)		(0.27	)

(1)

Computed based on historical common shares outstanding, as adjusted for common stock splits.

(2)

Computed based on 1^st Financial’s historical common shares outstanding, as adjusted for common stock splits, plus 3,146,890 pro forma shares at December 31, 2008, to be issued to AB&T’s shareholders in connection with the merger.

(3)

Pro forma equivalent per share amounts have been calculated by multiplying the “Pro forma combined” amounts by the exchange ratio of 1.175 shares of 1^st Financial common stock for each share of AB&T common stock

(4)

Computed based on 1^st Financials’s weighted average basic and diluted shares outstanding (as applicable), plus 3,146,890 pro forma shares at December 31, 2008, to be issued to AB&T’s shareholders in connection with the merger.

In deciding how to vote on the Agreement, the holders of AB&T’s stock will be making an investment decision on whether to take 1^st Financial stock in exchange for their AB&T stock. If you are an AB&T shareholder making this decision, in addition to normal investment risks and the other information in this document, you should carefully consider the following special factors.

Fluctuations in the market price of 1^st Financial common stock may affect the value of the consideration that AB&T’s shareholders receive for their AB&T common stock in the merger.

AB&T shareholders will receive 1.175 shares of 1^st Financial common stock in exchange for each share of their AB&T common stock. The amount of 1^st Financial common stock you receive will be fixed, even though the prices of AB&T common stock and/or 1 ^st Financial common stock at the time the merger is completed may vary from their prices on the date the Agreement was signed, on the date of this Joint Proxy Statement/Prospectus, and on the date of the AB&T Special Meeting. So, you will not know the market value of the shares you will receive, or how their market value compares to the value of your AB&T common stock, until the merger is completed. (See “The Merger — Conversion of AB&T Capital Stock” on page .)

The trading volume in 1^st Financial’s common stock has been relatively low, and the sale of a substantial number of shares in the public market could depress the price of its stock and make it difficult for you to sell your shares.

1^st Financial’s common stock or the stock of Mountain 1^st Bank & Trust Company (now 1^st Financial’s wholly-owned bank subsidiary) has been quoted “over-the-counter” on the Pink Sheets Electronic Quotation Service and on the OTC Bulletin Board since August 2004. However, 1^st Financial’s common stock is still relatively thinly traded. Thinly traded stocks can be more volatile than stock trading in an active public market. The average daily reported trading volume in 1^st Financial’s common stock for the twelve months ended December 31, 2008, was 1,368 shares. 1^st Financial cannot predict the extent to which an active public market for its common stock will develop or be sustained. In recent years, the stock market has experienced a high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to operating performance.

1^st Financial cannot predict what effect future sales of its common stock in the market, or the availability of shares of its common stock for sale in the market, will have on the market price of 1^st Financial common stock. So, 1^st Financial cannot assure you that sales of substantial amounts of 1^st Financial’s common stock in the market, or the potential for large amounts of market sales, would not cause the price of its common stock to decline or potentially impair 1^st Financial’s ability to raise capital in the future.

1^st Financial’s ability to pay dividends is limited and it may be unable to pay future dividends.

1^st Financial is a holding company and, currently, its sole source of funds for paying dividends to its shareholders is dividends it receives from Mountain 1^st. 1^st Financial is not obligated to pay dividends in any particular amounts or at any particular times. 1^st Financial has only paid one cash dividend to its shareholders, and is unlikely to pay cash dividends on its common stock in the foreseeable future. Its decision whether to pay any dividends in the future will depend on a number of factors, including its capital and the availability of funds from which dividends may be paid. (See “Market and Dividend Information — 1^st Financial’s Common Stock” on page , “Supervision and Regulation — Limitations on Cash Dividends” on page , and “Capital Stock of 1^st Financial — Description of Capital Stock” on page .)

1^st Financial’s management beneficially owns a substantial percentage of 1^st Financial common stock, so 1^st Financial’s directors and executive officers can significantly affect voting results on matters voted on by 1 ^st Financial stockholders.

On March 1, 2009, 1^st Financial’s current directors and executive officers, as a group, had the sole or shared right to vote, or to direct the voting of, an aggregate of 767,682 shares (or 15.36%) of 1^st Financial’s outstanding common stock. This group could purchase 617,561 additional shares under currently exercisable stock options they hold. Because of their voting rights, in matters put to a vote of 1^st Financial’s stockholders, it could be difficult for any group of 1^st Financial’s other stockholders to defeat a proposal favored by 1^st Financial’s management (including the election of one or more directors) or to approve a proposal opposed by management.

Combining AB&T and 1^st Financial may be more difficult, costly or time-consuming than 1^st Financial currently expects.

Until completion of the merger, Mountain 1^st and Alliance will operate independently. It is likely that Mountain 1 ^st and Alliance will integrate their operations at some point following the merger. If they do so, there could be disruptions in the operations of each bank. Inconsistencies in Mountain 1^st’s and Alliance’s business procedures, controls, personnel policies and operating philosophies may create problems that could affect Alliance’s relationships with its customers, cause Alliance to lose key employees, or affect Mountain 1^st’s ability to realize all anticipated benefits of the merger. Unanticipated problems with the merger could have a negative effect on 1^st Financial’s future operating results. 1^st Financial has no prior experience completing mergers or integrating other companies’ operations into its own.

AB&T’s directors and officers have interests in the merger that differ from the interests of AB&T’s other shareholders.

AB&T’s directors and officers have interests and will receive certain benefits in the merger in addition to their general interests as AB&T shareholders. Those interests may cause them to view the merger proposal differently than you view it. (See “The Merger — Special Interests of AB&T’s Directors and Officers” on page .)

Future results of the combined companies may be materially different from those reflected in the unaudited pro forma selected combined financial statements included in this document.

The unaudited pro forma selected combined financial statements included in this document only show a combination of 1^st Financial’s and AB&T’s historical results, and they do not necessarily indicate the future financial condition or operating results of the combined company. 1^st Financial estimates that the combined company will record an aggregate of approximately $1.5 million, net of income tax effect, in merger-related charges and acquisition accounting adjustments under a new accounting standard, FAS 141(R). The actual charges may be higher or lower than estimated, depending upon how costly or difficult it is to integrate the two companies. These charges will decrease the capital of the combined company available for future profitable, income-earning investments.

The merger likely will dilute 1^st Financial’s earnings per share for the period during which it is completed, and it could dilute earnings per share more than expected and in future periods.

The issuance of shares of 1 ^st Financial common stock in the merger is expected to dilute 1^st Financial’s earnings per share during the period in which the merger is completed. In periods following completion of the merger, and based on information currently available to it, 1^st Financial expects that the merger will be accretive to its earnings per share. However, the extent and duration of the dilution 1^st Financial will incur will depend on the amount of cost savings it achieves when the companies are combined, the amount of merger-related expenses

it incurs that are charged against its earnings, and the timing of those cost savings and expenses. The actual amount and timing of cost savings and expenses will not be known until the merger is completed. If cost savings are lower, or expenses charged against earnings are higher, than 1^st Financial expects, the amount of dilution could be greater than currently anticipated. Also, if cost savings are not recognized as quickly as expected, 1^st Financial’s earnings per share could be diluted in future periods. Earnings dilution resulting from the merger could have an adverse effect on 1^st Financial’s results of operations and on the market prices of 1^st Financial common stock.

Difficult market conditions and economic trends have adversely affected the banking industry and 1^stFinancial’s business.

Dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively affected the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions. In addition, the values of other real estate collateral supporting many loans have declined and may continue to decline. General downward economic trends, reduced availability of commercial credit, and increasing unemployment have negatively affected the credit performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy caused a decrease in lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer loan delinquencies, lack of consumer confidence, increased market volatility and widespread reduction in general business activity. Competition among depository institutions for deposits has increased significantly. Financial institutions have experienced decreased access to capital and to deposits or borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets has adversely affected most businesses and the prices of securities in general, and financial institutions in particular, and it will continue to adversely affect 1^st Financial’s business, financial condition, results of operations, and stock price for the foreseeable future.

Mountain 1^st’s ability to assess the creditworthiness of customers and to estimate the losses inherent in its credit exposure is made more complex by these difficult market and economic conditions. As a result of these factors, there is a potential for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be very aggressive in responding to concerns and trends identified in examinations. This increased government action may increase 1^st Financial’s costs and limit its ability to pursue certain business opportunities. 1^st Financial may be required to pay considerably higher Federal Deposit Insurance Corporation (“FDIC”) premiums than the recently increased level, because financial institution failures resulting from the depressed market conditions have depleted and may continue to deplete the deposit insurance fund and reduce its ratio of reserves to insured deposits.

1^st Financial does not believe these difficult conditions are likely to improve in the near future. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market and economic conditions on 1^st Financial, its customers and the other financial institutions in 1^st Financial’s market. As a result, 1^st Financial may experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds.

Recent legislative and regulatory initiatives to address difficult market and economic conditions may not stabilize the U.S. banking system.

The recently enacted Emergency Economic Stabilization Act of 2008 (“EESA”) authorizes the United States Treasury to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial instruments, including debt and equity securities issued by financial institutions and their holding companies, under the Troubled Asset Relief Program

(“TARP”). The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. The Treasury has allocated $250 billion towards the TARP Capital Purchase Program (“CPP”). Under the CPP, the Treasury is purchasing equity securities from participating institutions. 1^st Financial’s Series A Preferred Stock was issued by 1^st Financial to Treasury pursuant to the TARP Capital Purchase Program, as was AB&T’s Series A Preferred Stock, which will be converted into the right to receive shares of 1^st Financial Preferred Stock. EESA also temporarily increased federal deposit insurance on most deposit accounts from $100,000 to $250,000. This increase will remain in effect until the end of 2009 and is not covered by deposit insurance premiums paid by the banking industry.

In February, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted containing additional provisions designed to support the national economy and aid in economic recovery.

The provisions of EESA and ARRA are in addition to numerous other actions by the Federal Reserve, Treasury, the FDIC, the SEC and others to address the current decline in the national economy and liquidity and the credit crisis that commenced in 2007. These measures include homeowner relief that encourages loan restructuring and modification; the establishment of significant liquidity and credit facilities for financial institutions and investment banks; the lowering of the federal funds rate; emergency action against short selling practices; a temporary guaranty program for money market funds; the establishment of a commercial paper funding facility to provide back-stop liquidity to commercial paper issuers; and coordinated international efforts to address illiquidity and other weaknesses in the banking sector. The purpose of these legislative and regulatory actions is to stabilize the U.S. banking system. However, there is no assurance that EESA, ARRA and the other regulatory initiatives described above will be fully effective or have their desired effects. If the volatility in the markets continues and economic conditions fail to improve, 1^st Financial’s business, financial condition and results of operations could be materially and adversely affected.

The capital and credit markets have experienced volatility and disruption for more than a year. The markets have produced downward pressure on stock prices and credit availability for many issuers without regard to their underlying financial strength, especially in the case of financial institutions. The general market prices of financial services companies stock, including 1^st Financial’s, are at their lowest levels in recent history. If current levels of market disruption and volatility continue or worsen, there can be no assurance that 1^st Financial will not experience an adverse effect, which may be material, on its ability to access capital and on its business, financial condition and results of operations.

Mountain 1^st’s allowance for loan losses may prove to be insufficient to absorb losses in its loan portfolio.

Lending money is a substantial part of Mountain 1^st’s business. Every loan carries a degree of risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other factors:

Mountain 1^st uses underwriting procedures and criteria that it believes minimize the risk of loan delinquencies and losses, but banks routinely incur losses in their loan portfolios. However, regardless of the underwriting criteria used, Mountain 1^st will experience loan losses from time to time in the ordinary course of its business, and some of those losses will result from factors beyond its control. These factors include, among other things, changes in market conditions, economic, business or personal conditions, or other events (including changes in market interest rates), that affect its borrowers’ abilities to repay their loans and the value of properties that collateralize loans. Recent difficulties in the national economy and housing market, declining real estate values, rising unemployment, and loss of consumer confidence, have resulted and will continue to result in increasing loan delinquencies and loan losses for all financial institutions.

Mountain 1^st maintains an allowance for loan losses based on its current judgments about the credit quality of its loan portfolio. The amount of Mountain 1^st’s allowance is determined by its management through a periodic review and consideration of internal and external factors that affect loan collectibility, including, but not limited to:

On December 31, 2008, Mountain 1^st ’s allowance totaled 1.54% of its total loans, 1.55% of loans excluding sold mortgage loans which had not yet been delivered, and 1.63% of loans excluding loans with SBA and USDA guarantees. At December 31, 2008, Mountain 1^st had $10.8 million of nonperforming loans, $10.0 million of which were on non-accruing status and one restructured loan totaling $798 thousand. It should be noted that Mountain 1^st’s allowance is somewhat higher than more mature peer institutions as Mountain 1^st’s loan portfolio, due to its rapid growth, is somewhat unseasoned. This factor, in and of itself, is considered to increase its loan portfolio’s risk profile.

However, if delinquency levels increase or Mountain 1^st incurs higher than expected loan losses in the future, there is no assurance that its allowance will be adequate to cover resulting losses.

A large percentage of Mountain 1^st’s loans are secured by real estate. Adverse conditions in the real estate market in Mountain 1^st ’s banking markets might adversely affect its loan portfolio.

While Mountain 1^st does not have a sub-prime lending program, a relatively large percentage of its loans are secured by real estate. Mountain 1^st’s management believes that, in the case of many of those loans, the real estate collateral is not being relied upon as the primary source of repayment, and the level of real estate loans reflects, at least in part, Mountain 1^st’s policy to take real estate whenever possible as primary or additional collateral rather than other types of collateral. However, adverse conditions in the real estate market and the economy in general have decreased real estate values in Mountain 1^st’s banking markets. If the value of Mountain 1^st’s collateral for a loan falls below the outstanding balance of that loan, its ability to collect the balance of the loan by selling the underlying real estate in the event of a default will be diminished, and Mountain 1^st would be more likely to suffer a loss on the loan. An increase in Mountain 1^st’s loan losses could have a material adverse effect on 1^st Financial’s operating results and financial condition.

The FDIC recently adopted rules aimed at placing additional monitoring and management controls on financial institutions whose loan portfolios are deemed to have concentrations in commercial real estate (“CRE”).

At December 31, 2008, Mountain 1^st’s loan portfolio exceeded thresholds established by the FDIC for CRE concentrations and for additional regulatory scrutiny. Indications from regulators are that strict limitations on the amount or percentage of CRE within any given portfolio are not expected, but, rather, that additional reporting and analysis will be required to document management’s evaluation of the potential additional risks of such concentrations and the impact of any mitigating factors. It is possible that regulatory constraints associated with these rules could adversely affect Mountain 1^st’s ability to grow loan assets and thereby limit 1^st Financial’s overall growth and expansion plans. These rules also could increase the costs of monitoring and managing this component of its loan portfolio. Either of these eventualities could have an adverse impact on 1^st Financial’s operating results and financial condition.

1^st Financial’s business strategy includes the continuation of its growth plans, and 1^st Financial’s financial condition and operating results could be negatively affected if it fails to grow or fails to manage growth effectively.

1^st Financial intends to continue to grow in its existing banking markets (internally and through additional offices) and to expand into new markets as appropriate opportunities arise. Mountain 1^st has opened fifteen de novo branch offices since May 2004. 1^st Financial expects to continue with de novo branching during 2009 and beyond so long as it can continue to identify and successfully recruit qualified bankers to manage new offices.

1^st Financial’s business prospects must be considered in light of the risks, expenses, and difficulties frequently encountered by banking companies that are experiencing rapid growth. 1^st Financial cannot assure you it will be able to expand its market presence in its existing markets or successfully enter new markets, or that expansion will not adversely affect its operating results. Failure to manage growth effectively could have a material adverse effect on 1^st Financial’s business, future prospects, financial condition, or operating results, and could adversely affect its ability to successfully implement its business strategy. Also, if 1^st Financial’s growth occurs more slowly than anticipated, or declines, its operating results could be materially affected in an adverse way.

1^st Financial’s ability to successfully grow will depend on a variety of factors, including continued availability of desirable business opportunities and the competitive response from other financial institutions. Due to personnel and fixed asset costs of de novo branching, any new branch offices 1^st Financial establishes may operate at a loss until 1^st Financial can establish a sufficient base of business to operate profitably. Also, in establishing a new office in a new market, 1^st Financial likely would be faced with competitors with greater knowledge of that local market. Although 1^st Financial believes it has management resources and internal systems in place to successfully manage its future growth, it will need to hire and rely on well-trained local managers who have local affiliations and to whom it may need to give significant autonomy. 1^st Financial cannot assure you that any de novo or other branch office it establishes or acquires will not, for some period of time, operate at a loss and have an adverse effect on 1^st Financial’s earnings, that 1^st Financial will be able to hire managers who can successfully operate any new branch offices, or that 1^st Financial will become an effective competitor in any new banking market.

1^st Financial’s business depends on the condition of the local and regional economies where it operates.

Mountain 1^st currently has offices only in western North Carolina. Consistent with its community banking philosophy, Mountain 1^st’s customer base is located in that region, and it lends a substantial portion of its capital and deposits to commercial and consumer borrowers in its local banking markets. Therefore, Mountain 1^st’s local and regional economy has a direct impact on its ability to generate deposits to support loan growth, the demand for loans, the ability of borrowers to repay loans, the value of collateral securing Mountain 1^st’s loans (particularly loans secured by real estate), and Mountain 1^st’s ability to collect, liquidate and restructure possible problem loans. The local economies of the communities in Mountain 1^st’s banking markets are relatively dependent on the tourism industry and the retirement and second home real estate market. The economies of Mountain 1 ^st’s banking markets have been adversely affected by a general economic downturn and this downturn

has affected the tourism industry and real estate values in Mountain 1^st’s communities, which has adversely affected Mountain 1^st’s operating results. Further deterioration of economic conditions in Mountain 1^st’s banking markets could further reduce its growth rate, adversely affect the ability of its customers to repay their loans, and generally affect its financial condition and operating results. 1^st Financial is less able than larger institutions to spread risks of unfavorable local economic conditions across a large number of diversified economies. Also, 1^st Financial cannot assure you that it will benefit from any market growth or favorable economic conditions in its banking markets even if they do occur.

Adverse market and economic conditions in North Carolina, particularly in the real estate, agricultural or tourism industries, increase the risk Mountain 1^st ’s borrowers will be unable to make their loan payments and the risk that the market value of real estate securing its loans will not be sufficient collateral. On December 31, 2008, approximately 83.6% of the total dollar amount of Mountain 1^st’s loan portfolio was secured by liens on real estate, with approximately 4.8% of its portfolio representing home equity lines of credit. 1^st Financial’s management believes that, in the case of many of those loans, the real estate collateral is not being relied upon as the primary source of repayment, and those relatively high percentages reflect, at least in part, Mountain 1^st’s policy to take real estate whenever possible as primary or additional collateral. However, any sustained period of increased payment delinquencies, foreclosures or losses caused by adverse market or economic conditions in North Carolina could adversely affect the value of 1^st Financial’s assets, revenues, operating results and financial condition.

1^st Financial’s business model is primarily based on growth through de novo branching. However, 1^st Financial believes the opportunity to merge with AB&T nicely complements its existing franchise and that the merger would allow 1^st Financial to enter into new markets contiguous to its existing markets. In addition, the transaction provides additional capital that will enable growth in 1^st Financial’s assets. 1^st Financial currently has no additional agreements, understandings or definite plans for any merger or acquisition, but it will evaluate opportunities to acquire other banks and to establish or acquire branches that complement or expand its business as they arise. 1^st Financial is aware that such transactions involve a totally different risk profile as compared to risks associated with growth through de novo branching. These risks include these possibilities:

1^st Financial cannot assure you it will have opportunities to acquire or establish any new branches, or that it will be able to negotiate, finance or complete any acquisitions that may become available to it. 1^st Financial may incur substantial costs in expanding, and it cannot assure you that any expansion will benefit it, or that it will be able to successfully integrate any banking offices it acquires into its operations or retain the deposit and loan customers of those offices. Additionally, 1^st Financial may experience disruption and incur unexpected expenses in any branch acquisitions it completes, which may have a material adverse effect on 1^st Financial’s business, operating results or financial condition. Also, 1^st Financial may issue equity securities, including common stock and securities convertible into shares of 1^st Financial’s common stock, in connection with acquisitions, which could cause ownership and economic dilution to you.

Building market share through a de novo branching strategy could cause 1^st Financial’s expenses to increase faster than revenues.

1^st Financial intends to continue to build market share in western North Carolina through its de novo branching strategy, and has identified several sites for possible future de novo branches. There are considerable costs involved in opening branches, and industry averages indicate that new branches generally do not generate sufficient revenues to offset their costs until they have been in operation for at least a year. Therefore, any new branches 1^st Financial opens can be expected to negatively affect its operating results until those branches reach a size at which they become profitable. 1^st Financial’s expenses also could be increased if there are delays in opening any new branches. Finally, 1 ^st Financial cannot assure you that any new branches it opens will be successful, even after they have become established.

1^st Financial’s increasing volume of loans makes loan quality more difficult to control. Increased loan losses could affect the value of 1^st Financial common stock.

Although growth in earning assets is desirable in a community bank, it can have adverse consequences if it is not well managed. For example, rapid increases in loans could cause future loan losses if 1^st Financial cannot properly underwrite increasing volumes of loans as they are made and adequately monitor a larger loan portfolio to detect and deal with loan problems as they occur. 1^st Financial’s business strategy calls for it to continue to grow in its existing banking markets (internally and through additional offices) and to expand into new markets as appropriate opportunities arise. Because collection problems with some loans often do not arise until those loans have been in existence for some period of time, 1^st Financial cannot assure you that it will not have future problems collecting loans that now are performing according to their terms.

Higher loan to value ratios on a portion of 1^st Financial’s loan portfolio may increase loan portfolio risk and could adversely impact loan portfolio performance and the profitability and the value of 1^st Financial common stock.

During Mountain 1^st’s initial start-up phase during 2004 and 2005, management’s business plan was predicated upon reaching critical mass as quickly as possible so as to achieve break-even and minimize operating losses and the associated reduction in equity. Therefore, management elected to make a number of exceptions to existing policies with regard to maximum loan to value (“LTV”) ratios of assets used to collateralize some select, high quality credits. At December 31, 2005, these types of loans totaled $64.2 million representing 148.6% of Mountain 1^st’s total risk-based capital. During 2006, management determined that a reduction in the amount of loans with LTV exceptions was warranted to aid in mitigating the real estate concentration risk discussed in the preceding section. Therefore, by the end of 2006, loans with LTV ratios that exceeded regulatory guidelines had been reduced to 88% of risk-based capital. This was further reduced during 2007 and at December 31, 2007, and 2008 LTV exceptions totaled only 55% and 60% of risk-based capital, respectively. Even though this risk has been dramatically reduced with the substantial reduction in LTV exceptions, remaining loans with elevated LTV ratios could present future additional collection risk which could adversely affect earnings and financial performance, especially in light of the general downturn, discussed above, in the real estate markets.

1^st Financial’s recent results may not be indicative of its future results.

Mountain 1^st has experienced exceptional growth since its inception. However, it should be noted that 1^st Financial may not be able to sustain that historical rate of growth or even grow its business at all. Also, Mountain 1^st’s recent and rapid growth may distort some of its historical financial ratios and statistics. In the near future, 1^st Financial will most likely not have the benefit of several previously favorable factors, such as a generally stable interest rate environment, a generally strong residential mortgage market, or the ability to find suitable expansion opportunities. Various factors, such as economic conditions, regulatory and legislative considerations, and competition also may impede or restrict 1^st Financial’s ability to expand its market presence. If 1^st Financial experiences a significant decrease in its recent rate of growth, 1^st Financial’s operating results and financial condition may be adversely affected because a significant percentage of its operating costs are fixed expenses.

1^st Financial may need to raise additional capital in the future in order to continue to grow, but that capital may not be available when it is needed.

Federal and state banking regulators require 1^st Financial and Mountain 1^st to maintain adequate levels of capital to support its operations. On December 31, 2008, Mountain 1^st’s three capital ratios were above “well capitalized” levels under bank regulatory guidelines. A number of financial institutions recently have raised considerable amounts of capital in response to deterioration in their results of operations and financial condition arising from the turmoil in the mortgage loan market, deteriorating economic conditions, declines in real estate values, and other factors. However, growth in 1^st Financial’s earning assets resulting from internal expansion and new branch offices, at rates in excess of the rate at which 1^st Financial’s capital is increased through retained earnings, will reduce its capital ratios unless it continues to increase capital. Also, future unexpected losses, whether resulting from loan losses or other causes, would reduce 1^st Financial’s capital. However, 1^st Financial’s business strategy calls for it to continue to grow in its existing banking markets (internally and through additional offices) and to expand into new markets as appropriate opportunities arise. If 1^st Financial’s capital ratios fall below “well capitalized” levels, Mountain 1^st’s FDIC deposit insurance assessment rate would increase until it restored and maintained its capital at a “well capitalized” level. A higher assessment rate would cause an increase in the assessments Mountain 1^st pays the FDIC for deposit insurance, which would adversely affect 1^stFinancial’s operating results.

If 1^st Financial is able to effectively execute its business plan, in the future it will need to increase capital to fund additional growth or satisfy regulatory requirements. Based on management’s current projections, 1^st Financial expects to need additional capital sometime in the second half of 2009 or the first half of 2010 (although the merger may delay the need for additional capital). 1^st Financial’s ability to raise that additional capital will depend on conditions at that time in the capital markets that are outside its control, and on its financial performance. 1^st Financial cannot assure you that it will be able to raise additional capital on terms favorable to it or at all. If 1^st Financial cannot raise additional capital when needed, its ability to expand its operations through internal growth and acquisitions could be materially impaired.

Should 1 ^st Financial need, or be required by regulatory authorities, to raise additional capital, it may seek to do so through the issuance of, among other instruments, common stock, preferred stock, or trust preferred securities. However, 1^st Financial’s ability to raise that additional capital will depend on conditions at that time in the capital markets, economic conditions, 1^st Financial’s financial performance and condition, and other factors, many of which are outside its control. There is no assurance that, if needed, 1^st Financial will be able to raise additional capital on terms favorable to it or at all. Any future inability to raise additional capital, on terms acceptable to 1^st Financial, may have a material adverse effect on its ability to expand operations, and on its financial condition, results of operations, and future prospects.

The Treasury Department’s investment in 1^st Financial imposes restrictions and obligations limiting 1^st Financial’s ability to access equity markets, repurchase common stock, or increase dividends.

In November 2008, 1^st Financial issued preferred stock and a warrant to purchase common stock to the Treasury Department under the Capital Purchase Program. Prior to November 14, 2011, unless 1^st Financial has redeemed all of the preferred stock, or the Treasury Department has transferred all of the preferred stock to a third party, the consent of the Treasury Department will be required for 1^st Financial to, among other things, increase common stock cash dividends or to effect repurchases of common stock (with certain exceptions).

If 1^st Financial is unable to redeem its Series A Preferred Stock after five years, the cost of this capital will increase substantially.

If 1^st Financial is unable to redeem the Series A Preferred Stock it sold to Treasury prior to November 14, 2013, the cost of this capital will increase from 5.0% per annum (approximately $818,450 annually) to 9.0% per annum (approximately $1,473,210 annually). (See “Description of Capital Stock — Series A Preferred Stock, on page .”) Depending on 1^st Financial’s financial condition at the time, this increase in the annual dividend rate on the Series A Preferred Stock could have a material negative effect on its liquidity and on its net income available to holders of 1^st Financial common stock.

1^st Financial’s profitability is subject to interest rate risk. Changes in interest rates could have an adverse effect on operating results.

Changes in interest rates can have different effects on various aspects of 1^st Financial’s business, particularly net interest income. 1^st Financial’s profitability depends, to a large extent, on its net interest income, which is the difference between 1^st Financial’s income on interest-earning assets and its expense on interest-bearing deposits and other liabilities. Like most financial institutions, 1^st Financial is affected by changes in general interest rate levels and by other economic factors beyond its control. Interest rate risk arises in part from the mismatch (i.e., the interest sensitivity “gap”) between the dollar amounts of repricing or maturing interest-earning assets and interest-bearing liabilities, and is measured in terms of the ratio of the interest rate sensitivity gap to total assets. When more interest-earning assets than interest-bearing liabilities will reprice or mature over a given time period, a bank is considered asset-sensitive and has a positive gap. When more liabilities than assets will reprice or mature over a given time period, a bank is considered liability-sensitive and has a negative gap. A liability-sensitive position (i.e., a negative gap) may generally enhance net interest income in a falling interest rate environment and reduce net interest income in a rising interest rate environment. An asset-sensitive position (i.e., a positive gap) may generally enhance net interest income in a rising interest rate environment and reduce net interest income in a falling interest rate environment. 1^st Financial’s ability to manage its gap position determines to a great extent its ability to operate profitably. However, fluctuations in interest rates are not predictable or controllable, and 1^st Financial cannot assure you it will be able to manage its gap position in a manner that will allow it to remain profitable.

Since opening Mountain 1^st in mid-2004 and through the second half of 2006, short term interest rates continually rose. From the second half of 2006 through the second quarter of 2007 short term interest rates were static. However, during the third quarter of 2007, the Federal Reserve’s Federal Open Market Committee (FOMC) began to reduce short term interest rates in response to a weakening economy. Heretofore, management has structured Mountain 1^st’s balance sheet with a relatively short duration. Interest rate risk, while relatively neutral, has been maintained with a slightly asset sensitive bias since Mountain 1^st’s inception. Management considers this configuration to be favorable in most interest rate environments. The primary exception to this is a scenario in which short term interest rates are driven down dramatically and rapidly. Over the course of four months in late 2007 and through 2008, the FOMC has driven down short term interest rates by 500 basis points. This represents the most dramatic reduction in interest rates in decades. As a result, management expects Mountain 1^st’s earnings to be reduced during the first half of 2009 until its CD portfolio matures and can be repriced downward toward current market rates, and to remain somewhat muted until rates move upward from their current historical lows.

On December 31, 2008, Mountain 1^st remained in a slightly asset sensitive position. This reflects the construct of Mountain 1^st’s balance sheet whereby its interest-earning assets generally would be expected to reprice at a faster rate than its interest-bearing liabilities. Therefore, a rising rate environment would generally be expected to have a positive effect on 1^st Financial’s earnings, while a falling rate environment generally would be expected to have a negative effect on those earnings. In Mountain 1^st’s interest rate gap analysis, money market deposit accounts are considered rate sensitive and are placed in the shortest duration period, while negotiable order of withdrawal or other transaction accounts and regular savings accounts are assumed to be more stable sources that are less price sensitive and are placed in the five year duration interval. 1^st Financial management’s historical experience has shown that changes in market interest rates have a lesser effect on these type deposits within a given time period and, for that reason, those liabilities could be considered much less rate sensitive.

If 1^st Financial’s historical experience with the relative insensitivity of these deposits to changes in market interest rates does not continue in the future and 1^st Financial experiences more rapid repricing of interest-bearing liabilities than interest-earning assets in the near term rising interest rate environment, its net interest margin and net income may continue to decline.

Mountain 1^st’s reliance on time deposits, including out-of-market certificates of deposit, as a source of funds for loans and other liquidity needs could impair Mountain 1^st’s ability to fund operations and jeopardize its financial condition.

Liquidity is essential to 1^st Financial’s business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a substantial negative effect on liquidity. Through 2007, Mountain 1^sthad been able to fund its growth and liquidity needs predominantly through deposit gathering activities in its own markets. However, as a result of the “sub-prime mortgage crisis” and “credit crunch”, a disruption in funding for some of the larger financial institutions occurred in the fourth quarter of 2007. This disruption resulted in some of these institutions becoming more aggressive in pricing time deposits as they began using CDs to bridge liquidity shortfalls. As a result, the cost of locally generated CDs increased disproportionately during the fourth quarter of 2007. Management elected to begin utilizing lower cost wholesale funding rather than pay unusually high premiums on CDs resulting from this market disruption. At December 31, 2007, Mountain 1^st had outstanding borrowings with the Federal Home Loan Bank of Atlanta in the amount of $15 million. The sub-prime induced financial crisis continued to impact local and national markets through 2008 with multiple financial institutions failing in the last half of the year. This financial meltdown in essence froze the credit markets and increased the larger financial institutions’ dependence on CDs as a source of funding. As a result, the cost of locally generated CDs continued to increase disproportionately. In addition to use of the FHLB as a funding source, Mountain 1^st began its first use of brokered CDs during the fourth quarter of 2008 to off-set the high cost of local market CDs. At December 31, 2008, Mountain 1^st had approximately $48.0 million in FHLB advances and $38.0 million in brokered CDs outstanding. Management expects to continue to use and expand these wholesale funding sources for the foreseeable future and until CD pricing begins to normalize. Accordingly, 1^st Financial intends to rely on these other funding sources to meet a portion of its loan, liquidity, and overall growth requirements for some period of time. These sources may include brokered certificates of deposit, Internet certificates of deposit, Federal Home Loan Bank borrowings, Federal Reserve Bank discount window borrowings, or other wholesale sources. These sources may not be as stable as local deposits upon which Mountain 1^st has relied to date, and it may have to pay a higher rate of interest to keep them or to replace such sources. Not being able to acquire those funding sources or to keep them as they mature would adversely affect liquidity. Paying higher deposit rates to attract, keep or replace those funds could have a negative effect on 1^st Financial’s interest margin and operating results, impair its ability to fund operations, and jeopardize its financial condition.

Factors that could detrimentally affect 1^st Financial’s access to liquidity sources include a decrease in the level of business activity as a result of a downturn in the markets in which its loans are concentrated or adverse regulatory action against 1^st Financial. 1^st Financial’s ability to borrow could also be impaired by factors that are not specific to it, such as a disruption in the financial markets or negative views and expectations about the prospects for the financial services industry in light of the recent turmoil faced by banking organizations and the continued deterioration in credit markets.

Competition from financial institutions and other financial service providers may adversely affect 1^st Financial’s profitability.

Commercial banking in 1^st Financial’s banking markets and in North Carolina as a whole is extremely competitive. In addition to community, super-regional, national and international commercial banks, 1^st Financial competes against credit unions, savings and loan associations, mortgage banking firms, consumer finance companies, securities brokerage firms, insurance companies, money market funds and other mutual funds. 1^st Financial competes with these institutions in attracting deposits and in making loans, and has to attract its customer base from other existing financial institutions and from new residents. 1^st Financial’s larger competitors have greater resources, broader geographic markets and higher lending limits than it does, and they may be able to offer more products and services and better afford and more effectively use media advertising, support services and electronic technology than 1^st Financial can. Although 1^st Financial believes it competes effectively with other financial institutions, it may face a competitive disadvantage as a result of its size, lack of geographic diversification, and inability to spread marketing costs across a broader market. Although 1^st Financial competes by concentrating marketing efforts in its primary markets with local advertisements, personal contacts, and greater flexibility and responsiveness in working with local customers, 1^st Financial cannot assure you that it will continue to be an effective competitor in its banking markets.

1^st Financial is subject to extensive regulation that could limit or restrict its activities and adversely affect its earnings.

1^st Financial operates in a highly regulated industry and is subject to examination, supervision, and comprehensive regulation by various federal and state agencies. 1^st Financial’s compliance with these regulations is costly and restricts certain activities, including payment of dividends, possible mergers and acquisitions, investments, loans and interest rates charged on loans, interest rates paid on deposits, and establishment of new offices. 1^st Financial also is subject to capital guidelines established by its regulators which require it to maintain adequate capital to support its growth. Most of these regulations are primarily intended to protect depositors, the public, and the FDIC’s Deposit Insurance Fund rather than stockholders. (See “Supervision and Regulation” on page .)

The Sarbanes-Oxley Act of 2002, and the related rules and regulations issued by the Securities and Exchange Commission and The NASDAQ Stock Market (whose corporate governance rules apply to 1^st Financial even though 1^st Financial is not listed), have vastly increased the scope, complexity and cost of 1^stFinancial’s corporate governance, reporting, and disclosure practices, including the costs of completing its audit and maintaining its internal controls.

The laws and regulations that apply to 1^st Financial could change at any time, and 1^st Financial cannot fully predict the effects of those changes on its business and profitability. However, virtually any newly imposed governmental regulation is highly likely to create additional expense and in cases such as Sarbanes-Oxley noted above, the cost can be very significant. Implementation and adoption of regulatory and accounting rules greatly affects the business and financial results of all commercial banks and bank holding companies, and 1^st Financial’s cost of compliance would be expected to adversely affect 1^st Financial’s earnings.

1^st Financial’s operating results and ability to adequately manage its growth and minimize loan losses are highly dependent on the services, managerial abilities, and performance of its current executive officers. Smaller institutions like 1^st Financial sometimes find it more difficult to attract and retain experienced management personnel than larger institutions. 1^st Financial has a highly experienced management team with a demonstrated track record that its Board of Directors believes is capable of managing and growing Mountain 1^st. Also, the successful execution of 1^st Financial’s business model is predicated on retaining 1^st Financial’s current management team and complementing it with other experienced and talented managers. However, changes in key personnel and their responsibilities, or an inability to recruit and retain additional managers, may disrupt 1^st Financial’s business and could have a material adverse effect on its business, operating results, and financial condition.

1^st Financial may need to invest in new technology to compete effectively, and that could have a negative effect on its operating results and the value of its common stock.

The market for financial services, including banking services, is increasingly affected by advances in technology, including developments in telecommunications, data processing, computers, automation and Internet-based banking. 1^st Financial depends on third-party vendors for portions of its data processing services. In addition to its ability to finance the purchase of those services and integrate them into its operations, 1^st Financial’s ability to offer new technology-based services depends on its vendors’ abilities to provide and support those services. Future advances in technology may require 1^st Financial to incur substantial expenses that adversely affect its operating results, and its small size and limited resources may make it impractical or impossible for 1^st Financial to keep pace with its larger competitors. 1^st Financial’s ability to compete successfully in 1^st Financial’s banking markets may depend on the extent to which it and its vendors are able to offer new technology-based services and on 1^st Financial’s ability to integrate technological advances into its operations.

This Joint Proxy Statement/Prospectus includes forward-looking statements. Those statements usually will contain words such as “may,” “will,” “should,” “could,” “would be,” “believes,” “expects,” “anticipates,” “estimates,” “intends,” “plans,” “targets,” “projects,” “predicts,” “forecasts,” “continues,” “likely,” “potential,” or similar terms. AB&T and 1 ^st Financial have based those forward-looking statements on their current expectations and projections about future events. Forward-looking statements are subject to risks, uncertainties and assumptions, including, among other things, the factors discussed under the caption “Risk Factors” beginning on page . Therefore, the events described in forward-looking statements in this document might not occur, or they might occur in a different way than they are described in the statements.

In deciding how to vote on the Agreement, you should rely only on the information contained in this document. All information in this document about AB&T and Alliance has been furnished by AB&T, and all information about 1^st Financial and Mountain 1^st has been furnished by 1^st Financial. AB&T and 1^st Financial have not authorized any person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. You should not assume that the information in this document is accurate as of any date other than the date on the front cover. 1^st Financial is not offering 1^st Financial common stock to any person in any state where the offer or sale of the stock is not permitted.

General. This Joint Proxy Statement/Prospectus is being furnished by AB&T to its shareholders in connection with the solicitation by AB&T’s Board of Directors of appointments of proxy for use at the AB&T Special Meeting and at any adjournments of that meeting. The AB&T Special Meeting will be held on , 2009, at , at located at in Gastonia, North Carolina. This Joint Proxy Statement/Prospectus is being mailed to AB&T’s shareholders on or about , 2009.

Proposals to be Voted on at the AB&T Special Meeting. At the AB&T Special Meeting, record holders of AB&T common stock and preferred stock will consider and vote on proposals to:

How AB&T’s Shareholders Can Vote at the Special Meeting. If you are a holder of AB&T common stock or AB&T preferred stock and your shares are held of record in your name, they can be voted at the AB&T Special Meeting in one of the following ways.

If your shares of AB&T common stock are held in “street name” by a broker or other nominee, then the record holder of your shares is required to vote them for you. You will need to follow the directions your broker or nominee provides you and give it instructions as to how to vote your shares. Without specific voting instructions from you, brokers generally are not allowed to exercise their voting discretion on non-routine matters, including the proposal to approve the Agreement.

Solicitation and Voting of Proxy Cards. A proxy card is included with this Joint Proxy Statement/Prospectus that provides for you to name , individually and as a group, to act as your “AB&T

Proxies” and vote your shares of AB&T common stock at the Special Meeting. Please sign and date your proxy card and return it in the enclosed envelope so that your shares will be represented at the Special Meeting.

If you sign a proxy card and return it to AB&T so that it is received before the Special Meeting, the shares of AB&T common stock you hold of record will be voted by the AB&T Proxies according to your instructions. If you sign and return a proxy card but you do not give any voting instructions, then your shares will be voted by the AB&T Proxies “FOR” approval of the Agreement and merger and “FOR” authorization to adjourn the Special Meeting, if necessary, to allow additional time to solicit votes needed to approve the Agreement. AB&T’s management is not aware of any other business that will be brought before the Special Meeting but, if any other matter is properly presented for action by AB&T’s shareholders, your proxy card will authorize the AB&T Proxies to vote your shares according to their best judgment. Your proxy card also will authorize the AB&T Proxies to vote your shares according to their best judgment on matters incident to the conduct of the meeting, including adjournments for any purpose other than to solicit additional votes needed to approve the Agreement. If you do not return a proxy card, the AB&T Proxies will not have authority to vote for you and shares of AB&T common stock you hold of record will not be represented or voted at the Special Meeting unless you attend the meeting in person.

Revocation of Proxy Cards; How You Can Change Your Vote. If you are the record holder of your shares of AB&T common stock and you sign and return a proxy card, and you later wish to revoke the proxy card or to change the voting instructions you gave the AB&T Proxies, you can do so at any time before the voting takes place at the Special Meeting by taking the appropriate action described below.

The AB&T Proxies will follow the last voting instructions they receive from you before the Special Meeting. If your shares are held in “street name” and you want to change voting instructions you have given to your broker or other nominee, you must follow your broker’s or nominee’s directions.

Expenses and Method of Solicitation. In connection with the costs of soliciting appointments of proxy for the AB&T Special Meeting, AB&T and 1^st Financial will bear the costs of their own counsel, and will divide equally the costs of printing and mailing this Joint Proxy Statement/Prospectus. AB&T is requesting that banks,

brokers and other custodians, nominees and fiduciaries forward copies of its proxy solicitation materials to their principals and request their voting instructions, and AB&T may reimburse those persons for their expenses in doing so. In addition to using the mail, AB&T’s directors, officers and employees may solicit proxy cards, personally or by email or telephone or other methods of communication, but they will not receive any additional compensation from AB&T for doing so.

In general, in connection with proxy solicitations for meetings of the shareholders of public companies, many holders of shares held in “street name” fail to give voting instructions to their brokers or other nominees. AB&T may make arrangements for a firm that specializes in proxy solicitation to assist it by contacting record holders and beneficial owners of AB&T common stock and requesting that they vote their shares or send voting instructions to their brokers or other nominees. AB&T has not yet selected or made arrangements with a firm to assist it in soliciting proxy cards or voting instructions, but it would expect to pay approximately $10,000 to a firm for those services.

In connection with soliciting proxy cards for the Special Meeting, neither AB&T nor 1^st Financial has authorized anyone to give AB&T’s shareholders any information, or make any representation, not contained in this Joint Proxy Statement/Prospectus. If anyone gives you any other information or makes any other representation to you, you should not rely on it as having been authorized by AB&T or 1^st Financial.

Record Date and Voting Securities. The close of business on , 2009, is the “AB&T Record Date” being used to determine (a) which AB&T shareholders are entitled to receive notice of and to vote at the AB&T Special Meeting, and (b) how many shares of AB&T stock they are entitled to vote. AB&T’s voting securities are the shares of its common stock, and the 3,500 shares of its preferred stock, outstanding on the AB&T Record Date. A shareholder must have been a record holder of AB&T common stock or preferred stock on that date to be eligible to vote at the AB&T Special Meeting.

Quorum; Voting Procedures. A quorum of both the AB&T common stock and the AB&T preferred stock must be present for business to be conducted at the AB&T Special Meeting. For all matters to be voted on at the meeting, quorums will consist of a majority of the outstanding shares of AB&T common stock and a majority of the outstanding shares of AB&T preferred stock. Shares of AB&T common and preferred stock represented in person or by proxy at the meeting will be counted for the purpose of determining whether these quorums exist. Once a share is represented for any purpose at the meeting, it will be treated as present for quorum purposes for the remainder of the meeting and for any adjournments. If you return a valid proxy card, or attend the Special Meeting in person, your shares will be counted for purposes of determining whether there is a quorum, even if you abstain from voting. Broker “non-votes” also will be counted in determining whether there is a quorum. Broker “non-votes” will occur if your shares are held by a broker and are voted on one or more matters at the Special Meeting but they are not voted by the broker on a “non-routine” matter, such as the proposal to approve the Agreement, because you have not given the broker voting instructions on that matter. If your shares are represented at the Special Meeting with respect to any matter voted on, they will be treated as present with respect to all matters voted on, even if they are not voted on all matters.

You may cast one vote for each share of AB&T common stock and AB&T preferred stock you held of record on the AB&T Record Date on each matter voted on by shareholders at the Special Meeting, including the proposals to approve the Agreement (Proposal 1) and to authorize AB&T’s management to adjourn the Special Meeting, if necessary, to allow additional time to solicit votes needed to approve the Agreement (Proposal 2).

Vote Required for Approval. For the proposal to approve the Agreement (Proposal 1) to be approved, a majority of the outstanding shares of AB&T common stock and a majority of the outstanding shares of AB&T preferred stock must vote in favor of the proposal. For the proposal to authorize management to adjourn the Special Meeting, if necessary, to allow additional time to solicit votes needed to approve the Agreement (Proposal 2) to be approved, the number of votes of AB&T common shares cast in favor of such proposal must exceed the votes cast against it, and the number of votes of AB&T preferred shares cast in favor of such proposal

also must exceed the votes cast against it. In the case of Proposal 1, abstentions and broker non-votes will have the same effect as a vote against the merger. In the case of Proposal 2, abstentions and broker non-votes will have no effect.

General. 1^st Financial is furnishing this Joint Proxy Statement/Prospectus to its shareholders in connection with the solicitation by 1^st Financial’s Board of Directors of appointments of proxy for use at the 1^st Financial Special Meeting and at any adjournments of that meeting. The 1^st Financial Special Meeting will be held on , 2009, at .m., at the located at in , North Carolina. This Joint Proxy Statement/Prospectus is being mailed to 1^st Financial’s shareholders on or about , 2009.

Proposals to be Voted on at the 1^st Financial Special Meeting. At the 1^st Financial Special Meeting, record holders of 1^st Financial’s common stock will consider and vote on proposals to:

• Approve the Agreement and the transactions described in it, including the merger of AB&T into 1^st Financial, the conversion of outstanding shares of AB&T common stock into shares of 1^st Financial common stock, and the conversion of the outstanding shares of AB&T preferred stock into shares of 1^st Financial preferred stock. A copy of the Agreement is attached as Appendix A to this Joint Proxy Statement/Prospectus and is incorporated by reference into this document (see “The Merger” on page ); and

• Authorize 1 ^st Financial’s management to adjourn the 1^st Financial Special Meeting one or more times for up to a total of 120 days, if necessary, to allow additional time to solicit votes needed to approve the Agreement. There currently are no plans to adjourn the 1^st Financial Special Meeting, but 1^st Financial’s management requests the authority to do that if, at the time of the meeting, there are insufficient votes to approve the Agreement. (See “Information about 1^st Financial — Proposal to Authorize Management to Adjourn the 1^st Financial Special Meeting” on page .)

How 1^st Financial’s Shareholders Can Vote at the Special Meeting. If you are a holder of 1^st Financial common stock and your shares of 1^st Financial common stock are held of record in your name, they can be voted at the 1^st Financial Special Meeting in one of the following ways.

If your shares of 1^st Financial common stock are held in “street name” by a broker or other nominee, then the record holder of your shares is required to vote them for you. You will need to follow the directions your broker or nominee provides you and give it instructions as to how to vote your shares. Without specific voting instructions from you, brokers generally are not allowed to exercise their voting discretion on non-routine matters, including the proposal to approve the Agreement.

Solicitation and Voting of Proxy Cards. A proxy card is included with this Joint Proxy Statement/Prospectus that provides for you to name Peggy H. Denny, Roger A. Mobley, and Mary K. Dopko, individually and as a group, to act as your “1^st Financial Proxies” and vote your shares of 1^st Financial common stock at the Special Meeting. Please sign and date your proxy card and return it in the enclosed envelope, or follow the instructions above for appointing the 1^st Financial Proxies by Internet, so that your shares will be represented at the Special Meeting.

If you sign a proxy card and return it to 1^st Financial so that it is received before the Special Meeting, or if you appoint the 1^st Financial Proxies by Internet, the shares of 1^st Financial common stock you hold of record will be voted by the 1^st Financial Proxies according to your instructions. If you sign and return a proxy card, or appoint the 1^st Financial Proxies by Internet, but you do not give any voting instructions, then your shares will be voted by the 1^st Financial Proxies “FOR” approval of the Agreement and merger and “FOR” authorization to adjourn the Special Meeting, if necessary, to allow additional time to solicit votes needed to approve the Agreement. Under North Carolina law generally, no business may be brought before the 1^st Financial Special Meeting unless it is described in the notice of meeting that accompanies this Joint Proxy Statement/Prospectus, and 1^st Financial’s management is not aware of any other business that will be brought before the Special Meeting. However, if any other matter is properly presented for action by 1^st Financial’s shareholders, your proxy card will authorize the 1^st Financial Proxies to vote your shares according to their best judgment. Your proxy card also will authorize the 1^st Financial Proxies to vote your shares according to their best judgment on matters incident to the conduct of the meeting, including adjournments for any reason other than to solicit votes needed to approve the Agreement. If you do not return a proxy card or appoint the 1^st Financial Proxies by Internet, the 1^st Financial Proxies will not have authority to vote for you and shares of 1^st Financial common stock you hold of record will not be represented or voted at the Special Meeting unless you attend the meeting in person.

Revocation of Proxy Cards; How You Can Change Your Vote. If you are the record holder of your shares of 1^st Financial common stock and you sign and return a proxy card or appoint the 1^st Financial Proxies by Internet, and you later wish to revoke the authority or change the voting instructions you gave the 1 ^st Financial Proxies, you can do so at any time before the voting takes place at the Special Meeting by taking the appropriate action described below.

The 1^st Financial Proxies will follow the last voting instructions they receive from you before the Special Meeting. If your shares are held in “street name” and you want to change voting instructions you have given to your broker or other nominee, you must follow your broker’s or nominee’s directions.

To revoke your proxy card or your appointment of the 1^st Financial Proxies by Internet:

Expenses and Method of Solicitation. In connection with the costs of soliciting appointments of proxy for the 1^st Financial Special Meeting, AB&T and 1^st Financial will bear the costs of their own counsel, and will divide equally the costs of printing and mailing this Joint Proxy Statement/Prospectus. 1^st Financial is requesting banks, brokers and other custodians, nominees, and fiduciaries forward copies of its proxy solicitation materials to their principals and request their voting instructions, and 1^st Financial may reimburse those persons for their expenses in doing so. In addition to using the mail, 1^st Financial’s and Mountain 1^st’s directors, officers, and employees may solicit proxy cards, in person or by email or telephone or other methods of communication, but they will not receive any additional compensation from 1^st Financial or Mountain 1^st for doing so.

In general, in connection with proxy solicitations for meetings of the shareholders of public companies, many holders of shares held in “street name” fail to give voting instructions to their brokers or other nominees. If 1^st Financial considers it necessary or advisable to help ensure that a sufficient number of shares are represented at the Special Meeting to vote on and approve the Agreement, it will make arrangements for a firm that specializes in proxy solicitation to assist it by contacting record holders and beneficial owners of 1^st Financial common stock and requesting that they vote their shares or send voting instructions to their brokers or other nominees. If 1^st Financial requests that assistance, it will pay a fee to that firm for its services.

In connection with soliciting proxy cards for the Special Meeting, neither 1^st Financial nor AB&T has authorized anyone to give 1^st Financial’s shareholders any information, or make any representation, not contained in this Joint Proxy Statement/Prospectus. If anyone gives you any other information or makes any other representation to you, you should not rely on it as having been authorized by 1^st Financial or AB&T.

Record Date and Voting Securities. The close of business on , 2009, is the “1^st Financial Record Date” being used to determine (a) which 1^st Financial shareholders are entitled to receive notice of and to vote at the 1^st Financial Special Meeting, and (b) how many shares of 1^st Financial common stock they are entitled to vote. 1^st Financial’s voting securities are the 5,001,248 shares of its common stock outstanding on the 1^st Financial Record Date. A shareholder must have been a record holder of 1^st Financial common stock on that date to be eligible to vote at the 1^st Financial Special Meeting. Shares of 1^st Financial preferred stock are not voting shares and may not be voted at the Special Meeting.

Quorum; Voting Procedures. A quorum must be present for business to be conducted at the 1^st Financial Special Meeting. For all matters to be voted on at the meeting, a quorum will consist of a majority of the outstanding shares of 1^st Financial common stock. Shares of 1^st Financial common stock represented in person or by proxy at the meeting will be counted for the purpose of determining whether a quorum exists. Once a share is represented for any purpose at the meeting, it will be treated as present for quorum purposes for the remainder of the meeting and for any adjournments. If you return a valid proxy card, appoint the 1^st Financial Proxies by Internet, or attend the Special Meeting in person, your shares will be counted for purposes of determining whether there is a quorum, even if you abstain from voting. Broker “non-votes” also will be counted in determining whether there is a quorum. Broker “non-votes” will occur if your shares are held by a broker and are voted on one or more matters at the Special Meeting but they are not voted by the broker on a “non-routine” matter, such as the proposal to approve the Agreement, because you have not given the broker voting instructions on that matter. If your shares are represented at the Special Meeting with respect to any matter voted on, they will be treated as present with respect to all matters voted on, even if they are not voted on all matters.

You may cast one vote for each share of 1^st Financial common stock you held of record on the 1^st Financial Record Date on each matter voted on by shareholders at the Special Meeting, including the proposals to approve the Agreement (Proposal 1) and to authorize 1^st Financial’s management to adjourn the Special Meeting, if necessary, to allow additional time to solicit votes needed to approve the Agreement (Proposal 2).

Vote Required for Approval. For the proposal to approve the Agreement (Proposal 1) to be approved, a majority of the outstanding shares of 1^st Financial common stock must vote in favor of the proposal. For the proposal to authorize management to adjourn the Special Meeting, if necessary, to allow additional time to solicit

votes needed to approve the Agreement (Proposal 2) to be approved, the number of votes of 1^st Financial common shares cast in favor of such proposal must exceed the votes cast against it. In the case of Proposal 1, abstentions and broker non-votes will have the same effect as a vote against the merger. In the case of Proposal 2, abstentions and broker non-votes will have no effect.

The following is a summary of information about the merger and the important terms of the Agreement. This summary is not intended to be a complete description of all facts or terms regarding the merger. For more information, you should carefully read the entire Agreement.

At the AB&T Special Meeting and the 1^st Financial Special Meeting, AB&T’s shareholders and holders of 1^st Financial’s common stock each will vote on a proposal to approve the Agreement and the merger. The Agreement was entered into by AB&T and 1^st Financial as of February 16, 2009. When the transactions described in the Agreement become effective:

Following the merger, Alliance will carry on its business as a subsidiary of 1^st Financial and under the supervision and regulation of state and federal banking regulators.

Representatives of FIG attended a meeting of the AB&T Board on June 24, 2008 at which time they discussed a number of strategic issues, including a possible merger transaction with another financial institution. A number of possible candidates, including 1st Financial, were discussed. Over the next three months, FIG held numerous discussions with the management of AB&T regarding a select group of financial institutions identified during the June 24th Board meeting. As a result of these conversations with AB&T management, combined with the results of conversations with two of the identified financial institutions, including 1st Financial, AB&T retained FIG partners to act as its financial advisor in connection with a possible merger transaction on October 3, 2008.

During a routine discussion with representatives of the investment banking firm of FIG Partners, LLC, Atlanta, Georgia (FIG) in the fourth quarter of 2008, Greg Gibson, 1^st Financial’s CEO, discussed 1^st Financial’s potential interest in supplementing its organic growth by growing through acquisitions. Mr. Gibson and FIG discussed several possible merger partners. FIG identified AB&T as a possible candidate and Mr. Gibson and FIG reviewed a number of positive attributes of a potential combination of the two companies. As FIG maintained a relationship with AB&T, Mr. Gibson asked FIG to inquire as to the level of interest AB&T might have discussing a combination of the companies.

FIG contacted Daniel C. Ayscue, AB&T’s President and CEO, with this inquiry, to which he expressed interest. AB&T retained FIG on October 3, 2008, to act as financial advisor in connection with a possible business combination with 1^st Financial. Mr. Gibson and Mr. Ayscue met on November 20, 2008. In their discussions, they determined that there were many similarities between the two companies, including similar and compatible cultures. They also determined that both companies recognized the need for successful community banks to increase their size to be able to absorb the mounting costs of compliance with continually expanding regulations and enhance their ability to continue to compete effectively in the marketplace of the future. Mr. Gibson and Mr. Ayscue agreed to discuss the idea of a merger with each company’s respective Board.

AB&T and 1^st Financial executed a confidentiality agreement during the first week of December 2008. Subsequent discussions with both Boards produced sufficient interest in a business combination to warrant a meeting between Board and management representatives of each company to further explore that possibility. On December 11, 2008, the Chairman, Vice Chairman and CEO of 1^st Financial met with the Chairman and the CEO of AB&T, along with representatives of FIG.

During this meeting, a number of issues involved in a possible merger were discussed, including the possible benefits of a combination of the companies, a possible organizational structure, potential representation for each of the shareholder groups, and determining the exchange ratio. Each group agreed that the concept of a combination was sufficiently compelling to move forward to the next phase of negotiations, the drafting of a definitive agreement for consideration by each respective Board.

Mr. Gibson has contacted the investment banking firm of The Carson Medlin Company, Raleigh, North Carolina (Carson Medlin) from time to time in the past to discuss certain strategic issues, including possible mergers with other financial institutions. In December 2008, Mr. Gibson discussed the concept of a combination with AB&T with Carson Medlin representatives, along with other possible merger candidates.

On January 8, 2009, Mr. Gibson contacted Carson Medlin specifically to discuss the merger-related discussions he had recently held with AB&T and to request a proposal from Carson Medlin to be engaged by 1^st Financial as its financial advisor in connection with a possible transaction. Carson Medlin and 1^st Financial finalized an engagement agreement on January 13, 2009. On January 14, 2009, the CEO of 1^st Financial contacted Carson Medlin to request that Carson Medlin advise 1^st Financial with negotiations that could possibly lead to a merger of AB&T with 1^st Financial.

In late January and early February 2009, 1^st Financial and AB&T each conducted a due diligence review of the operations and books and records of the other. During this period, the parties and their financial advisors discussed the results of their due diligence reviews, certain aspects of combining the operations of the two banks, the financial implications for the combined entity, and a range of exchange ratios for the transaction. Those negotiations were concluded and on February 13, 2009, Carson Medlin representatives presented their analysis of the proposed transaction to the Board of 1^st Financial and rendered their preliminary opinion that the merger is fair, from a financial point of view, to 1^st Financial’s shareholders. On February 12, 2009 representatives of FIG presented their analysis of the proposed transaction to the Board of AB&T and rendered their preliminary opinion that the merger is fair, from a financial point of view, to AB&T’s shareholders. The parties executed the Agreement as of February 16, 2009.

AB&T. AB&T’s Board of Directors has approved the Agreement and the merger and believes the merger is in the best interests of AB&T and its shareholders. AB&T’s Board of Directors recommends that AB&T’s shareholders vote to approve the Agreement and the merger.

The material factors considered by the Board in deciding to consider strategic alternatives such as the Agreement and merger are described below. Each of those factors favored proceeding with investigation of the merger, and consideration, without foreclosing AB&T’s ability to remain independent.

The Board evaluated the increasing difficulty of maintaining and improving AB&T’s performance for its shareholders as an independent financial institution within its current banking market without expansion into nearby, highly competitive markets (an action the Board assessed to be costly and risky).

Other significant positive factors considered by the Board in deciding to approve the merger and recommend it to AB&T’s shareholders are listed below.

AB&T’s Board evaluated 1st Financial as a merger candidate based not only on the Board’s evaluation of the merger consideration offered by 1st Financial, but also on 1st Financial’s history, financial condition and historical operating performance, ownership profile, corporate structure, management, the nature of its banking business, asset quality, historical stock performance, branch locations, employee benefits, philosophy regarding expansion and growth, and other factors. 1st Financial’s community banking focus was important to the Board as well.

Negative factors considered by the Board in deciding to approve 1st Financial’s proposal and recommend it to AB&T’s shareholders included those listed below.

Additional factors the Board considered in determining to approve the Agreement and merger included the Board’s review with its legal and financial advisors of the provisions of the Agreement, the expected tax consequences of the merger to AB&T and its shareholders, the opinion of AB&T’s financial adviser, FIG Partners, LLC, that the consideration to be received under the Agreement was fair, from a financial point of view, to the holders of AB&T’s common stock, the value to be received by AB&T’s shareholders in relation to the historical trading prices, book value and earnings per share of AB&T’s common stock, and the lack of liquidity in the trading of AB&T’s common stock.

Although AB&T’s Board considered the foregoing and other factors individually, the Board did not collectively assign any specific or relative weights to the factors considered and did not make any determination with respect to any individual factor. The Board collectively made its determination with respect to the Agreement and merger based on the unanimous conclusion reached by its members, in light of the factors that each of them considered appropriate, that the Agreement and merger were in the best interests of AB&T’s shareholders.

1^st Financial. 1^st Financial’s Board of Directors also has approved the Agreement and the merger and believes the merger is in the best interests of 1^st Financial and its shareholders. 1^st Financial’s Board recommends that 1^st Financial’s shareholders vote to approve the merger. The material factors considered by the Board in deciding to proceed with merger negotiations and to approve the Agreement are described below.

1^st Financial’s management believes that a combination of the two institutions will create a stronger and more effective competitor in their markets and better serve their combined customer base. The significant positive factors considered by the Board in deciding to approve the merger and recommend it to 1^st Financial’s shareholders are listed below.

The significant negative factors considered by the Board in deciding to approve the merger and recommend it to 1^st Financial’s shareholders are listed below.

Although 1^st Financial’s Board considered the above and other factors individually, the Board did not collectively assign any specific or relative weights to the factors considered and did not make any determination with respect to any individual factor. The Board collectively made its determination with respect to the Agreement and merger based on the unanimous conclusion reached by its members, in light of the factors that each of them considered appropriate, that the Agreement and merger were in the best interests of 1^st Financial and its shareholders.

The conversion of AB&T shareholders’ common stock will result in fractional shares of 1 ^st Financial common stock in many cases. No fraction of a share of 1^st Financial common stock, or any scrip or certificate representing any fractional share, will be issued to any AB&T shareholder, and no right to vote or to receive any distribution will attach to any fractional share. Instead, if the conversion of an AB&T shareholder’s common stock otherwise would result in a fraction of a share of 1^st Financial common stock, then, after the merger, 1^st Financial will pay the shareholder cash (without interest) for that fraction. The amount of cash for each fraction will be determined by multiplying the fraction by the closing price of 1^st Financial shares on the date the merger becomes effective.

After the merger, the certificates that formerly represented shares of AB&T common stock and AB&T preferred stock (“Old Certificates”) will represent only the right to receive:

When the merger is completed, AB&T’s stock transfer books will be closed and no further transfer of Old Certificates will be recognized or registered. As soon as possible after the merger, 1^st Financial will send transmittal forms to AB&T’s former shareholders with instructions for forwarding their Old Certificates for surrender to 1^st Financial’s exchange agent. Upon their proper surrender of their Old Certificates (together with properly completed transmittal forms), holders of AB&T common stock will elect to receive either New Certificates or Book Entry representing the whole shares of 1^st Financial common stock into which their AB&T common stock has been converted, together with a check for any fractional share to which they otherwise would

be entitled. Holders of AB&T preferred stock will receive either New Certificates representing the whole shares of 1^st Financial preferred stock into which their AB&T preferred stock has been converted. Holding shares in book-entry provides the same rights, including voting rights, as holding a physical certificate, but eliminates the need to safeguard and deliver the physical certificate. For AB&T’s shareholders who properly exercise their dissenters’ rights, the process for submitting Old Certificates and receiving cash for the “fair value” of their shares is described in this Joint Proxy Statement/Prospectus under the caption “Rights of Dissenting AB&T Shareholders” on page .

Until Old Certificates are surrendered to 1^st Financial’s exchange agent, they will represent only the right of former AB&T shareholders to receive New Certificates or Book Entry evidencing the consideration into which their AB&T common stock or AB&T preferred stock has been converted. However, after the merger, and regardless of whether they have surrendered their Old Certificates, former AB&T shareholders will be entitled to vote and to receive any dividends or other distributions (for which the record date is after the merger) on the numbers of whole shares of 1^st Financial common or preferred stock into which their AB&T common or preferred stock has been converted, but no dividends or other distributions actually will be paid to them unless and until their Old Certificates are physically surrendered to 1^st Financial’s exchange agent. Upon surrender and exchange of Old Certificates, 1^st Financial will pay the amount, without interest, of any unpaid dividends or other distributions that became payable after the merger on the shares of 1^st Financial common or preferred stock represented by those Old Certificates.

If an AB&T shareholder’s Old Certificates have been lost, stolen or destroyed, that shareholder will be required to furnish to 1^st Financial evidence satisfactory to it of ownership of the AB&T common stock or AB&T preferred stock evidenced by those Old Certificates and of the loss, theft or destruction of those certificates. 1^st Financial also will require the shareholder to furnish appropriate and customary indemnification (which may include an indemnity bond issued by a surety) to receive the consideration to which the shareholder is entitled.

AB&T’s shareholders should not forward their Old Certificates to 1^st Financial’s exchange agent until they receive instructions to do so.

Shares of 1^st Financial common stock held by 1^st Financial’s shareholders when the merger is completed will remain outstanding. The merger will not change those outstanding shares of 1^st Financial common stock and will not affect any rights of 1^st Financial’s current shareholders or require that they surrender their stock certificates. However, based on the 2,678,205 currently outstanding shares of AB&T common stock, 1^st Financial will issue approximately 3,146,890 new shares of 1^st Financial common stock to AB&T’s shareholders. As a result, the merger will dilute the relative percentage voting and equity interests of 1^st Financial’s current shareholders. The issuance of 3,146,890 new shares of 1^st Financial common stock would result in 1^st Financial’s current shareholders holding approximately 38.62%, and AB&T’s former shareholders holding approximately 61.38%, of the total voting power represented by the outstanding shares of 1^st Financial’s voting stock following the merger. On a pro forma basis as of December 31, 2008, and based on the issuance of the number of new shares that would have been issued if the merger had been completed on that date, the merger would result in a decrease of approximately 12.48% in the tangible book value of each outstanding share of 1^st Financial common stock currently held by 1^st Financial’s shareholders. (See “Pro Forma Selected Combined Consolidated Financial Statements” on page F- .)

AB&T retained FIG Partners, LLC (“FIG”) on October 3, 2008 to act as a financial advisor in connection a possible business combination with 1^st Financial Services Corporation. FIG is a nationally recognized investment banking firm whose principal business specialty is financial institutions. In the ordinary course of its investment banking business, FIG is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions.

FIG acted as financial advisor to AB&T in connection with the proposed merger with 1^st Financial. In connection with FIG’s engagement, AB&T asked FIG to help structure and negotiate the terms of a transaction and to evaluate the fairness of the merger consideration to AB&T’s stockholders from a financial point of view. At the February 12, 2009 meeting of AB&T’s board of directors, FIG was asked to present its opinion that, based upon and subject to various matters to be set forth in its preliminary written opinion, the merger consideration to be received by AB&T’s ahreholders was fair from a financial point of view. AB&T’s board voted to approve the merger and subsequently executed a definitive agreement. FIG subsequently submitted its preliminary written opinion letter to the board of directors on February 13, 2009.

THE FULL TEXT OF FIG'S WRITTEN OPINION IS ATTACHED AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS. THE OPINION OUTLINES THE MATTERS FIG CONSIDERED, AND THE QUALIFICATIONS AND LIMITATIONS ON THE REVIEW UNDERTAKEN BY FIG IN RENDERING ITS OPINION. THE DESCRIPTION OF THE OPINION SET FORTH BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPINION. WE URGE YOU TO READ THE ENTIRE OPINION CAREFULLY IN CONNECTION WITH YOUR CONSIDERATION OF THE PROPOSED MERGER.

FIG'S OPINION SPEAKS ONLY AS OF THE DATE OF THE OPINION. THE OPINION WAS DIRECTED TO THE AB&T BOARD OF DIRECTORS AND IS DIRECTED ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION TO AB&T STOCKHOLDERS FROM A FINANCIAL POINT OF VIEW. IT DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION OF AB&T TO ENGAGE IN THE MERGER OR ANY OTHER ASPECT OF THE MERGER, THE MERGER AGREEMENT OR ANY RELATED AGREEMENTS, AND IS NOT A RECOMMENDATION TO ANY AB&T STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE AT THE STOCKHOLDER MEETING WITH RESPECT TO THE MERGER, OR ANY OTHER MATTER.

In connection with rendering its opinion, FIG reviewed and considered, among other things:

FIG held discussions with certain members of senior management of AB&T regarding their assessment of the strategic rationale for, and the potential benefits of, the merger and the past and current business operations,

financial condition and future prospects of their respective companies. In connection with FIG’s review, it relied upon the accuracy and completeness of all of the financial, accounting, legal, tax, and other information discussed with or reviewed by it.

AB&T’s board of directors did not limit the investigations made or the procedures followed by FIG in giving its opinion.

In performing its reviews and analyses and in rendering its opinion, FIG assumed and relied, without assuming any responsibility for independent verification, upon the accuracy and completeness of all the financial information, analyses, and other information that was publicly available or otherwise furnished to, reviewed by or discussed with management of AB&T and 1^st Financial. With respect to financial forecasts and other information and data relating to AB&T, and reviewed by or discussed with it, FIG was advised by the management of AB&T that such forecasts and other information and data were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of AB&T as to its future financial performance, the potential strategic implications and operational benefits anticipated to result from the proposed transaction and the other matters covered thereby. FIG assumed that the financial results (including the potential strategic implications and operational benefits anticipated to result from the merger) reflected in such forecasts and other information and data will be realized in the amounts and at the times projected. FIG was not asked to and did not independently verify the accuracy or completeness of such information and it did not assume responsibility or liability for the accuracy or completeness of any of such information. FIG did not make an independent evaluation or appraisal of the assets, the collateral securing assets, or the liabilities, contingent or otherwise, of AB&T or 1^st Financial or any of their respective subsidiaries, or the ability to collect any such assets, nor was it furnished with any such evaluations or appraisals. FIG is not an expert in the evaluation of allowances for loan losses and it did not make an independent evaluation of the adequacy of the allowance for loan losses of AB&T or 1^st Financial, nor did it review any individual credit files relating to AB&T or 1^st Financial. With AB&T’s consent, FIG assumed that the respective allowances for loan losses for both AB&T and 1^st Financial were adequate to cover such losses and will be adequate on a pro forma basis for the combined entity. In addition, FIG did not conduct any physical inspection of the properties or facilities of AB&T or 1^st Financial. FIG is not an accounting firm and it relied on the reports of the independent accountants of AB&T and 1^st Financial as to the audited financial statements furnished to it.

FIG’s opinion was necessarily based upon financial information, and market, economic and other conditions, as these existed on, and could be evaluated as of, the date of its opinion. FIG assumed, in all respects material to its analysis, that all of the representations and warranties contained in the merger agreement and all related agreements are true and correct, that each party to such agreements will perform all of the covenants required to be performed by such party under such agreements and that the conditions precedent in the merger agreement are not waived. FIG also assumed that there has been no material change in AB&T’s and 1^st Financial’ financial condition, results of operations, business or prospects since the date of the last financial statements made available to them, and that AB&T and 1^st Financial will remain as going concerns for all periods relevant to its analyses. FIG further assumed that, in the course of obtaining the necessary regulatory and third party approvals, consents and releases for the merger and the related transactions, no delay, limitation, restriction or condition will be imposed that would have a material adverse effect on AB&T or 1^st Financial or the contemplated benefits of the proposed transaction in any way meaningful to its analyses.

In rendering its opinion, FIG performed a variety of financial analyses. The following is a summary of the material analyses performed by FIG, but is not a complete description of all the analyses underlying FIG’s opinion. The summary includes information presented in tabular format. In order to fully understand the financial analyses, these tables must be read together with the accompanying text. The tables alone do not constitute a complete description of the financial analyses. The preparation of a fairness opinion is a complex process involving subjective judgments as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. The process, therefore, is not necessarily susceptible to a partial analysis or summary description. FIG believes that its analyses must be considered as a

whole and that selecting portions of the factors and analyses considered without considering all factors and analyses, or attempting to ascribe relative weights to some or all such factors and analyses, could create an incomplete view of the evaluation process underlying its opinion. Also, no company included in FIG’s comparative analyses described below is identical to AB&T or 1^st Financial and no transaction is identical to the merger. Accordingly, an analysis of comparable companies or transactions involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies and other factors that could affect the public trading values or merger transaction values, as the case may be, of AB&T or 1^st Financial and the companies to which they are being compared.

The internal earnings projections provided by AB&T were relied upon by FIG in its analyses. FIG assumed that such projected performance would be achieved, and expressed no opinion as to such financial projections or the assumptions on which they were based. The financial projections furnished to FIG by AB&T were prepared for internal purposes only and not with a view towards public disclosure. These projections, as well as the other estimates used by FIG in its analyses, were based on numerous variables and assumptions which are inherently uncertain and, accordingly, actual results could vary materially from those set forth in such projections.

In performing its analyses, FIG also made numerous assumptions with respect to industry performance, business and economic conditions, and various other matters, many of which cannot be predicted and are beyond the control of AB&T, 1^st Financial, and FIG. The analyses performed by FIG are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by such analyses. FIG prepared its analyses solely for purposes of rendering its opinion and provided such analyses to the AB&T board at the February 12, 2009 meeting. Estimates on the values of companies are not appraisals and do not necessarily reflect the prices at which companies or their securities may actually be sold. Such estimates are inherently subject to uncertainty and actual values may be materially different. Accordingly, FIG’s analyses do not necessarily reflect the value of AB&T common stock or 1^st Financial common stock or the prices at which AB&T or 1^st Financial common stock may be sold at any time. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of AB&T, 1^st Financial, or FIG, or any other person assumes responsibility if future results are materially different from those forecast.

Summary of Proposed Merger. FIG reviewed the financial terms of the proposed merger whereby the holders of AB&T common stock shall be entitled to receive 1.175 shares of 1^st Financial common stock in exchange for their shares of AB&T common stock. Holders of AB&T options and warrants will receive 1.175 1^st Financial options or warrants for each AB&T option or warrant they hold and the strike price of each 1^st Financial option will be equal to the quotient of the current ABTO option strike price divided by the Exchange Ratio (1.175). Based upon the terms of the merger agreement and 1^st Financial’s closing price of $5.50 on February 13, 2009, FIG calculated a transaction value of $17,307,900, or $6.46 per AB&T share. Utilizing AB&T’s publicly available financial information on the date of announcement, which was the December 31, 2008 financial information, FIG calculated the following ratios:

The Offer Price / Shares Outstanding calculation is based upon AB&T’s 2,678,205 outstanding common shares as of the date of the announcement.

Peer Group Performance. Using publicly available information, FIG compared the financial performance and stock market valuation of 1^st Financial with two separate peer groups. The first included publicly traded banks in North Carolina with assets between $500 million and $1 billion, referred to as the “Regional Peers.” The Regional Peers included the following institutions:

The second peer group included publicly traded banks, nationwide, with assets between $600 million and $800 million and NPA/Assets ratio less than 2.5%, referred to as the “Nationwide Peers.” The Nationwide Peers included the following institutions:

Indications of such financial performance and stock market valuation included profitability measures, earnings composition, operating and performance metrics, loan portfolio compositions, deposit compositions, yield and cost analysis, capital adequacy, asset quality, and reserve adequacy, all based on financial information as of December 31, 2008 and, where relevant, closing stock market information as of February 11, 2009. Selected market information for 1^st Financial and the two groups of comparable companies that was analyzed is provided below.

Contribution Analysis. FIG computed the contribution of 1^st Financial and AB&T to various elements of the pro forma entity’s income statement, balance sheet, and market capitalization, excluding estimated cost savings and operating synergies. The following table compares the pro forma ownership in the combined company, based upon the exchange ratio, to each company’s respective contribution to each element of the analysis.

The contribution analysis indicated that the pro forma ownership of 1^st Financial common stock issuable to AB&T stockholders in the merger was greater than projected earnings contribution in 2010 and greater than the projected balance sheet contributions.

Comparable Transactions Contribution Analysis. FIG also compared the asset contribution of AB&T and ownership of pro forma entity and compared them to nine recent M&A transactions in North Carolina, South Carolina, Tennessee, and Virginia. Below is the list of transactions analyzed:

The average asset contribution for the nine deals is 37.2% and the average target institution ownership of the pro forma institution was 35.2%. The proposed transaction compares favorably to the nine transaction average as AB&T is contributing 20.6% of the assets but would own 38.6% of the pro forma institution.

Analysis of Selected Merger Transactions. In order to address the specific valuation considerations within the market that AB&T serves, FIG selected a group of comparable merger and acquisition transactions and compared the pricing multiples to the multiples implied by the merger consideration. Specifically, FIG selected bank merger and acquisition transactions according to the following criteria:

FIG reviewed the multiples of transaction value at announcement to estimated 2009 earnings, transaction value to total assets, transaction value to tangible book value, and book premium to core deposits, and computed the average for the transactions. These average multiples and premiums were compared to the value AB&T received in the transaction with 1^st Financial. The summary of this analysis is shown below.

Discounted Cash Flow Analysis. Using a discounted cash flow analysis, FIG estimated the present value of the future stream of earnings and dividends that AB&T could produce over the next five years based upon an internal earnings and balance sheet forecast for 2009 – 2013, assuming a range of discount rates from 13% to 15%. FIG performed discounted cash flow analyses for two stand alone scenarios and two company sale scenarios.

In the present value of future earnings scenario, FIG arrived at the terminal value of AB&T by assuming a growth into perpetuity of 3.0% beyond 2013. This terminal value was then discounted, along with yearly cash flows for 2009 through and including 2013, to arrive at the present value for AB&T. These rates and values were chosen to reflect different assumptions regarding the required rates of return of holders or prospective buyers of the AB&T common stock. This discounted cash flow analysis indicated a value range between $5.35 and $6.59 per share of AB&T common stock.

In the second stand alone scenario, FIG derived the terminal value of AB&T earnings stream beyond 2013 assuming terminal value multiple 12x of fiscal year 2013 net income. The estimated dividend streams and terminal values were then discounted to present values using different estimated discount rates (ranging from 13.0% to 15.0%) chosen to reflect different assumptions regarding the required rates of return to holders or prospective buyers of AB&T common stock. This discounted cash flow analysis indicated a value range between $4.92 and $5.37 per share of AB&T common stock.

Additionally, FIG estimated the present value of AB&T in two company sale scenarios. In arriving at the value of AB&T, FIG assumed two separate terminal acquisition values, one based on a price-to-earnings multiple of 15.6x and the other based on a price-to-tangible book multiple of 1.2x. These terminal values were then discounted, along with yearly cash flows for 2009 through and including 2013, to arrive at the present values for AB&T. The price-to-earnings multiple analysis indicated a value range between $6.40 and $6.98 per share of AB&T common stock, while the price-to-tangible book multiple analysis indicated a value range between $7.12 and $7.78 per share of AB&T common stock.

Other Analyses and Factors. FIG took into consideration various other factors and analyses, including: historical market prices and trading volumes for AB&T’s and 1^st Financial’s common stock, movements in the common stock of selected publicly-traded companies, and movements in the S&P Bank Index.

Information Regarding FIG. FIG will receive a fee of approximately $225,000 from AB&T for performing its financial advisory services in connection with the merger and rendering a written opinion to the Board of Directors of AB&T as to the fairness, from a financial point of view, of the merger to AB&T’s shareholders.

AB&T also agreed to indemnify and hold harmless FIG and its officers and employees against certain liabilities in connection with its services under the engagement letters, except for liabilities resulting from the negligence, violation of law or regulation, or bad faith of FIG or any matter for which FIG may have strict liability.

FIG, as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bidding, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. FIG is a market maker in the securities of both 1^st Financial and AB&T. In the course of its daily trading activities, investment funds controlled by an affiliate (as such term is defined in Regulation 12G-2 promulgated under the Securities Exchange Act of 1934, as amended) of FIG and their affiliates may from time to time effect transactions and hold securities of AB&T and/or 1^st Financial.

1^st Financial retained The Carson Medlin Company (“Carson Medlin”) to act as its financial advisor in connection with the proposed merger of 1^st Financial and AB&T. Carson Medlin is a nationally recognized investment banking firm that provides specialized corporate finance services to community financial institutions. In the ordinary course of its investment banking business, Carson Medlin is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions. 1^st Financial selected Carson Medlin as its financial advisor based upon its qualifications, expertise and reputation in such capacity, as well as its long term relationship with Carson Medlin. Neither Carson Medlin nor any of its affiliates has a material relationship, other than the previously described financial advisory relationship, with 1^st Financial or AB&T or any material financial interest in 1^st Financial or AB&T. No limitations were imposed by 1^st Financial’s board of directors or its management upon Carson Medlin with respect to the investigations made or the procedures followed by Carson Medlin in rendering its opinion.

Carson Medlin acted as financial advisor to 1^st Financial in connection with the proposed merger with AB&T and participated in certain negotiations leading to the execution of the Agreement. In connection with Carson Medlin’s engagement, 1^st Financial asked Carson Medlin to evaluate the fairness of the merger consideration to 1^st Financial’s shareholders from a financial point of view. At the February 13, 2009 meeting of the board of directors of 1^st Financial, convened to evaluate the merger, Carson Medlin delivered to the 1^st Financial board its analysis of the proposed transaction and its potential impact on 1^st Financial and its shareholders as well as its oral opinion that, based upon and subject to various matters to be set forth in its preliminary written opinion, the merger consideration was fair to 1^st Financial’s shareholders from a financial point of view. Subsequently at that meeting, the 1^st Financial board voted to approve the execution of the Agreement and thereafter, officers of 1^st Financial executed the Agreement as of February 16, 2009.

You should consider the following when reading the discussion of Carson Medlin’s analysis and opinion in this document:

Analysis of the financial aspects of a transaction such as the merger and the preparation of the related financial fairness opinion involve various determinations as to the most appropriate methods of financial analysis and the application of those methods to the particular circumstances. The analytical process is therefore not readily susceptible to partial analysis or summary description. In connection with advising 1^st Financial on the merger and rendering its opinion, Carson Medlin performed a variety of financial analyses. Carson Medlin believes that those analyses must be considered together as a whole and that selecting portions of its analyses and the facts considered in its analyses, without considering the remaining facts and analyses, could create an incomplete or inaccurate view of Carson Medlin’s analyses and the process underlying the rendering of Carson Medlin’s opinion.

In performing its analyses, Carson Medlin made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of 1^st Financial and AB&T and may not be realized. Any estimates of future results contained in Carson Medlin’s analyses are not necessarily predictive of future results or values, which may be significantly more or less favorable than the estimates. Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which the companies or their securities may actually be sold. Except as described below, none of the analyses performed by Carson Medlin was assigned a greater significance by Carson Medlin than any other. The relative importance or weight given to these analyses by Carson Medlin is not necessarily reflected by the order of presentation of the analyses herein ( or by the corresponding results). The summaries of financial analyses include information presented in tabular format. Those tables should be read together with the text of those summaries.

Carson Medlin has relied, without independent verification, upon the accuracy and completeness of the information it received and reviewed for the purposes of advising 1^st Financial and rendering its opinion. Carson Medlin did not undertake any independent evaluation or appraisal of the assets and liabilities of 1^st Financial or AB&T nor was it furnished with any appraisals.

Carson Medlin is not an expert in the evaluation of loan portfolios, including under-performing or non-performing assets, charge-offs or the allowance for loan losses; Carson Medlin has not reviewed any individual credit files of 1^st Financial or AB&T; and Carson Medlin has assumed that the allowances for loan losses of 1^st Financial and AB&T are in the aggregate adequate to cover potential losses, except as to specific merger-related adjustments to such allowances that may have been negotiated by 1^st Financial and AB&T. Carson Medlin’s advice and its opinion provided to 1^st Financial were and are necessarily based on economic, market and other conditions existing on the date that the advice and opinion were provided and on information as of various earlier dates made available to it, which conditions are not necessarily indicative of current or future market conditions.

In advising 1^st Financial and rendering its opinion, Carson Medlin made the following assumptions:

The following is a summary of all material analyses performed by Carson Medlin in connection with advising 1^st Financial on the merger and in providing orally, to the 1^st Financial board of directors on February 13, 2009, its opinion, which opinion has since been confirmed in writing and is included here as Appendix . The following summary does not purport to be a complete description of the analyses performed by Carson Medlin.

Carson Medlin reviewed the terms of the proposed merger, including the form of consideration, the exchange ratio, the price per share of 1^st Financial’s common stock and the price paid to AB&T’s shareholders pursuant to the merger Agreement. To consummate the merger, 1^st Financial will issue approximately 3,146,891 shares of stock and 434,322 options to purchase shares of 1^st Financial common stock, based on an exchange ratio of 1.175 shares of 1^st Financial for each share and option of AB&T, in exchange for all of AB&T’s 2,678,205 outstanding common shares and 369,636 stock options. As of February 13, 2009, the date Carson Medlin rendered its opinion and the 1^st Financial board approved the Agreement, this resulted in a transaction

value of approximately $17.3 million, or $6.46 per share of AB&T common stock, based the recent trading price of 1^st Financial shares of $5.50 per share.

Based on AB&T’s December 31, 2008, financial information (estimated on February 13, 2009), Carson Medlin calculated the following ratios:

Carson Medlin calculated the pro forma impact of the merger on 1^st Financial’s diluted earnings per share, return ratios and capital levels, based on profitability and balance sheet estimates for 1^st Financial and AB&T as supplied by the managements of each of the companies and compiled by Carson Medlin. The pro forma impact included the projected after tax benefits from merger-related savings and improvements in expenses and revenues associated with AB&T’s ongoing, post-merger operations, as well as estimated one-time merger-related charges.

An important reason for 1^st Financial entering into the merger is that the transaction provides the opportunity to employ its expertise and experience in balance sheet management and business-generation capability in integrating and managing the AB&T franchise. 1^st Financial estimates that AB&T’s net interest income can be improved by approximately $1.2 million or 28% as a result of restructuring certain of AB&T’s short-term borrowings and reinvesting certain of AB&T’s liquid assets at higher rates. These improvements are expected immediately after the merger becomes effective. Furthermore, 1^st Financial considers approximately $8 million of AB&T’s common equity to be excess relative to the current and expected near-term capital needs of the existing AB&T franchise. 1^st Financial management believes that, in view of 1^st Financial’s past ability to generate earning assets, AB&T’s excess capital can be used to support additional consolidated earning assets of at least $16 million, $38 million and $55 million by the end of 2009, 2010 and 2011, respectively. Assuming a net interest margin of 3% and nominal incremental noninterest expenses, additional earnings on this growth would be $0.2 million, $0.9 million and $1.6 million in 2009 (one half year), 2010 and 2011, respectively.

Carson Medlin also considered a range of projected annual noninterest expense savings resulting from the merger of from approximately $750,000 (or approximately 19% of AB&T’s noninterest expenses) to $1.4 million (or approximately 36% of AB&T’s noninterest expenses). Carson Medlin considers the lower level of potential cost savings to be conservative and not difficult for 1^st Financial and AB&T to achieve. Carson Medlin considers the higher level of potential cost savings to be more aggressive, but achievable in view of cost savings obtained in similar transactions.

After evaluating the potential revenue enhancements and cost savings that may be realized in the merger, Carson Medlin calculated that the merger would be dilutive to fully diluted earnings per share in 2009, and $0.02 to $0.08 per share accretive in 2010, depending upon the level of cost savings assumed. In lower expense savings scenario (a) estimated consolidated return on average assets would decline by nine basis points in 2009 and increase by nineteen basis points in 2010; (b) the ratio of consolidated tangible equity to assets would increase from 9.0% to 9.8% in 2009; and (c) the consolidated total risk based capital ratio would increase from 12.8% to 13.6% in 2009. The actual results achieved by the combined companies may vary from projected results and the variations may be material.

Carson Medlin also noted 1^st Financial management’s estimate of one-time merger-related charges of approximately $0.7 million ($1.5 million including estimated payments required to restructure certain of AB&T’s short-term liabilities) or 3.9% (8.5%) of the approximate value of the transaction. Carson Medlin

considers that range of one-time merger-related charges to be typical of similar transactions in current market conditions. Carson Medlin computed that, as a result of the merger, 1^st Financial’s tangible common book value per share would decrease by $1.43 or 15% in 2009, assuming the lower expense savings scenario; Carson Medlin considers that level of decrease in tangible common book value per share to be within an acceptable range for transactions such as the merger. Furthermore, in view of (a) the level of AB&T’s common equity considered by management of 1^st Financial to be excess relative to the current and expected near-term capital needs of the existing AB&T franchise and (b) the importance of capital in the banking industry in current economic conditions, Carson Medlin estimated the dilutive impact on 1^st Financial’s tangible common book value per share that would result from a secondary offering of 1^st Financial common stock approximately equal to the amount of AB&T’s estimated excess capital in current market conditions. Carson Medlin concluded that the dilution to 1^st Financial’s tangible common book value per share from such an offering would be approximately equal to the dilution to 1^st Financial’s tangible common book value per share as a result of the merger.

Carson Medlin selected a number of recent U.S. bank merger and acquisition transactions that it deemed comparable to the merger and compared the multiples implied by the consideration to be paid in those transactions to the multiples implied by the terms of the merger. Specifically, Carson Medlin selected bank merger and acquisition transactions according to the following criteria:

Carson Medlin selected 30 transactions fitting the criteria listed above that it deemed comparable to the proposed merger and computed transaction multiples at the 25^th percentile, 50^th percentile (median), and 75^th percentile for the following: price/tangible book value, price/trailing twelve months’ earnings, price/assets, price/deposits, and the core deposit premium. Carson Medlin then computed ranges of implied values for AB&T using the comparable transaction multiples at the 25^th, 50^th and 75^th percentiles and AB&T’s recent tangible book value, twelve months’ trailing earnings, total assets, total deposits and core deposits. These valuation ranges are shown in the following table:

Carson Medlin’s analysis indicated that the merger consideration of approximately $17.3 million is best described as being in the bottom half of the valuation range indicated by the bottom quartile of the 30 comparable bank merger transactions considered.

Carson Medlin computed the relative contribution of AB&T and 1^st Financial to various elements of the combined income statement and balance sheet (excluding potential revenue enhancements and cost savings that may be realized in the merger, as well as estimated one-time merger-related charges). The following table summarizes that comparison.

The contribution analysis indicated that the pro forma ownership of 1^st Financial common stock to be issued to AB&T shareholders in the merger was greater than the total assets, loans, deposits, tangible equity, and recent net income to be contributed to 1^st Financial by AB&T. The contribution analysis also indicated that the pro forma ownership of 1^st Financial common stock to be issued to AB&T shareholders in the merger was less than the AB&T’s current market capitalization compared to the combined current market capitalization of 1^st Financial and AB&T.

Carson Medlin used publicly available information to compare selected financial information for 1 ^st Financial, AB&T and a number of financial institutions. Carson Medlin compared selected operating results of 1^st Financial and AB&T to those of the 55 traded community commercial banks that are listed in the Southeastern Independent Bank Review^TM, a proprietary research publication prepared by Carson Medlin quarterly since 1991 (the “SIBR Peer Group”). Carson Medlin considers this group of financial institutions to be comparable to 1^st Financial and AB&T for purposes of this analysis. Carson Medlin compared, among other factors, profitability, capitalization, asset quality and operating efficiency of 1^st Financial and AB&T to these financial institutions. Carson Medlin noted the following performance based on results as of or for the twelve months ended December 31, 2008 (most recent available) for the SIBR Peer Group and for 1^st Financial and AB&T.

Carson Medlin’s analysis indicated that the financial performance of both 1^st Financial and AB&T are relatively similar to peer median values.

After considering the results of the various analyses described above as well as other factors, Carson Medlin concluded that the consideration to be received by AB&T’s shareholders under the Agreement is fair, from a financial point of view, to the shareholders of 1^st Financial.

The opinion expressed by Carson Medlin was based upon market, economic and other relevant considerations as they existed and could be evaluated as of the date of the opinion. Events occurring after the date of issuance of the opinion, including but not limited to, changes affecting the securities markets, the results of operations or material changes in the assets or liabilities of 1^st Financial Valley Financial or AB&T could materially affect the assumptions used in preparing the opinion. Carson Medlin is not aware of any such events that have occurred between the date February 13, 2009 and the date of this Joint Proxy Statement/Prospectus.

Carson Medlin will receive fees of $112,500 for advisory services provided to 1^st Financial in connection with the merger and the rendering of the fairness opinion, as well as reimbursement for its reasonable expenses incurred in providing those services. In addition, 1^st Financial has agreed to indemnify Carson Medlin and its directors, officers and employees, from liability incurred in connection with the transaction, and to hold Carson Medlin harmless from any losses, actions, claims, damages, expenses or liabilities related to any of Carson Medlin’s acts or decisions made in good faith and in the best interest of 1^st Financial, all in connection with its services provided related to the merger.

AB&T’s Shareholders. Under North Carolina law, the Agreement must be approved by AB&T’s shareholders by a vote of a majority of the outstanding shares of each class voted on the Agreement at the AB&T Special Meeting.

1^st Financial’s Shareholders. Under North Carolina law, the Agreement must be approved by 1^st Financial’s shareholders by a vote of a majority of the shares of 1^st Financial common stock.

The merger is subject to approval by the Federal Reserve Bank of Richmond under the Bank Holding Company Act. The Agreement provides that AB&T’s and 1^st Financial’s respective obligations to complete the merger are conditioned on receipt of all required regulatory approvals of the transactions described in the Agreement. 1^st Financial and AB&T have submitted a notice to the Federal Reserve Bank of Richmond under an expedited procedure available to well-managed bank hoding companies which propose to merge. Although there is no assurance that Federal Reserve Bank of Richmond approval will be received, the managements of AB&T and 1^st Financial currently are not aware of any reason, condition or circumstance that might lead to denial of the requested approval.

The Agreement provides that, during the period from the date of the Agreement until the merger is completed, and except as otherwise permitted by the Agreement or consented to by 1^st Financial, AB&T will, among various other actions:

Additionally, the Agreement provides that, from the date of the Agreement until the time the merger is completed, except as otherwise permitted by the Agreement or consented to by 1^st Financial, AB&T may not, among various other actions:

The Agreement provides that, before the merger, AB&T may not declare or pay any cash dividend or make any other distributions on AB&T common or preferred stock without the consent of 1^stFinancial. 1^st Financial has consented to payment of quarterly cash dividends of 5% per annum on shares of AB&T preferred stock.

The Agreement makes exceptions to these prohibitions in the case of unsolicited offers that AB&T’s Board of Directors, based on the advice of its legal counsel and its financial advisor, deem to be materially more favorable to AB&T’s shareholders, from a financial point of view, than the Agreement. AB&T must give notice to 1^st Financial of any unsolicited offer and may not enter into agreements with others without giving notice to 1^st Financial. If AB&T terminates the Agreement based on an unsolicited offer and accepts that offer, it will be obligated to pay 1^st Financial a termination fee of $745,000.

1^st Financial will use the acquisition method of accounting for the merger, in accordance with the provisions of Statement of Financial Accounting Standard No. 141 (Revised) Business Combinations. As of the date of the merger, AB&T’s assets and liabilities will be recorded at their respective estimated fair values. To the extent that the purchase price exceeds the estimated fair value of the net assets acquired, the excess will be allocated to goodwill. In accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” the goodwill resulting from the merger will not be amortized to expense, but instead will be reviewed for impairment at least annually. To the extent goodwill is impaired, its carrying value would be written down to its implied fair value and a charge would be made to earnings. To the extent the fair value of the net assets of AB&T exceed the fair value of 1^st Financial’s shares received (measured on the closing date of the transaction), negative goodwill will be recognized in the combined statement of operations. Core deposit and other intangibles with definite useful lives will be amortized to expense over their estimated useful lives.

The financial statements of 1^st Financial issued after the merger will reflect the results attributable to the acquired operations of AB&T beginning on the date the merger is completed. The unaudited pro forma financial information contained in this document has been prepared using the acquisition method of accounting. See “Selected Unaudited Pro Forma Combined Financial Information” beginning on page of this document.

1^st Financial and AB&T have received a written opinion (the “Tax Opinion”) from Porter Keadle Moore, LLP to the effect that the merger will be treated as a tax-free reorganization under Section 368 of the Internal Revenue Code (the “Code”). The following discussion summarizes the material anticipated federal income tax consequences of the merger as described in the Tax Opinion that generally will apply to holders of AB&T common stock.

The Tax Opinion and this summary do not cover all aspects of federal income taxation that may apply to 1st Financial, AB&T, or AB&T’s shareholders, and do not cover the tax consequences of the merger under any local, state, foreign, or other taxes, including but not limited to sales and use taxes, federal excise taxes, payroll taxes, trust fund taxes, property taxes, or premium taxes, and does not cover any legal aspect of the merger. Also, each AB&T shareholder’s individual or special circumstances may affect the tax consequences of the merger to that shareholder, and the Tax Opinion and this summary do not cover those matters. For example, the tax consequences described in the Tax Opinion and this summary may not apply if an AB&T shareholder is a foreign person or an individual that would be subject to special rules under the Code. So, AB&T’s shareholders should consult with their own tax advisors in order to make an evaluation of the federal, foreign, state, or local, and other tax consequences of the merger based on their particular individual circumstances and, among other things, the tax return reporting requirements, the application and effect of federal, foreign, state, local, and other tax laws on them individually, and the implications of any proposed changes in the tax laws.

AB&T’s shareholders should be aware that AB&T and 1^st Financial will not request or obtain a ruling from the Internal Revenue Service (the “IRS”) about the tax consequences of the merger, and the Tax Opinion will not be binding on the IRS. There is no assurance that in the future the IRS will not disagree with or take a position contrary to that set forth in the Tax Opinion on any particular aspect of the tax consequences of the merger. If the IRS were to take a position contrary to the Tax Opinion and were to prevail in that position, that event could result in adverse tax consequences to 1^st Financial, AB&T, or AB&T’s shareholders.

The Tax Opinion and this summary are based on currently existing provisions of the Code, existing and proposed Treasury Regulations issued under the Code, and current administrative rulings and court decisions, all of which are subject to change. Any such change could be retroactive and cause the tax consequences of the merger to AB&T’s shareholders to be different from those described in the Tax Opinion. In accordance with Treasury Regulations, any federal tax advice provided in this Joint Proxy Statement/Prospectus may not be used to avoid any federal tax penalty. Any such advice is provided on the basis and with the intent that the advice may not be used to avoid any federal tax penalty.

Subject to the limitations and qualifications referred to above and in the Tax Opinion, the Tax Opinion states, among other things, that:

The managements of 1^st Financial and AB&T believe that, in general, cash received by AB&T’s shareholders who exercise dissenters’ rights under North Carolina law, or in exchange for fractional shares of 1^st Financial common stock, will be treated as amounts distributed in redemption of their shares and as if their shares were sold for cash. That determination will be governed by Section 302 of the Tax Code. Sale treatment under Section 302(a) would mean that any gain recognized would be taxed as long-term or short-term capital gain if the shareholder’s stock that is treated as being sold is held by the shareholder as a capital asset. The gain would be taxed as ordinary income if the shareholder held the stock as an asset other than a capital asset. The cash received would be offset by the shareholder’s basis in the shares treated as being sold to determine if there is taxable gain. However, depending on a shareholder’s individual circumstances (or, in the case of fractional shares, depending on the overall circumstances of the transaction creating the distribution of cash in lieu of fractional shares), it is possible that the sale provisions of Section 302(a) will not apply, in which case the cash received by that shareholder would be treated as a dividend (instead of a sale) under Section 301 of the Code. That would mean that the full amount received may be taxable and that some or all of the cash received may be taxed as ordinary income.

In general, a United States AB&T shareholder who receives 1^st Financial common stock as a result of the merger will be required to retain records pertaining to the merger and will be required to file with the shareholder’s United States federal income tax return for the year in which the merger takes place a statement setting forth certain facts relating to the merger.

AB&T’s shareholders are urged to consult with their own tax advisors about the specific tax consequences to them of the merger and the exchange of their AB&T common stock for 1^st Financial stock and/or of exercising their dissenters’ rights.

Completion of the merger is subject to various conditions described in the Agreement, including:

Additionally, under the Agreement, AB&T’s and 1^st Financial’s separate obligations to complete the merger are subject to various other conditions, including:

Any term or condition of the Agreement (except as to matters of shareholder and regulatory approvals and other approvals required by law) may be waived in writing, either in whole or in part, by AB&T or 1^st Financial if its respective Board of Directors or, in the case of 1^st Financial, its Chief Executive Officer, determines that the waiver would not materially and adversely affect its interests or the interests of its shareholders. The Agreement may be amended, modified or supplemented at any time or from time to time before the merger, and either before or after its approval by AB&T’s and 1^st Financial’s shareholders, by an agreement in writing approved by a majority of the Boards of Directors of AB&T and 1^st Financial or, in the case of 1^st Financial, by its Chief Executive Officer. Approval of the Agreement by AB&T’s and 1^st Financial’s shareholders will authorize AB&T’s and 1^st Financial’s respective Boards of Directors to grant any of these waivers, or to agree to any of these amendments, modifications or supplements. However, following approval of the Agreement by AB&T’s or 1^st Financial’s shareholders, the Boards of Directors may not amend the Agreement to change the numbers of shares of 1^st Financial stock into which shares of AB&T common stock will be converted, or the amount of cash into which shares of AB&T preferred stock will be converted, unless that change also is approved by those shareholders.

Before the merger is completed, the Agreement may be terminated by the mutual agreement of AB&T and 1^st Financial. The Agreement also may be terminated by either AB&T or 1^st Financial alone, by action of its Board of Directors, if among other things:

After all conditions described in the Agreement have been satisfied, the merger will be completed on a date agreed upon by AB&T and 1^st Financial after the expiration of the required waiting periods following approval of

the merger by the Federal Reserve Bank of Richmond. The merger will become effective on the date and time specified in Articles of Merger filed by 1^st Financial with the North Carolina Secretary of State (or, if a time is not specified, then at the time the Articles of Merger are filed). Although there is no assurance as to whether or when the merger will occur, it currently is expected that it will become effective during the second or third quarter of 2009.

As further described below, members of AB&T’s management and Board of Directors have interests and will receive certain benefits in the merger that are in addition to their interests as shareholders of AB&T generally.

Appointment of AB&T’s Directors as Directors of 1^st Financial. The Agreement provides that, immediately after the merger is completed, 1^st Financial’s Board of Directors will increase its number of members and select Mr. Wayne F. Shovelin and one additional member of AB&T’s Board, provided they remain directors of AB&T immediately before the closing of the merger, to serve as a director of 1^st Financial for terms of office extending to the next annual meeting of 1^st Financial’s shareholders at which its directors are elected. At that meeting, one director will be nominated for election to a three-year term, and one will be nominated for election to a two-year term, on 1^st Financial’s Board of Directors. Continued service of these directors will be subject to their reelection. 1^st Financial’s Board is still considering which member of AB&T’s board it plans to appoint in addition to Mr. Shovelin. For their services as directors, 1^st Financial’s outside directors currently receive fees of $400.00 for attendance at Board meetings, and fees ranging from $100 to $200 for attendance at meetings of Board committees. AB&T currently pays each of its directors $300 for attendance at Board meetings and $150 for attendance at meetings of Board committees. The chair of the Board receives an extra $200 per Board meeting attended and committee chairmen receive an extra $50 for each committee meeting attended. (See “Information About 1^st Financial — Directors’ Compensation” on page , and “Information About AB&T — Directors’ Compensation” on page .)

Payments to AB&T’s President and Certain Other Officers. AB&T has entered into employment agreements with its President and Chief Executive Officer, Daniel C. Ayscue, and with two other officers. (See “Information About AB&T — Executive Compensation” on page .) Mr. Ayscue will enter into a new employment agreement with 1^st Financial and Mountain 1^st. The other two officers’ agreements will continue following the merger. It is a condition of closing that Mr. Ayscue agrees to waive, and the other officers already have agreed to waive, change-of-control payments that would be due based on the merger.

Retention and Non-Compete Agreements. In consultation with 1 ^st Financial, AB&T may enter into agreements with some employees that provide extra benefits if they remain employed through completion of the merger or some later time following the merger.

Outstanding AB&T Stock Options. On , 2009, AB&T had outstanding options held by its officers and employees to purchase an aggregate of shares of AB&T common stock. The Agreement provides for each of those stock options that have not been exercised by the date the merger is completed to be exchanged for options to purchase shares of common stock in 1^st Financial based on the exchange ratio.

Employee Benefits. Alliance employees who remain employees after the merger will be entitled to participate in all employee benefit plans provided by Mountain 1^st generally to its employees. Each Alliance employee’s participation in each plan will be on the same basis, and subject to the same eligibility and vesting requirements and other conditions, restrictions and limitations, as generally are in effect and applicable to other employees of Mountain 1^st. However, Alliance’s employees will be given credit for their years of service with Alliance before the merger for purposes of their eligibility for participation and vesting (but not for benefit accrual) under Mountain 1^st’s Section 401(k) plan and for all purposes under Mountain 1^st’s other benefit plans.

Directors’ and Officers’ Indemnification and Liability Insurance. As a result of the merger, 1^st Financial will become responsible for AB&T’s obligations under North Carolina law and AB&T’s Articles of Incorporation to indemnify AB&T’s directors and officers for liabilities arising out of their status as directors and officers before the merger. AB&T and 1^st Financial have agreed that, if it can be purchased at a cost not exceeding $50,000 (except as approved by 1^st Financial), then immediately before the merger is completed AB&T will purchase “tail” coverage for the maximum term available under, and in the same amount of coverage as is provided by, AB&T’s current directors’ and officers’ liability insurance policy.

Under federal securities laws, there are restrictions that will apply to sales of any shares of 1^st Financial common stock held by persons who are considered to be “affiliates” of 1^st Financial following the merger, including AB&T shareholders who become “affiliates” of 1^st Financial as a result of the merger. Any sale of shares by a 1^st Financial affiliate will require:

Rule 144 is the exemption from registration used most often for resales of securities by affiliates of “reporting companies” (i.e., companies that have a class of securities registered under the Securities Exchange Act of 1934, as amended (the “1934 Act”)).

1^st Financial’s “affiliates,” as defined by the rules promulgated under the 1933 Act, are persons or entities who or which directly, or indirectly through one or more intermediaries, control, are controlled by, or are under common control with, 1^st Financial. The restrictions described above are expected to apply to persons who currently are, or become after the merger, 1^st Financial’s directors and executive officers, or a shareholder that owns an amount of stock sufficient to be considered to “control” 1^st Financial or that otherwise is an “affiliate” of 1^st Financial (and to any relative or spouse of any such person, or any relative of any such spouse, any of whom live in the same home as such person, and any trusts, estates, corporations, or other entities in which such persons have a 10% or greater beneficial or equity interest). Individual shareholders who may be considered to be 1^st Financial or 1^st Financial’s “affiliates” should consult with their own counsel regarding the application of these restrictions to them and the shares of 1^st Financial’s common stock they will receive.

This Joint Proxy/Prospectus does not apply to any resales of 1^st Financial’s common stock received by any person in connection with the merger, and no person is authorized to make use of this Proxy Statement/Offering Memorandum in connection with any such resale.

The Agreement provides that AB&T and 1^st Financial each will pay its own legal, accounting and financial advisory fees and all its other costs and expenses (including all filing fees, printing and mailing costs and travel expenses) incurred or to be incurred in connection with the performance of its obligations under the Agreement or otherwise in connection with the merger. In connection with the costs of soliciting appointments of proxy for the AB&T Special Meeting, AB&T and 1^st Financial will bear the costs of their own counsel, and will divide equally the costs of printing and mailing this Joint Proxy Statement/Prospectus.

Under Article 13 of Chapter 55 of the North Carolina General Statutes (“Article 13”), current holders of AB&T common stock and AB&T preferred stock who object to the Agreement may “dissent” and become entitled to be paid the “fair value” of their shares in cash if the merger is completed. The following is only a summary of the rights of a dissenting AB&T shareholder. If you intend to exercise your right to dissent (your “Dissenters’ Rights”), you should carefully review the following summary and comply with all requirements of Article 13. A copy of Article 13 is attached as Appendix B to this document and is incorporated into this discussion by reference. You also should consult with your attorney. NO FURTHER NOTICE OF THE EVENTS GIVING RISE TO DISSENTERS’ RIGHTS WILL BE FURNISHED BY AB&T TO YOU.

If you intend to exercise Dissenters’ Rights, you should be aware that cash paid to you likely will result in your receipt of taxable income. (See “The Merger — Material Federal Income Tax Consequences” on page .)

Article 13 provides in detail the procedure which you must follow if you wish to exercise Dissenters’ Rights. In summary, to exercise Dissenters’ Rights:

In other words, if you are a holder of AB&T common stock or AB&T preferred stock, you do not have to vote against the Agreement, or even vote at all, to exercise Dissenters’ Right, but you must not vote in favor of the Agreement. Both holders of AB&T common stock and holders of AB&T preferred stock must give the required written Notice of Intent. Your failure to satisfy these requirements will result in your not being entitled to exercise Dissenters’ Rights and receive payment for your shares under Article 13. Even if you vote against the Agreement (either in person or by appointment of proxy), you still must send the required Notice of Intent to exercise Dissenters’ Rights. You should remember that, as described under the caption “The Special Meeting of AB&T Shareholders — Solicitation and Voting of Proxy Cards” on page , if you return a signed appointment of proxy but fail to provide instructions on how to vote your shares, you will be considered to have voted in favor of the Agreement and you will not be able to assert Dissenters’ Rights. If you do not return a proxy card or otherwise vote at all at the AB&T Special Meeting, you will not be treated as waiving your Dissenters’ Rights as long as you have given the required Notice of Intent as described above.

If you intend to dissent, your Notice of Intent should be mailed or delivered to AB&T’s President and Chief Executive Officer, Daniel C. Ayscue, at AB&T’s corporate office at 292 West Main Avenue, Gastonia, North Carolina 28052, or it may be hand delivered to him at the AB&T Special Meeting (before the voting begins). In order for a Notice of Intent sent by mail to be effective, it must actually be received by AB&T at its address prior to the AB&T Special Meeting. A Notice of Intent that is hand delivered must be received prior to the vote on the Agreement at the AB&T Special Meeting.

If you deliver a Notice of Intent and the Agreement is approved by AB&T’s shareholders at the AB&T Special Meeting (or at any adjournment of the meeting), then, within ten days following that approval, AB&T will send you a written notice (a “Dissenters’ Notice”), by registered or certified mail, return receipt requested, so long as you have satisfied the requirements to exercise Dissenters’ Rights. The Dissenters’ Notice will include a copy of Article 13 and will:

After receipt of the Dissenters’ Notice, you must deliver to AB&T a written demand for payment (a “Payment Demand”) and deposit your share certificates with AB&T by the date set forth in and in accordance with the terms and conditions of the Dissenters’ Notice. Otherwise, you will not be entitled to payment for your shares under Article 13. If you deliver a Payment Demand and deposit your share certificates as required by the Dissenters’ Notice, you will retain all other rights as a shareholder until those rights are canceled or modified by completion of the merger.

As soon as the merger is completed, or within 30 days after receipt of your Payment Demand (whichever is later), AB&T will pay you (provided that you have satisfied all requirements to exercise Dissenters’ Rights) the amount AB&T estimates to be the fair value of your shares, plus interest accrued to the date of payment. AB&T’s payment will be accompanied by:

If the merger is not completed within 60 days after the date set for you to demand payment and deposit your share certificates, AB&T must return your deposited certificates, and if the merger is completed later, AB&T must send you a new Dissenters’ Notice and repeat the Payment Demand procedures described above.

If (1) you believe the amount paid by AB&T as described above is less than the fair value of your shares of AB&T common stock or AB&T preferred stock, or that the interest due is incorrectly calculated, (2) AB&T does not make timely payment to you, or (3) AB&T does not complete the merger and does not return your deposited certificates within 60 days after the date set for demanding payment, then you may notify AB&T in writing of your own estimate of the fair value of your shares of AB&T common stock or AB&T preferred stock and the amount of interest due and may demand payment of your estimate (a “Further Payment Demand”). In any such event, if you fail to take any such action within the 30 days after AB&T makes payment for your shares or fail to perform timely, you will be considered to have withdrawn your dissent and demand for payment and waived your rights under Article 13.

If you have taken all required actions and your demand for payment remains unsettled, you may file a lawsuit within 60 days after the earlier of the date of AB&T’s payment or the date of your Further Payment Demand. If you take no action within that 60-day period, you will be considered to have withdrawn your dissent and demand for payment. In the court proceeding described above, the court may appoint one or more persons as appraisers to receive evidence and recommend a decision on the question of fair value, and it has discretion to make all dissenters whose demands remain unsettled parties to one proceeding. Each dissenter made a party to the proceeding must be served with a copy of the complaint and will be entitled to judgment for the amount, if any, by which the court finds the fair value of his or her shares, plus interest, to exceed the amount paid by AB&T. Court costs, appraisal, and counsel fees may be assessed by the court as it deems equitable.

Article 13 contains certain additional provisions and requirements that apply in the case of dissents by nominees who hold shares for others, and by beneficial owners whose shares are held in the names of other persons.

AB&T’s common stock is traded on the Pink Sheets Electronic Quotation Service and on the OTC Bulletin Board under the trading symbol “ABTO,” and is considered thinly traded with low volume trades occurring infrequently. Prior to AB&T’s organization, Alliance’s common stock also was traded on the Pink Sheets Electronic Quotation Service and on the OTC Bulletin Board. The following table lists high and low trading prices known to AB&T for AB&T common stock for each calendar quarter since July 1, 2008, and, prior to that, the high and low trading prices for Alliance’s common stock for each calendar quarter since January 1, 2007. FIG Partners is the primary market maker for 1^st Financial’s common stock.

Neither AB&T nor Alliance, prior to AB&T’s organization, has paid dividends on its common stock. As a bank holding company that does not engage in separate business activities of a material nature, AB&T’s ability to pay cash dividends depends upon the cash dividends it receives from Alliance. As a state-chartered bank subject to North Carolina banking law, Alliance may not pay cash dividends to AB&T unless Alliance’s capital surplus is at least 50% of its paid-in capital. Further, Alliance may pay dividends only from retained earnings. At December 31, 2008, Alliance had a retained deficit of $157,424.

On February 16, 2009 (the day before the merger was publicly announced), the most recent price known to AB&T’s management at which AB&T’s common stock was sold in a private transaction was $6.75. On , 2009, the most recent price known to AB&T’s management at which AB&T common stock was sold in a private transaction was $ .

On [ ], 2009, there were approximately 683 holders of record of AB&T common stock.

Market Prices. 1^st Financial first issued common stock during May 2008, in exchange for the outstanding shares of Mountain 1^st’s common stock and in connection with the reorganization in which 1^st Financial became Mountain 1^st’s parent holding company. 1^st Financial common stock currently is traded on the Pink Sheets Electronic Quotation Service and on the OTC Bulletin Board under the trading symbol “FFIS.” Prior to 1^st Financial’s organization, Mountain 1^st’s common stock also was traded on the Pink Sheets Electronic Quotation Service and on the OTC Bulletin Board. There currently is a limited local trading market for 1^st Financial common stock, and there can be no assurance that a more active market will develop. FIG Partners is the primary market maker for 1^st Financial’s common stock.

1^st Financial’s common stock is still relatively thinly traded. Thinly traded stocks can be more volatile than stock trading in an active public market. 1^st Financial cannot predict the extent to which an active public market for 1^st Financial’s common stock will develop or be sustained. In recent years, the stock market has experienced a

high level of price and volume volatility, and market prices for the stock of many companies have experienced wide price fluctuations that have not necessarily been related to operating performance.

1^st Financial cannot predict what effect future sales of its common stock in the market, or the availability of shares of its common stock for sale in the market, will have on the common stock’s market price. So, 1^st Financial cannot assure you that sales of substantial amounts of its common stock in the market, or the potential for large amounts of market sales, would not cause the price of its common stock to decline or potentially impair 1^st Financial’s ability to raise capital in the future.

The following table lists high and low closing prices and the cash dividend declared per share for 1^stFinancial common stock for each calendar quarter since July 1, 2008, and, prior to that, the high and low published prices for, and the amount of cash dividend declared on, Mountain 1^st’s common stock for each calendar quarter since January 1, 2006. These prices have been adjusted to reflect the three stock splits paid in the form of stock dividends during 2006 and 2005.

On February 16, 2009 (the day before the merger was publicly announced), the reported closing price of 1^st Financial common stock on the OTCBB was $5.50. On , 2009, the most recent reported closing price of 1^st Financial common stock was $ . .

On [ ], 2009, there were approximately 2,684 holders of record of 1^st Financial common stock.

Dividends. 1^st Financial is a holding company and its sole source of funds for paying dividends to its shareholders is dividends it receives from Mountain 1^st. Following the merger, the ability of Mountain 1^st and Alliance to pay dividends to 1^st Financial will depend on their earnings and financial conditions, capital requirements, general economic conditions, compliance with requirements of their regulators, and other factors. There is no assurance that, in the future, Mountain 1^st and Alliance will have funds available to pay cash dividends to 1^st Financial or, even if funds are available, that they will pay dividends in any particular amounts or at any particular times.

1^st Financial’s ability to pay dividends to its shareholders also will be subject to its Board of Directors’ evaluation of separate factors relating to 1^st Financial, including 1^st Financial’s earnings and financial condition,

capital requirements, debt service requirements, and regulatory restrictions applicable to bank holding companies. In the future, 1^st Financial may borrow funds, issue debt instruments, or engage in other types of financing activities, in order to increase its capital and/or to provide funds that it can use to increase Mountain 1^st’s and Alliance’s capital. Covenants contained in a loan or financing agreement or other debt instruments could restrict or condition 1^st Financial’s payment of cash dividends based on various financial considerations or factors. (See “Supervision and Regulation — Limitations on Cash Dividends” on page , “Capital Stock of 1^st Financial — Description of Capital Stock” on page and “— Differences in Capital Stock of 1^st Financial and AB&T” on page .)

This unaudited financial information is based on and should be read in conjunction with 1^st Financial’s and AB&T’s audited consolidated financial statements and unaudited interim consolidated financial statements, together with the related financial statement footnotes, and the unaudited pro forma selected combined consolidated financial statements, and related notes and assumptions, included in this Joint Proxy Statement/Prospectus under the captions “Consolidated Financial Statements of 1^st Financial Services Corporation” on page F-1, “Consolidated Financial Statements of AB&T Financial Corporation” on page F- , and “Unaudited Pro Forma Selected Combined Consolidated Financial Statements” on page F- .

General. 1^st Financial is a North Carolina-chartered corporation that was incorporated on May 14, 2007, for the sole purpose of becoming the parent bank holding company for Mountain 1^st. Mountain 1^st is a banking corporation which was incorporated under the laws of the state of North Carolina on April 30, 2004, and opened for business as a commercial bank on May 14, 2004. Its deposits are insured by the Federal Deposit Insurance Corporation (“FDIC”) to the maximum extent permitted by law. 1^st Financial and Mountain 1^st completed a share exchange on May 23, 2008, in which Mountain 1^st became 1^st Financial’s wholly-owned bank subsidiary. 1^st Financial’s directors also serve as Mountain 1^st’s directors.

When the share exchange was completed, each outstanding share of Mountain 1^st’s $5.00 par value common stock was converted into and exchanged for one newly-issued share of 1^st Financial common stock, so 1^st Financial’s shareholders owned the same percentages of 1^st Financial stock that they previously held in Mountain 1^ststock. The share exchange had no impact on Mountain 1^st’s banking operations, and 1^st Financial’s consolidated capital, assets, liabilities, income and expenses were substantially the same as those of Mountain 1^st immediately before the share exchange.

1^st Financial has no other assets or liabilities other than its investment in Mountain 1^st, and 1^st Financial’s business activity primarily consists of directing the activities of Mountain 1^st. Through Mountain 1^st, 1^st Financial engages in a general, community-oriented commercial and consumer banking business. 1^st Financial and Mountain 1st are both headquartered at 101 Jack Street, Hendersonville, North Carolina 28792, and their telephone numbers at that address are (828) 697-3100.

Mountain 1^st operates under the banking laws of North Carolina and the rules and regulations of the FDIC. As a North Carolina bank, Mountain 1^st is subject to examination and regulation by the FDIC and the North Carolina Commissioner of Banks. Mountain 1^st also is subject to certain regulations of the Federal Reserve governing reserve requirements to be maintained against deposits and other matters. The business and regulation of Mountain 1st also is subject to legislative changes from time to time. See “Supervision and Regulation” on page .

Banking Offices. Mountain 1^st conducts a general commercial banking primarily through fifteen full-service offices in ten western North Carolina counties including Buncombe, Catawba, Cleveland, Haywood, Henderson, McDowell, Polk, Rutherford, Transylvania and Watauga.

Market Area. Mountain 1^st’s loans and deposits are primarily generated within its local market areas. Mountain 1st’s primary market area is the southwestern mountain region of North Carolina. The economy of this area is generally considered stable and growing. The primary economic drivers of the area are tourism and a burgeoning retirement industry which has provided a significant stimulus to residential and resort development. Although this area has relatively few large manufacturing facilities, it has numerous small to mid-sized businesses, which are Mountain 1^st’s primary business customers. These businesses include agricultural producers, artisans and specialty craft manufacturers, small industrial manufacturers, and a variety of service oriented industries. Although there are numerous financial institutions that have operations in Mountain 1^st’s area, only four other community commercial banks are headquartered in any of these counties.

Recent Developments. During 2008, 1^st Financial experienced continued asset growth. At December 31, 2008, Mountain 1^st’s assets totaled $707.1 million, representing an increase of $100.6 million, or 16.6%, compared with year end 2007 assets of $606.5 million. Net income for the year ended December 31, 2008, totaled $339 thousand, compared with $3.5 million for 2007, representing a decrease of 90.4%. Diluted earnings per share totaled $0.04 for 2008, compared with $0.66 per diluted share for 2007, for a decrease of 93.9%. At December 31, 2008, Mountain 1^st’s gross loans totaled $584.0 million, compared with $521.9 million at

December 31, 2007, while deposits amounted to $591.0 million, compared with $529.1 million at December 31, 2007, and stockholders’ equity increased to $62.6 million from $46.2 million. These totals represent increases of $62.1 million or 11.9%, $61.9 million or 11.7% and $16.4 million or 35.5%, respectively.

Mountain 1^st’s primary source of revenue is interest and fee income from its lending activities. These lending activities consist principally of originating commercial operating and working capital loans, residential mortgage loans, home equity lines of credit, other consumer loans and loans secured by commercial real estate. Current lending strategy targets a loan to asset ratio of 75% to 82%. It is management’s opinion that maintaining a loan to asset ratio in this range maximizes earnings potential while still providing adequate liquidity for the safe and sound operation of Mountain 1^st. At December 31, 2008, Mountain 1^st’s gross loan to asset ratio was 82.6%, slightly above this target range, principally as a result of the loans currently being warehoused for Live Oak Bank (as discussed below). These loans are expected to be sold to Live Oak during the second half of 2009. Excluding these loans, the ratio of loans to assets would have been 77.1%. At December 31, 2008, the largest amount Mountain 1^st had outstanding to any one borrower and its affiliates was approximately $7.6 million.

Interest and dividend income from investment activities generally provides the second largest source of income to Mountain 1^st after interest on loans. Management has chosen to introduce little credit risk into Mountain 1^st’s investment portfolio, so that portfolio consists primarily of debt and mortgage backed securities issued by agencies of the United States and Government Sponsored Enterprises. As a result of this strategy, Mountain 1^st has been able to avoid deteriorating credit issues and associated losses sustained recently by many institutions that invested in non-government guaranteed securities. Management expects to continue this practice for the foreseeable future. Furthermore, management has chosen to maintain a relatively short duration with respect to the investment portfolio as a whole. While this strategy has resulted in a slight reduction in portfolio yield, it has reduced the market price volatility and consequently, mark to market charges against the Mountain 1^st’s capital.

Deposits are the primary source of Mountain 1^st’s funds for lending and other investment purposes. Mountain 1 ^st attracts both short and long-term deposits from the general public by offering a variety of accounts and rates. In addition to noninterest bearing checking accounts, Mountain 1^st offers statement savings accounts, negotiable order of withdrawal (NOW) accounts, money market demand accounts, fixed interest rate certificates with varying maturities, and IRA deposit accounts. Beginning in the fourth quarter of 2007, a significant change occurred within the financial markets as a result of the sub-prime mortgage crisis with its ensuing adverse effect on liquidity within the market as a whole. The changes experienced within the financial markets with respect to liquidity created a critical funding challenge especially for larger banks. As a result, many of these larger institutions reverted to local and regionalized CD markets to fill their liquidity shortfalls and, during late 2007 and continuing throughout 2008, these banks dramatically changed the pricing dynamics of many of the markets in which Mountain 1^st operates. Management has made a strategic decision to apply a disciplined pricing philosophy with respect to both loan and deposit pricing. Particularly relating to CD pricing during this period of market disruption, management has opted to begin to utilize lower cost wholesale sources of funds rather than pay the higher premiums on CDs which have been manifested as a result of actions taken by larger bank competitors. Management believes that CD pricing will revert to a more normalized level as liquidity returns to fixed income markets during 2009 and 2010. Accordingly, during the fourth quarter of 2008, Mountain 1^st initiated its first use of brokered certificates of deposit. At December 31, 2008, $38 million in brokered cds were outstanding. At December 31, 2008, $48 million in advances were outstanding with the Federal Home Loan Bank of Atlanta. Management expects to continue to utilize these and other wholesale sources of funding as long as the liquidity and pricing disruption in Mountain 1^st’s core CD markets persist.

Throughout most of its history, Mountain 1^st has operated in an environment of rising interest rates. However, beginning the last half of 2007, the Federal Reserve’s Federal Open Market Committee (FOMC) began to reduce short term interest rates in response to a weakening economy. Heretofore, management had structured Mountain 1^st’s balance sheet with a relatively short duration. Interest rate risk, while relatively neutral, has been maintained with a slightly asset sensitive bias since Mountain 1^st’s inception. Management considers this

configuration to be favorable in most interest rate environments. The primary exception to this approach is a scenario in which short term interest rates are driven down dramatically and rapidly. Beginning in the third quarter of 2007 and continuing through 2008, the FOMC began the most dramatic reduction in short term interest rates experienced in the U.S. in decades. During this period, short term interest rates were reduced by 500 basis points. As a result of this extraordinary drop in short term interest rates and the asset sensitive structure of Mountain 1^st’s balance sheet, management expects Mountain 1^st’s earnings to be adversely impacted for at least the first half of 2009 until sufficient maturities occur in Mountain 1st’s CD portfolio to allow for repricing at lower market rates.

Competition. Commercial banking in North Carolina is highly competitive, due in large part to North Carolina’s early adoption of statewide branching. Over the years, federal and state legislation (including the elimination of restrictions on interstate banking) has heightened the competitive environment in which all financial institutions conduct their business, and the potential for competition among financial institutions of all types has increased significantly.

Banking also is highly competitive in Mountain 1^st’s market. North Carolina is home to several of the largest commercial banks in the United States all of which have branches located in Mountain 1^st’s ten county banking market. Mountain 1^st competes with numerous national, regional, and community commercial banks in its markets, as well as several savings institutions and credit unions.

Interest rates, both on loans and deposits, and prices of fee-based services are significant competitive factors among financial institutions generally. Other important competitive factors include office location, office hours, quality of customer service, community reputation, continuity of personnel and services, and, in the case of larger commercial customers, relative lending limits and the ability to offer sophisticated cash management and other commercial banking services. Many of Mountain 1^st’s competitors have greater resources, broader geographic markets, more extensive branch networks, and higher lending limits than it does. They also may offer a broader menu of products and services and can better afford and make more effective use of media advertising, support services, and electronic technology than Mountain 1^st can. In terms of assets, Mountain 1^st is one of the smaller commercial banks in North Carolina, and Mountain 1^st cannot assure you that it will be or continue to be an effective competitor in its banking market. However, Mountain 1^st believes that community banks can compete successfully by providing personalized service and making timely, local decisions, and that further consolidation in the banking industry is likely to create additional opportunities for community banks to capture deposits from customers who become dissatisfied as their financial institutions grow larger. Mountain 1^st also believes that the continued growth of its banking market affords an opportunity to capture new deposits.

Substantially all of Mountain 1^st’s customers are individuals and small and medium-sized businesses. Mountain 1^st seeks to differentiate itself from its larger competitors with a focus on relationship banking, personalized service, and direct customer contact, and with its ability to make credit and other business decisions locally. Mountain 1^st also depends on its reputation as a community bank in its banking market, its involvement in the communities it serves, the experience of its senior management team, and the quality of the members of its teams charged with its day to day operations. Mountain 1^st believes its focus allows it to be more responsive to its customers’ needs and more flexible in approving loans and customizing deposit products based on its personal knowledge of its customers.

Services. Mountain 1^st’s banking operations are primarily retail oriented and directed toward small to medium-sized businesses and individuals located in its banking markets. Mountain 1^st derives the majority of its deposits and loans from customers in its banking markets, but also makes loans and has deposit relationships with commercial and consumer customers in areas surrounding its immediate banking markets. Mountain 1^st provides most traditional commercial and consumer banking services, but its principal activities are taking demand and time deposits and making commercial and consumer loans. Mountain 1^st’s primary source of revenue is the interest income it derives from lending activities.

Lending Activities. Mountain 1^st provides a variety of commercial and consumer lending products to small to medium-sized businesses and individuals for various business and personal purposes, including term and installment loans, business and personal lines of credit, equity lines of credit and overdraft checking credit. For financial reporting purposes, Mountain 1^st’s loan portfolio generally is divided into real estate loans, consumer installment loans, commercial and industrial loans (including agricultural production loans if any), and revolving consumer related plans. Mountain 1^st currently makes credit card services available to its customers through a correspondent relationship. Statistical information about Mountain 1^st’s loan portfolio is contained under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page .

REAL ESTATE LOANS. Mountain 1 ^st’s real estate loan classification includes all loans secured by real estate. Real estate loans include loans made to purchase, refinance, construct or improve residential or commercial real estate, for real estate development purposes, and for various other commercial, agricultural and consumer purposes (which may or may not be related to Mountain 1^st’s real estate collateral). On December 31, 2008, loans amounting to approximately 83.6% of Mountain 1^st’s loan portfolio, excluding loans held for sale, were classified as real estate loans. This compares with 83.1% at December 31, 2007 and 80.8% at December 31, 2006. While Mountain 1^st does originate long term fixed rate residential mortgages, it generally does not retain these loans in its loan portfolio. Rather, these are sold on a flow basis to other lenders after closing and are reflected in Mountain 1^st’s financial statements as “Loans held for sale.” This arrangement permits Mountain 1^st to make long-term residential loans available to its customers and to generate fee income while avoiding the credit and interest rate risks associated with such loans in Mountain 1^st’s loan portfolio. At December 31, 2008, Mountain 1^st had a total of $81.8 million in residential first mortgages in the loan portfolio amounting to approximately 14.1% of its total portfolio, which compares with $72.4 million or 14.0% or the portfolio at December 31, 2007. These loans are predominantly variable rate or short maturity mortgages.

Commercial real estate and construction loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Repayment of commercial real estate loans may depend on the successful operation of income producing properties, a business, or a real estate project and therefore may, to a greater extent than in the case of other loans, be subject to the risk of adverse conditions in the economy generally or in the real estate market in particular.

Construction loans involve special risks because loan funds are advanced on the security of houses or other improvements that are under construction and are of uncertain value before construction is complete. For that reason, it is more difficult to evaluate accurately the total loan funds required to complete a project and the related loan-to-value ratios. To reduce these risks, Mountain 1^st generally limits construction loan amounts to 85% of the cost of the projected “as built” appraised value of its collateral upon completion of construction. For larger projects, Mountain 1^st includes amounts for contingencies in its construction cost estimates. Mountain 1^st also generally requires a qualified permanent financing commitment from an outside lender unless it has agreed to convert the construction loan to permanent financing itself.

On December 31, 2008, Mountain 1^st’s construction and acquisition and development loans (consumer and commercial) amounted to $165.0 million or approximately 28.5% of its loan portfolio, excluding loans held for sale. This compares with approximately 30.8% of the portfolio at December 31, 2007. Other commercial real estate loans totaled $193.0 million or approximately 33.3% of Mountain 1^st’s loan portfolio at the end of 2008. This compares with 31.9% of the loan portfolio at December 31, 2007.

Real estate loans also include home equity lines of credit that generally are used for consumer purposes and usually are secured by junior liens on residential real property. Mountain 1^st’s commitment on each line is for a term of 15 years. During the terms of the lines of credit, borrowers may either pay accrued interest only (calculated at variable interest rates), with their outstanding principal balances becoming due in full at the maturity of the lines, or they may make monthly payments of principal and interest equal to 1.5% of their outstanding balances. On December 31, 2008, Mountain 1^st’s home equity lines of credit accounted for approximately $31.9 million or 5.5% of its loan portfolio as compared with $24.4 million or 4.7% at December 31, 2007.

Many of Mountain 1^st’s real estate loans, while secured by real estate, were made for purposes unrelated to the real estate collateral, because Mountain 1^st tries to reduce credit risk by taking real estate as additional collateral, whenever possible, without regard to loan purpose. Substantially all Mountain 1^st ’s real estate loans are secured by real property located in or near its banking markets. Mountain 1^st’s real estate loans may be made at fixed or variable interest rates, and they generally have maturities that do not exceed five years (with the exception of home equity lines of credit as discussed above) and provide for payments based on typical amortization schedules of 25 years or less. A real estate loan with a maturity of more than five years or that is based on an amortization schedule of more than five years generally will include contractual provisions that allow Mountain 1^st to call the loan in full, or provide for a “balloon” payment in full, at the end of a period generally not exceeding five years.

CONSUMER INSTALLMENT LOANS. Mountain 1^st’s consumer installment loans consist primarily of loans for various consumer purposes, as well as the outstanding balances of non-real estate secured consumer revolving credit accounts. A majority of these loans are secured by liens on various personal assets of the borrowers, but they also may be made on an unsecured basis. On December 31, 2008, Mountain 1^st’s consumer installment loans totaled $6.5 million or 1.1% of the loan portfolio as compared with $6.5 million or approximately 1.3% of its loan portfolio at the end of 2007. In addition to loans classified on Mountain 1^st’s books as consumer installment loans, many of the loans included in its real estate loan classification are made for consumer purposes but are classified as real estate loans because they are secured by first or junior liens on real estate. Consumer loans generally are made at fixed interest rates and with maturities or amortization schedules that generally do not exceed five years. However, consumer-purpose loans secured by real estate (and, thus, classified as real estate loans as described above) may be made for terms of up to 20 years but under terms that allow Mountain 1^st to call the loan in full, or provide for a “balloon” payment, at the end of a period of generally no more than five years.

Consumer installment loans are considered to involve greater risks than other loans, particularly in the case of loans that are unsecured or secured by depreciating assets. When damage or depreciation reduces the value of Mountain 1^st’s collateral below the unpaid balance of a defaulted loan, repossession may not result in repayment of the entire outstanding loan balance. The resulting deficiency may not warrant further substantial collection efforts against the borrower. In connection with consumer lending in general, the success of Mountain 1^st’s loan collection efforts is highly dependent on the continuing financial stability of its borrowers, and Mountain 1^st’s

collection of consumer installment loans may be more likely to be adversely affected by a borrower’s job loss, illness, personal bankruptcy or other change in personal circumstances than is the case with other types of loans.

COMMERCIAL AND INDUSTRIAL LOANS. Mountain 1^st’s commercial and industrial loan classification includes loans to small to medium-sized businesses and individuals for working capital, equipment purchases and various other business and agricultural purposes. This classification excludes loans secured by real estate. These loans generally are secured by business assets, such as inventory, accounts receivable, equipment, or similar assets, but they also may be made on an unsecured basis. On December 31, 2008, Mountain 1^st’s commercial and industrial loans totaled $88.5 million and accounted for approximately 15.3% of its loan portfolio. This compares with $80.9 million or approximately 15.6% of Mountain 1^st’s loan portfolio at December 31, 2007. In addition to loans classified on Mountain 1^st’s books as commercial and industrial loans, many of its loans included in the real estate loan classification are made for commercial or agricultural purposes but are classified as real estate loans on Mountain 1^st’s books because they are secured by first or junior liens on real estate. Commercial and industrial loans may be made at variable or fixed rates of interest. However, any loan that has a maturity or amortization schedule of longer than five years normally will be made at an interest rate that varies with Mountain 1^st’s prime lending rate and will include contractual provisions that allow Mountain 1^st to call the loan in full, or provide for a “balloon” payment in full, at the end of a period generally not exceeding five years. Commercial and industrial loans typically are made on the basis of the borrower’s ability to make repayment from business cash flow. As a result, the ability of borrowers to repay commercial loans may be substantially dependent on the success of their businesses, and the collateral for commercial loans may depreciate over time and cannot be appraised with as much precision as real estate.

LOAN PRICING. Generally, Mountain 1^st prices its loans based on the level of risk identified in a particular loan transaction within market constraints and conditions and in conjunction with objectives established as a part of its asset/liability management function and annual budgeting process. On December 31, 2008, approximately 73.5% of the total dollar amount of Mountain 1^st’s loans accrued interest at variable rates. This is slightly more than the total of approximately 64.5% at December 31, 2007. Management believes that maintenance of the portfolio at this or higher levels of floating rate loans provides for the best earnings performance under most economic environments.

LOAN ADMINISTRATION AND UNDERWRITING. Mountain 1^st makes each loan based, to a great extent, on its assessment of the borrower’s income, cash flow, net worth, sources of repayment, and character. The principal risk associated with each of the categories of Mountain 1^st’s loans is the creditworthiness of its borrowers, and Mountain 1^st’s loans may be viewed as involving a higher degree of credit risk than is the case with some other types of loans, such as long-term residential mortgage loans, in which greater emphasis is placed on collateral values. To manage this risk, Mountain 1^st has adopted written loan policies and procedures, and its loan portfolio is administered under a defined process. That process includes guidelines and standards for loan underwriting and risk assessment, and procedures for loan approvals, loan grading, ongoing identification and management of credit deterioration, and portfolio reviews to assess loss exposure and to test Mountain 1^st’s compliance with its credit policies and procedures.

The loan underwriting standards Mountain 1^st uses include an evaluation of various factors, including a loan applicant’s income, cash flow, payment history on other debts, and ability to meet existing obligations and payments on the proposed loan. Although an applicant’s creditworthiness is a primary consideration in the loan approval process, Mountain 1^st’s underwriting process for secured loans also includes an analysis of the value of the proposed collateral in relation to the proposed loan amount. Mountain 1^st considers the value of collateral, the degree of certainty of that value, the marketability of the collateral in the event of foreclosure or repossession, and the likelihood of depreciation in the collateral value.

Mountain 1^st’s Board of Directors has approved levels of lending authority for lending and credit personnel based on its aggregate credit exposure to a borrower. A loan that satisfies Mountain 1^st’s loan policies and is within a lending officer’s assigned authority may be approved by that officer alone. Loans involving an aggregate

exposure to a single relationship in excess of a lending officer’s authority must be approved by Mountain 1^st’s President and/or Chief Credit Officer. These individuals have independent authority up to a total credit exposure amount of $2.0 million, and joint authority up to a total credit exposure amount of $4.0 million. A loan involving an aggregate exposure to a single relationship over that threshold must be approved by the Loan Committee of Mountain 1^st’s Board of Directors.

When a loan is made, Mountain 1^st’s lending officer handling that loan assigns it a grade based on various underwriting and other criteria under Mountain 1^st’s risk grading procedures. Generally, any proposed loan that grades below a threshold set by Mountain 1^st’s Board of Directors must be reviewed by a Credit Administration Officer before it can be made, even if the loan amount is within the loan officer’s approval authority. The grades assigned to loans Mountain 1^st makes indicate the level of ongoing review and attention it will give to those loans to protect its position and reduce loss exposure.

After loans are made, they are reviewed by Mountain 1^st’s Credit and Loan Administration personnel for adequacy of contract documentation, compliance with regulatory requirements, and documentation of compliance with loan underwriting criteria. Also, Mountain 1^st engages a third party consultant to perform detailed reviews of selected loans based on various criteria, including loan type, amount, collateral, and borrower identity, and the particular lending officer’s or branch’s lending history. These reviews typically include at least 10% of the loans made by each lending officer annually. Mountain 1^st’s policy requires that each loan relationship involving an aggregate exposure of more than $1.5 million be reviewed at least annually by a third party credit reviewer. Loan Administration personnel also periodically review various loans based on various criteria, and Mountain 1^st retains the services of at least one third party credit risk consultant to annually review its problem loans, a random sampling of performing loans related to its larger aggregate credit exposures, and selected other loans.

During the life of each loan, its grade is reviewed and validated or modified to reflect changes in circumstances and risk. Mountain 1^st generally places a loan on non-accruing status when it becomes 90 days past due or whenever it believes collection of interest and/or principal on that loan has become doubtful. Mountain 1^st charges off loans when their collection has become doubtful and the loans no longer can be considered sound collectible assets (or, in the case of unsecured loans, when they become 90 days past due).

Mountain 1^st Chief Credit Officer is charged with monitoring the overall performance of Mountain 1^st’s loan portfolio and the collection activities of its lending officers, and directly supervises collection actions that involve legal action or bankruptcies.

ALLOWANCE FOR LOAN LOSSES. Mountain 1^st’s Board of Directors reviews all impaired loans at least quarterly, and its management reviews asset quality trends at least monthly. Based on these reviews and its current judgments about the credit quality of its loan portfolio and other relevant internal and external factors, Mountain 1^st has established an allowance for loan losses. The adequacy of the allowance is assessed by Mountain 1^st’s management and reviewed by its Board of Directors at least quarterly. On December 31, 2008, Mountain 1^st’s allowance was $9.0 million and amounted to 1.55% of its total loans excluding loans held for sale. This compares with 1.46% at year end 2007. At December 31, 2008, Mountain 1^st had a total of $10.0 million of nonaccruing loans, $1.0 million of which was represented by a single credit secured by a first lien on commercial property with an appraised value of over $3 million. At that date, Mountain 1^st had $2.1 million in foreclosed or repossessed property and no loans past due 90 days or more. At December 31, 2007, Mountain 1^st had $1.3 million non-accruing loans, $1.0 million of which was represented by a single credit secured by a first lien on commercial property with an appraised value of over $3 million.

Deposit Activities. Mountain 1^st’s deposit services include business and individual checking accounts, NOW accounts, money market checking accounts, savings accounts, and certificates of deposit. Mountain 1^st monitors its competition in order to keep the rates paid on its deposits at a competitive level. On December 31, 2008, Mountain 1^st’s time deposits of $100,000 or more amounted to approximately $176.5 million or

approximately 29.9% of its total deposits. The fourth quarter of 2008 marked Mountain 1^st’s first use of wholesale deposits. At December 31, 2008, Mountain 1^st had $38.0 million in brokered certificates of deposit. Statistical information about Mountain 1^st’s deposit accounts is contained under the caption “1^st Financial’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page .

Investment Portfolio. On December 31, 2008, Mountain 1^st’s investment portfolio totaled approximately $87.6 million, of which $86.8 million in total securities was classified as “available for sale”. Available for sale securities include mortgage-backed securities guaranteed by the Government National Mortgage Association (“GNMA”) or issued by the Federal National Mortgage Corporation (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) including collateralized mortgage obligations. Also included in Mountain 1^st’s available for sale investment portfolio are debt instruments issued by U.S. governmental agencies or by Government Sponsored Enterprises including FNMA, FHLMC and SBA. Mountain 1^st analyzes their performance at least quarterly. Mountain 1^st’s securities have various interest rate features, maturity dates and call options. Statistical information about Mountain 1^st’s investment portfolio is contained under the caption “1^st Financial’s Management’s Discussion and Analysis of Financial Condition and Results of Operations” on page .

Employees. At December 31, 2008, Mountain 1^st’s had 156 full-time equivalent employees, including 145 full-time employees (and including its executive officers) and 22 part-time employees. Mountain 1^st is not a party to any collective bargaining agreement with its employees, and considers its relations with its employees to be good.

Properties. Mountain 1^st’s corporate offices are located in Hendersonville, North Carolina. Mountain 1^st currently maintains 15 full service branch offices and an operations center, all of which are leased by Mountain 1^st’s with the exception of the office facility in Shelby, North Carolina. The following table contains information about Mountain 1 ^st’s main and branch offices:

All of Mountain 1^st’s existing branch offices are in good condition and fully equipped for Mountain 1^st’s purposes. At December 31, 2008, the total net book value (cost less accumulated depreciation) of Mountain 1^st’s furniture, fixtures, leasehold improvements and equipment was approximately $7.1 million. [Additional information about property is set forth in Note 6 to the Financial Statements on page F- . Any property acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as Other Real Estate Owned until such time as it is sold or otherwise disposed of by Mountain 1^st to recover its investment. As of December 31, 2008, Mountain 1^st had $645 thousand in assets classified as Other Real Estate Owned.

Legal Proceedings. From time to time Mountain 1^st becomes involved in legal proceedings in the ordinary course of its business. However, subject to the inherent risks of any litigation, 1^st Financial believes that as of December 31, 2008, no pending legal proceeding is likely to have a material effect on 1^st Financial’s consolidated financial condition or results of operations.

1^st Financial’s (formerly Mountain 1st) audited consolidated financial statements as of and for the year ended December 31, 2008, and Mountain 1^st’s audited financial statements as of and for the years ended December 31, 2007 and 2006, , are included in this Joint Proxy Statement/Prospectus under the caption “Consolidated Financial Statements of 1^st Financial Services Corporation” on page F-1.

Principal Shareholders. 1^st Financial is not aware of anyone who owned, beneficially or of record, 5% or more of its outstanding shares of common stock on the Record Date for the Special Meeting.

Directors and Executive Officers. The following table describes the beneficial ownership of 1^st Financial’s common stock on the Record Date for the Annual Meeting by its current directors and certain of its executive officers, individually, and by all its directors and executive officers as a group.

Appointment of AB&T’s Directors as Directors of 1^st Financial. The Agreement provides that, following the merger, two AB&T directors, Wayne F. Shovelin and another director to be selected by 1^st Financial, provided they remain directors just before completion of the merger, will be appointed to serve as directors of 1^st Financial following the merger. In that regard, 1^st Financial’s Board tentatively has selected as the additional director to serve with Mr. Shovelin as directors of 1^st Financial. Final decisions or action on those appointments will not occur until after the merger is completed. All other directors of AB&T who remain directors just before completion of the merger will continue to serve as directors of Alliance. (See “The Merger — Special Interests of AB&T’s Directors and Officers” on page .)

1^st Financial’s Board of Directors periodically reviews transactions, relationships, and other arrangements involving individual directors and determines which directors the Board considers to be “independent.” In making those determinations, the Board applies the independence criteria contained in the listing requirements of The NASDAQ Stock Market. The Board has directed the Corporate Governance Committee to assess each outside director’s independence and report its findings to the Board in connection with the Board’s periodic determinations, and to monitor the status of each director on an ongoing basis and inform the Board of changes in factors or circumstances that may affect a director’s ability to exercise independent judgment. The following table lists 1^st Financial’s current directors, persons who served as directors during 2008, and all nominees for election as directors at the Annual Meeting who the Board believes are, were, or will be “independent” directors under NASDAQ’s criteria.

In addition to the specific NASDAQ criteria, in assessing the independence of 1^st Financial’s directors the Corporate Governance Committee and the Board consider whether they believe transactions required to be disclosed in 1^st Financial’s proxy statements as “related person transactions,” as well as any other transactions, relationships, arrangements, or factors, could impair a director’s ability to exercise independent judgment. In determining that the above directors are independent, those other factors considered by the Corporate Governance Committee and the Board included: (1) Mountain 1^st’s lending relationships with directors; (2) the lease arrangements between Mountain 1^st and Mr. McManus’ and Mr. Phillips’ companies described under the caption “Transactions with Related Persons — Related Person Transactions During 2008 and 2007,” and (3) appraisal services provided to Mountain 1^st from time to time by Mr. Foster’s company.

Director Fees. 1^st Financial’s outside directors serve and are compensated as directors of Mountain 1^st and they do not receive any additional compensation for their services as directors. The following table describes the standard schedule of fees paid to Mountain 1^st’s directors beginning in July 2007, which now are paid to 1^st Financial’s directors who also serve as Mountain 1^st’s directors:

Director Stock Options. 1^st Financial has a Director Stock Option Plan under which options were granted from time to time to its directors to purchase shares of 1^st Financial common stock. Each stock option gives the director to whom it is granted the right to buy shares of 1^st Financial common stock during a ten year period at a fixed price per share equal to the market value of 1^st Financial’s stock on the date the option was granted. Options generally remain in effect for their full terms following the termination of a director’s service for any reason. Option grants did not include any performance-based conditions. The exercise price and vesting schedule for each option was recommended by the Corporate Governance Committee to 1^st Financial’s Board of Directors, which approved the terms of each option granted.

No additional options will be granted under 1^st Financial’s Director Stock Option Plan. Any further options will be granted under 1^st Financial’s 2008 Omnibus Equity Plan described above under the caption Officer Compensation — Plan-Based Awards — 2008 Omnibus Equity Plan.

During 2008, no new stock options were granted to any of 1^st Financial’s directors and no previously granted options were exercised by any of them. Information about stock options held by 1^st Financial’s outside directors on December 31, 2008, is contained in the footnotes to the Director Compensation Table below.

The following table summarizes the compensation of 1^st Financial’s and Mountain 1^st’s directors for 2008:

Current Executive Officers. 1^st Financial’s and Mountain 1^st’s executive officers are listed below.

Gregory L. Gibson, age 52, serves as 1 ^st Financial’s Chief Executive Officer. He was employed by MountainBank in Hendersonville, North Carolina, from 2000 until October 2003, where he served as Executive Vice President and Chief Financial Officer of that bank and its parent holding company. From 1997 until 2000, Mr. Gibson operated his own public accounting and financial institutions consulting firm. He was employed as Senior Vice President of Bank of Mecklenburg, Charlotte, North Carolina, from 1994 to 1997, and as Executive Vice President and Chief Financial Officer of Rock Hill National Bank and its parent holding company, RHNB Corporation, Rock Hill, South Carolina, from 1985 until 1994, and he previously held positions with two other North Carolina commercial banks. Mr. Gibson is a certified public accountant and has a total of 28 years of experience in the banking industry, having served as an executive officer of six community banks and bank holding companies.

Vincent K. Rees, age 41, serves as 1^st Financial’s President. He was employed by MountainBank in Hendersonville, North Carolina, from its organization during 1997 until October 2003. He served MountainBank as Chief Lending Officer from 1997 until 2001 and then as a Regional President of that bank and Executive Vice

President of its parent holding company. Mr. Rees previously was employed in South Carolina for seven years by NationsBank (now Bank of America) and its predecessor, C&S Bank, where he served in various positions in branch management, credit analysis, and consumer and commercial lending. Mr. Rees has a total of 18 years of banking experience.

B. Lee Beason, age 51, serves as 1^st Financial’s Chief Operating Officer. From 2001 to November 2003, he was employed by MountainBank in Hendersonville, North Carolina, in various administrative and branch supervisory positions, including State Executive. He was employed as City Executive of High Street Banking Company, Asheville, North Carolina, from 1997 until 2001. He has a total of 18 years of banking experience.

Peggy H. Denny, age 58, serves as 1^st Financial’s Chief Administrative Officer and is responsible for branch network management, training, and various other functions. From 1997 to November 2003, Ms. Denny was employed by MountainBank in Hendersonville, North Carolina, as Senior Vice President. Earlier, she was employed by First Union National Bank and its predecessor, Northwestern Bank. She has a total of 35 years of banking experience.

Kirk P. Robinson, age 41, has served as 1^st Financial’s Chief Credit Officer since 2004. He previously was employed by Capital Bank in Raleigh, North Carolina, as Senior Credit Analyst from 2003 to 2004; by MountainBank in Hendersonville, North Carolina as Senior Credit Analyst from 2002 to 2003; and by BB&T as a City Executive and Business Banker in Lexington, South Carolina, from 1998 to 2002. He has a total of 12 years of banking experience.

Roger A. Mobley, age 38, has served as 1^st Financial’s Chief Financial Officer since September 8, 2008. Mr. Mobley previously served as a Certified Public Accountant and Assurance and Advisory Senior Manager with Elliott Davis, LLC. Prior to that position, from September of 2003, Mr. Mobley served as a Certified Public Accountant with KPMG in its banking group.

Appointment of AB&T Executive Officer as 1^st Financial Executive Officer. The Agreement provides that, following the merger, 1^st Financial shall enter into an employment agreement with AB&T’s current president, Mr. Daniel C. Ayscue. 1^st Financial expects Mr. Ayscue will serve as an executive officer of 1^st Financial and continue as President of Alliance after the merger.

Summary. The following table shows the cash and certain other compensation paid or provided to or deferred by 1^st Financial’s named officers for 2008 and 2007. 1^st Financial’s named officers are compensated by Mountain 1^st for their services as its officers, and they receive no separate salaries or other cash compensation from Mountain 1^st for their services as 1^st Financial’s officers. Each of 1^st Financial’s named officers is employed under an employment agreement with Mountain 1^st described below.

In addition to compensation paid in cash, from time to time 1^st Financial’s executive officers receive various personal benefits. None of the named officers received personal benefits during 2008 for which 1^st Financial’s estimated aggregate incremental cost exceeded $10,000, and the amounts of any such benefits they received during 2008 are not included in the table. 1^st Financial also provides its executive officers with group life, health, medical, and other insurance coverage that are generally available to all salaried employees, and the cost of that insurance is not included in the table.

Employment Agreements. Messrs. Gibson, Rees, and Beason, and Ms. Denny each are employed under an Employment Agreement which has a “rolling” three year term which, on each anniversary date of the agreement, is extended by one additional year unless Mountain 1^st’s Board of Directors gives notice that it will not be extended. Unless sooner terminated, the term of the agreement will end at the time each of them reaches age 65. Each agreement provides for:

Each of the current employment agreements were entered into on November 12, 2008. These agreements replaced prior employment agreements made in 2007. Mountain 1^st and these named executive officers entered into new agreements to comply with contractual restrictions required for 1^st Financial to participate in the Treasury Department’s “TARP Capital Purchase Program.” These restrictions are outlined below.

These employment agreements contain other provisions under which payments and benefits will be provided to Messrs. Gibson, Rees, and Beason, and Ms. Denny, following an involuntary termination of his or

her employment without cause, or a voluntary termination under various circumstances, whether before or after a change in control of Mountain 1^st, and that restrict their ability to compete against Mountain 1^st following termination of employment. Those provisions are described below under the caption “Potential Payments Upon Termination of Employment or a Change of Control.”

Plan-Based Awards. Mountain 1^st has three compensation plans under which awards have been granted, or from time to time in the future may be granted, to 1^st Financial’s executive officers, which are the:

The 2008 Omnibus Equity Plan was adopted during 2008, and approved by 1^st Financial’s shareholders at 1^st Financial’s 2008 Annual Meeting. The 2008 Omnibus Equity Plan authorizes the issuance of up to 288,292 shares, which includes 38,292 shares authorized to be granted under the Employee Stock Option Plan that were not awarded. No new awards may be granted under the Employee Stock Option Plan, but outstanding awards granted under it remain in effect and are subject to its terms.

EMPLOYEE STOCK OPTION PLAN. Stock options granted under the Employee Stock Option Plan give the officer to whom it is granted the right to buy shares of 1^st Financial’s common stock during a stated period of time (ordinarily ten years) at a fixed price per share equal to the market value of 1^st Financial’s stock on the date the option is granted. An officer’s options will terminate 90 days following his or her voluntary termination of employment (except in the case of retirement), or one year following termination as a result of disability. In the case of retirement, death or involuntary termination without cause, an officer’s options will remain in effect for its full term. Options will terminate immediately following the involuntary termination of an officer’s employment for cause. Option grants did not include any performance-based conditions. The exercise price and vesting schedule for each option were approved by 1^st Financial’s Corporate Governance Committee at the time the option was granted.

2008 OMNIBUS EQUITY PLAN. Under the 2008 Omnibus Equity Plan, Mountain 1^st may make the following types of awards:

Non-employee directors are eligible only for awards of non-qualified stock options and restricted stock. The terms of each award will be described in an award agreement between Mountain 1^st and the person to whom the award is granted.

An option is the right to acquire shares of 1^st Financial’s common stock during a stated period at a specified exercise price. An option may be an incentive stock option, or “ISO,” qualifying for favored tax treatment under Code section 422. ISOs may be granted only to employees. Any option that is not an ISO is known as a non-qualified stock option, or “NQSO.” An NQSO may be granted to employees or to non-employee directors.

The term, exercise price, conditions, and form of payment will be determined by the Plan Committee within limits set by the 2008 Omnibus Equity Plan. An option’s exercise price may not be less than the “fair market value” of a share of 1^st Financial’s common stock on the date the option is granted, as determined under rules set forth in the 2008 Omnibus Equity Plan.

A stock appreciation right, or “SAR,” is the right to receive cash equal to the difference between the fair market value of a share of 1^st Financial’s common stock on the date the SAR is exercised the SAR’s exercise price stated in the award. The exercise price of a SAR may not be less than the fair market value of 1^st Financial’s common stock on the date the SAR is granted. A SAR ordinarily yields the same value on the date of exercise as a stock option, although SARs ordinarily are more likely to be settled in cash rather than stock and the exercise of a SAR does not require payment by the award recipient. As an alternative to cash settlement of a SAR, the award agreement may permit or require a participant to receive common stock having an aggregate fair market value on the exercise date equal to the amount of cash the participant would have received had the SAR been exercised for cash instead of stock, with any fractional share settled in cash.

A restricted stock award is an award of common stock subject to forfeiture if conditions specified in the award agreement are not satisfied by the end of a specified restriction period established by the Plan Committee. The typical condition that would be imposed would be employment for a specified period. During the restriction period, restricted stock is held in escrow and may not be sold, transferred, or pledged. Restricted stock vests when the conditions to vesting stated in the award agreement are satisfied, and at that time the transfer restrictions and risk of forfeiture lapse and the shares are released to the participant. If the vesting conditions are not satisfied, restricted stock is forfeited and the forfeited shares again become available under the Plan for future awards.

Performance shares are similar to restricted stock awards but they ordinarily vest only if corporate or individual performance goals, or both, specified in the award agreement are satisfied by the end of the specified period. The plan is designed to allow conditions for performance share awards to be customized so that they can be measured by the particular award recipient’s responsibilities, by corporate goals and operating results, and by other factors, and by combinations of factors. A participant’s award agreement usually will specify that, at the end of the period in which satisfaction of the performance criteria is determined, the Plan Committee will certify that the employee has or has not satisfied the performance criteria. The shares will be forfeited if the performance criteria are not satisfied, or issued to the employee participant if the performance criteria are satisfied.

INCENTIVE PLAN. Under 1^st Financial’s Incentive Plan, a portion of the cash compensation paid each year to 1^st Financial’s executive officers and other employees chosen to participate in the plan is tied to the extent to which 1^st Financial achieves goals set by its Board for the year with respect to various measures of corporate performance. Cash awards under the plan are calculated based on a percentage of each executive officer’s annual base salary.

EESA AND ARRA LIMITATIONS. In November 2008, 1 ^st Financial became a participant in the Treasury Department’s TARP Capital Purchase Program (“CPP”). Under rules promulgated by the Treasury Department under the Emergency Economic Stabilization Act of 2008 (“EESA”) that apply to CPP participants, 1^st Financial is are required to implement provisions to “clawback” bonus or incentive compensation paid to 1^st Financial’s senior officers if any of the criteria on which those payments are based is later found to have been materially inaccurate. Each of 1^st Financial’s executive officers has agreed to repay upon 1^st Financial’s demand any bonus or incentive compensation they receive under any compensation arrangement if, in the judgment of 1^st Financial’s Board of Directors or Compensation Committee, the compensation was based on materially inaccurate financial statements or any other materially inaccurate performance criteria.

other provisions: (1) expand the “clawback” arrangements required by EESA to include, in addition to 1^st Financial’s executive officers, 1^st Financial’s next 20 highest paid employees, and (2) in the future, with limited exceptions, prohibit 1^st Financial from paying or accruing any bonus, retention award, or incentive compensation to 1^st Financial’s most highly compensated employee (currently, 1^st Financial’s Chief Executive Officer).

GRANTS DURING 2008. During 2008, no new stock options or other equity awards, and no cash awards for performance under the Incentive Plan, were granted to any of 1^st Financial’s executive officers named in the Summary Compensation Table.

OUTSTANDING STOCK OPTIONS. During 2008, no previously granted options were exercised by any of 1^st Financial’s executive officers named in the Summary Compensation Table. This table contains information about all outstanding options held by those named officers on December 31, 2008:

Retirement Benefits. In 2008, Mountain 1^st entered into Salary Continuation Agreements with Messrs. Gibson, Rees, and Beason, and with Ms. Denny, to provide them with retirement benefits. Under these agreements, Mountain 1^st would make monthly payments to the officers 15 years following their “normal retirement ages,” stated in the agreement as 62.

Under generally accepted accounting principles, Mountain 1^st accrues a liability on its books each year for its obligation to each officer under his or her agreement. These accruals are in amounts that, at each officer’s normal retirement age, cause his or her “accrual balance” to equal the then-current present value of the officer’s normal retirement benefits. The discount rate used by Mountain 1^st to determine the present value of the normal retirement benefit for 2008 was 6.00 %. It may be changed from time to time in the future to maintain the rate within reasonable standards under generally accepted accounting principles.

These Salary Continuation Agreements contain other provisions under which payments and benefits will be provided to Messrs. Gibson, Rees, and Beason, and Ms. Denny, following an involuntary termination of his or her employment under various circumstances. Those provisions are described below under the caption “Potential Payments Upon Termination of Employment or a Change of Control.”

Potential Payments Upon Termination of Employment or a Change of Control. Under employment agreements between Mountain 1^st and Messrs. Gibson, Rees, and Beason, and Ms. Denny, these executive officers will receive payments and benefits from Mountain 1^st if their employment terminates under various circumstances. Those arrangements are described in the following paragraphs, and a summary of the payments and benefits each officer will receive following different termination events is contained in the table below.

EMPLOYMENT AGREEMENTS. 1^st Financial’s named Executive Officers’ employment agreements are described under the caption “Employment Agreements.” Under these agreements, if an executive officer’s employment is terminated by Mountain 1^st without cause, or if an executive officer terminates his or her own

employment for “good reason,” the executive officer will continue to receive salary payments for the unexpired term of the employment agreement, and Mountain 1^st will provide him or her with continued life and medical insurance coverage for the remaining term or, if earlier, until the executive officer reaches age 65, dies, or becomes employed elsewhere. Continued life and medical insurance coverage also will be provided for the remaining term of the agreement following termination of the executive officer’s employment as a result of disability. “Good reason” will exist for the executive officer to terminate his or her own employment if, without the executive officer’s consent:

No payments will be made under the agreement if the executive officer’s employment is terminated by Mountain 1^st “for cause” or by the executive officer without “good reason.”

If there is a change in control of 1^st Financial or Mountain 1^st, each Executive Officer will be entitled to:

These changes in control payments and benefits would be in lieu of any other severance payments provided for in the agreement, and an executive officer’s right to receive the lump-sum payment would not depend on whether his or her employment was terminated.

The named executive officers’ agreements provide that, in general, a “change in control” will have occurred if:

Under these employment agreements, each of 1^st Financial’s named executive officers agrees not to disclose any confidential or proprietary information about 1^st Financial’s or Mountain 1^st to any other person and that, for the remaining period of the agreement following a termination of his or her employment, the executive officer may not directly or indirectly compete with Mountain 1^st by providing financial products or services on behalf of another financial institution, or assisting another financial institution in providing financial products or services, within the counties in North Carolina in which Mountain 1^st or any of its affiliates conducted operations at the time the executive officers’ employment was terminated, or in any North Carolina county contiguous to those counties. If the executive officer violates this non-competition provision, he or she will forfeit all rights and retirement benefits under his or her employment agreement as well as all death benefits under his or her Endorsement Split-Dollar Agreement described below. However, the restriction on their ability to compete against Mountain 1^st will terminate immediately upon a change in control.

This table lists estimates of aggregate payments and benefits that would have been paid or provided to the executive officers under their employment agreements if their employment had terminated under various circumstances, or there had been a change in control, on December 31, 2008:

SALARY CONTINUATION AGREEMENTS. 1^st Financial’s named executive officers’ Salary Continuation Agreements are described under the caption “Retirement Benefits.” If, before normal retirement age, an officer’s employment terminates for any reason other than for cause or following a change in control, Mountain 1^st will make monthly payments to the officer for 15 years in an amount that is based upon the accrual balance at the time of employment termination. Those payments will begin on the later of the first day of (1) the seventh month after termination of the officer’s employment, or (2) the month after the officer reaches normal retirement age.

Following an officer’s death, his or her beneficiaries will receive a lump-sum payment in an amount equal to the officer’s accrual balance at the time of death. An officer’s agreement will terminate automatically, and the officer’s rights to payments will be forfeited, if his or her employment is terminated for cause.

If there is a change in control of Mountain 1^st, Mountain 1^st will make a lump-sum payment to each officer of the greater of $750,000 or the accrual balance at the time of the change of control. For a change in control occurring in 2009 or thereafter, the Salary Continuation Agreements also provide that Mountain 1^st will pay a tax “gross-up” benefit if the benefits payable to the executive after a change in control are subject to excise taxes under the Internal Revenue Code. For a change in control occurring in 2009, Mountain 1^st would pay only 33% of the full gross-up payment. Mountain 1^st would pay 66% of the full gross-up payment if a change in control occurs in 2010, and 100% if a change in control occurs in 2011 or afterwards.

The following table lists the actual amounts of payments that would have been made to the named executive officers under their Salary Continuation Agreements if their employment had been terminated under the specified circumstances as of December 31, 2008.

ENDORSEMENT SPLIT-DOLLAR AGREEMENTS. Mountain 1^st has purchased insurance policies on the lives of 1^st Financial’s named executive officers, and has entered into Endorsement Split-Dollar Agreements with each of them. The policies are owned by Mountain 1^st. Under the agreements, upon an executive officer’s death, while employed by Mountain 1^st before reaching age 62, a portion of the total death benefits under the policies on his or her life will be paid to the officer’s beneficiary. The amount that will be paid to each officer’s beneficiary will be equal to the lesser of the policy’s “net death proceeds;” meaning the total death benefit minus the policy’s cash surrender value, or $1.25 million in the case of Messrs. Gibson and Rees or $1 million in the case of Mr. Beason or Ms. Denny. Mountain 1^st will receive the remainder of the death benefits from each officer’s policies, including the full cash surrender value of the policies.

These agreements previously provided that the executive officers received death benefits whether or not he or she was employed by Mountain 1^st. The officers agreed to amend these agreements to address unfavorable changes in accounting rules.

EMPLOYEE GROUP LIFE INSURANCE PLAN. Mountain 1^st also provides life insurance benefits to each of the named executive officers under its group life insurance plan in which all employees participate. Under the group plan, death benefits are payable to a participant’s beneficiaries equal to two times the participant’s annual salary rate at the date of death, subject to a cap of $250,000.

This table lists estimates of aggregate death benefits, calculated as described above, that would have been paid to the named officers’ beneficiaries under the policies if they had died on December 31, 2008.

ACCELERATED VESTING OF STOCK OPTIONS. In the event of a change in control of 1^st Financial’s company, if a provision is not made for the assumption of outstanding stock options held under 1^st Financial’s option plans, or for the exchange of those options for new options covering shares of the successor company, 1^st Financial’s executive officers’ rights under their options will terminate at the time the transaction becomes effective. However, to the extent that any option has not yet become exercisable, it will become exercisable in full immediately before the transaction becomes effective, without regard to any vesting schedule. All options currently granted to 1^st Financial’s named executive officers have vested in full.

EESA AND ARRA LIMITATIONS. During November of 2008, 1^st Financial became a participant in the Treasury Department’s TARP Capital Purchase Program (“CPP”). Under rules issued by the Treasury Department under the Emergency Economic Stabilization Act of 2008 (“EESA”) that apply to CPP participants, if the employment of one of 1^st Financial’s named executive officers is involuntarily terminated while the Treasury Department continues to hold any security purchased from 1^st Financial under the CPP, aggregate severance compensation paid to that officer could not exceed an amount in excess of three times the officer’s “base amount” calculated under Section 280G of the Internal Revenue Code.

More recently, the American Recovery and Reinvestment Act of 2009 (“ARRA”) enacted during February 2009 has amended EESA and directed the Treasury Department to establish new standards that impose additional restrictions on executive compensation, including severance payments, paid by CPP participants. ARRA appears to require that the new standards, among other provisions, prohibit payments to any of 1^st Financial’s named executive officers, or to any of 1^st Financial’s or Mountain 1^st’s next five highest paid employees, in connection with any termination of their employment for any reason, other than payments relating to services already performed or benefits already accrued.

In connection with 1^st Financial’s participation in the CPP, its named executive officers have entered into written agreements with Mountain 1^st under which 1^st Financial’s Board of Directors or Compensation Committee may unilaterally, and without the officers’ consent, modify any of their compensation agreements or arrangements (including by reducing or eliminating severance benefits) to the extent the Board, in its judgment, considers necessary to comply with applicable rules and guidance governing compensation paid by CPP participants.

Policy. 1^st Financial’s and Mountain 1^st’s Board of Directors have adopted a written policy under which their independent directors, acting as a separate committee, review and approve certain transactions, arrangements, or relationships in which 1^st Financial or Mountain 1^st Bank is a participant and in which any of their “related persons” have a material interest. 1^st Financial’s and Mountain 1^st’s related persons include their directors, nominees for election as directors, executive officers, any beneficial owners of more than 5% of a class of 1^st Financial’s common stock, and members of the immediate families of those persons.

The transactions covered by the policy generally include loans, but it does not cover loans Mountain 1^st makes in the ordinary course of its business that are subject to banking regulations related to “insider loans” and that are required to be approved by a majority of Mountain 1^st’s Board of Directors. The policy also does not cover Mountain 1^st’s depository or similar banking services in the ordinary course of its business, or compensation paid to Mountain 1^st’s executive officers that has been reviewed and approved, or recommended to Mountain 1^st’s Board of Directors for approval, by 1^st Financial’s and Mountain 1 ^st’s Corporate Governance Committee.

In its review of related person transactions, the policy provides that the Committee should exercise independent judgment and should not approve any proposed transaction unless and until it shall have concluded to its satisfaction that the transaction:

Related Person Transactions During 2008 and 2007. Mountain 1 ^st has had, and expects to have in the future, banking transactions in the ordinary course of its business with certain of 1^st Financial’s and its current directors, nominees for director, executive officers, and other related persons. All loans included in those transactions during 2008 and 2007 were made in the ordinary course of Mountain 1^st’s business on substantially the same terms, including interest rates, repayment terms and collateral, as those prevailing at the time those loans were made for comparable transactions with other persons, and those loans did not involve more than the normal risk of collectibility or present other unfavorable features.

During prior years, Mountain 1^st entered into leases with related parties of two of 1^st Financial’s directors on buildings Mountain 1^st uses as branch offices. Van F. Phillips is Vice President and co-owner of Great Meadows, Inc., which has leased Mountain 1^st the building that houses its branch office in Marion, North Carolina. The initial lease term is five years, and Mountain 1^st has options to renew the lease for up to four successive three-year renewal terms. The terms of the lease call for a $3,500 per month rental payment during the initial term. Rental payments for each renewal term will be adjusted by the aggregate increase in the Consumer Price Index for all Urban Consumers for the immediately preceding lease term.

H. Steve McManus is the owner of McManus Development LLC which leases Mountain 1^st the building that houses its Fletcher, North Carolina, branch office. The initial lease term is ten years, and Mountain 1^st has

options to renew the lease for up to three successive five-year renewal terms. The terms of the lease call for a $3,200 per month rental payment during the first five years of the initial term, with payments during the second five years to be increased by the lesser of 18% or the aggregate increase in the Chained Consumer Price Index for all Urban Consumers during the previous five years. Rental payments during each renewal term will be adjusted by the lesser of 15% or the aggregate increase in the Chained Consumer Price Index for all Urban Consumers for the immediately preceding five years.

In each of the above leases Mountain 1^st is responsible for the payment of insurance and property taxes on the building during the term of the lease. Both of these leases were approved by Mountain 1^st’s Board of Directors and are on terms and conditions its Board believes are at least as favorable to Mountain 1^st as those it could have obtained in leases from non-affiliated lessors on comparable properties in similar locations.

Proposal to Authorize Management to Adjourn the 1^st Financial Special Meeting

Under North Carolina law, a shareholders meeting may be adjourned and reconvened one or more times to a later date for any reason. If the new time and place at which the meeting will be reconvened are announced at the meeting before the adjournment, no further notice of the reconvened meeting is required to be given unless the adjournment is for more than 120 days. Even if a quorum is not present, shareholders who are represented at a meeting may approve an adjournment of the meeting.

If a quorum is not present at the 1^st Financial Special Meeting, or if there are insufficient shares of 1^st Financial common stock represented at the Special Meeting, being voted in the affirmative, or being voted at all, to vote on or approve the Agreement and merger, 1^st Financial’s management likely will propose to adjourn the meeting until a later date and time to allow time to solicit additional proxy cards needed to establish a quorum or additional votes needed to approve the Agreement and merger. In that event, a proposal would be submitted for voting by the shareholders represented at the Special Meeting to adjourn the meeting and reconvene it at a later date.

1^st Financial shareholders who sign a proxy card and return it to 1^st Financial, or who appoint the 1^st Financial Proxies by Internet, will be authorizing the 1^st Financial Proxies to vote their shares according to the 1^st Financial Proxies’ best judgment on matters incident to the conduct of the 1^st Financial Special Meeting, including routine adjournments of the meeting. That authority will permit the 1^st Financial Proxies to vote shares in favor of an adjournment if a quorum is not present at the meeting, or if an adjournment is needed for most other purposes. However, that general authority will not permit the 1^st Financial Proxies to vote shares in favor of an adjournment for the purpose of soliciting additional votes needed to approve the Agreement and merger. A separate proposal is included in the proxy card which accompanies this Joint Proxy Statement/Prospectus in which 1^st Financial’s shareholders are asked to give instructions to the 1^st Financial Proxies on how their shares should be voted in the event a proposal is submitted to adjourn the meeting to allow additional time to solicit votes needed to approve the Agreement and merger.

If you vote in favor of this proposal, you will authorize the 1^st Financial Proxies to vote your shares in favor of one or more adjournments of the Special Meeting for up to a total of 120 days, if necessary, to allow additional time to solicit votes needed to approve the Agreement and merger. The general authority given to the 1^st Financial Proxies in your proxy card to vote your shares on matters incident to the conduct of the Special Meeting will authorize them to vote your shares according to their best judgment on adjournments for any other reason.

Prior to the organization of 1^st Financial as the bank holding company, Mountain 1^st was subject to the informational requirements of Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and it filed reports and other information, including annual reports, quarterly reports and proxy statements, with the Federal Deposit Insurance Corporation (the “FDIC”) under the 1934 Act. Copies of the reports Mountain 1^st filed are on file with the FDIC and are available for inspection at the offices of the FDIC’s Accounting and Securities Disclosure Section located at Room F-6043, 550 17th Street, N.W., Washington, DC 20429. You also may obtain copies of Alliance’s reports by calling the FDIC’s Accounting and Securities Disclosure Section at (202) 898-8913 or, by facsimile at (202) 898-8505.

A copy of 1^st Financial’s 2008 Annual Report on Form 10-K, will be sent without charge upon his or her written request. Requests should be sent to Roger A. Mobley, Chief Financial Officer, at 101 Jack Street, Hendersonville, North Carolina 28792.

1^st Financial is subject to the informational requirements of Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and it files reports and other information, including annual reports, quarterly reports and proxy statements, with the Securities and Exchange Commission (the “SEC”) under the 1934 Act. 1^st Financial’s SEC file number is 000-53264. You may read and copy any information filed by 1^st Financial with the SEC:

1^st Financial’s and Mountain 1^st’s Internet website address is www.mountain1st.com. Information included on this website is not part of this Joint Proxy Statement/Prospectus. Electronic versions of 1^st Financial’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act are available on that website. 1^st Financial will provide electronic or paper copies of those filings free of charge upon request. Requests for copies should be directed by mail to Roger A. Mobley, Chief Financial Officer, at 101 Jack Street, Hendersonville, North Carolina 28792, or by telephone at (828) 697-3100.

This Joint Proxy Statement/Prospectus is part of a registration statement 1^st Financial has filed with the SEC and it does not contain all the information included in the registration statement. You should review the registration statement for further information regarding 1^st Financial, the merger, and 1^st Financial’s common stock.

Any shareholder proposal, other than a nomination for election as a director, which is intended to be presented for action at 1^st Financial’s 2009 annual meeting of shareholders must have been received by 1^st Financial’s Corporate Secretary in writing at its address listed below no later than March 4, 2008, to be considered timely received for inclusion in the proxy statement and proxy card that 1^st Financial will distribute in connection with that meeting. Thatt deadline has passed. In order for a proposal to be included in 1^st Financial’s proxy materials for a particular meeting, the person submitting the proposal must own, beneficially or of record, at least 1% or $2,000 in market value, whichever is less, of 1^st Financial’s common stock entitled to be voted on that proposal at the meeting, must have held those shares for a period of at least one year, and must continue to hold them through the date of the meeting. Also, the proposal and the shareholder submitting it must comply with certain other eligibility and procedural requirements contained in rules of the Securities and Exchange Commission.

Written notice of a shareholder proposal (other than a nomination) intended to be presented at 1^st Financial’s [2010] annual meeting, but which is not intended to be included in 1^st Financial’s proxy statement and form of appointment of proxy, must have been received by 1^st Financial’s Corporate Secretary at the address listed below within a reasonable time prior to 1^st Financial’s shareholder meeting, scheduled for May 26, 2009, in order for that proposal to be considered timely received for purposes of the discretionary authority of the proxies for shareholders at that meeting to vote on other matters presented for action at the meeting.

Under 1^st Financial’s Bylaws, at a shareholder meeting at which directors will be elected, nominations for election to 1^st Financial’s board of directors may be made by its board or by a shareholder of record who is entitled to vote at the meeting if written notice of the shareholder’s nomination has been delivered to 1^st Financial’s Corporate Secretary at its principal office not later than the close of business on the tenth business day following the date on which notice of the meeting is first given to shareholders.

The required notice of a nomination must include: (1) the names and addresses of the shareholder who intends to make the nomination and of the person to be nominated; (2) a representation that the shareholder is a holder of record of shares of 1^st Financial’s common stock entitled to vote at the meeting and that he or she intends to appear in person or by proxy at the meeting to nominate the person named in the notice; (3) a description of all arrangements or understandings between the shareholder and the nominee and any other persons (naming those persons) pursuant to which the nomination is to be made by the shareholder; (4) a representation that each nominee satisfies all qualifications provided by 1^st Financial’s Bylaws or by applicable statute or regulation to serve as a director; and (5) the written consent of the nominee to serve as a director if elected. The shareholder also must provide other information regarding each proposed nominee that 1^st Financial reasonably requests and which can be obtained by the shareholder, including information that would be required to be included in a proxy statement filed pursuant to the proxy rules under the Securities Exchange Act of 1934 if the nominee had been nominated by the board of directors. Only persons nominated in the manner described in the Bylaws are eligible to be elected as directors at meetings of 1^st Financial’s shareholders, and the Chairman of a meeting of shareholders may refuse to acknowledge a nomination not made in compliance with these procedures.

The discussion and analysis that follows is intended to assist readers in the understanding and evaluation of the financial condition and results of operations of 1^st Financial and Mountain 1^st. It should be read in conjunction with the audited financial statements and accompanying notes included in this Joint Proxy Statement Prospectus and the supplemental financial data appearing throughout this discussion and analysis.

The following discussion includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Those statements include statements about 1^st Financial’s profitability, liquidity, allowance for loan losses, nonperforming loans, interest rate sensitivity, market risk, ability to compete in 1 ^st Financial’s markets, business strategies, and other such statements that are not historical facts. They usually will contain qualifying words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “plan,” “project,” “likely,” “estimate,” “continue,” “could,” “would,” “should,” or similar terms, or the negative or other variations of those terms. 1^st Financial has based those forward-looking statements on 1^st Financial’s current expectations and projections about future events, but 1^st Financial does not guarantee its future performance described in the statements or that the facts or events described in the statements actually will happen. 1^st Financial’s actual performance, or any of those events or facts, may never occur or be realized, or they may be materially different from, or occur in a way substantially different from, the results, facts or events indicated by the forward-looking statements. Those statements involve a number of risks and uncertainties, including, among other things, the factors discussed in Item 1A under the heading “Risk Factors.” Other factors that could influence the accuracy of those forward-looking statements include, among other things:

All forward-looking statements attributable to 1^st Financial or persons acting on 1^st Financial’s behalf are expressly qualified in their entirety by the cautionary statements in this section. 1st Financial has no obligation, and does not intend, to publicly update or otherwise revise any of the forward-looking statements as a result of any new information, future events or otherwise.

During 2008, Mountain 1^st continued to experience asset growth. Growth experienced during 2008 continued to be derived from both organic growth at existing branches as well as the opening of a new branch office in the Hickory, NC market. This new office brings Mountain 1^st’s total number of full service banking locations to fifteen. During the year, assets increased by $100.6 million or 16.6%. Net income for the year ended December 31, 2008

totaled $339 million representing a decrease of $3.2 million or 90.4% as compared with 2007 earnings of $3.5 million. Earnings per share and earnings per diluted share decreased to $0.04. This compares with $0.71 per share and $0.66 per diluted share in 2007 or decreases of 94.4% and 93.90%, respectively. Pre-tax, pre-provision income during 2008 decreased $2.1 million or 24.0% to $7.0 million. During the year, the provision for loan loss expense amounted to $6.5 million and tax expense totaled $98 thousand resulting in the aforementioned net income amount of $339 thousand. This compares with $9.1 million pre-tax, pre-provision income for 2007 with $3.4 million in provision and a tax expense of $2.2 million. While pre-tax, pre-provision income is a non-GAAP financial measure, management believes it to be a meaningful additional metric for periods presented within this report and has included it herein to provide further information and transparency for the reader of these financial statements.

As noted above, Mountain 1^st experienced continued strong asset growth during fiscal 2008. Growth in loans and deposits were the primary drivers of overall growth. During the year, gross loans increased $62.1 million or 11.9% while deposits increased $61.9 million or 11.7%. The increase in loans was comprised of increases totaling $5.9 million or 3.7% in construction and land development loans, $28.1 million or 17.0% in commercial real estate loans, $8.5 million or 11.0% in loans secured by first liens on one to four family residential properties, $7.6 million or 31.0% in home equity loans, $3.3 million or 56.3% in multifamily residential loans and $7.6 million or 9.4% in commercial and industrial loans. Consumer loans remained relatively static during the year.

Investment securities increased during the period by $26.5 million, or 43.4%. At December 31, 2008, cash and cash equivalents increased by $1.0 million or 10.8% as compared with December 31, 2007. Liquid assets, consisting of cash and demand balances due from banks, interest-earning deposits in other banks and available for sale investment securities totaled $97.1 million at December 31, 2008 constituting 13.7% of total assets. This compares with $70.4 million or 11.6% of total assets at year end 2007.

Other assets increased from $19.2 million at December 31, 2007 to $29.1 million at December 31, 2008 principally as a result of Mountain 1^st’s purchase of $5 million in life insurance policies on certain key employees during 2008. Also contributing to the increase in other assets was a $585 thousand increase in Mountain 1^st’s property and equipment from $6.6 million at December 31, 2007 to $7.1 million at December 31, 2008.

Deposits increased $61.9 million or 11.7% during 2008. At year end 2008, noninterest-bearing demand accounts increased $7.0 million, or 13.6% to $58.0 million. Other transaction accounts, including NOW, Money Market and Savings accounts increased $38.6 million or 29.7%. At December 31, 2008, transaction accounts accounted for 38.3% of Mountain 1^st’s total deposits. Certificates of deposit under $100 thousand increased $8.8 million or 4.9% while jumbo CDs increased $7.6 million or 4.5%. Through the end of 2007, Mountain 1^st had utilized wholesale funding sources only on a limited basis via borrowing from the Federal Home Loan Bank of Atlanta. At December 31, 2008 these borrowings totaled $48 million and Mountain 1^st had brokered CDs totaling $38.0 million in its CD portfolio. Management’s funding strategy remains centered around balanced growth in loans and deposits generated via Mountain 1^st’s retail branch network, supplemented through the selective use of wholesale funding when such sources present a lower cost alternative to CD pricing in the local markets in which Mountain 1^st operates.

Stockholders’ equity increased by $16.4 million, or 35.4%, during 2008, as a result of the issuance of $16.4 million of preferred stock under the U.S Treasury Capital Purchase Program. At December 31, 2008, all of Mountain 1^st’s capital ratios continued to be sufficient to classify it as a well-capitalized institution by regulatory measures.

For the year ended December 31, 2008, Mountain 1^st reported net income of $339 thousand or $0.04 per diluted share. This compares with $3.5 million or $0.66 per diluted share for the year ended December 31, 2007

and $2.8 million or $0.51 per share for 2006. Net interest income decreased $420 thousand or 2.0% in 2008 as compared with an increase of $5.2 million, or 32.8%, in 2007, both of which resulted from the overall growth of Mountain 1^st. Noninterest income and expense also increased as a general result of overall growth of Mountain 1^st’s balance sheet. During 2008, noninterest income increased $530 thousand or 12.3%. This increase resulted predominantly from increases in the cash surrender value of life insurance totaling $413 thousand or 393.3%. During the year, noninterest expense rose $2.3 million or 14.2%. This increase was attributed to the overall growth of Mountain 1^st, the addition and staffing of one new branch office and the addition of associated infrastructure required to support continued future growth. Individual components with substantial increases included personnel costs which rose $350 thousand or 4.1%, occupancy and equipment costs which increased $337 thousand or 29.4% and data processing and telecommunications which recorded an increase of $534 thousand or 30.6%. During 2007, noninterest income increased by $789 thousand or 22.5%, as a result of increases of $587 thousand or 50.3% in service charges on deposit accounts and an increase in mortgage origination revenues of $168 thousand or 7.8%. During the same period, noninterest expenses increased $3.5 million or 27.9%. This increase resulted from the overall growth of Mountain 1^st necessitating the hiring of more personnel and adding facilities and infrastructure to support the growth. See further discussion in “Noninterest Expense” below.

The primary component of earnings for Mountain 1^st is net interest income. Net interest income is defined as the difference between interest income, principally from the loan and investment securities portfolios, and interest expense, principally on deposits and borrowings. Changes in net interest income result from changes in volume, spread and margin. For this purpose, “volume” refers to the average dollar level of interest-earning assets and interest-bearing liabilities, “spread” refers to the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities and “margin” refers to net interest income divided by average interest-earning assets. Margin is influenced by the level and relative mix of interest-earning assets and interest-bearing liabilities, as well as levels of noninterest-earning assets and noninterest-bearing liabilities. During the years ended December 31, 2008, 2007 and 2006, average interest-earning assets were $637.2 million, $525.8 million and $394.2 million, respectively. During these same periods, Mountain 1^st’s net interest margins were 3.24%, 4.01% and 4.02% respectively.

Net interest income decreased to $20.6 million during 2008 as compared with $21.1 million for the year ended December 31, 2007, a decrease of $420 thousand or 2.0%. Due to the falling rate environment the small decrease in interest income and interest expense is primarily a result of the continued overall growth of Mountain 1^st’s asset and deposit accounts. The increase in net interest income during 2007 amounted to $5.2 million or 32.8%. The 2007 increase in both interest income as well as interest expense primarily resulted from the overall growth of Mountain 1^st’s asset and deposit bases. However, in the third quarter of 2007 and through 2008, short term interest rates have been dramatically decreased by the Federal Reserve’s Federal Open Market Committee (FOMC). The unprecedented nature of this decline in rates is expected to adversely impact Mountain 1^st’s net interest margin and consequently net income for 2008 and at least the first half of 2009. The degree to which Mountain 1 ^st’s margin and earnings may be affected is dependent on future actions by the FOMC and is currently unknown.

Management strives to maintain a high interest-earning asset ratio so as to maximize income. To that end, management targets an earning asset ratio at or above 93%. For the year ended December 31, 2008 that ratio was 96.0% as compared with 96.7% for 2007 and 96.8% for 2006. Average interest-earning assets for 2008 increased $111.4 million, or 21.2% as compared to 2007 while the average yield decreased by 170 basis points from 7.75% to 6.05%. The decrease in yield was primarily a function of the 500 basis point decrease in short term interest rates from the third quarter of 2007. Average interest-bearing liabilities increased by $110.7 million, or 25.1%, also as a result of the overall growth of Mountain 1^st. The average cost of interest-bearing liabilities decreased by 122 basis points from 4.47% to 3.25%. The decrease in cost was also influenced by the 500 basis point decrease in short term interest rates from the third quarter of 2007. Due to the rapid rate decreases during 2008, management was unable to balance yields and costs so as to maintain margins at a stable level. For the year ended December 31, 2008, Mountain 1^st’s net interest margin was 3.24% as compared with 4.01% for 2007.

The following table presents an analysis of Mountain 1st’s net interest income for 2008, 2007 and 2006.

The following table illustrates that the change in the average rate of loans was the predominant factor in the decreased amount of net interest income realized by Mountain 1^st in 2008 compared to 2007. In the preceding year, the change in the average volume of loans was the predominant factor in the increase in Mountain 1^st’s net interest income.

Mountain 1^st recorded $6.5 million in provision for loan losses in 2008, representing an increase of $3.1 million or 92.3% as compared with the provision of $3.4 million during 2007. The increase in the provision resulted from continued growth in Mountain 1^st’s loan portfolio as well as loan losses during 2008 which totaled $5.1 million of which $29 thousand was recovered during the year.

Provisions for loan losses are charged to income to bring the allowance for loan losses to a level deemed appropriate by management. In evaluating the allowance for loan losses, management considers factors that include growth, composition, diversification, or conversely, concentrations by industry, geography or collateral within the portfolio, historical loan loss experience, current seasoning of the portfolio, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors. For 2008, approximately $1.0 million of the provision for loan losses was attributable to growth of the loan portfolio while $5.5 million resulted from loan losses. At December 31, 2008, the allowance for loan losses was $9.0 million representing an increase of $1.4 million or

19.0% from the $7.6 million at the end of 2007. The allowance represented 1.55% and 1.46%, respectively, of loans outstanding at the end of 2008 and 2007, net of loans held for sale. At December 31, 2008 Mountain 1^st had $10.8 million of impaired loans, $10.0 million of which were on a non-accruing status and one restructured loan totaling $798 thousand. Approximately $1 million of this total was represented by a single commercial property which was in bankruptcy. Mountain 1^st holds the first lien on this property and management expects full recovery of this credit upon the release of the property by the bankruptcy court.

Noninterest income increased to $4.8 million for the year ended December 31, 2008 compared to $4.3 million for 2007 and $3.5 million for 2006, representing increases of $530 thousand or 12.3% and $789 thousand or 22.5%, respectively for these years. In 2008, increases in other service charges and fees and the increase in the cash surrender value of life insurance offset the decrease in fees from mortgage operations. In 2007, increases in mortgage origination income accounted for 21.3% of the total increase in noninterest income. Service charges on deposit accounts increased in 2008 to $1.7 million as compared with $1.2 million in 2007 and $856 thousand in 2006. The following table is a comparative analysis of the components of noninterest income for 2008, 2007 and 2006.

Noninterest expenses include all of the operating costs of Mountain 1^st excluding interest and provision expenses. During 2008 noninterest expenses totaled $18.5 million, increasing $2.3 million or 14.2% from $16.2 million in 2007. During 2007, noninterest expenses increased $3.5 million or 27.9%. The most significant component of noninterest expense, personnel costs, increased $350 thousand or 4.1% during 2008 and increased by $1.6 million or 23.8% during 2007. These increases were primarily driven by staffing increases required by expansion of Mountain 1^st’s branch network and the increase in infrastructure required by the overall growth of the balance sheet. During 2008, Mountain 1^st’s full time equivalent employees increased from 148 at December 31, 2007 to 156 at December 31, 2008. Expenses associated with growth of Mountain 1^st’s branch network accounted for a significant portion of the remainder of the increase in noninterest expense. These expenses, including occupancy, equipment and IT and telecom costs, which increased $1.1 million or 26.8% in 2008 as compared with an increase of $1.0 million or 35.8% for 2007. Management expects noninterest expense to continue to increase in approximate proportion to the overall growth in Mountain 1^st’s balance sheet over the foreseeable future. The following table presents a comparison of the components of noninterest expense for 2008, 2007 and 2006.

In mid-2006, having depleted all net operating tax loss carryforwards, Mountain 1^st’s earnings became fully taxable. Accordingly, income tax expense totaling $1.5 million was recorded during the year for the portion of Mountain 1^st’s earnings for that year that was taxable. During 2007, earnings for the entire year were taxable, therefore, income tax expense increased to $2.2 million representing a marginal tax rate of 38.5 percent. Income tax expenses for 2008 decreased to $98.0 thousand representing a marginal tax rate of 22.4 percent.

Mountain 1^st’s primary sources of liquidity are customer deposits, cash and demand balances due from other banks, interest-earning deposits in other banks and investment securities available for sale. These funds, together with loan repayments, are used to make loans and to fund continuing operations.

Total deposits were $591.0 million, $529.1 million and $424.5 million at December 31, 2008, 2007 and 2006, respectively. Mountain 1^st’s deposits increased $61.9 million or 11.7% during 2008 and $104.6 million or 24.7% during 2007. Until the fourth quarter of 2007, deposit growth within Mountain 1^st’s retail branch bank network was sufficient to meet Mountain 1^st’s funding requirements. However, as previously discussed, management began a limited utilization of wholesale funding in the fourth quarter of 2007. At December 31, 2008 this was limited to a $48 million advance from the Federal Home Loan Bank of Atlanta (FHLB) and approximately $38.0 million of brokered CDs. Management expects to continue to utilize these and potentially other wholesale sources of funding to supplement deposits generated from Mountain 1^st’s branch network and assist in managing the overall cost of funds.

At December 31, 2008 and 2007, time deposits represented 61.7% and 65.8% of total deposits, respectively. Certificates of deposit of $100,000 or more represented 29.9% and 31.9%, respectively, of Mountain 1^st’s total deposits at December 31, 2008 and 2007. Management believes that a sizeable portion of Mountain 1^st’s time deposits are relationship-oriented. Brokered certificates of deposit totaled $38.0 million and $0 at December 31, 2008 and 2007, respectively. While Mountain 1^st appreciates the need to pay competitive rates to retain these deposits, other subjective factors also influence deposit retention. Based upon prior experience, Mountain 1^st anticipates that a substantial portion of outstanding certificates of deposit will renew upon maturity.

In the normal course of business there are various outstanding contractual obligations of Mountain 1^st that will require future cash outflows. In addition, there are commitments and contingent liabilities, such as commitments to extend credit that may or may not require future cash outflows. The following table summarizes Mountain 1^st’s contractual obligations and commitments as of December 31, 2008.

At December 31, 2008 and 2007, Mountain 1^st’s equity totaled $62.6 million and $46.2 million, respectively. Mountain 1^st’s equity to asset ratio on those dates was 8.8% and 7.6%, respectively. This increase resulted from the issuance of preferred stock and warrants to the U.S. Treasury. Mountain 1^st is subject to minimum capital requirements which are further discussed under the caption “Business — Supervision and Regulation.” on page .

All capital ratios place Mountain 1^st in excess of minimum requirements to be classified as “well capitalized” by regulatory measures. Mountain 1^st’s regulatory capital ratios as of December 31, 2008 were leverage ratio 8.34%, Tier I risk-based capital ratio 10.44% and total risk-based capital ratio 11.70%. At December 31, 2007 these ratios were 7.85%, 9.18% and 10.44%, respectively.

Note 14 to the accompanying financial statements present an analysis of the 1^stFinancial’s and Mountain 1^st’s regulatory capital position as of December 31, 2008 and 2007. The decline in capital ratios is a result of Mountain 1^st’s successful growth and leveraging of its capital base. Based on current capitalization and growth expectations, management anticipates that Mountain 1 ^st will need to generate additional capital during the second half of 2009. Accordingly, management and Mountain 1^st’s Board of Directors are currently evaluating various options for increasing Mountain 1^st’s capital base.

Mountain 1^st’s results of operations depend substantially on its net interest income. Like most financial institutions, Mountain 1^st’s interest income and cost of funds are affected by general economic conditions as well as by competition in the market place. The objective of Mountain 1^st’s asset/liability management process is aimed toward providing relative stability and reduction of volatility for Mountain 1^st’s net interest income

through various scenarios of changes in interest rates. The process attempts to balance the need for stability and predictability of net interest income against competing needs such as balance sheet mix constraints, overall earnings targets and the risk/return relationships between liquidity, interest rate risk, market risk and capital adequacy. Mountain 1^st maintains an asset/liability management policy approved by Mountain 1^st’s Board of Directors. This policy and the analysis process undertaken by management and the Board’s Asset/Liability Management Committee (“ALCO”) provides guidelines for limiting exposure to interest rate risk by placing limits on rate risk assumed via the existing structure of Mountain 1^st’s balance sheet based on the results produced by Mountain 1^st’s computer simulation. Mountain 1^st’s policy is to control the exposure of its earnings to changing interest rates by generally endeavoring to maintain a position within a range around an “earnings neutral position,” which is defined as the mix of assets and liabilities that generate a net interest margin that is least affected by interest rate changes.

When suitable lending opportunities are not sufficient to utilize available funds, Mountain 1^st has generally invested such funds in securities, primarily securities issued by U.S. governmental agencies, Government Sponsored Enterprises, mortgage-backed securities and municipal securities. The securities portfolio contributes to Mountain 1^st’s earnings and plays an important part in overall interest rate management. However, management of the securities portfolio alone cannot balance overall interest rate risk. The securities portfolio must be used in combination with other asset/liability techniques to actively manage the balance sheet. The primary objectives in the overall management of the securities portfolio are safety, liquidity, yield, and asset/liability management (interest rate risk).

In reviewing the needs of Mountain 1^st with regard to proper management of its asset/liability program, Mountain 1^st’s management estimates its future needs, taking into consideration estimations of loan demand and deposit balances, forecasted interest rate changes, competition and a number of other factors. Several measures are used to monitor and manage interest rate risk, including income simulations and interest sensitivity (gap) analyses. An income simulation model is the primary tool used to assess the direction and magnitude of changes in net interest income resulting from changes in interest rates. Key assumptions in the model include prepayments on loan and mortgage-backed securities, cash flows and maturities of other investment securities and loan and deposit volumes and pricing. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest income or precisely predict the impact of higher or lower interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors.

While Mountain 1^st’s gap analysis at December 31, 2008 indicates that its balance sheet is generally asset sensitive, the results of computer simulation modeling at that date suggests minimal interest rate exposure under moderately increasing or decreasing interest rate scenarios. Under these scenarios, Mountain 1^st’s net interest income would be expected to decrease no more than approximately 5%.

The analysis of an institution’s interest rate gap (the difference between the repricing of interest-earning assets and interest-bearing liabilities during a given period of time) is another standard tool for the measurement of the exposure to interest rate risk. Management believes that because interest rate gap analysis does not address all factors that can affect earnings performance, its practical usefulness in managing Mountain 1^st’s interest rate risk is limited and it should be used in conjunction with other methods of evaluating interest rate risk.

The “Interest Rate Sensitivity Analysis” table, presented below, sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2008, which are projected to reprice or mature in each of the future time periods shown. Except as stated below, the amounts of assets and liabilities shown which reprice or mature within a particular period were determined in accordance with the contractual terms of the assets or liabilities. Loans with adjustable rates are shown as being due at the end of the next upcoming adjustment period. Money market deposit accounts are considered rate sensitive and are placed in the shortest period, while negotiable order of withdrawal or other transaction accounts and regular savings accounts have been evaluated and are deemed to be more stable sources that are less price elastic and are placed in the five year

bucket. In making the gap computations, none of the assumptions sometimes made regarding prepayment rates and deposit decay rates are used for any interest-earning assets or interest-bearing liabilities. In addition, the table does not reflect scheduled principal payments that will be received throughout the lives of the loans. The interest rate sensitivity of Mountain 1^st’s assets and liabilities illustrated in the table would vary substantially if different assumptions were used or if actual experience differs from that indicated by such assumptions.

On a cumulative basis, at December 31, 2008, Mountain 1^st was asset sensitive for each time interval presented in the table. As stated above, certain shortcomings are inherent in the method of analysis presented in the table. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market interest rates. For instance, while the table is based on the assumption that money market accounts are immediately sensitive to movements in rates, Mountain 1^st expects that in a changing rate environment the amount of the adjustment in interest rates for such accounts would be less than the adjustment in categories of assets that are considered to be immediately sensitive. The same is true for all other interest bearing transaction accounts. Additionally, certain assets have features that restrict changes in the interest rates of such assets both on a short-term basis and over the lives of such assets. Further, in the event of a change in market interest rates, prepayment and early withdrawal levels could deviate significantly from those assumed in calculating the tables. Finally, the ability of many borrowers to service their adjustable-rate debt may decrease in the event of an increase in market interest rates. Due to these shortcomings, Mountain 1 ^st places primary emphasis on its computer simulation model when managing its exposure to changes in interest rates. Mountain 1^st does not normally make interest rate predictions, nor take significant risk based on potential changes in interest rate direction. Mountain 1^st is currently asset sensitive, accordingly, should interest rates increase and all other factors remain stable, Mountain 1^st’s earnings, margins and spreads would be positively impacted. The opposite would be true in a declining interest rate environment.

Mountain 1^st provides to its customers a full range of short to medium-term commercial, mortgage, construction and personal loans, both secured and unsecured. Mountain 1^st’s loan policies and procedures establish the basic guidelines governing its lending operations. Generally, the guidelines address the types of loans that Mountain 1^st seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness to Mountain 1^st, including the indebtedness of any guarantor. The policies are reviewed and approved at least annually by the Board of Directors of Mountain 1^st. Mountain 1^st supplements its own supervision of the loan underwriting and approval process with periodic loan audits by internal loan examiners as well as by third party professionals experienced in loan review work. Mountain 1^st has focused its portfolio lending activities on typically higher yielding commercial, construction and consumer loans. Mountain 1^st also originates 1-4 family mortgages that are typically sold into the secondary market.

The following tables provide additional information regarding Mountain 1^st’s loan portfolio as of December 31, 2008, 2007, 2006, 2005 and 2004. The “Loan Summary” table provides an analysis of the composition of the loan portfolio by type of loan. The “Loan Maturity Schedule” presents (i) the aggregate maturities or re-pricings of commercial, industrial and commercial mortgage loans and of real estate constructions loans and (ii) the aggregate amounts of such loans by variable and fixed rates for the same periods presented in the Loan Summary table.

Commercial business lending is another component of Mountain 1^st’s lending activities. At December 31, 2008, Mountain 1^st’s commercial and industrial loan portfolio equaled $88.5 million or 15.3% as compared with $80.89 million or 15.6% of total loans at year end 2007. Commercial and industrial loans include both secured and unsecured loans for working capital, expansion and other business purposes. Short-term working capital loans generally are secured by accounts receivable, inventory and/or equipment. Mountain 1^st also makes term commercial loans secured by equipment and real estate. Lending decisions are based on an evaluation of the financial strength, management and credit history of the borrower, and the quality of the collateral securing the loan. With few exceptions, Mountain 1^st requires personal guarantees and secondary sources of repayment.

Commercial and industrial loans generally provide greater yields and reprice more frequently than other types of loans, such as real estate loans, as most commercial loan yields are tied to the prime rate index. Therefore, yields on most commercial loans adjust with changes in the prime rate.

Real estate loans are originated for the purpose of purchasing, constructing or refinancing one- to four- family, multi- family and commercial properties, and for purposes unrelated to real estate taken as collateral. Mountain 1^st offers fixed and adjustable rate options. Mountain 1^st provides customers access to long-term conventional real estate loans through its mortgage loan department which makes FNMA and FHLMC conforming loans that are originated and sold to upstream correspondent banks on a flow basis generally within 30-45 days of closing.

Residential one- to four-family loans are classified into two categories: conforming loans, that are originated under the underwriting guidelines established by FNMA or FHLMC and which are generally sold into the secondary market as discussed above and nonconforming loans that are originated and retained in Mountain 1^st’s loan portfolio. The terms “conforming” and “nonconforming” do not refer to credit quality, but rather to whether the loan is underwritten so that it can be readily sold in the secondary market. At December 31, 2008, loans held

for sale amounted to $4.2 million while nonconforming loans held in Mountain 1^st’s permanent portfolio amounted to $113.7 million in loans secured by first liens and $4.1 million secured by junior liens. Mountain 1^st’s permanent residential mortgage loans are generally secured by properties located within Mountain 1^st’s market area. Most of the one- to four-family residential mortgage loans that Mountain 1^st makes are conforming loans and are sold within 30 days of closing to a correspondent bank. Mountain 1^st originated loans totaling $97.1 million for sale into the secondary market during 2008. Mountain 1 ^st receives fee income for each loan originated and sold. Mortgage origination activities resulted in aggregate noninterest income of $1.7 million, $2.3 million and $2.2 million for the years ended December 31, 2008, 2007 and 2006, respectively. Mountain 1^st anticipates that it will continue to be an active originator of residential loans. Nonconforming residential mortgage loans that are retained in Mountain 1^st’s loan portfolio generally have rate terms of five years or less, with amortizations up to 25 years.

Mountain 1^st has made, and anticipates continuing to make, commercial real estate loans. Commercial real estate loans amounted to $193.0 million at December 31, 2008. These loans are secured principally by commercial office buildings, owner occupied retail and commercial operations, storage and warehouse space, agricultural properties and a variety of other facilities used by commercial enterprises. Generally in underwriting commercial real estate loans, Mountain 1^st requires the personal guarantee of borrowers and a demonstrated cash flow capability sufficient to service the debt. Loans secured by commercial real estate may involve a greater degree of risk than one to four family residential mortgage loans. Payments on such loans are often dependent on successful operation or management of the properties.

Mountain 1^st originates both commercial and one- to four- family residential construction loans. These include the construction of commercial buildings, infrastructure for residential developments, custom homes (where the home buyer is the borrower), pre-sold homes where the builder is the borrower and to a lesser degree speculative home construction projects. Mountain 1^st generally receives a pre-arranged permanent financing commitment from an outside entity prior to financing the construction of pre-sold homes. Mountain 1^st lends to builders who have demonstrated a favorable record of performance and profitable operations and who are building in markets that management believes it understands and in which it is comfortable with the economic conditions. Mountain 1^st further endeavors to limit its construction lending risk through adherence to established underwriting procedures. Mountain 1^st generally requires documentation for all draw requests and utilizes loan officers and third party vendors to inspect projects prior to honoring draw requests from builders. With few exceptions, Mountain 1^st requires personal guarantees and secondary sources of repayment on construction loans. At December 31, 2008 construction and acquisition and development loans totaled $165.0 million or 28.5% of total loans.

Consumer Loans and Home Equity Lines of Credits. Loans to individuals include automobile loans, boat and recreational vehicle financing, home equity and home improvement loans and miscellaneous secured and unsecured personal loans. Consumer loans generally can carry significantly greater risks than other loans, even if secured, if the collateral consists of rapidly depreciating assets such as automobiles and equipment. Repossessed collateral securing a defaulted consumer loan may not provide an adequate source of repayment of the loan. Consumer loan collections are sensitive to job loss, illness and other personal factors. Mountain 1^st attempts to manage the risks inherent in consumer lending by following established credit guidelines and underwriting practices designed to minimize risk of loss. At December 31, 2008 home equity loans totaled $27.7 million or 4.8% of total loans while other consumer lending accounted for $6.5 million or 1.1% of outstanding loans.

Loan Approvals. Mountain 1^st’s loan policies and procedures establish the basic guidelines governing its lending operations. Generally, the guidelines address the type of loans that Mountain 1^st seeks, target markets, underwriting and collateral requirements, terms, interest rate and yield considerations and compliance with laws and regulations. All loans or credit lines are subject to approval procedures and amount limitations. These limitations apply to the borrower’s total outstanding indebtedness to Mountain 1^st, including the indebtedness of any guarantor. The policies are reviewed and approved at least annually by the Board of Directors of

Mountain 1^st. Mountain 1^st supplements its own supervision of the loan underwriting and approval process with periodic loan audits by independent, outside professionals experienced in loan review analysis.

Responsibility for loan production rests with the Senior Commercial Lending Officer in each market. The responsibility for loan underwriting, loan processing and approval is with the Chief Credit Officer. The Board of Directors of Mountain 1^st determines individual officer lending authority annually. Delegated authorities may include loans, letters of credit, overdrafts, uncollected funds and such other authority as determined by the Board of Directors. The President and Chief Credit Officer each have the authority to approve loans up to $2,000,000. The President in conjunction with the Chief Credit Officer and Chief Executive Officer comprise the Officer Loan Committee and may approve loans up to $4 million, which is the maximum staff lending limit set by the Board of Directors. The Board’s Loan Committee approves all loans in excess of the staff’s lending limit. The Board Loan Committee consists of the CEO, President, Chief Credit Officer and four outside directors as appointed by the Board of Directors of Mountain 1^st. Mountain 1 ^st’s legal lending limit was $9.9 million at December 31, 2008.

General Economic Lending and Real Estate Conditions. One of the most challenging environments for the banking industry in decades came to the national forefront during 2007 and remained in the forefront through 2008. A number of markets across the country were already experiencing a marked downturn in real estate early in 2007. However, by midyear, the sub-prime mortgage debacle hit the country and the banking industry. This was followed in 2008 by a credit and liquidity crisis that affected many banks across the country. Fortunately, Mountain 1^st was not as directly impacted by these events because Western North Carolina real estate markets have generally not been as harshly impacted as the national averages. 1^st Financial believes that Mountain 1^st’s markets in western North Carolina are generally strong, certainly compared with many other markets across the country. As discussed elsewhere herein, Mountain 1^st, as with most community banks, has a concentration of loans secured by real estate. Management believes that prudent lending using real estate as collateral presents one of the most attractive lending opportunities available to community banks. However, with the current widespread downturn in real estate markets, management has undertaken actions it has deemed both prudent and available to maintain and enhance the strength of Mountain 1^st’s real estate based loan assets. As early as two years ago, Mountain 1^st’s lending on residential lots was curtailed based on the inflated pricing on some residential lots within the markets Mountain 1^st serves. This along with increasing inventory of this product type in its markets prompted Mountain 1^st to generally exit the residential lot lending space. In late 2006, management began to reduce exposure to new acquisition and development projects as a widespread downturn in real estate was becoming more evident. Several previously originated real estate development loans remain in Mountain 1^st’s portfolio as they progress through their life cycle. However, lending on similar new projects along with most speculative building has been greatly curtailed. While 1^st Financial believes that the steps taken to date will assist in strengthening the performance of Mountain 1^st’s real estate loan portfolio, much of the performance of this portfolio is dependent upon the duration and depth of the current real estate downturn.

The more direct impact of these economic events on Mountain 1^st has been a reduction in its net interest margin. Beginning effectively in the third quarter of 2007, the Federal Open Market Committee (FOMC) of the Federal Reserve Board, began reducing short term interest rates. Since September 2007, the FOMC decreased rates dramatically by 500 basis points. The unprecedented velocity of this decline in rates is expected to adversely impact Mountain 1^st during 2009.

In the ordinary course of business, Mountain 1^st enters into various types of transactions that include commitments to extend credit that are not included in loans, net of allowance for loan losses, as presented on Mountain 1^st’s balance sheets. Mountain 1^st applies the same credit standards to these commitments as it uses in all its lending activities and has included these commitments in its lending risk evaluations. Mountain 1^st’s exposure to credit loss under commitments to extend credit is represented by the amount of these commitments. See Note 13 to Mountain 1^st’s financial statements and the table above for “Contractual Obligations and Other Commitments.”

Mountain 1^st considers asset quality to be of primary importance, and employs a formal internal loan review process to ensure adherence to the lending policy as approved by Mountain 1^st’s Board of Directors. It is the responsibility of each loan officer to assign an appropriate risk grade to loans when originated. Credit Administration, through the loan review process, tests the accuracy of the initial risk grade assessment. In addition, as a given loan’s credit quality changes, it is the responsibility of Credit Administration to change the borrower’s risk grade accordingly. In determining the allowance for loan losses and any resulting provision to be charged against earnings, particular emphasis is placed on the results of the loan review process. Consideration is also given to historical loan loss experience, the value and adequacy of collateral, economic conditions in Mountain 1^st’s market area and other factors. For loans determined to be impaired, the allowance is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. This evaluation is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. The allowance for loan losses represents management’s estimate of the appropriate level of reserve to provide for probable losses inherent in the loan portfolio.

Mountain 1^st’s policy regarding past due loans normally requires a prompt charge-off to the allowance for loan losses following a thorough review and timely collection efforts. Further efforts are then pursued through various means available. Loans carried in a non-accrual status are generally collateralized and probable losses are considered in the determination of the allowance for loan losses.

Over the course of the past two years, credit quality at a number of banks across the country has deteriorated as real estate markets have been hit with slowing sales and declining prices. Fortunately, the markets in which Mountain 1^st operates have not experienced such dramatic downturns. Although real estate prices in western North Carolina have shown a downward trend, they have been relatively stable over the past year. The longer the current real estate market downturn persists, the more vulnerable sales volume and prices become. Management believes that Mountain 1^st’s loan portfolio currently remains strong. However, a future scenario of protracted real estate market problems, especially if they become more severe, could produce portfolio underperformance as compared to the first four and one half years of Mountain 1^st’s existence.

Mountain 1^st’s financial statements are prepared on the accrual basis of accounting, including the recognition of interest income on loans, unless a loan is placed on non-accrual basis. Loans are accounted for on a non-accrual basis when management has serious concerns about the collectability of principal or interest. Generally, Mountain 1^st’s policy is to place a loan on non-accrual status when the loan becomes 90 days past due or when management is uncertain whether the borrower can satisfy the contractual terms of the loan agreement. Payments received on non-accrual loans generally are applied to principal first, and then to interest after all principal payments have been satisfied. Restructured loans are those for which concessions, including the reduction of interest rates below a rate otherwise available to that borrower or the deferrals of interest or principal, have been granted due to the borrower’s weakened financial condition. Mountain 1^st accrues interest on restructured loans at the restructured rate when management anticipates that no loss of original principal will occur. Potential problem loans are defined as loans currently performing that are not included in non-accrual or restructured loans, but are loans that management has concerns as to the borrower’s ability to comply with present repayment terms. These loans could deteriorate to non-accrual, past due or restructured loans status. Therefore, management quantifies the risk associated with problem loans in assessing the adequacy of the allowance for loan losses. At December 31, 2008 Mountain 1^st had $645 thousand of foreclosed real estate and $1.4 million of repossessed personal property. At December 31, 2008 and 2007, Mountain 1^st had approximately $10 million and $1.3 million respectively in nonaccruing loans. Approximately $1 million of these totals were represented by one commercial real estate parcel with an appraised value in excess of $3 million on which Mountain 1^st holds the first lien. Management expects full collection of this loan upon release of Mountain 1^st ’s

collateral from the bankruptcy court which currently controls this collateral. At year end 2006, Mountain 1^st had a total of $611 thousand in nonperforming loans, all of which had been placed on non-accrual status at that time. The following table summarizes Mountain 1^st’s nonperforming assets at December 31, 2008, 2007, 2006, 2005 and 2004.

The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. Management increases the allowance for loan losses by provisions charged to operations and by recoveries of amounts previously charged off. The allowance is reduced by loans charged off. Management evaluates the adequacy of the allowance at least quarterly which is then reviewed and approved by the Board of Directors after making any changes as may be required. In evaluating the adequacy of the allowance, management considers the growth, composition and industry diversification of the portfolio, historical loan loss experience, current delinquency levels, adverse situations that may affect a borrower’s ability to repay, estimated value of any underlying collateral, prevailing economic conditions and other relevant factors derived from Mountain 1^st’s limited history of operations. In addition, regulatory agencies, as an integral part of their examination process, periodically review Mountain 1^st’s allowance for loan losses and may require it to make adjustments to the allowance for loan losses based upon judgments different from those of Mountain 1^st’s management.

Management uses a risk-grading system, as described under “ASSET QUALITY,” to facilitate evaluation of probable inherent loan losses and the adequacy of the allowance for loan losses. In this program, risk grades are initially assigned by loan officers and reviewed and tested by Credit Administration and external loan review processes. The testing program includes an evaluation of a sample of new loans, large loans, loans that are identified as having potential credit weaknesses, accruing loans past due 90 days or more, and non-accrual loans. Mountain 1^st strives to maintain its loan portfolio in accordance with conservative loan underwriting policies that

result in loans specifically tailored to the needs of Mountain 1^st’s market area. Every effort is made to identify and minimize the credit risks associated with such lending strategies.

Mountain 1^st follows a loan review program designed to evaluate the credit risk in its loan portfolio. Through this loan review process, an internally classified watch list is maintained that helps management assess the overall quality of the loan portfolio and the adequacy of the allowance for loan losses. In establishing the appropriate classification for specific assets, management considers, among other factors, the estimated value of the underlying collateral, the borrower’s ability to repay, the borrower’s payment history and the current delinquency status. As a result of this process, loans with a higher than standard risk profile are categorized as watch, OAEM, (Other Assets Especially Mentioned — loans not placed on the watch list and not classified, but that may contain potentially unsatisfactory characteristics), substandard, doubtful or loss, and reserves are allocated based on management’s judgment and historical experience.

Loans classified as “substandard” are those loans with clear and defined weaknesses such as unfavorable financial ratios, uncertain repayment sources or poor financial condition that may jeopardize the collection of the debt. They are characterized by the distinct possibility that Mountain 1^st will sustain some losses if the deficiencies are not corrected. A specific reserve based on the estimation of loss within each credit classified as substandard is allocated to such loans. Loans classified as “doubtful” are those loans that have characteristics similar to substandard loans but with an increased risk that collection or liquidation in full is highly questionable and improbable. As with substandard loans, specific reserves are allocated to these credits. Such reserve allocations average approximately 50% of doubtful loans. Loans classified as “loss” are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value but rather it is not practical or desirable to defer writing off this asset even though partial recovery may be achieved in the future. As a practical matter, when loans are identified as loss they are charged off against the allowance for loan losses. In addition to the above classification categories, Mountain 1^st also categorizes loans based upon risk grade and loan type, assigning an allowance allocation based upon each category.

Significant growth in Mountain 1^st’s loan portfolio has been the primary reason for increases in Mountain 1^st’s allowance for loan losses and the resultant provisions for loan losses necessary to provide for those increases. This growth has been spread among Mountain 1^st’s major loan categories, with the mix of major loan categories being relatively consistent. The percentage of each major category of loans as a percentage of total loans outstanding for the past five years is illustrated in the afore-mentioned “Loan Summary” table. During 2008, Mountain 1^st experienced $5.1 million in loan losses, of which $29 thousand was recovered during the year. Charge offs are typically recognized when it is the opinion of management that all or a portion of an outstanding loan becomes uncollectible. Examples of loans which may be deemed uncollectible are credits whose principal and interest payments are past due, and/or when the fair market value of underlying pledged collateral is less than the outstanding loan balance and the borrower is not meeting contractual obligations. Loan repayment may be realized through a contractual agreement, or through liquidation of assets pledged as collateral. Mountain 1^st’s allowance for loan losses at December 31, 2008 totaled $9.0 million representing 1.55 percent of total loans outstanding, excluding loans held for sale. At December 31, 2007, this total was $7.6 million or 1.46 percent.

The allowance for loan losses represents management’s estimate of an amount adequate to provide for known and inherent losses in the loan portfolio in the normal course of business. Management makes specific allowances that are allocated to certain individual loans and pools of loans based on risk characteristics, as discussed below. At December 31, 2008, a portion of Mountain 1^st’s allowance was unallocated to specific credits or specific classes of loans. This unallocated portion of the allowance has been provided due to a number of unknown factors that management believes could potentially pose future general portfolio risks beyond those identified by means of specific allocations. These risks include but are not limited to the relative lack of seasoning of Mountain 1^st’s portfolio, the significant growth of the loan portfolio in a relatively short time, continued growth, development and demands on the credit administration function since inception of Mountain 1^st, potential risks associated with the concentration of real estate loans within the portfolio and significant

uncertainties within the general domestic economy and to a lesser degree, in the local economies in which Mountain 1^st conducts its operations.

While management believes that it uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while management believes that it has established the allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that regulators, in reviewing Mountain 1^st’s portfolio, will not require adjustment to the allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed herein. Any material increase in the allowance for loan losses may adversely affect Mountain 1^st’s financial condition and results of operations. The following table presents the allocation of the allowance for loan losses at the end of each of the last five years. The allocation is based on an evaluation of defined loan problems, historical ratios of loan losses and other factors that may affect future loan losses in the categories of loans shown.

The following table summarizes information regarding changes in Mountain 1^st’s allowance for loan losses for the years ended December 31, 2008, 2007, 2006, 2005 and 2004.

Mountain 1^st’s portfolio of investment securities consists primarily of debt instruments of U.S. government agencies or of Government Sponsored Enterprises, and mortgage-backed securities. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale (AFS) and carried at fair value, with any unrealized gains or losses reflected as an adjustment to stockholders’ equity. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates and/or significant prepayment risks. Securities for which Mountain 1^st has the ability and intent to hold the securities to maturity are classified as held to maturity securities (HTM). HTM securities are carried at amortized cost. It is Mountain 1^st’s policy to classify most investment securities as available for sale. The following table summarizes investment securities by type at December 31, 2008, 2007 and 2006.

The following table summarizes the amortized costs, fair values and weighted average yields of securities at December 31, 2008, by contractual maturity groups.

Mountain 1^st does not engage in, nor does it presently intend to engage in, securities trading activities and therefore does not maintain a trading account. At December 31, 2008, there were no securities of any issuer

(other than governmental agencies or Government Sponsored Enterprises) that exceeded 10% of Mountain 1^st’s stockholders’ equity.

Mountain 1^st provides a range of deposit services, including noninterest-bearing checking accounts, interest-bearing checking and savings accounts, money market accounts, IRAs and certificates of deposit. These accounts generally earn interest at rates established by management based on asset/liability planning, earnings budgets, competitive market factors and management’s desire to increase or decrease certain types or maturities of deposits. Management believes that one of the primary keys to the long-term success of Mountain 1^st is the acquisition of demand deposit accounts and other transaction accounts. Accordingly, Mountain 1st strives to establish relationships with customers which will facilitate and attract core deposits. While certificates of deposit are certainly a significant component in the funding of Mountain 1^st, management endeavors to utilize these instruments as an entrée into a full relationship with each customer resulting in a complete banking relationship inclusive of the customer’s transaction accounts.

As noted previously, during the fourth quarter of 2008, management initiated the use of brokered certificates of deposit as a supplemental source of funding. Management elected to begin to utilize wholesale funding to avoid the steep increase in funding costs associated with unusually high premiums being paid on CDs within Mountain 1^st’s local markets. Such unusual premiums have emanated from a disruption of normalized CD pricing resulting from liquidity shortfalls experienced by some larger financial institutions. Management believes that this situation stems from the disruption of the secondary mortgage and credit markets and the inability of larger institutions to generate liquidity from commercial paper markets and from the securitization and sale of financial assets.

The following table summarizes the average balances outstanding and average interest rates for each major category of deposits for the years ended December 31, 2008 and 2007.

The following table presents information regarding maturities of certificates of deposit with balances of $100,000 or more at December 31, 2008.

Please refer to Note 1 to 1^st Financial’s Financial Statements on page [ ] for a full description of recent accounting pronouncements including the respective expected dates of adoption and effects on results of operations and financial condition.

Because Mountain 1^st’s assets and liabilities are primarily monetary in nature, the effect of inflation on its assets is less significant compared to most commercial and industrial companies. However, inflation does have an impact on the growth of total assets in the banking industry and the resulting need to increase capital at higher than normal rates in order to maintain an appropriate equity-to-assets ratio. Inflation also has a significant effect on other expenses, which tend to rise during periods of general inflation. Notwithstanding these effects of inflation, management believes its financial results are influenced more by Mountain 1^st’s ability to react to changes in interest rates and general economic conditions impacting the creditworthiness of customers than directly by inflation.

Except as discussed in this Management’s Discussion and Analysis, management is not aware of trends, events or uncertainties that will have or that are reasonably likely to have a material adverse effect on Mountain 1^st’s liquidity, capital resources or operations. Management is not aware of any current recommendations by regulatory authorities which, if they were implemented, would have such an effect.

Allowance for Loan Losses. Mountain 1^st’s most significant critical accounting policy is the determination of its allowance for loan losses. A critical accounting policy is one that is both very important to the portrayal of Mountain 1^st’s financial condition and results, and requires management’s most difficult, subjective or complex judgments. What makes these judgments difficult, subjective and/or complex is the need to make estimates about the effects of matters that are inherently uncertain. If the mix and amount of future loan write-offs differ significantly from those assumptions used in making a determination, the allowance for loan losses and resultant provisions for loan losses could materially impact Mountain 1^st’s financial position and results of operations. For further discussion of the allowance for loan losses and a detailed description of the methodology used in determining the adequacy of the allowance, see the sections of this discussion titled “Asset Quality” and “Analysis of Allowance for Loan Losses” and Note 1 to the financial statements contained in this Annual Report.

Off-Balance Sheet Arrangements. Except as discussed in Note 13 of 1^st Financial’s Financial Statements with regard to committed, unfunded lines of credit, Mountain 1^st does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Quantitative and Qualitative Disclosures about Market Risk is set forth above under the caption “Asset/Liability Management.”

General. Alliance was incorporated on September 7, 2004, as a North Carolina-chartered commercial bank. Alliance opened for business on September 8, 2004 at 285 West Main Avenue, Gastonia, North Carolina. As of December 31, 2008, Alliance operates a commercial branch facilities at 412 South Dekalb Street, Shelby, North Carolina, 2227 Union Branch Road, Gastonia, North Carolina, 209 South Battleground Avenue, Kings Mountain, North Carolina, and its main and administrative office at 292 West Main Avenue, Gastonia, North Carolina. Alliance operates for the primary purpose of serving the banking needs of individuals and small to medium-sized businesses in its market area. Alliance offers a range of banking services including checking and savings accounts, commercial, consumer and personal loans, and other associated services.

On May 22, 2007, Alliance’s shareholders approved a plan of corporate reorganization under which Alliance became a wholly-owned subsidiary of AB&T, which was organized for that purpose by Alliance’s Board of Directors. AB&T’s authorized common stock is 11,000,000 shares with $1.00 par value per share and its original authorized preferred stock is 1,000,000 shares with no par value. Pursuant to the reorganization, AB&T issued shares of its common stock in exchange for all of the common shares of Alliance outstanding on May 14, 2008. The consolidated financial statements include the accounts of the AB&T as the parent company and AB&T’s wholly-owned subsidiary after elimination of all significant intercompany balances and transactions.

AB&T applied and was approved for participation in the “TARP” Capital Purchase Program in late 2008. On January 23, 2009, AB&T issued and sold to the United States Treasury (1) 3,500 shares of the AB&T’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase 80,153 shares of the AB&T’s common stock for an aggregate purchase price of $3.5 million in cash. The preferred stock qualifies as Tier 1 capital.

Primary Market Area. AB&T’s primary market area (“PMA”) consists of Gaston and Cleveland Counties in North Carolina. The PMA has a population of over 300,000 with an average median household income of over $39,000.

Recent Developments. At June 30, 2008, total deposits in AB&T’s PMA exceeded $3.5 billion. In the fourth quarter 2008, the PMA reported moderate levels of unemployment (10.2% in Gaston County and 10.7% in Cleveland County) compared to lower state and national averages (7.7% and 6.6%, respectively). The leading economic components of Gaston and Cleveland Counties are manufacturing, services and retail trade. The largest employers in AB&T’s PMA include Caromont Health, Gaston County Schools, Wal-Mart Distribution Center, Wix Filtration Corp., Pharr Yarns, Sara Lee Corp., Cleveland Regional Medical Center, PPG Industries, Freightliner, Gaston County Administration and Gardner-Webb University.

Competition. Commercial banking in North Carolina is extremely competitive, as North Carolina long has permitted statewide branching. In its market area, Alliance competes directly for deposits with other commercial banks, savings and loan associations, agencies issuing U. S. Government securities, and all other organizations and institutions engaged in money market transactions. In its lending activities, Alliance competes with all other financial institutions as well as consumer finance companies, mortgage companies, and other lenders that do business in its PMA. The most recent data for the AB&T’s PMA indicates that there are 90 offices of commercial banks and savings institutions (58 in Gaston County and 32 in Cleveland County).

Employees. Alliance currently employs 31 full-time employees and one part-time employee. None of these employees are covered by a collective bargaining agreement. AB&T believes Alliance’s relations with its employees to be good.

Properties. The following table sets forth the location of Alliance’s banking offices or properties, as well as certain information relating to these properties to date.

Legal Proceedings. There are no pending legal proceedings to which either AB&T or Alliance is a party, or of which any of their properties are subject, other than routine litigation that is incidental to their business.

AB&T’s audited consolidated financial statements as of and for the year ended December 31, 2008, and Alliance’s audited financial statements as of and for the years ended December 31, 2007 and 2006, and AB&T’s unaudited consolidated interim statements of condition, statements of income, and statements of cash flows, as of and for the three-month period ended March 31, 2009 and Alliance’s unaudited interim statements of condition, statements of income, and statements of cash flows, as of and for the three-month period ended March 31, 2008, are included in this Joint Proxy Statement/Prospectus under the caption “Consolidated Financial Statements of AB&T Financial Corporation” on page F- .

As of December 31, 2008, the shareholders identified in the following table beneficially owned more than 5% of AB&T’s common stock.

As of December 31, 2008, the beneficial ownership of AB&T’s common stock, by directors individually, and by directors and executive officers as a group, was as follows:

AB&T’s bylaws provide that its Board shall consist of between five (5) and seven (7) members divided into three classes in as equal number as possible. Such classes shall be elected to staggered three (3) year terms. The Board has set the number of directors of the Company at five (5). There is currently one vacancy on the Board. This vacancy was created by the resignation of director G. William Sudyk on November 20, 2008.

of office extending to the next annual meeting of 1^st Financial’s shareholders at which its directors are elected. At that meeting, one director will be nominated for election to a three-year term, and one will be nominated for election to a two-year term, on 1^st Financial’s Board of Directors. Continued service of these directors will be subject to their reelection. 1^st Financial is still considering which members of AB&T’s board it plans to appoint in addition to Mr. Shovelin. For their services as directors, 1^st Financial’s outside directors currently receive fees of $400 for attendance at Board meetings, and fees ranging from $100 to $200 for attendance at meetings of Board committees. AB&T currently pays each of its directors $300 per Board meeting attended with an additional $200 per Board meeting paid to the Chairman of the Board for each Board meeting attended. In addition, directors receive $150 per committee meeting attended with an additional $50 per committee meeting attended by the committee chairman. (See “Information About 1^st Financial — Directors’ Compensation” on page , and “Information About AB&T — Directors’ Compensation” on page .)

The following table presents a summary of all compensation paid by AB&T to its non-employee directors for their service as such during the year ended December 31, 2008.

Board Fees. Non-employee directors received cash compensation for attendance at meetings of the Board and committee meetings during 2008. As of December 31, 2008, each director received $300.00 and the chairperson received $500.00 per board meeting attended. Each director received $150.00 and the chairperson received $200.00 per committee meeting attended.

2005 Nonstatutory Stock Option Plan. The shareholders of Alliance approved the Alliance Bank & Trust Company 2005 nonstatutory stock option plan for directors at the 2005 annual meeting of shareholders. Following this approval, options to purchase 133,845 (as adjusted for the 5-for-4 stock split effected in the form of a 25% stock dividend in May 2006) shares of Alliance’s common stock were made available for issuance to members of Alliance’s Board of Directors under the nonstatutory plan. In connection with the reorganization of Alliance into the holding company form of organization which resulted in the creation of AB&T financial corporation, the 2005 nonstatutory plan was adopted by AB&T and options under that plan were converted into options to purchase shares of AB&T’s common stock. At AB&T’s 2008 annual meeting, the shareholders approved the adoption of an amendment to the nonstatutory plan whereby an aggregate of 133,910 shares were added to the original 133,845 shares then reserved under the nonstatutory plan. At December 31, 2008, 243,911 options had been granted under the nonstatutory plan.

Set forth below is certain information regarding the AB&T’s Executive Officers.

Summary. The following table shows cash and certain other compensation paid to or received or deferred by G. William Sudyk, Daniel C. Ayscue, Matthew J. Triplett and Eric Dixon for services rendered in all capacities during 2008. No other current executive officer of AB&T received compensation for 2008 which exceeded $100,000.

Employment Agreements. Alliance has entered into employment agreements with Daniel C. Ayscue as its President and Chief Executive Officer, Matthew J. Triplett as a Senior Vice President and Eric Dixon as a Senior Vice President. The employment agreements establish the duties and compensation of each of the officers and provide for the officers’ continued employment with Alliance. The Employment Agreements provide for an initial term of employment of one year, with provisions for one year extensions on each anniversary of the date of execution. They also provide that each officer may be terminated for “cause” (as defined in the Employment Agreements) by Alliance, and may otherwise be terminated by Alliance (subject to vested rights) or by each officer.

The Employment Agreements provide for annual base salary to be reviewed by the Board of Directors not less often than annually. In addition, the Employment Agreements provide for discretionary bonuses, participation in other pension and profit-sharing retirement plans maintained by Alliance on behalf of its employees, as well as fringe benefits normally associated with the officers’ respective offices or made available to all other employees.

The Employment Agreements provide that in the event of a “termination event” within eighteen months after a change in control of Alliance the employee shall be able to terminate the agreement and receive 299% of his base amount of compensation. A “termination event” will occur if (i) the employee is assigned any duties or responsibilities that are inconsistent with his position, duties, responsibilities or status at the time of the change in control or with his reporting responsibilities or title with Alliance in effect at the time of the change in control; (ii) the employee’s annual base salary rate is reduced below the annual amount in effect as of the change in control; (iii) the employee’s life insurance, medical or hospitalization insurance, disability insurance, stock option plans, stock purchase plans, deferred compensation plans, management retention plans, retirement plans or similar plans or benefits being provided by Alliance to the employee as of the date of the change in control are reduced in their level, scope or coverage, or any such insurance, plans or benefits are eliminated, unless such reduction or elimination applies proportionately to all salaried employees of Alliance who participated in such benefits prior to the change in control; or (iv) the employee is transferred to a location outside of Gastonia, North Carolina in the case of Messrs. Ayscue and Dixon and Shelby, North Carolina in the case of Mr. Triplett, without the employee’s express written consent. A change in control of Alliance will occur if (i) any individual or entity, directly or indirectly, acquires beneficial ownership of voting securities or acquires irrevocable proxies or any combination of voting securities and irrevocable proxies, representing 50% or more of any class of voting securities or Alliance, or acquires control in any manner of the election of a majority of the directors of Alliance; (ii) Alliance is consolidated or merged with or into another corporation, association or entity where Alliance is not the surviving corporation; or (iii) all or substantially all of the assets of Alliance are sold or otherwise transferred to or are acquired by any other corporation, association or other person, entity or group. The Employment Agreements also provide for restrictions on each officer’s right to compete with Alliance for a period of one year after termination of employment. Such noncompete restrictions do not apply if the officer is terminated with cause. In the event, the employee’s employment is terminated and the employee is not entitled to any further benefits, the Employment Agreements provide that the employee shall continue to receive salary compensation for an additional twelve months provided the employee abides by the noncompete restrictions. If after the expiration of the noncompete restrictions, the employee has not obtained new employment with another financial institution, Alliance shall pay the employee as additional compensation his regular salary until he secures new employment or the expiration of six months, whichever is earlier. As of December 31, 2008, the value of the lump sum payment that would have been payable to Messrs. Ayscue, Triplett and Dixon upon the occurrence of a “change in control” followed by a termination event would have been approximately $397,048, $286,987 and $316,711 respectively. It is a condition of closing that Mr. Ayscue agree, and Messrs. Triplett and Dixon have agreed, to waive any change in control payments that would be due as a result of the merger.

2005 Incentive Stock Option Plan. At Alliance’s 2005 Annual Meeting, the shareholders approved the adoption of the Alliance Bank & Trust Company 2005 Incentive Stock Option Plan, which provides for the issuance of incentive stock options, as defined in Section 422 of the Internal Revenue Code (the “Code”). In connection with the reorganization of Alliance into the holding company form of organization which resulted in

the creation of the Company, the 2005 Incentive Plan was adopted by AB&T Financial Corporation and options under that plan were converted into options to purchase shares of AB&T’s common stock. The Incentive Plan provides for the grant of stock options covering up to 267,755 shares of AB&T’s common stock, as adjusted following the 5-for-4 stock split effected in the form of a 25% stock dividend in May 2006 and subject to adjustment for further stock dividends, stock splits or similar changes in capitalization. At AB&T’s 2008 Annual Meeting, the shareholders approved the adoption of an amendment to the Incentive Plan whereby an aggregate of 133,910 shares were added to the original 133,845 shares currently reserved under the Incentive Plan. At December 31, 2008, 184,044 options had been granted under the Incentive Plan.

Stock options are periodically granted under the Incentive Plan to executive officers and other employees. All stock options authorized under the Incentive Plan are required to be granted with an exercise price not less than 100% of fair market value of AB&T’s common stock on the date of the grant.

The following table sets forth information regarding equity awards granted to Messrs. Sudyk, Ayscue and Triplett that were outstanding as of December 31, 2008.

401(k) Savings Plan. Alliance has a 401(k) Plan covering employees. Alliance makes matching contributions on the first 3% of an employee’s compensation which is contributed to the 401(k) Plan. On employee contributions that exceed 3% of such employee’s compensation, Alliance makes matching contributions equal to 50% of such employee contributions up to an additional 1.5% of such employee’s compensation.

Alliance has, had, and expects in the future to have, transactions in the ordinary course of business with certain of its current directors, nominees for director, executive officers and their associates. All loans included in such transactions will be made on substantially the same terms, including interest rates, repayment terms and collateral, as those prevailing for comparable transactions with other persons at the time such loans were made, and will not involve more than the normal risk of collectability or present other unfavorable features.

Loans made by Alliance to directors and executive officers are subject to the requirements of Regulation O of the Board of Governors of the Federal Reserve System. Regulation O requires, among other things, prior approval of the Board of Directors with any “interested director” not participating, dollar limitations on amounts of certain loans and prohibits any favorable treatment being extended to any director or executive officer in any of Alliance’s lending matters. To the best knowledge of the management of Alliance, Regulation O has been complied with in its entirety.

If a quorum is not present at the AB&T Special Meeting, or if there are insufficient shares of AB&T common stock, or of AB&T preferred stock, represented at the Special Meeting, being voted in the affirmative, or being voted at all, to vote on or approve the Agreement and merger, AB&T’s management will likely propose to adjourn the meeting until a later date and time to allow time it to solicit additional proxy cards needed to establish a quorum or additional votes needed to approve the Agreement and merger. In that event, a proposal would be submitted for voting by the shareholders represented at the Special Meeting to adjourn the meeting and reconvene it at a later date.

AB&T shareholders who sign a proxy card and return it to AB&T will be authorizing the AB&T Proxies to vote their shares according to the AB&T Proxies’ best judgment on matters incident to the conduct of the AB&T Special Meeting, including routine adjournments of the meeting. That authority will permit the AB&T Proxies to vote shares in favor of an adjournment if a quorum is not present at the meeting, or if an adjournment is needed for most other purposes. However, that general authority will not permit the AB&T Proxies to vote shares in favor of an adjournment for the purpose of soliciting additional votes needed to approve the Agreement and merger. A separate proposal is included in the proxy card that accompanies this Joint Proxy Statement/Prospectus in which AB&T’s shareholders are asked to give instructions to the AB&T Proxies on how their shares should be voted in the event a proposal is submitted to adjourn the meeting to allow additional time to solicit votes needed to approve the Agreement and merger.

If you vote in favor of this proposal, you will authorize the AB&T Proxies to vote your shares in favor of one or more adjournments of the Special Meeting for up to a total of 120 days, if necessary, to allow additional time to solicit votes needed to approve the Agreement and merger. The general authority given to the AB&T Proxies in your proxy card to vote your shares on matters incident to the conduct of the Special Meeting will authorize them to vote your shares according to their best judgment on adjournments for any other reason.

Prior to the organization of AB&T as the bank holding company, Alliance was subject to the informational requirements of Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and it filed reports and other information, including annual reports, quarterly reports and proxy statements, with the Federal Deposit Insurance Corporation (the “FDIC”) under the 1934 Act. Copies of the reports Alliance filed are on file with the FDIC and are available for inspection at the offices of the FDIC’s Accounting and Securities Disclosure Section located at Room F-6043, 550 17th Street, N.W., Washington, DC 20429. You also may obtain copies of Alliance’s reports by calling the FDIC’s Accounting and Securities Disclosure Section at (202) 898-8913 or, by facsimile at (202) 898-8505.

A copy of AB&T’s 2008 Annual Report on Form 10-K, will be sent without charge to any AB&T shareholder upon his or her written request. Requests should be sent to Daniel C. Ayscue at AB&T Financial Corporation, 292 West Main Avenue, Gastonia, North Carolina 28052.

AB&T is subject to the informational requirements of Sections 13 and 15(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and it files reports and other information, including annual reports, quarterly reports and proxy statements, with the Securities and Exchange Commission (the “SEC”) under the 1934 Act. AB&T’s SEC file number is 000-53249. You may read and copy any information filed by AB&T with the SEC:

AB&T and Alliance’s Internet website address is www.alliancebankandtrust.com. Information included on this website is not part of this Joint Proxy Statement/Prospectus. AB&T will provide electronic or paper copies, free of charge upon request, of AB&T’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act. Requests for copies should be directed by mail to Daniel C. Ayscue, President and Chief Executive Officer, at 292 W. Main Avenue, Gastonia, North Carolina 28052, or by telephone at (704) 867-5828.

If the merger is completed, then AB&T will not have a 2009 annual meeting of shareholders. However, in the event that the merger is not completed, there will be a 2009 annual meeting and, based on the date of the upcoming Special Meeting, any shareholder proposal, other than a nomination for election as a director, that is intended to be presented for action at that annual meeting would have to have been received by AB&T’s Corporate Secretary in writing at its address listed below no later than February 3, 2009, to have been considered timely received for inclusion in the proxy statement and proxy card that AB&T would distribute in connection with that meeting. Written notice of a shareholder proposal (other than a nomination) intended to be presented at AB&T’s annual meeting, but which is not intended to be included in AB&T’s proxy statement and form of appointment of proxy, would have to have been received by AB&T’s Corporate Secretary at the address listed below no later than April 18 , 2009, for that proposal to be considered timely received for purposes of the discretionary authority of the proxies for shareholders at that meeting to vote on other matters presented for action at the meeting.

However, if AB&T does have a 2009 annual meeting, it likely will be held during 2009 and the deadlines for submitting shareholder proposals will be earlier than the dates listed above. In that event, AB&T will announce the earlier deadline in its earliest possible quarterly filing on Form 10-QSB or in a Current Report on Form 8-K.

In order for a proposal to be included in AB&T’s proxy materials for a particular meeting, the person submitting the proposal must own, beneficially or of record, at least 1% or $2,000 in market value, whichever is less, of AB&T’s common stock entitled to be voted on that proposal at the meeting, must have held those shares for a period of at least one year, and must continue to hold them through the date of the meeting. Also, the proposal and the shareholder submitting it must comply with certain other eligibility and procedural requirements contained in SEC rules.

The following discussion describes AB&T’s and Alliance’s results of operations for 2008 as compared to 2007, and 2007 as compared to 2006, and also analyzes AB&T’s and Alliance’s financial condition as of December 31, 2008 as compared to December 31, 2007. Like most community banks, AB&T and Alliance derive most of their income from interest received on loans and investments. AB&T’s and Alliance’s primary source of funds for making these loans and investments is deposits, on which they pay interest. Consequently, one of the key measures of AB&T’s and Alliance’s success is their amount of net interest income, or the difference between the income on their interest-earning assets, such as loans and investments, and the expense on their interest-bearing liabilities, such as deposits. Another key measure is the spread between the yield AB&T and Alliance earn on these interest-earning assets and the rate they pay on their interest-bearing liabilities.

AB&T and Alliance have included a number of tables to assist in the description of these measures. For example, the “Average Balances” table shows the average balance in 2007 and 2008 of each category of assets and liabilities, as well as the yield earned or the rate paid with respect to each category. A review of this table shows that AB&T’s and Alliance’s loans typically provide higher interest yields than do other types of interest earning assets, which is why AB&T and Alliance intend to channel a substantial percentage of their earning assets into their loan portfolio. AB&T and Alliance also track the sensitivity of their various categories of assets and liabilities to changes in interest rates, and they have included an “Interest Sensitivity Analysis” table to help explain this. Finally, AB&T and Alliance have included a number of tables that provide detail about their investment securities, loans, and deposits and other borrowings.

Naturally, there are risks inherent in all loans, so AB&T and Alliance maintain an allowance for loan losses to absorb probable losses on existing loans that may become uncollectible. AB&T and Alliance establish and maintain this allowance by charging a provision for loan losses against their operating earnings. In the “Provision and Allowance for Loan Losses” section, AB&T and Alliance have included a detailed discussion of this process, as well as several tables describing their allowance for loan losses and the allocation of this allowance among various categories of loans.

In addition to earning interest on AB&T’s and Alliance’s loans and investments, they earn income through fees and other expenses charged to customers. AB&T and Alliance describe the various components of this noninterest income, as well as noninterest expense, in the “Noninterest Income and Expense” section.

The following discussion and analysis also identifies significant factors that have affected AB&T’s and Alliance’s financial position and operating results during the periods included in the accompanying financial statements. AB&T and Alliance encourage you to read this discussion and analysis in conjunction with the financial statements and the related notes and the other statistical information also included in this report.

The following selected financial data for the years ended December 31, 2008 and 2007 is derived from the consolidated financial statements and other data of AB&T Financial Corporation. The selected financial data should be read in conjunction with the Registrant’s financial statements, including the accompanying notes, included elsewhere herein.

The following discussion should be read in conjunction with the preceding “Selected Financial Data” and AB&T’s Financial Statements and the Notes thereto and the other financial data included elsewhere in this Annual Report. The financial information provided in certain tables below has been rounded in order to simplify its presentation. However, the ratios and percentages provided below are calculated using the detailed financial information contained in the Financial Statements, the Notes thereto and the other financial data included elsewhere in this Annual Report.

AB&T Financial Corporation and Alliance Bank and Trust are headquartered in Gastonia, North Carolina. The principal business activity of Alliance is to provide banking services to domestic markets, principally in the Gastonia and Shelby, North Carolina metropolitan area. Deposits are insured by the Federal Deposit Insurance Corporation.

In 2004, Alliance completed an initial public offering of its common stock in which it sold a total of 1,065,030 shares of common stock at $11.00 per share. Proceeds of the offering were used to pay organizational costs and provide the initial capital for Alliance.

In January 2007, Alliance completed a secondary offering of its common stock in which it sold a total of 1,339,100 shares of its common stock at an offering price of $9.85 per share. Gross proceeds from the offering were $13,190,135, less offering expenses of $928,111. Proceeds from the offering were used to support the growth of Alliance.

On May 22, 2007, the shareholders of Alliance approved a plan of corporate reorganization under which Alliance became a wholly owned subsidiary of AB&T Financial Corporation, which was organized for that purpose by the Alliance’s board of directors. Pursuant to the reorganization, AB&T issued all shares of its common stock in exchange for all of the outstanding common shares of Alliance on May 14, 2008.

On February 16, 2009, AB&T entered into an Agreement and Plan of Merger (the Merger Agreement) with 1^st Financial Services Corporation (1^st Financial) pursuant to which AB&T will merge with and into 1^st Financial (the Merger). The Board of Directors of AB&T approved the Merger Agreement and the transactions contemplated in it on February 12, 2009. The Board of Directors of 1^st Financial approved the Merger Agreement and the transactions contemplated in it on February 13, 2009. Upon the consummation of the Merger, each share of the Common Stock of AB&T issued and outstanding at the effective time of the merger will be converted into and exchanged for the right to receive 1.175 shares of the Common Stock of 1^st Financial. Each share of preferred stock of AB&T issued and outstanding at the effective time of the Merger shall be converted into and exchanged for the right to receive one share of the preferred stock of 1^st Financial. Options to purchase shares of AB&T Stock will be converted into options to purchase shares of 1^st Financial Stock based on the exchange ratio. The outstanding warrants to purchase shares of AB&T common stock will be converted into warrants to purchase shares of 1^st Financial common stock based on the exchange ratio. The Merger is intended to constitute a tax-free reorganization under the Internal Revenue Code of 1986, as amended.

AB&T applied and was approved for participation in the “TARP” Capital Purchase Program in late 2008. On January 23, 2009, AB&T issued and sold to the Treasury (1) 3,500 shares of AB&T’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (2) a warrant to purchase 80,153 shares of AB&T’s common stock for an aggregate purchase price of $3.5 million in cash. The preferred stock qualifies as Tier 1 capital.

For the year ended December 31, 2008, compared with year ended December 31, 2007

Net interest income decreased $688,354 or 13.96% in 2008 from $4,931,331 in 2007. Although the average loan portfolio increased $29,630,118 or 28.28% from 2007 to 2008, the decrease in net interest income was due primarily to a decrease in net interest spread which decreased from 3.16% in 2007 to 2.25% in 2008. The components of interest income were from loans, including fees of $8,267,849, federal funds sold of $205,415, and investment income of $252,287, and interest earning deposits of $84,135.

AB&T’s net interest spread and net interest margin were 2.25% and 2.76%, respectively, in 2008 compared to 3.16% and 4.07%, respectively, in 2007. Yields on most earning assets decreased in 2008. Yields on average earning assets decreased from 8.14% in 2007 to 5.72% in 2008. Yields on average interest-bearing liabilities decreased from 4.98% in 2007 to 3.47% in 2008.

The provision for loan losses was $1,312,969 in 2008 compared to $572,898 in 2007. The charges to the provision were primarily to maintain the allowance for loan losses at a level sufficient to cover possible future losses in the loan portfolio. Impaired loans as of December 31, 2008 increased to $5,043,946 from $863,880 as of December 31, 2007. Impaired loans as of December 31, 2008 were made up largely of three credits, two participated credits facilities, as well as an operating company closely tied to the residential construction industry. All three credits are currently within various stages of workouts and management feels that loss provisions placed against these credits are appropriate at this time.

Noninterest income decreased $100,473, or 40.52%, to $147,478 in 2008 from $247,951 in 2007. The largest component of noninterest income was from service charges on deposit accounts which increased $107,696 or 73.48%, to $254,257 for the year ended December 31, 2008, when compared to 2007 as a result of increased deposit account volume. There were losses on the sale of other real estate in 2008 of $190,470, compared to a gain on the sale of other real estate in 2007 of $40,242.

Noninterest expense increased $617,836, or 19.02%, to $3,866,169 in 2008 from $3,248,333 in 2007. The largest component of noninterest expense was salaries and employee benefits which increased $281,221, or 14.32%, to $2,245,302 for the year ended December 31, 2008. Other operating expenses increased $263,373, or 27.12%, to $1,234,622 for the year ended December 31, 2008. The increase in other operating expenses in 2008 was largely due to an increase in other professional fees which increased to $130,158 in 2008 from $57,211 in 2007. The increase in professional fees was primarily a result of professional fees associated with management’s assessment of internal controls under Sarbanes-Oxley Section 404.

AB&T’s and Alliance’s net loss was $513,797 in 2008 compared to a net income of $829,263 in 2007. The net loss in 2008 is after the recognition of an income tax benefit of $274,886, and the net income in 2007 is after the recognition of an income tax expense of $528,788. The income tax expense was based on an effective tax rate of 34.85% and 38.94% for 2008 and 2007, respectively. The decrease in income and subsequent net loss for 2008 was driven by multiple factors based upon the economic environment in which Alliance is currently operating. However, two primary factors in the decline of income were the historically low levels of interest rates after 400 basis points of rate reductions by the Federal Reserve. This pushed net interest margins much lower than prior periods thus reducing net interest income, a primary source of Alliance’s revenue. A second factor was the increase in provision for loan losses that Alliance added during the year. During the year ending December 31, 2008 Alliance added $1,312,969 to the provision, an increase of $740,071 or 129% over the prior year.

For the year ended December 31, 2007, compared with year ended December 31, 2006

Net interest income increased $1,114,161 or 29.19% in 2007 from $3,817,170 in 2006. The increase in net interest income was due primarily to an increase in average earning assets, which increased $30,374,671, or 33.42%, due to continued growth in the loan portfolio. The components of interest income were from loans,

including fees of $9,042,477, federal funds sold of $365,880, investment income of $137,304 and interest earned on deposits of $320,221.

AB&T’s net interest spread and net interest margin were 3.16% and 4.07%, respectively, in 2007 compared to 3.62% and 4.20%, respectively, in 2006. Yields on most earning assets decreased in 2007. Yields on average earning assets decreased from 8.33% in 2006 to 8.14% in 2007. Yields on average interest-bearing liabilities increased from 4.71% in 2006 to 4.98% in 2007.

The provision for loan losses was $572,898 in 2007 compared to $501,391 in 2006. The charges to the provision were primarily to maintain the allowance for loan losses at a level sufficient to cover possible future losses in the loan portfolio.

Noninterest income increased $82,424, or 49.79%, to $247,951 in 2007 from $165,527 in 2006. The largest component of noninterest income was from service charges on deposit accounts which increased $59,359, or 68.07%, to $146,561 for the year ended December 31, 2007, when compared to 2006 as a result of increased deposit account volume.

Noninterest expense increased $603,479, or 22.82%, to $3,248,333 in 2007 from $2,644,854 in 2006. The largest component of noninterest expense was salaries and employee benefits which increased $359,945, or 22.44%, to $1,964,081 for the year ended December 31, 2007. Other operating expenses increased $172,832, or 21.65%, to $971,249 for the year ended December 31, 2007.

AB&T’s and Alliance’s net income was $829,263 in 2007 compared to a net income of $501,747 in 2006. The net income in 2007 is after the recognition of an income tax expense of $528,788, and the net income in 2006 is after the recognition of an income tax expense of $334,705. The income tax expense was based on an effective tax rate of 38.94% and 40.01% for 2007 and 2006, respectively.

General. For an established financial institution, the largest component of net income is its net interest income, which is the difference between the income earned on assets and interest paid on deposits and borrowings used to support such assets. Net interest income is determined by the yields earned on AB&T’s and Alliance’s interest-earning assets and the rates paid on interest-bearing liabilities, the relative amounts of interest-earning assets and interest-bearing liabilities, and the degree of mismatch and the maturity and repricing characteristics of interest-earning assets and interest-bearing liabilities. This net interest income divided by average interest-earning assets represents net interest margin.

Average Balances, Income and Expenses and Rates. The following tables set forth, for the periods indicated, certain information related to their average balance sheet and their average yields on assets and average costs of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities and are then annualized. Average balances have been derived from the daily balances throughout the period indicated.

Analysis of Changes in Net Interest Income. Net interest income can also be analyzed in terms of the impact of changing rates and changing volume. The following table reflects the extent to which changes in interest rates and changes in the volume of earning assets and interest-bearing liabilities have affected AB&T’s interest income and interest expense during the periods indicated. Information on changes in each category attributable to (i) changes due to volume (change in volume multiplied by prior period rate), (ii) changes due to rates (changes in rates multiplied by prior period volume) and (iii) changes in rate/volume (change in rate multiplied by the change in volume) is provided as follows:

Interest Sensitivity. AB&T and Alliance monitor and manage the pricing and maturity of their assets and liabilities in order to diminish the potential adverse impact that changes in interest rates could have on net interest income. The principal monitoring technique employed by AB&T and Alliance is the measurement of interest sensitivity “gap”, which is the positive or negative dollar difference between assets and liabilities that are subject to interest rate repricing within a given period of time. Interest rate sensitivity can be managed by repricing assets or liabilities, selling securities available for sale, replacing an asset or liability at maturity, or adjusting the interest rate during the life of an asset or liability. Managing the amount of assets and liabilities repricing in this same time interval helps to hedge the risk and minimize the impact on net interest income of rising or falling interest rates.

The following table sets forth AB&T’s and Alliance’s interest rate sensitivity at December 31, 2008.

The above table reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their repricing or maturity dates. Overnight federal funds are reflected at the earliest pricing interval due to the immediately available nature of the instruments. Debt securities are reflected at each instrument’s ultimate maturity date. Interest-bearing deposits in other banks are reflected at their contractual maturity date. Scheduled payment amounts of fixed rate amortizing loans are reflected at each scheduled payment date. Scheduled payment amounts of variable rate amortizing loans are reflected at each scheduled payment date until the loan may be repriced contractually; the unamortized balance is reflected at that point. Interest-bearing liabilities with no contractual maturity, such as savings deposits and interest-bearing transaction accounts, are reflected in the earliest repricing period due to contractual arrangements which give Alliance the opportunity to vary the rates paid on those deposits within a thirty-day or shorter period. Fixed rate time deposits, principally certificates of deposit, are reflected at their contractual maturity date. Other borrowings, which consist of federal funds

purchased and securities sold under agreements to repurchase, are reflected at their contractual maturity date. Federal Home Loan Bank advances are reflected at their contractual maturity dates.

AB&T and Alliance generally would benefit from increasing market rates of interest when they have an asset-sensitive gap position and generally would benefit from decreasing market rates of interest when they are liability-sensitive. AB&T and Alliance are cumulatively asset sensitive over all periods. However, their gap analysis is not a precise indicator of their interest sensitivity position. The analysis presents only a static view of the timing of maturities and repricing opportunities, without taking into consideration that changes in interest rates do not affect all assets and liabilities equally. Net interest income may be impacted by other significant factors in a given interest rate environment, including changes in the volume and mix of earning assets and interest-bearing liabilities.

General. AB&T and Alliance have developed policies and procedures for evaluating the overall quality of their credit portfolio and the timely identification of potential problem credits. On a quarterly basis, their Board of Directors reviews and approves the appropriate level of their allowance for loan losses based upon management’s recommendations, the results of the internal monitoring and reporting system, and an analysis of economic conditions in their market.

Additions to the allowance for loan losses, which are expensed as the provision for loan losses on their income statement, are made periodically to maintain the allowance at an appropriate level based on management’s analysis of the risk inherent in the loan portfolio. Loan losses and recoveries are charged or credited directly to the allowance. The amount of the provision is a function of the level of loans outstanding, the level of nonperforming loans, the amount of loan losses actually charged against the reserve during a given period, and current and anticipated economic conditions.

AB&T’s and Alliance’s allowance for loan losses is based upon judgments and assumptions about risk elements in the portfolio, future economic conditions, and other factors affecting borrowers. The process includes identification and analysis of loss potential in various portfolio segments utilizing a credit risk grading process and specific reviews and evaluations of significant problem credits. In addition, management monitors the overall portfolio quality through observable trends in delinquencies, charge-offs, and general and economic conditions in the service area. The adequacy of the allowance for loan losses and the effectiveness of their monitoring and analysis system are also reviewed periodically by banking regulators.

Based on present information and an ongoing evaluation, AB&T considers the allowance for loan losses to be adequate to meet presently known and inherent risks in the loan portfolio. AB&T’s and Alliance’s judgment about the adequacy of the allowance is based upon a number of assumptions about future events which AB&T and Alliance believe to be reasonable but which may or may not be accurate. Thus, there can be no assurance that charge-offs in future periods will not exceed the allowance for loan losses in 2008 or that additional increases in the allowance for loan losses will not be required. AB&T and Alliance do not allocate the allowance for loan losses to specific categories of loans but evaluate the adequacy on an overall portfolio basis utilizing a risk grading system.

The following table sets forth certain information with respect to AB&T’s and Alliance’s allowance for loan losses and the composition of charge-offs and recoveries for the years ended December 31, 2008 and 2007.

Nonperforming Assets. As of December 31, 2008 and 2007, loans in nonaccrual status totaled $2,692,504 and $863,881, respectively. Loans past due ninety days or more and still accruing interest as of December 31, 2008 and 2007, were $8,613 and $597,811, respectively. Assets held as other real estate totaled $2,296,290 and $820,844 in 2008 and 2007, respectively.

AB&T’s and Alliance’s policy with respect to nonperforming assets is as follows. Accrual of interest will be discontinued on a loan when AB&T and Alliance believe, after considering economic and business conditions and collection efforts that the borrower’s financial condition is such that the collection of interest is doubtful. A delinquent loan will generally be placed in nonaccrual status when it becomes 90 days or more past due. When a loan is placed in nonaccrual status, all interest which has been accrued on the loan but remains unpaid will be reversed and deducted from current earnings as a reduction of reported interest income. No additional interest will be accrued on the loan balance until the collection of both principal and interest becomes reasonably certain. When a problem loan is finally resolved, there may ultimately be an actual writedown or charge-off of the principal balance of the loan which would necessitate additional charges to earnings.

Potential Problem Loans. At December 31, 2008, through AB&T’s and Alliance’s internal review mechanisms, AB&T and Alliance had identified $1,722,862 of criticized loans and $5,569,588 of classified loans. The results of this internal review process are considered in determining AB&T’s and Alliance’s assessment of the adequacy of the allowance for loan losses.

AB&T’s and Alliance’s criticized loans decreased from $2,020,720 at December 31, 2007 to $1,722,862 at December 31, 2008. However, total classified loans increased from $1,473,793 at December 31, 2007 to $5,569,588 at December 31, 2008. The increase in classified loans as of period end is made up of a limited number of credits. Two of these credits were “purchased participations” which Alliance, in conjunction with the lead Banks, is working through resolutions to minimize loss exposure to Alliance. Alliance also has a credit facility to an operating entity closely tied to the residential building industry which has been negatively impacted by the deterioration in the construction industry. Other credits included within this category are secured with real estate holdings and Alliance is currently working to resolve the impairment and minimize a negative impact to Alliance.

Noninterest Income. The largest component of noninterest income was service charges on deposit accounts.

The following table sets forth the principal components of noninterest income for the years ended December 31, 2008 and 2007.

Noninterest Expense. Salaries and employee benefits comprised the largest component of noninterest expense and totaled $2,245,302 for the year ended December 31, 2008 as compared to $1,964,081 for the year ended December 31, 2007. Other operating expenses totaled $1,234,622 for the year ended December 31, 2008, compared to $971,249 for the year ended December 31, 2007.

The following table sets forth the primary components of noninterest expense for the years ended December 31, 2008 and 2007.

General. At December 31, 2008, AB&T and Alliance had total assets of $170,310,305, consisting principally of $137,734,564 in net loans, $6,009,494 in investments, $9,008,817 in federal funds sold, $4,157,724 in net premises, furniture and equipment, and $8,159,812 in cash and due from banks compared to December 31, 2007 when Alliance had total assets of $147,215,505, an increase of 15.69%. Total assets in 2007 consisted principally of $118,153,191 in net loans, $4,807,187 in investments, $14,226,695 in federal funds sold, $3,715,291 in net premises, furniture and equipment and $4,233,921 in cash and due from banks.

At December 31, 2008, Alliance had liabilities totaling $146,116,204, consisting principally of $121,318,018 in deposits, $1,068,339 in federal funds purchased and securities sold under agreements to repurchase, and $23,570,000 in advances from the Federal Home Loan Bank. This was an increase of 19.04% over the total liabilities at December 31, 2007 which totaled $122,741,783 and consisted principally of $103,785,483 in deposits, $5,610,411 in federal funds purchased and securities sold under agreements to repurchase, and $13,000,000 in advances from Federal Home Loan Bank.

At December 31, 2008 shareholders’ equity equaled $24,194,101, a decrease of 1.14% over the 2007 year ending equity balance of $24,473,722. This decrease is primarily due to a net loss for the year of $513,797.

Loans. Loans are the largest category of earning assets and typically provide higher yields than the other types of earning assets. Associated with the higher loan yields are the inherent credit and liquidity risks which AB&T and Alliance attempt to control and counterbalance. Loans averaged $134,393,383 in 2008 as compared to $104,763,265 in 2007. At December 31, 2008 total loans were $139,670,266 or 16.86% higher than the December 31, 2007 balance of $119,523,426.

The following table sets forth the composition of the loan portfolio by category at December 31, 2008 and 2007 and highlights AB&T’s and Alliance’s general emphasis on real-estate lending.

The largest component of loans in AB&T’s and Alliance’s loan portfolio is real estate mortgage loans. At December 31, 2008 real estate mortgage loans totaled $91,708,000 and represented 65.66% of the total loan portfolio. At December 31, 2007, real estate mortgage loans totaled $75,749,000 and represented 63.38% of the total loan portfolio.

In the context of this discussion, a “real estate mortgage loan” is defined as any loan, other than a loan for construction purposes, secured by real estate, regardless of the purpose of the loan. It is common practice for financial institutions in Alliance’s market area to obtain a security interest in real estate whenever possible, in addition to any other available collateral. This collateral is taken to reinforce the likelihood of the ultimate repayment of the loan and tends to increase the magnitude of the real estate loan portfolio component.

Residential 1 to 4 family real estate loans totaled $48,815,000 at December 31, 2008 and $39,254,000 at December 31, 2007. Residential 1 to 4 family real estate loans consist of first and second mortgages on single or multi-family residential dwellings. Nonresidential real estate loans, which include commercial loans and other loans secured by multi- family properties and farmland, totaled $71,487,000 at December 31, 2008 and $62,900,000 at December 31, 2007. The demand for residential and commercial real estate loans in the market remains strong due to the low interest rate environment.

AB&T’s and Alliance’s loan portfolio also includes consumer loans. At December 31, 2008 and 2007, consumer loans totaled $1,048,000 and $1,127,000 and represented 0.75% and 0.94% of the total loan portfolio, respectively.

AB&T’s and Alliance’s loan portfolio reflects the diversity of their market. AB&T’s and Alliance’s home office is located in Gastonia, North Carolina and AB&T and Alliance have branches in Shelby and Kings

Mountain, North Carolina. AB&T and Alliance expect the area to remain stable with continued growth in the near future. The diversity of the economy creates opportunities for all types of lending. AB&T and Alliance do not engage in foreign lending.

The repayment of loans in the loan portfolio as they mature is also a source of liquidity for Alliance. The following table sets forth AB&T’s and Alliance’s loans maturing within specified intervals at December 31, 2008.

The information presented in the above table is based on the contractual maturities of the individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval as well as modification of terms upon their maturity. Consequently, AB&T and Alliance believe this treatment presents fairly the maturity and repricing structure of the loan portfolio shown in the above table.

Investment Securities. The investment securities portfolio is also a component of AB&T’s and Alliance’s total earning assets and includes securities available for sale and nonmarketable equity securities. Total securities available for sale averaged $3,975,873 in 2008 as compared to $2,605,535 in 2007. Total nonmarketable equity securities averaged $1,186,370 in 2008 as compared to $344,273 in 2007. At December 31, 2008, the total securities portfolio was $6,009,494 as compared to $4,807,187 at December 31, 2007.

The following table sets forth the scheduled maturities and average yields of securities available for sale at December 31, 2008. The table excludes nonmarketable equity securities.

Other attributes of the securities portfolio, including yields and maturities, are discussed above in “ — Net Interest Income — Interest Sensitivity.”

Short-Term Investments. Short-term investments, which consist primarily of federal funds sold, averaged $10,263,858 in 2008 and $7,359,221 in 2007. At December 31, 2008 and 2007, short-term investments totaled

$9,008,817 and $14,226,695, respectively. These funds are an important source of AB&T’s and Alliance’s liquidity. Federal funds are generally invested in an earning capacity on an overnight basis.

Deposits. Average total deposits totaled $113,340,907 during 2008 as compared to $98,876,830 during 2007. At December 31, 2008, total deposits were $121,318,018 as compared to $103,785,483 at December 31, 2007. Average interest-bearing liabilities totaled $131,427,862 in 2008 as compared to $99,098,167 in 2007.

The following table sets forth AB&T’s and Alliance’s deposits by category as of December 31, 2008 and 2007.

Core deposits, which exclude certificates of deposit of $100,000 or more, provide a relatively stable funding source for AB&T’s and Alliance’s loan portfolio and other earning assets. AB&T’s and Alliance’s core deposits were $44,403,929 at December 31, 2008.

Deposits, and particularly core deposits, have been a primary source of funding and have enabled both AB&T and Alliance to meet short-term and long-term liquidity needs. AB&T and Alliance anticipate that such deposits will continue to be AB&T’s and Alliance’s primary source of funding in the future. AB&T’s and Alliance’s loan-to-deposit ratio was 115.13% and 115.16% at December 31, 2008 and 2007, respectively. The maturity distribution of AB&T’s and Alliance’s time deposits over $100,000 at December 31, 2008, is set forth in the following table:

Time deposits over $100,000 in the aggregate amount of $19,683,000 had scheduled maturities within three months, and approximately $48,179,000, or 62.64%, had maturities within twelve months. Large certificate of deposit customers tend to be extremely sensitive to interest rate levels, making these deposits less reliable sources of funding for liquidity planning purposes than core deposits.

Federal Home Loan Bank Advances. Total advances from the Federal Home Loan Bank were $23,570,000 at December 31, 2008, compared to $13,000,000 at December 31, 2007. The average of Federal Home Loan Bank advances was $19,796,421 during 2008, compared to $2,463,014 during 2007. Advances from the Federal Home Loan Bank serve as a secondary funding source. Advances from the Federal Home Loan Bank mature at different periods as discussed in the notes to the financial statements and are secured by Alliance’s investment in Federal Home Loan Bank stock and real estate loan portfolio.

Other Borrowings. Other borrowings, which consist of federal funds purchased and securities sold under agreements to repurchase, averaged $2,739,648 in 2008 as compared to $1,536,874 in 2007 and totaled $1,068,339 at December 31, 2008 and $5,610,411 at December 31, 2007. The maximum amount at any month end in 2008 was $8,567,865 and had a weighted average interest rate during the year of 3.30%. The maximum amount at any month end in 2007 was $7,586,991 and had a weighted average interest rate during the year of 5.33%. The repurchase agreements are collateralized by investment securities.

AB&T and Alliance are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on AB&T’s and Alliance’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, Alliance must meet specific capital guidelines that involve quantitative measures of Alliance’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. AB&T’s and Alliance’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require AB&T and Alliance to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 capital and 8% for total risk-based capital.

AB&T and Alliance are also required to maintain capital at a minimum level based on quarterly average assets, which is known as the leverage ratio. Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

AB&T and Alliance exceeded the regulatory capital requirements at December 31, 2008 and 2007 as set forth in the following table.

Through AB&T’s and Alliance’s operations, AB&T and Alliance have made contractual commitments to extend credit in the ordinary course of AB&T’s and Alliance’s business activities. These commitments are legally binding agreements to lend money to AB&T’s and Alliance’s customers at predetermined interest rates

for a specified period of time. At December 31, 2008, AB&T and Alliance had issued commitments to extend credit of $12,131,000 through various types of commercial lending arrangements. All of these commitments to extend credit had variable rates. AB&T also had standby letters of credit which totaled $180,000.

The following table sets forth the length of time until maturity for unused commitments to extend credit at December 31, 2008.

AB&T and Alliance evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by them upon extension of credit, is based on AB&T’s and Alliance’s credit evaluation of the borrower. Collateral varies but may include accounts receivable, inventory, property, plant and equipment, and commercial and residential real estate.

AB&T and Alliance have adopted various accounting policies which govern the application of accounting principles generally accepted in the United States in the preparation of AB&T’s and Alliance’s financial statements. AB&T’s and Alliance’s significant accounting policies are described in the footnotes to the consolidated financial statements at December 31, 2008 as filed with AB&T’s and Alliance’s annual report on Form 10-K. Certain accounting policies involve significant judgments and assumptions which have a material impact on the carrying value of certain assets and liabilities. These accounting policies are considered to be critical accounting policies. The judgments and assumptions used are based on historical experience and other factors, which are believed to be reasonable under the circumstances. Because of the nature of the judgments and assumptions, actual results could differ from these judgments and estimates which could have a material impact on the carrying values of assets and liabilities and results of operations.

AB&T and Alliance believe the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of the consolidated financial statements. Refer to the portion of this discussion that addresses the allowance for loan losses for a description of AB&T’s and Alliance’s processes and methodology for determining AB&T’s and Alliance’s allowance for loan losses.

Liquidity management involves monitoring AB&T’s and Alliance’s sources and uses of funds in order to meet their day-to-day cash flow requirements while maximizing profits. Liquidity represents their ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Without proper liquidity management, AB&T and Alliance would not be able to perform the primary function of a financial intermediary and would, therefore, not be able to meet the needs of the communities AB&T and Alliance serve.

Liquidity management is made more complex because different balance sheet components are subject to varying degrees of management control. For example, the timing of maturities of the investment portfolio is very predictable and subject to a high degree of control at the time investment decisions are made. However, net deposit inflows and outflows are far less predictable and are not subject to nearly the same degree of control. AB&T and Alliance also have the ability to obtain funds from various financial institutions should the need arise. The amount available under such agreements was $15,400,000 at December 31, 2008. In addition, AB&T and Alliance have the ability to borrow from the Federal Home Loan Bank. AB&T’s and Alliance’s available credit with the Federal Home Loan Bank was $1,930,000 at December 31, 2008.

Unlike most industrial companies, the assets and liabilities of financial institutions such as Alliance are primarily monetary in nature. Therefore, interest rates have a more significant effect on Alliance’s performance than do the effects of changes in the general rate of inflation and change in prices. In addition, interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. As discussed previously, management seeks to manage the relationships between interest sensitive assets and liabilities in order to protect against wide interest rate fluctuations, including those resulting from inflation.

Statements contained in this report, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Registrant with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as “believe”, “expect”, “anticipate”, “should”, “might”, “planned”, “estimated”, and “potential”. Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Registrant that are subject to various factors which could cause actual results to differ materially form these estimates. These factors include, but are not limited to, general economic conditions, changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting Alliance’s operations, pricing, products and services.

The business and operations of 1^st Financial and Mountain 1^st, and of AB&T and Alliance, are subject to extensive federal and state governmental regulation and supervision. The following is a brief summary of certain statutes and rules and regulations that apply to 1^st Financial and Mountain 1^st, and to AB&T and Alliance. This summary is qualified in its entirety by reference to the particular statute and regulatory provisions referred to below and is not intended to be an exhaustive description of the statutes or regulations applicable to their business. Supervision, regulation and examination by the regulatory agencies are intended primarily for the protection of depositors rather than their shareholders.

1^st Financial and AB&T are bank holding companies registered with the Federal Reserve Board (the “FRB”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Both are subject to supervision and examination by, and the regulations and reporting requirements of, the FRB. Under the BHCA, a bank holding company’s activities are limited to banking, managing or controlling banks, or engaging in other activities the FRB determines are closely related and a proper incident to banking or managing or controlling banks.

The BHCA prohibits a bank holding company from acquiring direct or indirect control of more than 5.0% of the outstanding voting stock, or substantially all of the assets, of any financial institution, or merging or consolidating with another bank holding company or savings bank holding company, without the FRB’s prior approval. Additionally, the BHCA generally prohibits bank holding companies from engaging in a nonbanking activity, or acquiring ownership or control of more than 5.0% of the outstanding voting stock of any company that engages in a nonbanking activity, unless that activity is determined by the FRB to be closely related, and a proper incident, to banking. In approving an application to engage in a nonbanking activity, the FRB must consider whether that activity can reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices.

The law imposes a number of obligations and restrictions on bank holding companies and their insured bank subsidiaries designed to minimize potential losses to depositors and the FDIC insurance funds. For example, if a bank holding company’s insured bank subsidiary becomes “undercapitalized,” that bank holding company is required to guarantee the bank’s compliance (subject to certain limits) with the terms of any capital restoration plan filed with its federal banking agency. A bank holding company is required to serve as a source of financial strength to its bank subsidiaries and to commit resources to support bank subsidiaries in circumstances in which, absent that policy, it might not do so. Under the BHCA, the FRB may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary if the FRB determines that the activity or control constitutes a serious risk to the financial soundness and stability of a bank subsidiary of a bank holding company.

Mountain 1^st and Alliance are both North Carolina chartered banks. Their deposits are insured under the FDIC’s Deposit Insurance Fund (“DIF”), and they are subject to supervision and examination by, and the regulations and reporting requirements of, the FDIC and the North Carolina Commissioner of Banks (the “Commissioner”). The FDIC and the Commissioner are Mountain 1^st’s and Alliance’s primary federal and state banking regulators. Neither Mountain 1^st nor Alliance is a member bank of the Federal Reserve System.

As insured banks, Mountain 1^st and Alliance are prohibited from engaging as principal in any activity that is not permitted for national banks unless (1) the FDIC determines that the activity or investment would not pose a significant risk to the DIF, and (2) that bank is, and continues to be, in compliance with the capital standards that apply to it. Mountain 1^st and Alliance also are prohibited from directly acquiring or retaining any equity investment of a type or in an amount that is not permitted for national banks.

The FDIC and the Commissioner regulate all areas of Mountain 1^st’s and Alliance’s business, including their payments of dividends and other aspects of their operations. They examine both banks regularly, and Mountain 1^st and Alliance must furnish these regulators with periodic reports containing detailed financial and other information about their affairs. The FDIC and the Commissioner have broad powers to enforce laws and regulations that apply to Mountain 1^st and Alliance and to require either of them to correct conditions that affect safety and soundness. These powers include issuing cease and desist orders, imposing civil penalties, removing officers and directors, and otherwise intervening in their operations if these regulators believe their examinations of the Mountain 1^st or Alliance, or the reports either files, indicate a need to exercise these powers.

Mountain 1^st ’s and Alliance’s business also is influenced by prevailing economic conditions and governmental policies, both foreign and domestic, and by the monetary and fiscal policies of the Federal Reserve Board. Although neither bank is a member bank of the Federal Reserve System, the Federal Reserve Board’s actions and policy directives determine to a significant degree the cost and availability of funds Mountain 1^st and Alliance can obtain from money market sources for lending and investing. These actions and policy directives also influence, directly and indirectly, the rates of interest the Mountain 1^st and Alliance pay on their time and savings deposits and the rates they charge on loans.

1^st Financial and AB&T each is required to comply with the capital adequacy standards established by the FRB for bank holding companies. Mountain 1^st and Alliance each is required to comply with the capital adequacy standards established by the FDIC for insured banks. The FRB and the FDIC have promulgated risk-based capital and leverage capital guidelines for determining the adequacy of the capital of a bank holding company or a bank, and all applicable capital standards must be satisfied for a bank holding company or a bank to be considered in compliance with these capital requirements.

Under the risk-based capital measure, the minimum ratio (“Total Capital Ratio”) of an entity’s total capital (“Total Capital”) to its risk-weighted assets (including certain off-balance-sheet items, such as standby letters of credit) is 8.0%. At least half of Total Capital must be composed of common equity, undivided profits, minority interests in the equity accounts of consolidated subsidiaries, qualifying noncumulative perpetual preferred stock, a limited amount of cumulative perpetual preferred stock, and, for bank holding companies, qualifying trust preferred securities, less goodwill and certain other intangible assets (“Tier 1 Capital”). The remainder (“Tier 2 Capital”) may consist of certain subordinated debt, certain hybrid capital instruments and other qualifying preferred stock, and a limited amount of loan loss reserves. A bank or bank holding company that does not satisfy minimum capital requirements may be required to adopt and implement a plan acceptable to its federal banking regulator to achieve an adequate level of capital.

On , 2009, Mountain 1^st’s Total Capital Ratio was % and its ratio of Tier 1 Capital to risk-weighted assets (“Tier 1 Capital Ratio”) was %. These levels exceeded the minimum required levels under the FDIC’s standards. On the same date, 1^st Financial’s Total Capital Ratio, at %, and its Tier 1 Capital Ratio, at %, exceeded minimum required levels under the FRB’s standards.

On , 2009, Alliance’s Total Capital Ratio was 7% and its Tier 1 Capital Ratio was %. These levels exceeded the minimum required levels under the FDIC’s standards. On the same date, AB&T’s Total Capital Ratio, at %, and its Tier 1 Capital Ratio, at %, exceeded minimum required levels under the FRB’s standards.

Under the leverage capital measure, the minimum ratio (the “Leverage Capital Ratio”) of Tier 1 Capital to average assets, less goodwill and certain other intangible assets, is 3.0% for entities that meet certain specified criteria, including having the highest regulatory rating. All others generally are required to maintain an additional cushion of 100 to 200 basis points above the stated minimum. The FDIC’s guidelines also provide that banks experiencing internal growth or making acquisitions will be expected to maintain strong capital positions

substantially above the minimum levels without significant reliance on intangible assets, and the FDIC has indicated that it will consider a bank’s “Tangible Leverage Ratio” (deducting all intangibles) and other indicia of capital strength in evaluating proposals for expansion or new activities. On , 2009, 1^st Financial’s Leverage Capital Ratio was % and Mountain 1^st’s Leverage Capital Ratio was %, which exceeded the required minimum levels. On the same date, AB&T’s Leverage Capital Ratio was % and Alliance’s Leverage Capital Ratio was %, which also exceeded the required minimum levels.

A bank’s capital category is determined for the purpose of applying “prompt corrective action” rules adopted by the various federal banking regulators, and they do not necessarily constitute an accurate representation of a bank’s overall financial condition or prospects for other purposes. (See “— Prompt Corrective Action” on page .) A failure to meet capital guidelines could subject a bank holding company or bank to a variety of enforcement remedies under those rules, including the issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on the taking of brokered deposits, and certain other restrictions on its business. As described below, substantial additional restrictions can be imposed on FDIC-insured banks that fail to meet applicable capital requirements.

The FRB and the FDIC also consider interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance-sheet position) in evaluating an entity’s capital adequacy. Banks with excessive interest rate risk exposure are required to hold additional amounts of capital against their exposure to losses resulting from that risk. The regulators also require banks to incorporate market risk components into their risk-based capital. Under these market risk requirements, capital is allocated to support the amount of market risk related to a bank’s trading activities.

Federal law establishes a system of prompt corrective action to resolve the problems of undercapitalized institutions. Under this system, the federal banking regulators have established five capital categories (“well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized”). The regulators are required to take certain mandatory supervisory actions, and they are authorized to take other discretionary actions, with respect to institutions in the three undercapitalized categories. The severity of any actions taken will depend upon the capital category in which an institution is placed. Generally, subject to a narrow exception, current federal law requires the banking regulators to appoint a receiver or conservator for an institution that is critically undercapitalized.

Under the final agency rules implementing the prompt corrective action provisions, an institution is deemed to be “well capitalized” if it (1) has a Total Capital Ratio of 10.0% or greater, a Tier 1 Capital Ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or greater, and (2) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the appropriate federal banking agency. An institution is considered to be “adequately capitalized” if it has a Total Capital Ratio of 8.0% or greater, a Tier 1 Capital Ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater. A depository institution that has a Total Capital Ratio of less than 8.0%, a Tier 1 Capital Ratio of less than 4.0%, or a Leverage Ratio of less than 4.0%, is considered to be “undercapitalized.” A depository institution that has a Total Capital Ratio of less than 6.0%, a Tier 1 Capital Ratio of less than 3.0%, or a Leverage Ratio of less than 3.0%, is considered to be “significantly undercapitalized,” and an institution that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.” For purposes of the regulation, the term “tangible equity” includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards, plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets with certain exceptions. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating.

An institution that is categorized as “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized” is required to submit an acceptable capital restoration plan to its federal banking agency. An

“undercapitalized” institution also is generally prohibited from increasing its average total assets, making acquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In addition, the appropriate federal banking agency is given authority with respect to any “undercapitalized” depository institution to take any of the actions it is required to or may take with respect to a “significantly undercapitalized” institution as described above if it determines that those actions are necessary to carry out the purpose of the law. On , 2009, 1^st Financial and AB&T each had the requisite capital levels to qualify as “well capitalized.”

Under North Carolina law, 1^st Financial and AB&T are authorized to pay dividends as declared by their Boards of Directors, provided that no such distribution results in insolvency on a going concern or balance sheet basis. However, although 1^st Financial and AB&T are legal entities separate and distinct from their bank subsidiaries, their principal sources of funds with which they can pay dividends to their shareholders are dividends received from their bank subsidiaries. For that reason, 1^st Financial’s and AB&T’s abilities to pay dividends effectively are subject to the same limitations that apply to Mountain 1^st and Alliance.

Under North Carolina law, commercial banks, such as Mountain 1^st and Alliance, may pay dividends only from undivided profits. However, if their surplus is less than 50% of their paid-in capital stock, their directors may not declare any cash dividend until they have transferred from undivided profits to surplus 25% of undivided profits or any lesser percentage necessary to raise surplus to an amount equal to 50% of paid-in capital. The Commissioner’s approvals of Mountain 1^st’s and Alliance’s organizations during 2004 were conditioned on the requirement that, for a period of three years following the time they began banking operations, neither would pay any cash dividend without the Commissioner’s prior approval. These prohibitions expired in 2007. Mountain 1^st’s Board of Directors announced the Mountain 1^st’s first, and so far only, cash dividend in the fourth quarter of 2007. AB&T and Alliance have not paid any cash dividends to date.

In addition to these restrictions, other state and federal statutory and regulatory restrictions apply to 1^st Financial’s and AB&T’s payment of cash dividends on their common stock. As insured depository institutions, federal law prohibits a bank from making any capital distributions, including payment of a cash dividend, if it is “undercapitalized” (as that term is defined in the Federal Deposit Insurance Act), or would become undercapitalized after making the distribution. Also, the FDIC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. The FDIC has issued policy statements that provide that insured banks generally should pay dividends only from their current operating earnings, and, under the Federal Deposit Insurance Act, no dividend may be paid by an insured bank while it is in default on any assessment due the FDIC. If the FDIC believes that a bank is engaged in, or is about to engage in, an unsafe or unsound practice, the FDIC may require, after notice and hearing, that bank cease and desist from that practice. A bank’s payment of dividends also could be affected or limited by other factors, such as events or circumstances which lead the FDIC to require (as further described below) that it maintain capital in excess of regulatory guidelines. In the future, 1^st Financial’s and AB&T’s ability to declare and pay cash dividends will be subject to their respective Boards of Directors’ evaluations of operating results, capital levels, financial condition, future growth plans, general business and economic conditions, and tax and other relevant considerations. In addition, 1^st Financial and AB&T are also subject to further limitations on cash dividends due to the United States Treasury’s purchases of preferred stock. See “CPP Participation” below.

1^st Financial’s management expects to maintain an above average growth rate for the foreseeable future. Therefore, 1^st Financial’s management anticipates that any further cash dividends paid for the foreseeable future will be nominal and that the majority of the 1^st Financial’s earnings will be retained to support expected growth. Neither 1^st Financial nor AB&T can assure you that, in the future, it will have funds available to pay cash dividends or that, even if funds are available, it will pay dividends in any particular amounts or at any particular times, or that it will pay dividends at all.

On February 8, 2006, President Bush signed the Federal Deposit Insurance Reform Act of 2005 (“FDIRA”). Among other things, FDIRA changes the Federal deposit insurance system by:

FDIRA also authorized the FDIC to revise the current risk-based assessment system, subject to notice and comments, and caps the amount of the DIF at 1.50% of domestic deposits. The FDIC must issue cash dividends, awarded on a historical basis, for the amount of the DIF over the 1.50% ratio. Additionally, if the DIF exceeds 1.35% of domestic deposits at year-end, the FDIC must issue cash dividends, awarded on a historical basis, for half the amount of the excess.

On October 3, 2008, President Bush signed the Emergency Economic Stabilization Act of 2008 (“ESSA”), which temporarily raised the basic limit on federal deposit insurance coverage from $100,000 to $250,000 per depositor. The temporary increase in deposit insurance coverage became effective upon the President’s signature. The legislation provides that the basic deposit insurance limit will return to $100,000 after December 31, 2009.

Pursuant to the EESA, the maximum deposit insurance amount per depositor has been increased from $100,000 to $250,000 until December 31, 2009. Additionally, on October 14, 2008, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with President Bush, the Secretary of the Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to establish its Temporary Liquidity Guarantee Program (“TLGP”). Under the transaction account guarantee program of the TLGP, the FDIC will fully guarantee, until the end of 2009, all non-interest-bearing transaction accounts, including NOW accounts with interest rates of 0.5 percent or less and IOLTAs (lawyer trust accounts). The TLGP also guarantees all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008, and June 30, 2009, with a stated maturity greater than 30 days. All eligible institutions were permitted to participate in both of the components of the TLGP without cost for the first 30 days of the program. Following the initial 30 day grace period, institutions were assessed at the rate of ten basis points for transaction account balances in excess of $250,000 for the transaction account guarantee program and at the rate of either 50, 75, or 100 basis points of the amount of debt issued, depending on the maturity date of the guaranteed debt, for the debt guarantee program. Institutions were required to opt-out of the TLGP if they did not wish to participate. 1^st Financial chose not to participate (opt-out) of debt guarantee program component of the TGLP, but elected to participate in the deposit guarantee program. AB&T did not opt out of either component of the TGLP.

Under the Federal Deposit Insurance Reform Act of 2005 (“FDIRA”), the FDIC uses a revised risk-based assessment system to determine the amount of a bank’s deposit insurance assessment based on the evaluation of the probability that the DIF will incur a loss with respect to that bank. That evaluation takes into consideration risks attributable to different categories and concentrations of assets and liabilities and any other factors the FDIC considers to be relevant, including information obtained from the Commissioner. A higher assessment rate results in an increase in the assessments a bank pays the FDIC for deposit insurance.

Under the Federal Deposit Insurance Act, the FDIC may terminate a bank’s deposit insurance if it finds that bank has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operation, or has violated applicable laws, regulations, rules, or orders.

The FDIC is responsible for maintaining the adequacy of the DIF, and the amount a bank pays for deposit insurance is influenced not only by the assessment of the risk it poses to the DIF, but also by the adequacy of the insurance fund at any time to cover the risk posed by all insured institutions. FDIC insurance assessments could be increased substantially in the future if the FDIC finds such an increase to be necessary in order to adequately maintain the DIF.

On February 27, 2009, the Board of Directors of the Federal Deposit Insurance Corporation (FDIC) voted to amend the restoration plan for the Deposit Insurance Fund. The Board took action by imposing a special assessment on insured institutions of 20 basis points, implementing changes to the risk-based assessment systems, and increased regular premium rates for 2009, which banks must pay on top of the special assessment. The 20 basis point special assessment on the industry will be as of June 30, 2009 payable on September 30, 2009. On March 5, 2009, the FDIC Chairman announced that the FDIC intends to lower the special assessment from 20 basis points to 10 basis points. The approval of the cutback is contingent on whether Congress approves legislation that would expand the FDIC’s line of credit with the Treasury to $100 billion. Legislation to increase the FDIC’s borrowing authority on a permanent basis is also expected to advance to Congress.

For the year ended December 31, 2008, Mountain 1^st paid approximately $395 thousand in deposit insurance premiums. As a result of the special assessment and an approximate 100% increase in regular assessments, Mountain 1^st projects it will experience an increase in FDIC assessment expense by approximately $1.8 million from 2008 to 2009 if the special assessment is 20 basis points, and approximately $1.3 million if the special assessment is 10 basis points. Alliance paid approximately $84 thousand in deposit insurance for the year ended December 31, 2008. Alliance projects it will experience an increase in FDIC assessment expense by approximately $318,000 thousand from 2008 to 2009 if the special assessment is 20 basis points, and approximately $201 thousand if the special assessment is 10 basis points

All FDIC rates, including the special assessment, are subject to change at the discretion of the Board of Directors of the FDIC.

Under the Community Reinvestment Act (“CRA”), as implemented by regulations of the FDIC, an insured institution has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution’s discretion to develop, consistent with the CRA, the types of products and services that it believes are best suited to its particular community. The CRA requires the federal banking regulators, in connection with their examinations of insured institutions, to assess the institutions’ records of meeting the credit needs of their communities, using the ratings of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance,” and to take those records into account in its evaluation of certain applications by those institutions. All institutions are required to make public disclosure of their CRA performance ratings. In their most recent CRA examinations, both Mountain 1^st and Aliance received “satisfactory” ratings.

1^st Financial’s and AB&T’s common stock is registered under Section 12(g) of the Securities Exchange Act of 1934, so both 1^st Financial and AB&T file reports with the SEC. As a result of these registrations, the proxy and tender offer rules, insider trading reporting requirements, annual and periodic reporting, and other requirements of the Exchange Act apply to 1^st Financial and AB&T.

Although neither Mountain 1^st nor Alliance is a member of the Federal Reserve System, both are subject to the provisions of Sections 23A and 23B of the Federal Reserve Act. Section 23A places limits on the amount of:

Transactions of the type described above are limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, each of these transactions also must meet specified collateral requirements. Mountain 1^st and Alliance also must comply with other provisions designed to avoid purchasing low quality assets from an affiliate.

Section 23B of the Federal Reserve Act, among other things, prohibits a bank from engaging in these affiliate transactions unless the transactions are on terms substantially the same, or at least as favorable to the bank or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies.

Federal law also places restrictions on a bank’s ability to extend credit to executive officers, directors, principal shareholders, and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated third parties, and (2) must not involve more than the normal risk of repayment or present other unfavorable features.

Mountain 1^st and Alliance are subject to the Commissioner’s loans to one borrower limits, which are substantially the same as those applicable to national banks. Under these limits, no loans or extensions of credit to any borrower outstanding at one time and not fully secured by readily marketable collateral shall exceed 15% of the unimpaired capital and unimpaired surplus of the bank. Loans and extensions of credit fully secured by readily marketable collateral may comprise an additional 10% of unimpaired capital and unimpaired surplus.

Under Federal Reserve Board regulations, Mountain 1^st and Alliance must maintain average daily reserves against their transaction accounts. They are not required to maintain reserves on the first $10.3 million of transaction accounts, but must maintain reserves equal to 3.0% on the aggregate balances of those accounts between $10.3 million and $44.4 million, and reserves equal to 10.0% on aggregate balances in excess of $44.4 million. The Federal Reserve Board may adjust these percentages. Because Mountain 1^st’s and Alliance’s reserves are required to be maintained in the form of vault cash or in a non-interest-bearing or low interest account at a Federal Reserve Bank or a correspondent bank, one effect of the reserve requirement is to reduce the amount of their interest-earning assets. During 2007, Mountain 1^st adopted an internal deposit reclassification system (approved by the Federal Reserve Board of Governors under Regulation D) whereby significant portions of interest-bearing and noninterest bearing transaction accounts were transferred to a non-reservable savings account status. As a result, all required reserves at December 31, 2008, and December 31, 2007, were met by the Mountain 1^st’s vault cash.

The Bank Holding Company Act, as amended by the interstate banking provisions of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking Law”), generally permits adequately capitalized and managed bank holding companies to acquire control of the assets of other banks, including branches, in any state. Acquisitions are subject to antitrust provisions that cap at 10.0% the portion of the total deposits of insured depository institutions in the United States that a single bank holding company may control, and generally cap at 30.0% the portion of the total deposits of insured depository institutions in a state that a single bank holding company may control. Under certain circumstances, states have the authority to increase or decrease the 30.0% cap, and states may set minimum age requirements of up to five years on target banks within their borders.

Subject to certain conditions, the Interstate Banking Law also permits interstate branching by allowing a bank in one state to merge with a bank located in a different state. Each state was allowed to accelerate the effective date for interstate mergers by adopting a law authorizing such transactions prior to June 1, 1997, or it could “opt out” and thereby prohibit interstate branching by enacting legislation to that effect prior to that date. The Interstate Banking law also permits banks to establish branches in other states by opening new branches or acquiring existing branches of other banks, provided the laws of those other states specifically permit that form of interstate branching. North Carolina has adopted statutes which, subject to certain conditions, authorize out-of-state bank holding companies and banks to acquire or merge with North Carolina banks and to establish or acquire branches in North Carolina.

The federal Gramm-Leach-Bliley Act enacted in 1999 (the “GLB Act”) dramatically changed various federal laws governing the banking, securities and insurance industries. The GLB Act permits bank holding companies to become “financial holding companies” and, in general (1) expands opportunities to affiliate with securities firms and insurance companies; (2) overrides certain state laws that would prohibit certain banking and insurance affiliations; (3) expands the activities in which banks and bank holding companies may participate; (4) requires that banks and bank holding companies engage in some activities only through affiliates owned or managed in accordance with certain requirements; (5) reorganizes responsibility among various federal regulators for oversight of certain securities activities conducted by banks and bank holding companies; and (6) requires banks to adopt and implement policies and procedures for the protection of the financial privacy of their customers, including procedures that allow customers to elect that certain financial information not be disclosed to certain persons.

Neither 1^st Financial nor AB&T has chosen to become a “financial holding company” and engage in expanded financial activities under the GLB Act.

The GLB Act has expanded opportunities for banks and bank holding companies to provide services and engage in other revenue-generating activities that previously were prohibited to them. However, this expanded authority also presents smaller banks with new challenges as their larger competitors are able to expand their services and products into areas that are not feasible for smaller, community oriented financial institutions.

The USA Patriot Act of 2001 was enacted in response to the terrorist attacks that occurred in the United States on September 11, 2001. The Act is intended to strengthen the ability of U.S. law enforcement and the intelligence community to work cohesively to combat terrorism on a variety of fronts. The Act’s impact on financial institutions of all kinds is significant and wide ranging. The Act contains sweeping anti-money laundering and financial transparency requirements and imposes various other regulatory requirements, including standards for verifying customer identification at account opening and rules to promote cooperation among

financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

The Sarbanes-Oxley Act of 2002, which became effective during 2002, is sweeping federal legislation addressing accounting, corporate governance and disclosure issues. The impact of the Sarbanes-Oxley Act is wide-ranging as it applies to all public companies and imposes significant new requirements for public company governance and disclosure requirements.

In general, the Sarbanes-Oxley Act mandated corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process and created a new regulatory body to oversee auditors of public companies. The Sarbanes-Oxley Act backed these requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud and created new criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.

The economic and operational effects of the Sarbanes-Oxley Act on public companies, including 1 ^st Financial and AB&T, have been and will continue to be significant in terms of the time, resources, and costs associated with compliance. Because the Act, for the most part, applies equally to larger and smaller public companies, 1^st Financial and AB&T continue to be presented with additional challenges as smaller, community-oriented financial institutions seeking to compete with larger financial institutions in their markets.

In response to recent extraordinary market turmoil, the Congress enacted the Emergency Economic Stabilization Act (“EESA”) in October 2008. EESA authorizes the Secretary of the Treasury to purchase or guarantee up to $700 billion in troubled assets from financial institutions under the Troubled Assets Relief Program (“TARP”). Pursuant to authority granted under EESA, the Secretary has created the TARP Capital Purchase Program (“CPP”) under which the Treasury Department will invest up to $250 billion in senior preferred stock of healthy U.S. banks and savings associations or their holding companies. Qualifying financial institutions may issue senior preferred stock with a value equal to not less than 1% of risk-weighted assets and not more than the lesser of $25 billion or 3% of risk-weighted assets.

Institutions participating in the TARP or CPP are required to issue warrants for common or preferred stock or senior debt to the Treasury. If an institution participates in the CPP or if the Secretary acquires a meaningful equity or debt position in the institution as a result of TARP participation, the institution is required to meet certain standards for executive compensation and corporate governance, including a prohibition against incentives to take unnecessary and excessive risks, recovery of bonuses paid to senior executives based on materially inaccurate earnings or other statements and a prohibition against agreements for the payment of golden parachutes. Institutions that sell more than $300 million in assets under TARP auctions or participate in the CPP will not be entitled to a tax deduction for compensation in excess of $500,000 paid to its chief executive or chief financial official or any of its other three most highly compensated officers. In addition, any severance paid to such officers for involuntary termination or termination in connection with a bankruptcy or receivership will be subject to the golden parachute rules under the Internal Revenue Code. Additional standards with respect to executive compensation and corporate governance for institutions that have participated or will participate in the TARP (including the CPP) were enacted as part of the ARRA, described below.

1^st Financial, on November 14, 2008, and AB&T, on January 23, 2009, entered into purchase agreements with the Treasury Department under the CPP. 1^st Financial, under its purchase agreement, issued 16,369 shares of its “Fixed Rate Cumulative Perpetual Preferred Stock, Series A,” with a liquidation amount per share equal to $1 thousand, for a total price of $16,369,000. AB&T, under its purchase agreement, issued 3,500 shares of its “Fixed Rate Cumulative Perpetual Preferred Stock, Series A,” with a liquidation amount per share equal to $1 thousand, for a total price of $3,500,000. The preferred stock is to pay cumulative dividends at a rate of 5% per year for the first five years and thereafter at a rate of 9% per year. Under their purchase agreements, 1^st Financial and AB&T may not redeem the preferred stock issued to the Treasury Department during the first three years except with the proceeds from a “qualified equity offering” (as defined in amended articles of incorporation adopted pursuant to their purchase agreements). However, under the ARRA, described below, it appears that 1^st Financial and AB&T may redeem the preferred stock at any time, without a “qualified equity offering”, provided they obtain the approvals of their primary federal regulator. After three years, 1^st Financial and AB&T may, at their option, redeem the preferred stock at par value plus accrued and unpaid dividends. The preferred stock is generally non-voting, but does have the right to vote as a class on the issuance of any senior preferred stock, any change in its terms, or any merger, exchange or similar transaction that would adversely affect its rights. The holder(s) of preferred stock also have the right to elect two directors if dividends have not been paid for six periods.

As part of its purchase of 1^st Financial’s and AB&T’s preferred stock, the Treasury Department received warrants to purchase (1) 276,815 shares of 1^st Financial’s common stock at a per share exercise price of $8.87, and (2) 80,153 shares of AB&T’s common stock at a per share exercise price of $6.55. These warrants provide for the adjustment of the exercise price and the number of shares of common stock issuable upon exercise pursuant to customary anti-dilution provisions, such as upon stock splits or distributions of securities or other assets to holders of common stock, and upon certain issuances of common stock at or below a specified price relative to the initial exercise price. The warrants expire ten years from their issuance dates. If, on or prior to December 31, 2009, 1^st Financial or AB&T receive aggregate gross cash proceeds of not less than the amounts the Treasury Department paid for the preferred stock from “qualified equity offerings” announced after the purchase dates, the number of shares of common stock issuable on the Treasury Department’s exercise of the warrant will be reduced by one-half of the original number of shares, taking into account all adjustments, underlying the warrant. Under the ARRA, the warrant would be liquidated upon the redemption of the preferred stock. Under the purchase agreements, the Treasury Department has agreed not to exercise voting power with respect to any shares of common stock issued upon exercise of the warrants.

Both the preferred stock and the warrant will be accounted for as components of Tier 1 capital.

Prior to November 14, 2011, in the case of 1^st Financial, and January 23, 2012, in the case of AB&T, unless the preferred stock has been redeemed or transferred by the Treasury Department to a third party, the Treasury Department’s consent will be required (1) for 1^st Financial to declare or pay any dividend or make any distribution on its common stock other than dividends not exceeding $0.10 per share of common stock per fiscal year, (2) for AB&T to declare or pay any dividend or make any distribution on its common stock, or (3) for either 1^st Financial or AB&T to redeem, purchase, or acquire any shares of their common stock or other equity or capital securities, other than in connection with benefit plans consistent with past practices and certain other circumstances specified in the purchase Agreements.

Congress enacted the American Recovery and Reinvestment Act of 2009 (“ARRA”) on February 17, 2009. ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, ARRA imposes certain new executive compensation and corporate governance obligations on all current and future CPP participants, including 1^st Financial and AB&T, until they have redeemed the preferred stock they sold to the Treasury Department. ARRA

also provides that CPP participants may redeem preferred stock purchased by the Treasury Department without regard to the three year holding period and without the need to raise new capital, subject to approval of their primary federal regulator. The executive compensation restrictions under ARRA (described below) are more stringent than those currently in effect under the CPP, but it is yet unclear how these executive compensation standards will relate to the similar standards recently announced by the Treasury Department, or whether the standards will be considered effective immediately or only after implementing regulations are issued by the Treasury Department.

ARRA amends Section 111 of the EESA to require the Secretary of the Treasury to adopt additional standards on executive compensation and corporate governance for CPP participants (including 1^st Financial and AB&T). The standards required to be established by the Secretary include, in part, (1) prohibitions on making golden parachute payments to senior executive officers and the next 5 most highly-compensated employees during such time as any obligation arising from financial assistance provided under the TARP remains outstanding (the “Restricted Period”), (2) prohibitions on paying or accruing bonuses or other incentive awards for certain senior executive officers and employees, except for awards of long-term restricted stock with a value equal to no greater than 1/3 of the subject employee’s annual compensation that do not fully vest during the Restricted Period or unless such compensation is pursuant to a valid written employment contract made prior to February 11, 2009, (3) requirements that TARP CPP participants provide for the recovery of any bonus or incentive compensation paid to their senior executive officers and their next 20 most highly-compensated employees based on statements of earnings, revenues, gains, or other criteria later found to be materially inaccurate, with the Secretary having authority to negotiate for reimbursement, and (4) a review by the Secretary of all bonuses and other compensation paid by TARP participants to senior executive employees and the next 20 most highly-compensated employees before the date of enactment of ARRA to determine whether such payments were inconsistent with the purposes of the Act.

ARRA also sets forth additional corporate governance obligations for TARP recipients, including requirements for the Secretary to establish standards that provide for semi-annual meetings of compensation committees of the board of directors to discuss and evaluate employee compensation plans in light of an assessment of any risk posed from such compensation plans. TARP recipients are further required by the to have in place company-wide policies regarding excessive or luxury expenditures, permit non-binding shareholder “say-on-pay” proposals to be included in proxy materials, and provide written certifications by the chief executive officer and chief financial officer with respect to compliance. The Secretary is required to promulgate regulations to implement the executive compensation and certain corporate governance provisions detailed in ARRA.

The federal banking agencies, including the FDIC, have developed joint regulations requiring annual examinations of all insured depository institutions by the appropriate federal banking agency, with some exceptions for small, well-capitalized institutions and state-chartered institutions examined by state regulators. These regulations also establish requirements for operational and managerial standards, asset quality, earnings, and stock valuation standards for insured depository institutions as well as compensation standards when such compensation would endanger the insured depository institution or would constitute an unsafe practice.

In addition, Mountain 1^st and Alliance are subject to various other state and federal laws and regulations, including state usury laws; laws relating to fiduciaries, consumer credit and equal credit; fair credit reporting laws, and laws relating to branch banking. As an insured North Carolina commercial banks, Mountain 1^st and Alliance are prohibited from engaging as principal in activities that are not permitted for national banks, unless (i) the FDIC determines that the activity would pose no significant risk to the deposit insurance fund and (ii) the bank is, and continues to be, in compliance with all applicable capital standards.

Authorized Capital. 1^st Financial’s authorized capital stock currently consists of 20,000,000 shares of $5.00 par value common stock, and 10,000,000 shares of no par value Class B stock, which 1^st Financial’s Board of Directors may authorize and issue from time to time, in one or more series, and fix and determine the relative rights, limitations and preferences of each series of shares at the time of issuance. 1^st Financial had 5,001,248 shares of its common stock issued and outstanding on , 2009. 1^st Financial’s Board of Directors has created “Series A” of its Class B stock, authorized the issuance of up to 20,000 shares of Series A, and issued 16,369 shares of Series A to the United States Treasury. Shares of 1^st Financial common stock represent equity interests in 1 ^st Financial and are not deposits or savings accounts and are not obligations of or guaranteed by 1^st Financial or Mountain 1^st. They are not insured by the FDIC or any other government agency and are subject to investment risk, including the possible loss of principal.

Voting Rights. Holders of 1^st Financial common stock are entitled to one vote per share held of record on all matters submitted to a vote of 1^st Financial’s shareholders. Holders of 1^st Financial preferred stock are entitled to very limited voting rights under North Carolina law and under 1^st Financial’s Articles of Incorporation.

The North Carolina Control Share Acquisition Act, in general, provides that shares of voting stock of a corporation (to which that Act applies) acquired in a “control share acquisition” (“Control Shares”) will have no voting rights unless those rights are granted by resolution adopted by the holders of at least a majority of the outstanding shares of the corporation entitled to vote in the election of directors, excluding shares held by the person who has acquired or proposes to acquire the Control Shares and excluding shares held by any officer or director who is also an employee of the corporation. “Control Shares” are defined as shares of a corporation acquired by any person which, when added to the shares already owned by that person, would entitle the person (except for the application of the Act) to voting power in the election of directors equal to or greater than (1) one-fifth of all voting power, (2) one-third of all voting power, or (3) a majority of all voting power. “Control share acquisition” means the acquisition by any person of beneficial ownership of Control Shares with certain exceptions, including an acquisition pursuant to certain agreements of merger or consolidation to which the corporation is a party, and purchases of shares directly from the corporation.

Election of Directors. 1^st Financial’s Bylaws provide that its Board of Directors is divided into three classes and directors are elected to staggered three-year terms, and that each year the terms of the directors in one class expire and directors in that class are elected for new three-year terms or until their respective successors have been duly elected and qualified. Members of 1^st Financial’s Board of Directors are elected each year at the annual meeting for terms of one year. Shareholders have no right to vote cumulatively in the election of 1^st Financial’s directors. The Bylaws further provide that 1^st Financial’s Board of Directors shall consist of not less than five nor more than 20 members, and the Board is authorized to set and change the actual number of directors from time to time within those limits.

Charter Amendments. Subject to certain conditions, an amendment to 1^st Financial’s charter, including an amendment to increase or change 1^st Financial’s authorized capital stock, may be effected if the amendment is recommended to 1^st Financial’s shareholders by the Board of Directors and if the votes cast by shareholders in favor of the amendment exceed the votes cast opposing the amendment.

Merger, Share Exchange, Sale of Assets and Dissolution. In general, North Carolina law requires that any merger, share exchange, voluntary liquidation or transfer of substantially all the assets (other than in the ordinary course of business) of a business corporation be recommended to its shareholders by its board of directors and be approved by the affirmative vote of the holders of at least a majority of the outstanding shares of its voting stock.

However, under the North Carolina Shareholder Protection Act, the affirmative vote of the holders of 95% of 1^st Financial’s outstanding voting shares (voting as a single class, but excluding shares owned by an “interested shareholder”) is required to approve certain business combinations between 1^st Financial and an entity which owns more than 10% of 1^st Financial’s voting shares.

Dividends. Holders of 1^st Financial common stock are entitled to dividends if and when declared by 1^st Financial’s Board of Directors from funds legally available, whether in cash or in stock. (See “ — Differences in Capital Stock of 1^st Financial and AB&T” below.)

Liquidation. Holders of 1^st Financial common stock are entitled, upon a liquidation, dissolution or winding up of 1^st Financial, to participate ratably in the distribution of assets legally available for distribution to holders of common stock.

Miscellaneous. 1^st Financial’s shareholders do not have preemptive rights to acquire other or additional shares which might be issued by 1^st Financial in the future, and they do not have any redemption, sinking fund or conversion rights. First-Citizens Bank & Trust Company currently serves as the registrar and transfer agent for 1^st Financial common stock.

“Anti-takeover” Charter Provisions. 1^st Financial’s Articles of Incorporation and Bylaws contain certain provisions that could be considered to be “anti-takeover” in nature and, under some circumstances, may be used as, or have the effect of, a deterrent to an acquisition or change in control of 1^st Financial, whether or not such a transaction was favored by 1^st Financial’s shareholders.

1^st Financial’s bylaws contain a shareholder-approved “staggered term” provision which divides its Board of Directors will be divided into three classes and provides for directors to serve staggered three-year terms. Each year the terms of directors in one class expire and directors in that class are to be elected for new three-year terms. The primary purpose of that provision is to encourage continuity on the Board of Directors rather than to establish barriers to a change of control or acquisition of by another entity. But the staggering of terms will lengthen the time it would take a person seeking to acquire control of 1^st Financial to replace its directors through the normal election process.

1^st Financial’s and Mountain 1^st’s articles of incorporation provide that, in deciding what is in the best interests of 1^st Financial and its shareholders and Mountain 1^st (including any proposed acquisition or change of control), the directors may, but are not required to, consider the effects of its decision on 1^st Financial’s and Mountain 1^st’s employees, depositors, customers, and creditors, and the communities in which 1^st Financial and Mountain 1 ^st operate. These articles specifically provide that the directors may consider in addition to immediate profits, (i) the business and financial condition and earnings prospects of the acquiror person or persons, including without limitation existing debt service and other financial obligations, and financial obligations that would be incurred in connection with the proposed transaction, (ii) the competence, experience, and integrity of the acquiring person or persons and its or their management, and (iii) the prospects for successful completion of the proposed transaction. Those interests could be considered in addition to the long-term and short-term interests of its shareholders. 1^st Financial believes the effect on those other constituencies would be a proper consideration for its Board in making decisions about proposed acquisitions or changes in control, but this provision could be used by 1^st Financial’s directors to deter an acquisition or change in control.

1^st Financial’s Bylaws provide, subject to certain limitations under North Carolina law, that they may be amended or repealed by either its Board of Directors or its shareholders. Therefore, 1^st Financial’s Board of Directors is authorized to amend or repeal Bylaws without the approval of 1^st Financial’s shareholders. However, a Bylaw adopted, amended or repealed by 1^st Financial’s shareholders may not be readopted, amended or repealed by the Board alone unless 1^st Financial’s Articles of Incorporation or a Bylaw adopted by its shareholders authorizes the Board of directors to adopt, amend or repeal that particular Bylaw or the Bylaws generally.

1^st Financial’s Bylaws provide that special meetings of shareholders may be called only by or at the direction of 1^st Financial’s Chief Executive Officer or Board of Directors. Therefore, shareholders have no separate right to call a meeting of shareholders or to require that a meeting be called.

General. Upon completion of the merger, AB&T’s common shareholders will receive 1^st Financial common stock for their AB&T common stock and will become common shareholders of 1^st Financial. Certain legal distinctions exist between owning AB&T common stock and owning 1^st Financial common stock.

The following is only a general summary of certain differences in the rights of holders of 1^st Financial common stock and those of holders of AB&T common stock. AB&T’s shareholders should consult with their own legal counsel with respect to specific differences and changes in their rights as a shareholder which will result from the merger.

Issuance of Preferred Stock. AB&T’s Articles of Incorporation authorize it to issue up to one million shares of preferred stock, which AB&T’s Board of Directors may authorize and issue from time to time, in one or more series, and fix and determine the relative rights, limitations and preferences of each series of shares at the time of issuance. AB&T has only issued 3,500 shares, so its Board may issue 996,500 additional shares of preferred stock. 1^st Financial’s Articles of Incorporation authorize it to issue up to 10 million shares of Class B stock, which 1^st Financial’s Board of Directors may authorize and issue from time to time, in one or more series, and fix and determine the relative rights, limitations and any preferences of each series of shares at the time of issuance. 1^st Financial has only issued 16,369 shares, so its Board may issue 9,983,631 additional shares of Class B stock.

Merger, Share Exchange, Sale of Assets or Dissolution. AB&T’s articles of incorporation contain a provision that requires that any merger, share exchange, sale of assets involving another company that is not approved by a majority of directors not affiliated with the other company involved must be approved by a two-thirds vote of the outstanding shares of all classes of capital stock. 1^st Financial’s charter does not contain such a provision.

1^st Financial’s charter permits, but does not require, directors considering a change of control to consider, in addition to the interests of 1^st Financial’s shareholders, the social and economic effects on employees, depositors, customers, creditors, and communities in which Mountain 1^st operates, and to consider in addition to immediate profits, (i) the business and financial condition and earnings prospects of the acquiror person or persons, including without limitation existing debt service and other financial obligations, and financial obligations that would be incurred in connection with the proposed transaction, (ii) the competence, experience, and integrity of the acquiring person or persons and its or their management, and (iii) the prospects for successful completion of the proposed transaction. AB&T’s charter does not contain such a provision.

Appraisal Rights and Rights of Dissenting Shareholders. Under Chapter 55, a shareholder of a corporation participant in certain major corporate transactions may, under varying circumstances, be entitled to appraisal rights pursuant to which such shareholder may receive cash in the amount of the “fair value” of his or her shares, as determined by a court, in lieu of the consideration he or she would otherwise receive in the transaction. However, Chapter 55 provides that holders of shares of a North Carolina corporation which has shares listed on a national securities exchange or which has at least 2,000 record shareholders are not entitled to dissenters’ rights unless certain requirements are met. Because 1^st Financial has at least 2,000 record shareholders, its shareholders generally have no rights to dissent from mergers, consolidations and certain other corporate transactions to which 1^st Financial is a party.

Removal of Directors. AB&T’s charter provides that shareholders may remove directors only in certain cases involving conviction of crimes involving dishonesty or exclusion or limitation of coverage under AB&T’s

bonds or insurance policies. 1^st Financial’s charter contains no such limitation, so shareholders may remove a director for any reason.

General Standards for Director Action. In considering any matter affecting 1^st Financial, its directors may consider the social and economic effects on employees, depositors, customers, creditors, and communities in which Mountain 1^st operates. AB&T’s charter does not contain such a provision.

Permissible Indemnification. In the case of a North Carolina corporation, Chapter 55 allows the corporation, by charter, bylaw, contract, or resolution, to indemnify or agree to indemnify its officers, directors, employees, and agents and any person who is or was serving at the corporation’s request as a director, officer, employee, or agent of another entity or enterprise or as a trustee or administrator under an employee benefit plan, against liability and expenses, including reasonable attorneys’ fees, in any proceeding (including without limitation a proceeding brought by or on behalf of the corporation itself) arising out of their status as such or their activities in any of the foregoing capacities as summarized herein. Any provision in a corporation’s charter or bylaws or in a contract or resolution may include provisions for recovery from the corporation of reasonable costs, expenses and attorneys’ fees in connection with the enforcement of rights to indemnification granted therein and may further include provisions establishing reasonable procedures for determining and enforcing such rights.

The corporation may indemnify such person against liability expenses incurred only where such person conducted himself or herself in good faith and reasonably believed (1) in the case of conduct in his or her official corporate capacity, that his or her conduct was in the corporation’s best interests, and (2) in all other cases, that his or her conduct was at least not opposed to the corporation’s best interests; and, in the case of a criminal proceeding, he or she had no reasonable cause to believe his or her conduct was unlawful. However, a corporation may not indemnify such person either in connection with a proceeding by or in the right of the corporation in which such person was adjudged liable to the corporation, or in connection with any other proceeding charging improper personal benefit to such person (whether or not involving action in an official capacity) in which such person was adjudged liable on the basis that personal benefit was improperly received.

Mandatory Indemnification. Unless limited by the corporation’s charter, Chapter 55 requires a North Carolina corporation to indemnify a director or officer of the corporation who is wholly successful, on the merits or otherwise, in the defense of any proceeding to which such person was a party because he or she is or was a director or officer of the corporation against reasonable expenses incurred in connection with the proceeding.

Advance for Expenses. Expenses incurred by a director, officer, employee, or agent of a North Carolina corporation in defending a proceeding may be paid by the corporation in advance of the final disposition of the proceeding as authorized by the board of directors in the specific case, or as authorized by the charter or bylaws or by any applicable resolution or contract, upon receipt of an undertaking by or on behalf of such person to repay amounts advanced, unless it ultimately is determined that such person is entitled to be indemnified by the corporation against such expenses.

Court-Ordered Indemnification. Unless otherwise provided in the corporation’s charter, a director or officer of the corporation who is a party to a proceeding may apply for indemnification to the court conducting the proceeding or to another court of competent jurisdiction. On receipt of an application, the court, after giving any notice the court deems necessary, may order indemnification if it determines either (1) that the director or officer is entitled to mandatory indemnification as described above, in which case the court also will order the corporation to pay the reasonable expenses incurred to obtain the court-ordered indemnification, or (2) that the director or officer is fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not such person met the requisite standard of conduct or was adjudged liable to the corporation in connection with a proceeding by or in the right of the corporation or on the basis that personal benefit was improperly received in connection with any other proceeding so charging (but if adjudged so liable, indemnification is limited to reasonable expenses incurred).

Parties Entitled to Indemnification. Chapter 55 defines “director” to include former directors and the estate or personal representative of a director. Unless its charter provides otherwise, a corporation may indemnify

and advance expenses to an officer, employee or agent of the corporation to the same extent as to a director and also may indemnify and advance expenses to an officer, employee or agent who is not a director to the extent, consistent with public policy, as may be provided in its charter or bylaws, by general or specific action of its board of directors, or by contract.

1^st Financial’s and Mountain 1^st’s Bylaws provide for indemnification of their directors and officers to the fullest extent permitted by North Carolina law and require their respective Boards of Directors to take all actions necessary and appropriate to authorize such indemnification.

Under North Carolina law, a corporation also may purchase insurance on behalf of any person who is or was a director or officer against any liability arising out of his status as such. 1^st Financial and Mountain 1^st currently maintain a directors’ and officers’ liability insurance policy and its coverage is applicable to all their directors and officers.

1^st Financial’s Articles of Incorporation provide, in a manner similar to AB&T’s bylaws, that to the fullest extent permitted by Chapter 55 as it exists or may be amended, no person who is serving or who has served as a director of 1^st Financial shall be personally liable to 1^st Financial or any of its shareholders or otherwise for monetary damages for breach of any duty as a director. Under Chapter 55, this provision will not affect a director’s liability for (1) acts or omissions that the director knew or believed were clearly in conflict with the best interests of the corporation, (2) unlawful distributions by the corporation, (3) a transaction in which the director derived an improper personal benefit, or (4) acts or omissions occurring before the date the provision becomes effective.

The validity of the 1^st Financial common stock to be issued in connection with the merger is being passed upon for 1^st Financial by Ward and Smith, P.A., Raleigh, North Carolina. Certain legal matters relating to the merger will be passed upon for AB&T by Gaeta & Eveson, P.A., Raleigh, North Carolina.

The consolidated financial statements of 1^st Financial as of December 31, 2008, which are included in this Joint Proxy Statement/Prospectus, have been audited by Brown, Edwards & Company, LLP, an independent registered public accounting firm, as indicated in their report which is included herein. The consolidated financial statements of 1^st Financial Services Corporation (formerly, Mountain 1^st Bank & Trust Company), as of December 31, 2007, and for each of the years in the two-year period ended December 31, 2007, which are included in this Joint Proxy Statement/Prospectus, have been audited by Elliott Davis, PLLC, an independent registered public accounting firm, as indicated in their report which is included herein.

The consolidated financial statements of AB&T Financial Corporation (formerly Alliance Bank & Trust Company), as of and for the two year period ended December 31, 2008, which are included in this Joint Proxy Statement/Prospectus, have been audited by Elliott Davis, PLLC, an independent registered public accounting firm, as indicated in their report which is included herein.

Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance to the company’s management and board of directors regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Under the supervision and with the participation of management, including the chief executive officer and chief financial officer, the Company conducted an evaluation of the effectiveness of internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control — Integrated Framework, management of the Company has concluded the Company maintained effective internal control over financial reporting, as such term is defined in Securities Exchange Act of 1934 Rules 13a-15(f), as of December 31, 2008.

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting can also be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

Management is also responsible for the preparation and fair presentation of the financial statements and other financial information contained in this report. The accompanying financial statements were prepared in conformity with U.S. generally accepted accounting principles and include, as necessary, best estimates and judgments by management.

This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting for the year ended December 31, 2008. The Company’s registered public accounting firm was not required to issue an attestation on its internal control over financial reporting pursuant to temporary rules of the Securities and Exchange Commission.

We have audited the accompanying consolidated balance sheet of 1st Financial Services Corporation as of December 31, 2008, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for the year then ended. 1st Financial Services Corporation’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The accompanying consolidated balance sheet of 1st Financial Services Corporation as of December 31, 2007, and the related consolidated statements of operations, changes in stockholders’ equity and comprehensive income, and cash flows for the years ended December 31, 2007 and 2006 were audited by other auditors whose report dated March 13, 2008, expressed an unqualified opinion on those statements.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstance, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1st Financial Services Corporation as of December 31, 2008, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying balance sheet of Mountain 1st Bank & Trust Company (the predecessor to 1^st Financial Services Corporation) as of December 31, 2007, and the related statements of operations, changes in stockholders’ equity and comprehensive income (loss) and cash flows for each of the two years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Mountain 1st Bank & Trust Company as of December 31, 2007, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income(Loss)

1^st Financial Services Corporation (“1^st Financial”), formed in May 2008, is the Bank holding company for Mountain 1^st Bank & Trust Company (the “Bank”). 1^st Financial has no other assets or liabilities other than its investment in the Bank. 1^st Financial’s business activity primarily consists of directing the activities of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank. 1^st Financial and the Bank are collectively referred to as the “Company” herein.

Mountain 1^st Bank & Trust (the “Bank”) is a federally insured non-member commercial bank incorporated and chartered under the laws of North Carolina on April 30, 2004 and commenced operations on May 14, 2004. The Bank provides financial services through its branch network located in western North Carolina and operates under the banking laws of North Carolina and the Rules and Regulations of the Federal Deposit Insurance Corporation. The Bank competes with other financial institutions and numerous other non-financial services commercial entities offering financial services products. The Bank is further subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory authorities. The Bank’s customers are principally located in western North Carolina.

The accounting and reporting policies of the Bank follow generally accepted accounting principles and general practices within the financial services industry. Following is a summary of the more significant policies.

The Bank reports its activities as a single business segment. In determining proper segment definition, the Bank considers the materiality of a potential segment and components of the business about which financial information is available and regularly evaluated, relative to resource allocation and performance assessment.

The consolidated financial statements include the accounts of 1^st Financial Services Corporation and its wholly-owned subsidiary Mountain 1^st Bank & Trust. All intercompany transactions and balances have been eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of income and expenses for the periods presented. Actual results could differ significantly from those estimates.

Material estimates that are particularly susceptible to significant change in the near-term relate to the determination of the allowance for loan losses.

For the purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, short-term interest-bearing deposits and federal funds sold. Cash and cash equivalents have maturities of three months or less. Accordingly, the carrying amount of such instruments is considered to be a reasonable estimate of fair value.

Management determines the appropriate classification of investment securities at the time of purchase. Securities are classified as held to maturity (HTM) when the Bank has both the positive intent and ability to hold the securities to maturity. HTM securities are stated at amortized cost. Securities that are bought and held principally for the purpose of selling in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. Securities not classified as HTM or trading are classified as available for sale (AFS). AFS securities are stated at fair value, with the unrealized gains and losses, net of income taxes, reported as a separate component of stockholders’ equity.

The fair value of securities is based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

A decline in the market value of any AFS or HTM security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, the Bank considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary. Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, and forecasted performance of the investee.

At December 31, 2008 and 2007, the Bank had no trading assets. At those dates, all of the Bank’s investment securities were classified as AFS or HTM.

Premiums and discounts are amortized or accreted over the life of the related security as an adjustment to yield using the effective-interest method. Dividend and interest income are recognized when earned. The cost of securities sold is based on the specific identification method. Gains and losses are recorded on the trade date.

The Bank, as a member institution is required to own stock in the Federal Home Loan Bank of Atlanta (FHLB). No ready market exists for this stock and it has no quoted market value, however, redemption of these stocks has historically been at par. At December 31, 2008, the Bank owned $3,251,700 in FHLB stock compared to $1,532,600 at December 31, 2007. Also, the Bank owns stock in its upstream correspondent, Silverton Bank (formerly the Bankers Bank of Atlanta, Georgia). The Bank’s investment in Silverton Bank stock totaled $423,528 at December 31, 2008 compared to $105,457 at December 31, 2007. Also included in restricted equity securities is an investment in Capital South Partners, LLC (a Small Business Investment Corporation) which totaled $862,500 at December 31, 2008 and 2007. Restricted Equity Securities also include a $500,000 and $102,000 investment made during 2008 in the Senior Housing Investment Fund and Pacific Coast Bankers Bank stock, respectively.

In December, 2007 the Bank purchased $6.0 million in life insurance policies on certain key employees and in January 2008 purchased an additional $5.0 million. These policies are recorded on the Bank’s balance sheet at their cash surrender value, or the amount that can be realized, and any income from these policies and changes in the net cash surrender values are recorded in Other Noninterest Income on the Bank’s Statement of Operations.

The Bank originates single family, residential first mortgage loans on a pre-sold, flow basis. Loans held for sale are carried at the lower of cost or fair value in the aggregate as determined by outstanding commitments from investors. At closing, these loans, together with their servicing rights, are sold to other financial institutions under prearranged terms. The Bank recognizes certain origination and service release fees upon the sale which are classified as mortgage origination income on the statements of operations.

Loans are generally stated at their outstanding unpaid principal balances net of an allowance for loan losses and net deferred fees and costs. Loan origination fees net of certain direct loan origination costs are deferred and amortized as a yield adjustment over the contractual life of the related loans using the level-yield method.

Interest on loans is recorded based on the principal amount outstanding. The Bank ceases accruing interest on loans (including impaired loans) when, in management’s judgment, the collection of interest appears doubtful or the loan is past due 90 days or more. Payments received on non-accrual loans generally are applied to principal first, and then to interest after all principal payments have been satisfied. Management may return a loan classified as nonaccrual to accrual status when the obligation has been brought current, has performed in accordance with its contractual terms over an extended period of time, and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

The allowance for loan and lease losses (ALLL) is established through provisions for losses charged against income. Loan amounts deemed to be uncollectible are charged against the ALLL, and subsequent recoveries, if any, are credited to the allowance. The ALLL represents management’s estimate of the amount necessary to absorb estimated probable losses in the loan portfolio. Management’s periodic evaluation of the adequacy of the allowance is based on individual loan reviews, past loan loss experience, economic conditions in the Bank’s market areas, the fair value and adequacy of underlying collateral, and the growth and loss attributes of the loan portfolio. This evaluation is inherently subjective as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. Thus, future additions to the ALLL may be necessary based on the impact of changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s ALLL. Such agencies may require the Bank to recognize adjustments to the ALLL based on their judgments about information available to them at the time of their examination.

A loan is considered impaired when full payment according to the terms of the loan agreement is not probable or when the terms of a loan are modified. The ALLL related to loans that are deemed impaired is based on discounted cash flows using the loan’s initial effective interest rate, the loan’s observable market price, or the fair value of the collateral for collateral dependent loans. At December 31, 2008 the only loans considered by the Bank to be impaired were one restructured loan which totaled $798 thousand and $10.0 million in non-accrual loans. At December 31, 2007 impaired loans were comprised of $1.3 million in non-accrual loans.

Real estate acquired in settlement of loans (ORE) consists of property acquired through a foreclosure proceeding or acceptance of a deed-in-lieu of foreclosure. Real estate acquired in settlement of loans is recorded initially at estimated fair value of the property less estimated selling costs at the date of foreclosure. The initial

recorded value may be subsequently reduced by additional write-downs, which are charged to earnings if the estimated fair value of the property less estimated selling costs declines below the initial recorded value. Costs related to the improvement of the property are capitalized, whereas those related to holding the property are expensed. Such properties are held for sale and, accordingly, no depreciation or amortization expense is recognized. As of December 31, 2008, the Bank held approximately $645 thousand of ORE. The Bank held no ORE at December 31, 2007.

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method and is charged to operations over the estimated useful lives of the assets which range from 2 to 15 years for leasehold improvements and 2 to 25 years for furniture and equipment.

Maintenance, repairs, renewals and minor improvements are charged to expense as incurred. Major improvements are capitalized and depreciated.

Advertising, promotional and other business development costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expensed in the period in which the direct mailings are sent.

At December 31, 2008, the Bank’s borrowings consisted of $48.0 million in borrowings from the Federal Home Loan Bank (FHLB), federal funds purchased of $237 thousand and securities sold under agreements to repurchase of $1.1 million. At December 31, 2007, the Bank’s borrowings consisted of $15.0 million in overnight borrowings from the FHLB, federal funds purchased totaling $7.9 million and securities sold under agreements to repurchase of $1.5 million.

The provision for income taxes consists of amounts currently payable to taxing authorities and the net change in income taxes payable or refundable in future years. Income taxes deferred to future years are determined using the asset and liability method. Under this method, deferred income taxes are determined based on temporary differences between the financial statement and tax bases of assets and liabilities using enacted tax rates expected to be in effect when such amounts are realized or settled.

In 2006, the FASB issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, the Bank adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on the Bank’s financial position.

On February 14, 2005, December 1, 2005 and December 5, 2006 the Bank effected 5-for-4 stock splits in the form of stock dividends. Net income (loss) per share information has been adjusted for all periods prior to the splits.

Basic income per share represents the net income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Dilutive income per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and warrants, and are determined using the treasury stock method. For the year ended December 31, 2008, basic weighted average shares outstanding totaled 4,997,027 and basic earnings per share amounted to $0.04 per share. Diluted weighted average shares totaled 5,211,060 which accounted for no dilution per share and resulted in fully diluted EPS of $0.04 for the year ended December 31, 2008. For the year ended December 31, 2007, basic weighted average shares outstanding totaled 4,988,604 and basic earnings per share (EPS) amounted to $0.71 per share. Diluted weighted average shares totaled 5,381,687 which accounted for dilution of $0.05 per share and resulted in fully diluted EPS for 2007 of $0.66 per share. For the year ended December 31, 2006, basic weighted average shares outstanding totaled 4.977,795 and basic earnings per share (EPS) amounted to $0.56 per share. Diluted weighted average shares totaled 5,442,835 which accounted for dilution of $0.05 per share and resulted in fully diluted EPS for 2006 of $0.51 per share.

Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) consists of unrealized gains and losses on investment securities available for sale, net of taxes. Comprehensive income (loss) is presented in the statements of stockholders’ equity and comprehensive income (loss).

In December 2004, the FASB issued SFAS No. 123(Revised), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) replaces SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS 123”), and supersedes APB Opinion No 25, “Accounting for Stock Issued to Employees” (“APB 25”). SFAS 123(R) requires compensation costs related to share-based payment transactions to be recognized ratably in the financial statements over the period that an employee provides service in exchange for the award. Public companies are required to adopt, and the Bank has adopted effective January 1, 2006, the new standard using a modified prospective method. Under the modified prospective method, companies are allowed to record compensation cost for new and modified awards over the related vesting period of such awards prospectively and record compensation cost prospectively on the nonvested portion, at the date of adoption, of previously issued and outstanding awards over the remaining vesting period of such awards. No change to prior periods presented is permitted under the modified prospective method. At December 31, 2006, the Bank had two stock-based payment plans, one for directors and another for employees, which is described below. Prior to January 1, 2006, the Bank, as permitted under SFAS 123, applied the intrinsic value method under APB 25 and related interpretations in accounting for its stock-based compensation plan.

Effective January 1, 2006, the Bank adopted the provisions of SFAS 123(R) thereby expensing employee stock-based compensation using the fair value method prospectively for all awards granted, modified, or settled on or after January 1, 2006. The fair value at the date of grant of the stock option is estimated using the Black-Scholes option-pricing model based on assumptions noted in a table below. The dividend yield is based on estimated future dividend yields. The risk-free rate for periods within the contractual term of the share option is based on the U.S. Treasury yield curve in effect at the time of grant. Expected volatilities are generally based on historical volatilities. The expected term of share options granted is generally derived from historical experience. Compensation expense is recognized on a straight-line basis over the stock option vesting period. The impact of adoption of the fair value based method for expense recognition of employee awards resulted in net expense of

approximately $44 thousand for the year ended December 31, 2008 compared to $99 thousand for the year ended December 31, 2007.

The Bank’s stock option plans, which are stockholder approved, provide for stock options to be granted primarily to directors, officers and other key associates. Options granted under the directors’ stock option plan are non-incentive stock options while options granted under the employee stock option plan are incentive stock options. Share option awards are granted with an exercise price equal to, or higher than, the market price of the Bank’s shares at the date of grant. Options vest ratably over a pre-determined period, generally five years, and expire after ten years from the date of grant, except as discussed below. Share options awards provide for accelerated vesting if there is a change in control, as defined in the stock option plan. At December 31, 2008, no shares were available to be granted under the directors’ plan and 327,706 shares remained available for award under the employee plan. Of the 941,095 options awarded prior to December 31, 2005, 933,283 or 99.2% were fully vested at that date with the remaining shares fully vested during the first and second quarters of 2006.

As noted in Note 12, the Plans were established in 2004 subject to approvals of shareholders and the Commissioner, which occurred in June 2005. The Bank entered into stock option agreements during 2004 with directors and certain employees. Agreements executed in June and July of 2004 for options to purchase approximately 595 thousand shares (all share and per share amounts in this note have been adjusted for all stock splits) had an exercise price of $5.63 per share that was less than the market value of $10.35 per share of the Bank’s stock on the deemed grant date in June 2005. The difference between the exercise price and the market value of the stock was $4.72 per share (i.e. the intrinsic value). Compensation cost recognized in the year ended December 31, 2005 was approximately $2.8 million. This amount represents the per share intrinsic value based on the 595 thousand shares at the value of $4.72 per share.

Management believes that the over-the-counter (“OTC”) quoted market prices of the Bank’s stock do not reflect an accurate value of the stock since the stock is not traded in large volumes and the OTC bid and ask quotes are for very small share lots. The Plans themselves contemplate that there is no efficient market unless the stock is listed on an exchange. The Plans assign the responsibility to value the stock at each grant date to the Board of directors, until such time the Bank’s stock trades on a stock exchange. Management believes that this approach to valuation is consistent with the measurement principles established by APB 25.

The Bank engaged an investment banker to assist in the valuation of the Bank’s stock as of June 2005. The investment banker first concluded that the Bank’s stock does not freely trade on an established market, which is the condition required to be met by APB 25 when the value of the underlying stock is valued on a basis other than a quoted market price. Next the valuation considered the ratio of the market price of publicly traded (on an exchange) peer group banks in relation to their book values. This ratio was then applied to the book value of the Bank to estimate a value under this approach. The valuation also included a discounted cash flow analysis using discount rates of 13% to 15% applied to growth and performance assumptions provided by management. The results of the values obtained under the two methodologies were analyzed and a conclusion was reached by the Board of Directors that the value of the stock at the time the Plans were approved was $10.35 per share.

Under the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (“SFAS 123”) if a company elects to follow the intrinsic value method of measuring compensation cost under APB 25, proforma disclosures of compensation cost must be made as if the Bank had adopted the fair value recognition method under SFAS 123. The following table illustrates the effect on net income (loss) per share and earnings (loss) per share as if the fair value method had been applied to all outstanding and unvested awards in each of the periods presented: (dollars in thousands except per share data).

The weighted average fair value of options granted for the years ended December 31, 2008 and 2006 were $4.93 and $10.36, respectively. No options were granted during 2007.

Certain prior year amounts have been reclassified from service charges on deposit accounts to other service charges and fees in the financial statements to conform with the current year presentation. The reclassifications had no effect on previously reported net income or stockholders’ equity.

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 141(R), “Business Combinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a

bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The Company will assess the impact of SFAS 141(R) as future acquisitions occur.

Also, in December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51,” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Before this statement, limited guidance existed for reporting noncontrolling interests (minority interest). As a result, diversity in practice exists. In some cases minority interest is reported as a liability and in others it is reported in the mezzanine section between liabilities and equity. Specifically, SFAS 160 requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interests. SFAS 160 was effective for the Company on January 1, 2009. SFAS 160 had no impact on the Company’s financial position, results of operations or cash flows.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS 161”). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, thereby improving the transparency of financial reporting. It is intended to enhance the current disclosure framework in SFAS 133 by requiring that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure is intended to convey the purpose of derivative use in terms of the risks that the entity is intending to manage. SFAS 161 was effective for the Company on January 1, 2009 and will result in additional disclosures if the Company enters into any material derivative or hedging activities.

In February 2008, the FASB issued FASB Staff Position No. 140-3, “Accounting for Transfers of Financial Assets and Repurchase Financing Transactions,” (“FSP 140-3”). This FSP provides guidance on accounting for a transfer of a financial asset and the transferor’s repurchase financing of the asset. This FSP presumes that an initial transfer of a financial asset and a repurchase financing are considered part of the same arrangement (linked transaction) under SFAS 140. However, if certain criteria are met, the initial transfer and repurchase financing are not evaluated as a linked transaction and are evaluated separately under SFAS 140. FSP 140-3 was effective for the Company on January 1, 2009. The adoption of FSP 140-3 had no impact on the Company’s financial position, results of operations or cash flows.

In April 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets,” (“FSP 142-3”). This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS 142”). The intent of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R) and other U.S. generally accepted accounting

principles. This FSP was effective for the Company on January 1, 2009 and had no material impact on the Company’s financial position, results of operations or cash flows.

In May, 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 is effective November 15, 2008. The FASB has stated that it does not expect SFAS 162 will result in a change in current practice. The application of SFAS 162 had no effect on the Company’s financial position, results of operations or cash flows.

The FASB issued FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement),” (“FSP APB 14-1”). The Staff Position specifies that issuers of convertible debt instruments that may be settled in cash upon conversion should separately account for the liability and equity components in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 provides guidance for initial and subsequent measurement as well as derecognition provisions. The Staff Position was effective as of January 1, 2009 and had no material effect on the Company’s financial position, results of operations or cash flows.

In June, 2008, the FASB issued FASB Staff Position No. EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities,” (“FSP EITF 03-6-1”). The Staff Position provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and must be included in the earnings per share computation. FSP EITF 03-6-1 was effective January 1, 2009 and had no effect on the Company’s financial position, results of operations, earnings per share or cash flows.

The Staff Position also amends FASB Interpretation No. (“FIN”) 45 to require disclosure of the current status of the payment/performance risk of the credit derivative guarantee. If an entity utilizes internal groupings as a basis for the risk, how the groupings are determined must be disclosed as well as how the risk is managed.

The Staff Position encourages that the amendments be applied in periods earlier than the effective date to facilitate comparisons at initial adoption. After initial adoption, comparative disclosures are required only for subsequent periods.

FSP SFAS 133-1 and FIN 45-4 clarifies the effective date of SFAS 161 such that required disclosures should be provided for any reporting period (annual or quarterly interim) beginning after November 15, 2008. The adoption of this Staff Position had no material effect on the Company’s financial position, results of operations or cash flows.

The SEC’s Office of the Chief Accountant and the staff of the FASB issued press release 2008-234 on September 30, 2008 (“Press Release”) to provide clarifications on fair value accounting. The Press Release includes guidance on the use of management’s internal assumptions and the use of “market” quotes. It also reiterates the factors in SEC Staff Accounting Bulletin (“SAB”) Topic 5M which should be considered when determining other-than-temporary impairment: the length of time and extent to which the market value has been less than cost; financial condition and near-term prospects of the issuer; and the intent and ability of the holder to retain its investment for a period of time sufficient to allow for any anticipated recovery in market value.

On October 10, 2008, the FASB issued FSP SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS 157-3”). This FSP clarifies the application of SFAS No. 157, “Fair Value Measurements” (see Note 17) in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. For the Company, this FSP was effective for the quarter ended September 30, 2008.

The Company considered the guidance in the Press Release and in FSP SFAS 157-3 when conducting its review for other-than-temporary impairment as of December 31, 2008 as discussed in Note 3.

FSP SFAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities,” (“FSP SFAS 140-4 and FIN 46(R)-8”) was issued in December 2008 to require public entities to disclose additional information about transfers of financial assets and to require public enterprises to provide additional disclosures about their involvement with variable interest entities. The FSP also requires certain disclosures for public enterprises that are sponsors and servicers of qualifying special purpose entities. The FSP is effective for the first reporting period ending after December 15, 2008. This FSP had no material impact on the financial position of the Company.

Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) as amended by SFAS No.’s 137, 138 and 149 establishes accounting and reporting standards for derivatives and hedging activities. It requires an entity to recognize all derivatives as either assets or liabilities in the balance sheet, and measures those instruments at fair value. Changes in the fair value of those derivatives are reported in current earnings or other comprehensive income depending on the purpose for which the derivative is held and whether the derivative qualifies for hedge accounting. The Bank does not currently engage in any activities that qualify for hedge accounting under SFAS 133. Accordingly, changes in fair value of these derivative instruments are included in gain on sales of loans held for sale in the consolidated statements of operations.

The Bank is required to maintain average reserve balances, computed by applying prescribed percentages to its various types of deposits, either at the Bank or on deposit with the Federal Reserve Bank (FRB). During 2007, the Bank adopted an internal deposit reclassification system (approved by the Board of Governors under Regulation D) whereby significant portions of interest bearing and noninterest bearing transaction accounts are transferred to a non-reservable savings account status. As a result, all required reserves at December 31, 2008 and 2007 were met by the Bank’s vault cash.

Following is a summary of investment securities at December 31, 2008 and 2007 (dollars in thousands):

The following tables show the gross unrealized losses and fair values, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position at December 31, 2008 and 2007, respectively. All unrealized losses on investment securities are considered by management to be temporary in nature. Given the credit ratings on these investment securities, the short duration of the individual securities, and the Bank’s ability and intent to hold these securities to maturity, these securities are not considered to be permanently impaired. (dollars in thousands):

Thirteen individual securities were in a continuous unrealized loss position for twelve months or more at December 31, 2008.

The aggregate amortized cost and fair value of investment securities available for sale at December 31, 2008, by remaining contractual maturity, are shown below. Actual expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations (dollars in thousands):

Proceeds from sales of investment securities available for sale were $21.2 million and $3.1 million for the years ended December 31, 2008 and 2007, respectively. Gross realized gains from the sales of investment securities available for sale for the year ended December 31, 2008, 2007, and 2006 were $146,000, $0, and $8,000, respectively. Gross realized losses for the year ended December 31, 2007 were $16,000. There were no realized losses for the years ended December 31, 2008 or 2006.

Investment securities with amortized cost of $12.5 million and fair value of $12.5 million were pledged as collateral on a credit availability through Silverton Bank, for securities sold under agreements to repurchase and other banking purposes at December 31, 2008.

Following is a summary of loans, excluding loans held for sale, at December 31, 2008, 2007, and 2006 (dollars in thousands):

At December 31, 2008, the Bank had $10.0 million in non-accruing loans compared to $1.3 million and $611 thousand at December 31, 2007 and 2006, respectively. The foregone interest associated with these loans totaled $233 thousand at December 31, 2008 compared to $124 thousand and $26 thousand at December 31, 2007 and 2006, respectively.

An analysis of the changes in the allowance for loan losses is as follows (dollars in thousands):

The components of property and equipment and accumulated depreciation are as follows (amounts in thousands):

Depreciation amounted to $1.3 million, $991 thousand and $644 thousand for the years ended December 31, 2008, 2007 and 2006, respectively.

Time deposits in denominations of $100,000 or more were $176.5 million and $168.9 million at December 31, 2008 and 2007, respectively. Interest expense on such deposits aggregated approximately $6.7 million, $7.9 million and $5.6 million for the years ended December 31, 2008, 2007 and 2006, respectively. Time deposits maturing subsequent to December 31, 2008 are as follows (dollars in thousands):

At December 31, 2008, the Bank’s borrowings consisted of borrowings from the Federal Home Loan Bank, federal funds purchased and securities sold under agreements to repurchase. Additional information as of December 31, 2008 and 2007 is summarized below: (dollars in thousands):

At December 31, 2008, the Bank’s borrowings consisted of $48.0 million in borrowings from the Federal Home Loan Bank at a rate of 0.46%, federal funds purchased of $237 thousand at a rate of 0.95% and securities sold under agreements to repurchase of $1.1 million at a rate of 0.83%. A portion of the Bank’s borrowings are collateralized by investment securities as described in Note 3.

As of December 31, 2008, the Bank had lines of credit to purchase federal funds from unrelated banks totaling $38.5 million. These lines of credit are unsecured and are available on a one to fourteen day basis for general corporate purposes. As of December 31, 2008, the Bank had no outstanding balances on these lines. The Bank also has a line of credit to borrow funds from a correspondent bank on a secured basis. This $7.0 million line is available on a one day basis and is secured by investment securities with total fair market values of $7.9 million.

As of December 31, 2008, the Bank leases office space under non-cancelable operating leases. Future minimum lease payments required under the leases are as follows (dollars in thousands):

The leases contain options for renewals after the expiration of the current lease terms. The cost of such renewals is not included above. Total rent expense for the years ended December 31, 2008, 2007 and 2006 amounted to $739 thousand, $606 thousand and $465 thousand, respectively.

The following table presents the Bank’s current and deferred income tax provision (benefit) at the end of 2008, 2007 and 2006 (dollars in thousands):

Reconciliation between the income tax expense and the amount computed by applying the statutory federal income tax rate of 34% to income before income taxes is as follows (dollars in thousands):

The significant components of deferred tax assets and liabilities are summarized as follows (dollars in thousands):

Deferred tax assets represent the future tax benefit of deductible differences and, if it is more likely than not that a tax asset will not be realized, a valuation allowance is required to reduce the recorded deferred tax assets to net realizable value. As of December 31, 2008 and 2007, management determined that it was more likely than not that all assets would be realized and no valuation allowance was appropriate. As of December 31, 2005, in consideration of the lack of an established earnings history, management provided valuation allowances of approximately 11% to reflect its estimate of net realizable value as of that date. The net deferred asset is included in “other assets” in the balance sheet.

The Bank has analyzed the tax positions taken or expected to be taken in its tax returns and has concluded it has no liability related to uncertain tax positions in accordance with FIN 48.

Effective January 1, 2005, the Bank adopted a 401(k) / Profit Sharing Plan which is available to all full-time employees and part-time employees working more than 1000 hours per year. The 401(k) plan provides that employee contributions are matched in an amount equal to 100% of employee contributions which do not exceed

3% of compensation and 50% of employee contributions over 3% and up to 5% of compensation. Both employee contributions and the initial 3% Bank matching contribution under the 401(k) Plan are 100% vested at all times. The additional 2% match under the 401(k) Plan, as well as any discretionary Bank contributions under the Profit Sharing Plan, are fully vested after three years. Matching contributions under the 401(k) Plan / Profit Sharing Plan totaled approximately $241 thousand, $202 thousand and $164 thousand for 2008, 2007 and 2006, respectively. There were no discretionary contributions made in 2008 or 2007. Discretionary contributions totaled $112 thousand for the 2006 plan year.

During 2004, the Bank’s Board of Directors approved both an Employee Stock Option Plan and a Director Stock Option Plan (collectively referred to as the Plans) subject to the approval of the Bank’s stockholders and the North Carolina Commissioner of Banks. The Plans, as they subsequently were amended by the Board and approved by the Bank’s stockholders and the Commissioner, provide that up to 497,110 shares (adjusted for all stock splits) of the Bank’s common stock may be issued under each of these plans for a combined total of 994,220 shares. Options granted under the Plans may be vested immediately and expire no more than 10 years from date of grant. The exercise price for any options granted under the Plans is set by the Board of Directors at the date of grant (and is adjusted on a pro rata basis for any subsequent stock split). In 2007, no options were granted either under the Employee Stock Option Plan or the Director Stock Option Plan. During 2006, 25,000 options were granted under the Employee Stock Option Plan while no options were granted under the Director Stock Option Plan. Including options forfeited and those exercised, the total number of options outstanding at December 31, 2007 under each plan was 497,110 in the Director Stock Option Plan and 431,667 in the Employee Stock Option Plan.

During 2008, the Company’s Board of Directors and stockholders approved the 2008 Omnibus Equity Plan, which provided an additional 250,000 shares of the 1^st Financials’ common stock to be reserved and made available for use as either stock option awards or restricted stock grants. As of December 31, 2008, no restricted stock awards have been granted. During 2008, 10,000 options were granted and 50,195 options were forfeited.

A summary of the activity in the Plans and related information for the years ended December 31, 2008, 2007, 2006 is as follows:

Additional information concerning the Bank’s Plans as of December 31, 2008 is as follows:

It is the Bank’s policy to issue new shares to satisfy option exercises. There were no options exercised during 2008. Cash received from option exercises amounted $107 thousand for the years ended December 31, 2007. The total intrinsic value of options exercised in 2007 was $160 thousand.

As of December 31, 2008 anticipated total unrecognized compensation cost related to outstanding non-vested stock options will be recognized over the following periods (in thousands):

In the normal course of business the Bank is involved in various legal proceedings. Management believes that any liability resulting from such proceedings will not be material to the financial statements.

In the normal course of its business, the Bank encounters numerous risks. Two of the most significant of these types of risk are economic and regulatory. There are three main components of economic risk; interest rate risk, credit risk, and market risk. The Bank is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different bases, than its interest-earning assets. Credit risk is the risk of default on the Bank’s loan portfolio that results from borrowers’ inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable, the valuation of real estate held by the Bank, and the valuation of loans held for sale and investment securities available for sale.

The Bank is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Bank also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances, and operation restrictions, resulting from the regulators’ judgments based on information available to them at the time of their examination.

The Bank is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, credit risk in excess of the amount recognized in the balance sheets. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Bank’s commitments are as follows (dollars in thousands):

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivables, inventory, property and equipment, residential real estate and income-producing commercial properties.

Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above, and is required in instances which the Bank deems necessary. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. The Bank has not recorded a liability for the current carrying amount of the obligation to perform as a guarantor, and no contingent liability was considered necessary, as such amounts were not considered material.

Financial instruments, which potentially subject the Bank to concentrations of credit risk, consist principally of loans, investment securities, federal funds sold and amounts due from banks with loans accounting for the most significant risk.

The Bank makes loans to individuals and small businesses for various personal and commercial purposes primarily in western North Carolina. Management does not consider the loan portfolio to be significantly concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.

Recently, banking regulators have raised concern and are preparing to heighten regulatory scrutiny regarding loan portfolios with concentrations of loans collateralized by real estate, particularly commercial real estate (“CRE”). They have defined CRE to include construction loans, acquisition and development loans, loans collateralized with tracts of raw land for speculative purposes, any sort of commercial premise unless it is owner occupied and a number of other subcategories. As noted within this report, slightly more than 83% of Mountain 1^st Bank’s loan portfolio is collateralized by real estate. As with the vast majority of community banks, management believes that utilizing real estate as collateral generally provides the safest form of lending reasonably available to the Bank. Furthermore, real estate lending is the principal core competency and expertise of the Bank’s lending team. North Carolina has become the number one state in the country for in-migration and western North Carolina has been and is forecast to continue to be the beneficiary of a sizeable portion of this influx of new residents. These factors, coupled with the diversification of the different types of real estate collateral and the Bank’s emphasis on borrowers’ secondary repayment sources rather than placing over reliance on liquidation of real estate as the source of repayment of loans, significantly mitigates the risk of this concentration in management’s opinion.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries, geographic regions and loan types, management monitors exposure to credit risk from other lending practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc.) and loans with high loan-to-value ratios (“LTV”). Regulatory

guidelines state that the total amount of all loans in excess of the regulatory loan-to-value ratio limits should not exceed 100% of a bank’s total risk-based capital. These types of loans totaled $64.2 million at December 31, 2005 representing 148.6% of the Bank’s total risk-based capital. During 2006, management determined that a reduction in the amount of loans with LTV exceptions was warranted to aid in mitigating the above noted real estate concentration risk. As a result of management’s actions, loans with LTV’s that exceeded regulatory guidelines were reduced to 88% of risk-based capital at December 31, 2006. Continued efforts in 2007 further reduced the amount of loans with LTV exceptions to $29.0 million or 55% of risk-based capital at December 31, 2007. LTV exceptions rose to 60% at December 31, 2008.

The Bank’s investment portfolio consists principally of obligations of the United States, its agencies, Government Sponsored Enterprises and general obligation municipal securities. In the opinion of management, there is no concentration of credit risk in its investment portfolio.

The Bank places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

In November 2008, under the U.S. Department of the Treasury’s (U.S. Treasury) TARP Capital Purchase Program, 1^st Financial issued to the U.S. Treasury 16,369 shares of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (Series A Preferred Stock), and a 10-year warrant to purchase up to 276,815 shares of common stock at an exercise price of $8.87 per share, for aggregate proceeds of $16,369,000. The allocated carrying values of the warrant and the Series A Preferred Stock on the date of issuance (based on their relative fair values) were $1,016,000 and $15,353,000, respectively. Cumulative dividends on the Series A Preferred Stock are payable at 5% per annum through November 14, 2013 and at a rate of 9% per annum thereafter. The Series A Preferred Stock will be accreted to the redemption price of $16,369,000 over five years. The warrant is exercisable at any time until November 14, 2018 and the number of shares of common stock underlying the warrant and the exercise price are subject to adjustment for certain dilutive events. If, on or prior to December 31, 2009, the company receives aggregate gross cash proceeds of at least $16,369,000 from sales of Tier 1 qualifying perpetual preferred stock or common stock, the number of shares of common stock issuable upon exercise of the warrant will be reduced by one-half of the original number of shares of common stock.

Each share of Series A Preferred Stock issued and outstanding has no par value, has a liquidation preference of $1,000 and is redeemable at the company’s option, subject to the approval of the Federal Reserve Board, at a redemption price equal to $1,000 plus accrued and unpaid dividends, provided that through November 14, 2011 the Series A Preferred Stock is redeemable only in an amount up to the aggregate net cash proceeds received from sales of Tier 1 qualifying perpetual preferred stock or common stock, and only once such sales have resulted in aggregate gross proceeds of at least approximately $4.1 million.

The Series A Preferred Stock has a preference over the company’s common stock upon liquidation. Dividends on the preferred stock, if declared, are payable quarterly in arrears. The company’s ability to declare or pay dividends on, or purchase, redeem or otherwise acquire, its common stock is subject to certain restrictions in the event that the company fails to pay or set aside full dividends on the preferred stock for the latest completed dividend period. In addition, pursuant to the U.S. Treasury’s TARP Capital Purchase Program, until at the earliest November 14, 2011 or the redemption of all of the Series A Preferred Stock or transfer by the U.S. Treasury of all of the Series A Preferred Stock to third parties, the company must obtain the consent of the U.S. Treasury to raise the firm’s common stock dividend or to repurchase any shares of common stock or other preferred stock, with certain exceptions.

As a North Carolina banking corporation, the Bank may pay cash dividends only out of undivided profits as determined pursuant to North Carolina banking laws. However, regulatory authorities may limit payment of dividends when it is determined that such a limitation is in the public interest and is necessary to ensure a bank’s financial soundness. In addition, as a condition to receiving its charter, the Bank entered into an agreement with the North Carolina Banking Commission (which is standard with all newly chartered banks in the state) restricting the payment of cash dividends for the first three years of its existence.

The Company and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory (and possibly additional discretionary) actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as all those terms are defined in the applicable regulations.

As of December 31, 2008, the most recent notification from the Bank’s primary regulator categorized the Bank as “well-capitalized” under the regulatory framework for prompt corrective action. There are no events or conditions since that notification that management believes have changed the Bank’s category.

The table below summarizes the Company and the Bank’s capital ratios at December 31, 2008 and 2007 (dollars in thousands):

The Bank has loan and deposit relationships with most of its directors and executive officers and with companies with which certain directors and executive officers are associated. The following is a reconciliation of loans directly outstanding to executive officers, directors and their affiliates (dollars in thousands):

As a matter of policy, these loans and credit lines are approved by the Board of Directors and are made with interest rates, terms, and collateral requirements comparable to those required of other borrowers. In the opinion of management, these loans do not involve more than the normal risk of collectability. The Bank also enters into other transactions in the ordinary course of business with affiliates. Bank policy requires transactions with affiliates to be on terms no less favorable than could be obtained from an unaffiliated third party and to be approved by a majority of disinterested directors. The following are two transactions entered into with affiliates which were outstanding at December 31, 2008:

The Bank leases the site for its Fletcher branch from a company owned by a director of the Bank. The initial lease term is ten years, with options to renew the lease for up to three successive five-year renewal terms. The terms of the lease call for a $3,200 per month rental payment during the first five years of the initial term, with payments during the second five years to be increased by the lesser of 18% or the aggregate increase in the Chained Consumer Price Index for all Urban Consumers during the previous five years. Rental payments during each renewal term will be adjusted by the lesser of 15% or the aggregate increase in the Chained Consumer Price Index for all Urban Consumers for the immediately preceding five years. Lease payments under this lease totaled $38,400 for the years ended December 31, 2008, 2007 and 2006.

The Bank leases the site for its Marion branch from a company of which a director is co-owner. The initial lease term is five years, with options to renew the lease for up to four successive three-year renewal terms. The terms of the lease call for a $3,500 per month rental payment during the initial term. Rental payments for each renewal term will be adjusted by the aggregate increase in the Consumer Price Index for all Urban Consumers for the immediately preceding lease term. Lease payments under this lease totaled $42,000 for the year ended December 31, 2008 and 2007 and $26,250 for the portion of the year during which the Bank leased this facility in 2006.

SFAS No. 107, “Disclosures About Fair Value of Financial Instruments,” requires a company to disclose the fair value of its financial instruments, whether or not recognized in the balance sheet, where it is practical to estimate that value.

Fair value estimates are made at a specific point in time based on relevant market information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Bank’s entire holding of a particular financial instrument. In cases where quoted market prices are not available, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments and other factors. These

estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. Finally, the fair value estimates presented herein are based on pertinent information available to management as of December 31, 2008 and 2007, respectively.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

The carrying amounts for cash and due from banks, federal funds sold and interest-earning deposits approximate fair value because of the short maturities of those instruments. These instruments are considered cash and cash equivalents.

Fair values for investment securities are based on quoted market price if such information is available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.

Fair values of mortgage loans held for sale are based on commitments on hand from investors or prevailing market prices.

For certain homogenous categories of loans, such as residential mortgages, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rate at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

The carrying value of life insurance approximates fair value since this investment is carried at cash surrender value, as determined by the insurer.

The fair value of demand deposits and savings accounts is the amount payable on demand at the reporting date. The fair value of time deposits, short-term borrowings and long-term debt is estimated based upon the discounted value of projected future cash outflows using the rates currently offered for instruments of similar remaining maturities.

The carrying amounts of accrued interest receivable and accrued interest payable are assumed to approximate fair values. Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under

generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2008 (dollars in thousands):

The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

The Company is predominantly an asset based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued on a nonrecurring basis at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs.

FASB Staff Position No. FAS 157-2 delays the implementation of SFAS 157 until the first quarter of 2009 with respect to goodwill, other intangible assets, real estate and other assets acquired through foreclosure and other non-financial assets measured at fair value on a nonrecurring basis.

The following table presents the carrying values and estimated fair values of the Bank’s financial instruments at December 31, 2008 and 2007 (dollars in thousands):

Unaudited condensed financial data by quarter for the years ended December 31, 2008 and 2007 is as follows (dollars in thousands except per share data):

On February 16, 2009, 1^st Financial and AB&T Financial Corporation (AB&T), the parent company of Alliance Bank & Trust Company, entered into a definitive agreement whereby AB&T Financial Corporation will merge with and become part of 1^st Financial Services Corporation. Under the terms of the agreement, AB&T stockholders will exchange each of their approximately 2,678,205 shares of common stock and 369,636 stock options for 1.175 1^st Financial common shares, and the approximately 369,636 stock options would be exchanged for options to purchase shares of 1^st Financial common stock on the same basis. The merger is designed to be a tax free exchange. Cash will be paid in lieu of fractional shares. The terms of exchange represent pro forma

ownership in the resulting combined institution of approximately 37.8% and 62.2% for AB&T and 1^st Financial stockholders, respectively, on a diluted basis. Closing of the merger, which is expected to occur in the second or third quarter of 2009, is subject to certain conditions, including approval by the stockholders of both companies and regulatory approval.

Following is condensed financial information of 1st Financial Services, Inc. (parent company only). Since 1^st Financial Services was formed in May 2008 no prior period information is presented.

We have audited the accompanying consolidated balance sheets of AB&T Financial Corporation and subsidiary, Alliance Bank & Trust, (the Company) as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards of the Public Company Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of AB&T Financial Corporation and subsidiary, as of December 31, 2008 and 2007 and the related statements of operations, changes in shareholders’ equity and comprehensive income, and cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

We were not engaged to examine management’s assertion about the effectiveness of the Company’s internal control over financial reporting as of December 31, 2008 included in the accompanying Management’s Report on Internal Control over Financial Reporting and, accordingly, we do not express an opinion thereon.

As discussed in Note 1 to the consolidated financial statements, on February 16, 2009, the Company entered into an agreement and plan of merger with 1^st Financial Services Corporation.

The accompanying notes are an integral part of the consolidated financial statements

Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income

The accompanying notes are an integral part of the consolidated financial statements

On February 16, 2009, the Company entered into an Agreement and Plan of Merger (the Merger Agreement) with 1st Financial Services Corporation (1st Financial) pursuant to which the Company will merge with and into 1st Financial (the Merger). The Board of Directors of the Company approved the Merger Agreement and the transactions contemplated in it on February 12, 2009. The Board of Directors of 1st Financial approved the Merger Agreement and the transactions contemplated in it on February 13, 2009. Upon the consummation of the Merger, each share of the Common Stock of the Company issued and outstanding at the effective time of the merger will be converted into and exchanged for the right to receive 1.175 shares of the Common Stock of 1st Financial. Each share of preferred stock of the Company issued and outstanding at the effective time of the Merger shall be converted into and exchanged for the right to receive one share of the preferred stock of 1st Financial. Options to purchase shares of the Company Stock will be converted into options to purchase shares of 1st Financial Stock based on the exchange ratio. The outstanding warrants to purchase shares of the Company common stock will be converted into warrants to purchase shares of 1st Financial common stock based on the exchange ratio. The Merger is intended to constitute a tax-free reorganization under the Internal Revenue Code of 1986, as amended.

Organization — Alliance Bank & Trust Company (the Bank) was incorporated in North Carolina and commenced business on September 8, 2004. The principal business activity of the Bank is to provide commercial banking services to domestic markets, principally in Gaston and Cleveland counties in North Carolina. The Bank is a state-chartered bank, and its deposits are insured by the Federal Deposit Insurance Corporation (FDIC).

On May 22, 2007, the shareholders of the Bank approved a plan of corporate reorganization under which the Bank became a wholly-owned subsidiary of AB&T Financial Corporation (the Company), which was organized for that purpose by the Bank’s Board of Directors. The authorized common stock of AB&T Financial Corporation is 11,000,000 shares with $1.00 par value and the original authorized preferred stock of AB&T Financial Corporation is 1,000,000 shares with no par value. Pursuant to the reorganization, the Company issued all shares of its common stock in exchange for all of the outstanding common shares of the Bank on May 14, 2008. The accompanying consolidated financial statements for the year ended December 31, 2007 are unchanged from the amounts previously reported by Alliance Bank & Trust. For purposes of presentation, the financial statements are presented as if the reorganization was effective January 1, 2007. The consolidated financial statements include the accounts of the parent company and its wholly-owned subsidiary after elimination of all significant intercompany balances and transactions.

Management’s Estimates — The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change relate to the determination of the allowance for losses on loans, including valuation allowances for impaired loans, and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowances for losses on loans and foreclosed real estate, management obtains independent appraisals for significant properties. Management must also make estimates in determining the estimated useful lives and methods for depreciating premises and equipment.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as

an integral part of their examination process, periodically review the Company’s allowance for losses on loans. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for losses on loans may change materially in the near term.

Concentrations of Credit Risk — Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of loans receivable, investment securities, federal funds sold and amounts due from banks.

The Company makes loans to individuals and small businesses for various personal and commercial purposes primarily in Gaston and Cleveland counties in North Carolina. The Company’s loan portfolio is not concentrated in loans to any single borrower or a relatively small number of borrowers. Additionally, management is not aware of any concentrations of loans to classes of borrowers or industries that would be similarly affected by economic conditions.

In addition to monitoring potential concentrations of loans to particular borrowers or groups of borrowers, industries and geographic regions, management monitors exposure to credit risk from concentrations of lending products and practices such as loans that subject borrowers to substantial payment increases (e.g. principal deferral periods, loans with initial interest-only periods, etc), and loans with high loan-to-value ratios. Management has determined that there is no concentration of credit risk associated with its lending policies or practices. Additionally, there are industry practices that could subject the Company to increased credit risk should economic conditions change over the course of a loan’s life. For example, the Company makes variable rate loans and fixed rate principal-amortizing loans with maturities prior to the loan being fully paid (i.e. balloon payment loans). These loans are underwritten and monitored to manage the associated risks. Therefore, management believes that these particular practices do not subject the Company to unusual credit risk.

The Company’s investment portfolio consists principally of obligations of the United States, and its agencies or its corporations. In the opinion of Management, there is no concentration of credit risk in its investment portfolio. The Company places its deposits and correspondent accounts with and sells its federal funds to high quality institutions. Management believes credit risk associated with correspondent accounts is not significant.

Time Deposits with Other Banks — Time deposits with other banks include the bank’s investments in certificates of deposit with a maturity date greater than 90 days. Because the maturity date is greater than 90 days, these time deposits are not included in cash and cash equivalents.

Securities Available-for-Sale — Securities available-for-sale are carried at amortized cost and adjusted to estimated market value by recognizing the aggregate unrealized gains or losses in a valuation account. Aggregate market valuation adjustments are recorded in shareholders’ equity net of deferred income taxes. Reductions in market value considered by management to be other than temporary are reported as a realized loss and a reduction in the cost basis of the security. The adjusted cost basis of investments available-for-sale is determined by specific identification and is used in computing the gain or loss upon sale.

Nonmarketable Equity Securities — Nonmarketable equity securities include the cost of the Company’s investment in the stock of Federal Home Loan Bank and Community Bankers Bank. These stocks have no quoted market value and no ready market for them exists. Investment in the Federal Home Loan Bank is a condition of borrowing from the Federal Home Loan Bank, and the stock is pledged to collateralize such borrowings. At December 31, 2008 and 2007, the Company’s investment in Federal Home Loan Bank stock was $1,326,100 and $787,000, respectively. At December 31, 2008 and 2007, investment in Community Bankers Bank was $45,180.

Loans Receivable — Loans are stated at their unpaid principal balance. Interest income is computed using the simple interest method and is recorded in the period earned.

When serious doubt exists as to the collectibility of a loan or when a loan becomes contractually 90 days past due as to principal or interest, interest income is generally discontinued unless the estimated net realizable value of collateral exceeds the principal balance and accrued interest. When interest accruals are discontinued, income earned but not collected is reversed.

The Company identifies impaired loans through its normal internal loan review process. Loans on the Company’s problem loan watch list are considered potentially impaired loans. These loans are evaluated in determining whether all outstanding principal and interest are expected to be collected at their contractual terms. Loans are not considered impaired if a minimal payment delay occurs and all amounts due, including accrued interest at the contractual interest rate for the period of delay, are expected to be collected consistent with the contract. At December 31, 2008 and 2007, loans in impaired status totaled $5,043,946 and $863,881, respectively.

Allowance for Loan Losses — An allowance for loan losses is maintained at a level deemed appropriate by management to provide adequately for known and inherent losses in the loan portfolio. The allowance is based upon past loan loss experience, current economic conditions that may affect the borrowers’ ability to pay, and the underlying collateral value of the loans. Loans which are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries of loans previously charged off are added to the allowance.

The Bank accounts for impaired loans in accordance with SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” This standard requires that all lenders value loans at the loan’s fair value if it is probable that the lender will be unable to collect all amounts due according to the terms of the loan agreement. Fair value may be determined based upon the present value of expected cash flows, market price of the loan, if available, or value of the underlying collateral. Expected cash flows are required to be discounted at the loan’s effective interest rate. SFAS No. 114 was amended by SFAS No. 118 to allow a lender to use existing methods for recognizing interest income on an impaired loan and by requiring additional disclosures about how a creditor recognizes interest income on an impaired loan.

Under SFAS No. 114, as amended by SFAS No. 118, when the ultimate collectability of an impaired loan’s principal is in doubt, wholly or partially, cash receipts are applied to principal. Once the reported principal balance has been reduced to the loan’s estimated net realized value, future cash receipts are applied to interest income, to the extent that any interest has been foregone. Further cash receipts are recorded as recoveries of any amounts previously charged off. When this doubt does not exist, cash receipts are applied under the contractual terms of the loan agreement first to interest income then to principal.

A loan is also considered impaired if its terms are modified in a troubled debt restructuring. For these accruing impaired loans, cash receipts are typically applied to principal and interest receivable in accordance with the terms of the restructured loan agreement. Interest income is recognized on these loans using the accrual method of accounting.

Premises, Furniture and Equipment — Premises, furniture and equipment are stated at cost, less accumulated depreciation. The provision for depreciation is computed by the straight-line method, based on the estimated useful lives for buildings of 40 years and furniture and equipment of 5 to 10 years. Leasehold improvements are amortized over the life of the leases. The cost of assets sold or otherwise disposed of and the related allowance for depreciation are eliminated from the accounts and the resulting gains or losses are reflected

in the income statement when incurred. Maintenance and repairs are charged to current expense. The costs of major renewals and improvements are capitalized.

Other Real Estate Owned — Other real estate owned includes real estate acquired through foreclosure. Other real estate owned is initially recorded at the lower of cost (principal balance of the former loan plus costs of improvements) or estimated fair value. Any write-downs at the dates of foreclosure are charged to the allowance for loan losses. Expenses to maintain such assets and subsequent write-downs, are included in other expenses. Gains and losses on disposal are included in noninterest income.

Securities Sold Under Agreements to Repurchase — The Bank enters into sales of securities under agreements to repurchase. Fixed-coupon repurchase agreements are treated as financing, with the obligation to repurchase securities sold being reflected as a liability and the securities underlying the agreements remaining as assets.

Income Taxes — Income taxes are the sum of amounts currently payable to taxing authorities and the net changes in income taxes payable or refundable in future years. Income taxes deferred to future years are determined utilizing a liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of certain assets and liabilities which are principally the allowance for loan losses, depreciable premises and equipment, and the Company’s net operating loss carryforward.

In 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48 (FIN 48), “Accounting for Uncertainty in Income Taxes – an Interpretation of SFAS No. 109.” FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 also prescribes a recognition threshold and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. Accordingly, the Company adopted FIN 48 effective January 1, 2007. The adoption of FIN 48 did not have any impact on the Company’s consolidated financial position.

Advertising Expense — Advertising and public relations costs are generally expensed as incurred. External costs incurred in producing media advertising are expensed the first time the advertising takes place. External costs relating to direct mailing costs are expended in the period in which the direct mailings are sent. Advertising and public relations costs of $72,565 and $65,920 were included in the Company’s results of operations for 2008 and 2007, respectively.

Stock-Based Compensation — The Company accounts for stock options under the fair value recognition provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.” Compensation expense is recognized as salaries and benefits in the consolidated statement of operations.

In calculating the compensation expense for stock options for 2008, the fair value of options granted is estimated as of the date granted using the Black-Scholes option pricing model with the following weighted-average assumptions: dividend yield of 0 percent; expected volatility of 18.50 percent; risk-free interest rate of 4.43 percent; and expected life of 10 years. There were no options granted in 2007.

Earnings (Losses) Per Share — Basic earnings (losses) per share represents income available to shareholders divided by the weighted-average number of common shares outstanding during the period. Dilutive earnings per share reflects additional common shares that would have been outstanding if dilutive potential

common shares had been issued. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

Comprehensive Income — Accounting principles generally require that recognized income, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income and related tax effects are as follows for the years ended December 31, 2008 and 2007:

Statement of Cash Flows — For purposes of reporting cash flows in the financial statements, the Company considers certain highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents include amounts due from banks and federal funds sold. Generally, federal funds are sold for one-day periods.

Interest paid on deposits and other borrowings totaled $4,538,441 and $4,951,119 for the year ended December 31, 2008 and 2007 respectively.

Income tax payments made during 2008 totaled $166,350. There were no income tax payments made during 2007.

Changes in the valuation account of securities available-for-sale, including deferred tax effects, are considered noncash transactions for purposes of the statements of cash flows and are presented in the notes to the financial statements.

During 2008 and 2007, the Company reclassified loans totaling $2,182,016 and $693,349 as foreclosures of real estate, respectively.

Off-Balance-Sheet Financial Instruments — In the ordinary course of business, the Company enters into off-balance-sheet financial instruments consisting of commitments to expend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.

Recent Accounting Pronouncements — The following is a summary of recent authoritative pronouncements that may affect accounting, reporting, and disclosure of financial information by the Company:

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 141(R), “Business Combinations,” (“SFAS 141(R)”) which replaces SFAS 141. SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination

recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisitions by the Company taking place on or after January 1, 2009. Early adoption is prohibited. Accordingly, a calendar year-end company is required to record and disclose business combinations following existing accounting guidance until January 1, 2009. The business combination, as described in note 1, will be accounted for under SFAS 141(R).

SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts, an Interpretation of FASB Statement No. 60,” (“SFAS 163”) was issued by the FASB in May, 2008 to alleviate diversity in accounting for financial guarantee insurance contracts. SFAS 163 requires an insurance enterprise to recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. The Statement also modifies premium revenue and claim liabilities recognition and measurement. SFAS 163 is effective for fiscal years beginning after December 15, 2008, and all interim periods

within those fiscal years with the exception of disclosures related to the insurance enterprise’s risk-management activities which are effective for the first period (including interim periods) beginning after issuance of this Statement. Except for those disclosures, earlier application is not permitted. The adoption of this Statement had no material effect on the Company’s financial position, results of operations or cash flows.

FSP SFAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161,” (“FSP SFAS 133-1 and FIN 45-4”) was issued September 2008, effective for reporting periods (annual or interim) ending after November 15, 2008. FSP SFAS 133-1 and FIN 45-4 amends SFAS 133 to require the seller of credit derivatives to disclose the nature of the credit derivative, the maximum potential amount of future payments, fair value of the derivative, and the nature of any recourse provisions. Disclosures must be made for entire hybrid instruments that have embedded credit derivatives. The Staff Position also amends FASB Interpretation No. (“FIN”) 45 to require disclosure of the current status of the payment/performance risk of the credit derivative guarantee. If an entity utilizes internal groupings as a basis for the risk, how the groupings are determined must be disclosed as well as how the risk is managed. The Staff Position encourages that the amendments be applied in periods earlier than the effective date to facilitate comparisons at initial adoption. After initial adoption, comparative disclosures are required only for subsequent periods.

On October 10, 2008, the FASB issued FSP SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active” (“FSP SFAS 157-3”). This FSP clarifies the application of SFAS No. 157, “Fair Value Measurements” (see Note 19) in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that asset is not active. The FSP is effective upon issuance, including prior periods for which financial statements have not been issued. For the Company, this FSP was effective for the quarter ended September 30, 2008. The Company considered the guidance in the Press Release and in FSP SFAS 157-3 when conducting its review for other-than-temporary impairment as of December 31, 2008 as discussed in Note 4.

December 2008 to require public entities to disclose additional information about transfers of financial assets and to require public enterprises to provide additional disclosures about their involvement with variable interest entities. The FSP also requires certain disclosures for public enterprises that are sponsors and servicers of qualifying special purpose entities. The FSP is effective for the first reporting period ending after December 15, 2008. This FSP had no material impact on the financial position of the Company.

FSP EITF 99-20-1, “Amendments to the Impairment Guidance of EIFT Issue No. 99-20,” (“FSP EITF 99-20-1”) was issued in January 2009. Prior to the Staff Position, other-than-temporary impairment was determined by using either EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets,” (“EITF 99-20”) or SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” (“SFAS 115”) depending on the type of security. EITF 99-20 required the use of market participant assumptions regarding future cash flows regarding the probability of collecting all cash flows previously projected. SFAS 115 determined impairment to be other than temporary if it was probable that the holder would be unable to collect all amounts due according to the contractual terms. To achieve a more consistent determination of other-than-temporary impairment, the Staff Position amends EITF 99-20 to determine any other-than-temporary impairment based on the guidance in SFAS 115, allowing management to use more judgment in determining any other-than-temporary impairment. The Staff Position is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. Retroactive application is not permitted. Management has reviewed the Company’s security portfolio and evaluated the portfolio for any other-than-temporary impairments as discussed in Note 4.

Other accounting standards that have been issued or proposed by the PCAOB or other standard setting bodies are not expected to have a material impact on the Company’s Financial position, results of operations or cash flows.

Risks and Uncertainties — In the normal course of its business, the Company encounters two significant types of risks: economic and regulatory. There are three main components of economic risk: interest rate risk, credit risk and market risk. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities mature or reprice at different speeds, or on different basis than its interest-earning assets. Credit risk is the risk of default on the Company’s loan portfolio that results from borrower’s inability or unwillingness to make contractually required payments. Market risk reflects changes in the value of collateral underlying loans receivable and the valuation of real estate held by the Company.

The Company is subject to the regulations of various governmental agencies. These regulations can and do change significantly from period to period. The Company also undergoes periodic examinations by the regulatory agencies, which may subject it to further changes with respect to asset valuations, amounts of required loss allowances and operating restrictions from the regulators’ judgments based on information available to them at the time of their examination.

Reclassifications — Certain captions and amounts in the 2007 financial statements were reclassified to conform with the 2008 presentation.

The Company is required to maintain cash balances with its correspondent banks to cover all cash letter transactions. At December 31, 2008 and 2007, the requirement was met by the cash balance in the vault.

The amortized cost and estimated fair values of securities available-for-sale were:

The following is a summary of maturities of securities available-for-sale as of December 31, 2008. The amortized cost and estimated fair values are based on the contractual maturity dates. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.

The following table shows gross unrealized losses and fair value, aggregated by investment category, and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2008 and 2007:

Securities classified as available-for-sale are recorded at fair market value. Approximately 100% of the unrealized losses, or one individual security, consisted of securities in a continuous loss position for twelve months or more at December 31, 2008. The Company has the ability and intent to hold the security until such

time as the value recovers or the security matures. The Company believes, based on industry analyst reports and credit ratings, that the deterioration in value is attributable to changes in market interest rates and is not in the credit quality of the issuer and therefore, these losses are not considered other-than-temporary.

At December 31, 2008 and 2007, investment securities with a book value of $1,768,936 and $573,673 and a market value of $1,825,982 and $564,844, respectively, were pledged as collateral for the securities sold under agreements to repurchase. At December 31, 2008, investment securities with a book value of $3,677,513 and a market value of $3,718,310 were pledged as collateral for Federal Home Loan Bank advances.

Major classifications of loans receivable at December 31, 2008 and 2007 are summarized as follows:

As of December 31, 2008 and 2007, loans individually evaluated and considered impaired under SFAS No. 114 “Accounting by Creditors for Impairment of a Loan” were as follows:

As of December 31, 2008 and 2007, loans in nonaccrual status were $2,692,504 and $863,881, respectively. Loans ninety days or more past due and still accruing interest as of December 31, 2008 and 2007, were $8,613 and $597,811, respectively.

Transactions in the allowance for loan losses for the years ended December 31, 2008 and 2007 are summarized as follows:

At December 31, 2008, the Company had pledged approximately $56,235,441 of loans as collateral for advances from the Federal Home Loan Bank (see note 9).

Premises, furniture and equipment consisted of the following at December 31, 2008 and 2007:

Depreciation expense for the years ended December 31, 2008 and 2007 was $192,715 and $141,824, respectively. Construction in progress at December 31, 2007 related to the construction of the Union Road and Kings Mountain Branches. These branches were completed and placed in service in 2008.

At December 31, 2008, the scheduled maturities of certificates of deposit and individual retirement accounts were as follows:

NOTE 8 — FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Company had federal funds purchased and securities sold under agreements to repurchase which generally mature within one day. At December 31, 2008, the securities sold under agreements to repurchase totaled $68,339. At December 31, 2008, the amortized cost of securities pledged to collateralize the repurchase was $1,768,936 and the estimated fair value was $1,825,982. The securities underlying the agreements are held by a third-party custodian. At December 31, 2008, federal funds purchased were $1,000,000.

At December 31, 2007, securities sold under agreements to repurchase totaled $1,110,411. At December 31, 2007, the amortized cost of securities pledged to collateralize the repurchase was $573,672 and the estimated fair value was $564,844. The securities underlying the agreements are held by a third-party custodian. At December 31, 2007, federal funds purchased were $4,500,000.

Advances from the Federal Home Loan Bank consisted of the following at December 31, 2008 and 2007:

Scheduled principal reductions of Federal Home Loan Bank advances are as follows:

As collateral, the Company has pledged first mortgage loans on one to four family residential loans totaling $23,273,383 multifamily loans totaling $1,932,017 and commercial real estate loans totaling $31,030,041 at December 31, 2008 (see Note 5). The Company’s Federal Home Loan Bank stock, in the amount of $1,326,100, is pledged to secure the borrowings. In addition, two Federal Home Loan Bank bonds are pledged as collateral with a total book value of $2,351,413 and total market value of $2,392,210. Certain advances are subject to prepayment penalties.

Income tax expense (benefit) for the years ended December 31, 2008 and 2007 is summarized as follows:

The gross amounts of deferred tax assets and deferred tax liabilities are as follows at December 31, 2008 and 2007:

A reconciliation between the income tax expense (benefit) and the amount computed by applying the federal statutory rate of 34% to income before income taxes follows:

The Company had analyzed the tax positions taken or expected to be taken in its tax returns and concluded it has no liability related to uncertain tax positions in accordance with FIN 48.

The Company leases a Kings Mountain branch location. The operating lease has a term of two years and three months, expiring on March 31, 2010. Under the terms of the lease, the monthly rental payment is $2,650 or $31,800 per year.

The total lease expense included in the statement of operations for the years ended December 31, 2008 and December 31, 2007 was $43,072 and $39,524, respectively

Certain parties (principally certain directors and executive officers of the Company, their immediate families and business interests) were loan customers of and had other transactions in the normal course of business with the Bank. Related party loans are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and do not involve more than the normal risk of collectibility. As of December 31, 2008 and 2007, the Company had related party loans totaling $6,446,723 and $6,271,647, respectively. Advances on related party loans totaled $983,906 and $2,401,088 during 2008 and 2007, respectively. Repayments totaled $808,830 and $1,576,803 during 2008 and 2007, respectively.

Deposits by directors, officers and their related interests, as of December 31, 2008 and 2007 approximated $3,523,016 and $4,361,493, respectively.

The Company is subject to claims and lawsuits which arise primarily in the ordinary course of business. Management is not aware of any legal proceedings which would have a material adverse effect on the financial position or operating results of the Company.

In 2005, the shareholders approved the Incentive Stock Option Plan (Incentive Plan) and the Nonstatutory Stock Option Plan (Nonstatutory Plan). The Incentive Plan provides for the granting of up to 267,755 stock options to purchase shares of the Company’s common stock to officers and employees of the Company. The Company may grant awards for a term of up to ten years from the effective date of the Plan. Options may be exercised up to ten years after the date of grant. The per-share exercise price will be determined by the Option Committee of the Board of Directors, except that the exercise price of an incentive stock option may not be less than fair market value of the common stock on the grant date. At December 31, 2008, 183,922 options had been granted under the Incentive Plan.

The Nonstatutory Plan provides for the granting of up to 267,755 stock options to purchase shares of the Company’s common stock to Directors of the Company. The Company may grant awards for a term of up to ten years from the effective date of the Plan. Options may be exercised up to ten years after the date of grant. The per-share exercise price will be determined by the Board of Directors, except that the exercise price of an incentive stock option may not be less than fair market value of the common stock on the grant date. At December 31, 2008, 243,911 options had been granted under the Nonstatutory Plan.

A summary of the status of our stock option plans as of December 31, 2008 and 2007, and changes during the periods then ended are presented below.

The following table summarizes information about stock options outstanding under the Company’s plan at December 31, 2008:

The aggregate intrinsic value (the difference between the Company’s closing stock price on the last trading day of 2008 and the exercise price, multiplied by the number of in-the-money options) for options outstanding and exercisable at December 31, 2008 amounted to $0. This amount represents what would have been received by the option holder had all option holders exercised their options on December 31, 2008. This amount changes based on changes in the fair market value of the Company’s stock.

The Company measures the fair value of each option award on the date of grant using the Black-Scholes option pricing model with the following assumptions: the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant; the dividend yield is based on the Company’s dividend yield at the time of the grant (subject to adjustment if the dividend yield on the grant date is not expected to approximate the dividend yield over the expected life of the options); the volatility factor is based on the historical volatility of the Company’s stock (subject to adjustment if historical volatility is reasonably expected to differ from the past); the weighted-average expected life is based on the historical behavior of employees related to exercises, forfeitures and cancellations. These assumptions are summarized in Note 2 to these financial statements.

Basic earnings (losses) per share is computed by dividing net income by the weighted-average number of common shares outstanding. Diluted earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding and dilutive common share equivalents using the treasury stock method. There were no dilutive common share equivalents outstanding during 2008 and 2007; therefore, basic loss per share and diluted earnings per share were the same.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct adverse material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum ratios of Tier 1 and total capital as a percentage of assets and off-balance-sheet exposures, adjusted for risk weights ranging from 0% to 100%. Tier 1 capital consists of common shareholders’ equity, excluding the unrealized gain or loss on securities available-for-sale, minus certain intangible assets. Tier 2 capital consists of the allowance for loan losses subject to certain limitations. Total capital for purposes of computing the capital ratios consists of the sum of Tier 1 and Tier 2 capital. The regulatory minimum requirements are 4% for Tier 1 and 8% for total risk-based capital.

The Company and the Bank are also required to maintain capital at a minimum level based on total assets, which is known as the leverage ratio. Only the strongest institutions are allowed to maintain capital at the minimum requirement of 3%. All others are subject to maintaining ratios 1% to 2% above the minimum.

As of December 31, 2008, management believes it is categorized as well-capitalized under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the Company’s or the Bank’s categories.

The following table summarizes the capital amounts and ratios of the Company and the Bank and the regulatory minimum requirements at December 31, 2008 and 2007.

At December 31, 2008, the Company had lines of credit to purchase federal funds up to $15,400,000 from unrelated financial institutions. At December 31, 2008, the Company had borrowed $1,000,000 on these lines. Under the terms of the arrangements, the Company may borrow at mutually agreed-upon rates for periods varying from one to thirty days. The Company also has a line of credit to borrow funds from the Federal Home Loan Bank up to 15% of the Bank’s total assets, which totaled $25,500,000 as of December 31, 2008. As of December 31, 2008, the Bank had $23,570,000 in advances on this line.

The Company, as a North Carolina banking corporation, may pay dividends only out of undivided profits as determined pursuant to North Carolina General Statutes. However, regulatory authorities may limit payment of dividends by any bank when it is determined that such a limitation is in the public interest and is necessary to ensure financial soundness of the Bank.

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist of commitments to extend credit and standby letters of credit. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. A commitment involves, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Company’s exposure to credit loss in the event of nonperformance by the other party to the instrument is represented by the contractual notional amount of the instrument. Since certain commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company uses the same credit policies in making commitments to extend credit as it does for on-balance-sheet instruments. Letters of credit are conditional commitments issued to guarantee a customer’s performance to a third party and have essentially the same credit risk as other lending facilities.

Collateral held for commitments to extend credit and letters of credit varies but may include accounts receivable, inventory, property, plant, equipment and income-producing commercial properties.

The following table summarizes the Company’s off-balance-sheet financial instruments whose contract amounts represent credit risk at December 31, 2008 and 2007:

The fair value of a financial instrument is the amount at which the asset or obligation could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instruments. Because no market value exists for a significant portion of the financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors.

The following methods and assumptions were used to estimate the fair value of significant financial instruments:

Cash and Due from Banks — The carrying amount is a reasonable estimate of fair value.

Federal Funds Sold — Federal funds sold are for a term of one day, and the carrying amount approximates the fair value.

Time Deposits with Other Banks — The carrying amount approximates the fair value.

Investment Securities — The fair values of securities available-for-sale equal the carrying amounts, which are the quoted market prices. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. The carrying value of nonmarketable equity securities approximates the fair value since no ready market exists for the stocks.

Loans Receivable — For certain categories of loans, such as variable rate loans which are repriced frequently and have no significant change in credit risk, fair values are based on the carrying amounts. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Deposits — The fair value of demand deposits, savings, and money market accounts is the amount payable on demand at the reporting date. The fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies current interest rates to a schedule of aggregated expected maturities.

Federal Funds Purchased and Securities Sold Under Agreements to Repurchase — The carrying amount is a reasonable estimate of fair value because these instruments typically have terms of one day.

Advances from the Federal Home Loan Bank — The carrying amounts of variable rate borrowings are reasonable estimates of fair value because they can be repriced frequently. The fair values of fixed rate borrowings are estimated using a discounted cash flow calculation that applies the Company’s current borrowing rate from the Federal Home Loan Bank.

Accrued Interest Receivable and Payable — The carrying value of these instruments is a reasonable estimate of fair value.

Off-Balance-Sheet Financial Instruments — In the ordinary course of business, the Company enters into off- balance-sheet financial instruments consisting of commitments to extend credit and letters of credit. These financial instruments are recorded in the financial statements when they become payable by the customer.

The carrying values and estimated fair values of the Company’s financial instruments are as follows:

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”) which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. SFAS 157 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available-for-sale investment securities) or on a nonrecurring basis (for example, impaired loans).

Available-for-sale investment securities, $4,638,214 at December 31, 2008, are the only assets whose fair values are measured on a recurring basis using level 2 inputs. The Company has no assets or liabilities whose fair values are measured on a recurring basis using level 1 or level 3 inputs. The Company has no liabilities carried at fair value or measured at fair value on a nonrecurring basis.

The Company is predominantly an asset-based lender with real estate serving as collateral on a substantial majority of loans. Loans which are deemed to be impaired are primarily valued at the fair values of the underlying real estate collateral. Such fair values are obtained using independent appraisals, which the Company considers to be level 2 inputs. The aggregate carrying amount of impaired loans at December 31, 2008 was $4,490,371.

Presented below are the condensed financial statements for AB&T Financial Corporation (Parent Company only):

On January 23, 2009, the Company, received $3,500,000 from the United States Department of the Treasury (the Treasury) as part of the Company’s participation in the Treasury’s Capital Purchase Program. Under the agreement, the Company issued and sold to the Treasury (1) 3,500 shares of the Registrant’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A and (2) a warrant to purchase 80,153 shares of the Registrant’s common stock, $1.00 par value per share, for an aggregate purchase price of $3,500,000 in cash. The Preferred Stock will qualify as Tier 1 capital and will pay cumulative dividends at a rate of 5% per annum for the first five years, and 9% per annum thereafter. The warrant has a 10-year term and is immediately exercisable upon its issuance, with an initial per share exercise price of $6.55.

UNAUDITED PRO FORMA SELECTED COMBINED CONSOLIDATED FINANCIAL STATEMENTS

We are providing the following unaudited pro forma selected combined consolidated financial statements to aid you in your analysis of the financial aspects of the proposed merger. The unaudited pro forma selected combined consolidated balance sheet gives effect to the proposed transaction as if it occurred on December 31, 2008. The unaudited pro forma selected combined consolidated statements of income for the year ended December 31, 2008 give effect to the proposed transaction as if the purchase transaction occurred January 1, 2009. The statements include pro forma adjustments as described in the notes accompanying the financial statements.

We derived this information from the audited consolidated financial statements for the year ended December 31, 2008 of 1st Financial and AB&T. The unaudited pro forma selected combined consolidated financial statements should be read in conjunction with the audited historical consolidated financial statements and related notes of 1st Financial and AB&T which are included in this Joint Proxy Statement/Prospectus.

The unaudited pro forma selected combined consolidated financial information is presented for illustrative purposes only and does not purport to be indicative of the operating results or financial position that would have actually occurred if the merger had been in effect on and for the dates indicated, nor is it indicative of the future operating results or financial position of the combined company. The pro forma adjustments are based on the information and assumptions available at the time of the printing of this Joint Proxy Statement/Prospectus.

The merger will be accounted for as an acquisition by 1^st Financial of AB&T using the acquisition method of accounting reflecting the acquisition by 1^st Financial of AB&T and, accordingly, the assets and liabilities of AB&T will be recorded at their respective fair values on the date the merger is completed. The merger will be affected by the issuance of shares of 1^st Financial common stock ($5.00 par value) to AB&T shareholders. Each share of AB&T common stock will be exchanged for 1.175 shares of 1^st Financial common stock. Under SFAS 141(R), the merger accounting journal entries will be based on the closing price on the date of merger which may be different than this estimate.

The pro forma financial information includes estimated adjustments to record assets and liabilities of AB&T at their respective fair values. The pro forma adjustments included herein are subject to change as additional information becomes available and as additional analyses are performed.

The final allocation of the purchase price will be determined after the merger is completed and additional analyses are performed to determine the fair values of AB&T’s tangible and identifiable intangible assets and liabilities as of the date the merger is completed. Changes in the fair value of the net assets of AB&T as of the date of the merger will change the amount of purchase price allocable to goodwill, if any, and the respective assets and liabilities. The further refinement of transaction costs will result in additional charges to operations in the period incurred. The final adjustments may be materially different from the unaudited pro forma adjustments presented herein.

The pro forma financial information for the merger is included only as of and for the year ended December 31, 2008. The unaudited pro forma information is not necessarily indicative of the results of operations or the combined financial position that would have resulted had the merger been completed at the beginning of the applicable period presented, nor is it necessarily indicative of the results of operations in future periods or the future financial position of the combined company.

The unaudited pro forma financial information of 1^st Financial and AB&T shows the effect of a $3.5 million issuance of Senior Preferred Stock issued to the Treasury pursuant to the Capital Purchase Program (CPP) by AB&T that was consummated in January 2009. The pro forma financial data presented below may change based on, among other things, the timing and utilization of the proceeds as well as certain other factors including, any subsequent changes in the Company’s common stock price, and the discount rate used to determine the fair value of the preferred stock. Accordingly, we can provide no assurance that the following pro forma financial data will ever be achieved. We have included the following unaudited pro forma consolidated financial data solely for the purpose of providing stockholders with information that may be useful for purposes of considering and evaluating the merger proposal.

The pro forma financial information reflects the issuance of 3,146,890 shares of 1^st Financial common stock with an aggregate market value of approximately $20.5 million. The table below provides the calculation of the number of shares issued:

NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The pro forma financial information includes adjustments to shareholders’ equity for the elimination of AB&T’s accumulated other comprehensive income of $66 thousand and the elimination of AB&T’s accumulated deficit of $157 thousand as of December 31, 2008. In addition to these equity adjustments, $950 thousand was included in the purchase price for estimated transaction costs.

The US Treasury received warrants to purchase 80,153 shares of common stock of AB&T. The term is 10 years and immediately exercisable, in whole or in part, with an initial exercise price of $6.55.

The following table provides a summary of pro forma adjustments to stockholders’ equity:

The adjustments under the acquisition method of accounting included in the pro forma statement of financial condition include adjustments to loans, of $(4.9) million. These adjustments are based on preliminary valuations performed as of September 30, 2008. The adjustments recorded for these assets and liabilities on the merger date could vary significantly from the pro forma adjustments included herein depending on changes in interest rates and the components of the assets and liabilities.

The adjustments under the acquisition method of accounting include a core deposit intangible asset adjustment of $321 thousand. The $321 thousand was calculated by applying a premium of 1.0% to AB&T’s

NOTES TO UNAUDITED PRO FORMA COMBINED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

core deposits. Core deposits are defined as all non-interest bearing deposits and interest-bearing transaction accounts excluding non-core time deposits. The amortization of the core deposit intangible assets in the pro forma statements (approximately $80 thousand) of operations is assumed to be over the estimated life using an accelerated method. An analysis to determine if other identifiable intangible assets exist has not yet been completed. Upon completion of this analysis, additional intangible assets may be recorded which will affect the purchase price allocation.

The pro forma balance sheet includes total merger costs, of $950 thousand. Projected merger costs include projected legal, accounting, and investment banking fees of $950 thousand which will be recognized as period expenses in accordance with SFAS No. 141(R). These expenses are expected to be non-deductible.

Application of SFAS No. 141(R) will require adjustments under the acquisition method of accounting to net loans at the merger date. Loans will be recorded at fair value with respect to current interest rates, credit quality, and any other factors that may impact the value of loans. Prior to adoption of SFAS No. 141(R), the loan portfolio of the acquired entity was valued excluding the effects of credit losses, and the allowance for loan losses of the acquired entity was carried over by the acquiring company. As a result of SFAS 141(R), the fair value estimate of loans will include the effects of uncertainty about the collectibility of future cash flows and 1^st Financial will not carry over the allowance for loan losses of AB&T.

The pro forma financial information reflects the issuance of $3.5 million of AB&T Senior Preferred Shares. Investment securities include the proceeds reinvested in federal agency bonds with a rate of return of approximately 4.0%. Warrants included the book value as determined by applying the relative fair market value percentages to the amount of TARP capital raised. Preferred stock to be issued under TARP is $1,000 par value at an annual rate of 5%. The carrying values of the preferred stock and warrants are based on their estimated relative fair values at issue date. The discount on the preferred stock is amortized over a five year period via the effective yield method.

The pro forma condensed combined statements of income for the year ended December 31, 2008 include adjustments for the amortization of the estimated core deposit intangible, the estimated amortization or accretion of purchase accounting adjustments made to loans and the related tax effect of all the adjustments. The amortization or accretion of the purchase accounting adjustments made to loans was estimated based on estimated weighted average maturities.

These results are not indicative of what the historical results of the combined company would have been had the companies been actually combined during the periods presented.

THIS AGREEMENT AND PLAN OF MERGER (hereinafter called “Agreement”) is entered into as of the 16^th day of February, 2009, by and between 1st FINANCIAL SERVICES CORPORATION (“1st Financial”) and AB&T FINANCIAL CORPORATION (“AB&T”).

WHEREAS, 1st Financial is a North Carolina corporation with its principal office and place of business located in Hendersonville, North Carolina and is the owner of all the outstanding shares of common stock of Mountain 1stBank & Trust Company (Mountain 1st), a North Carolina state-chartered banking corporation; and

WHEREAS, AB&T is a North Carolina corporation with its principal office and place of business located in Gastonia, North Carolina and is the owner of all the outstanding shares of common stock of Alliance Bank & Trust Company (“Alliance”), a North Carolina state-chartered banking corporation; and,

WHEREAS, 1st Financial and AB&T have agreed that it is in their mutual best interests and in the best interests of their respective shareholders for 1st Financial and AB&T to consummate a merger whereby each of the outstanding shares of AB&T’s common stock would be exchanged for shares of 1st Financial’s common stock, and AB&T would be merged with and into 1st Financial with 1st Financial as the surviving entity in such merger, all in the manner and upon the terms and conditions contained in this Agreement and Plan of Merger and,

WHEREAS, to effectuate the foregoing, 1st Financial and AB&T desire to adopt this Agreement as a plan of reorganization in accordance with the provisions of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”); and,

WHEREAS, the respective boards of directors of AB&T and 1st Financial have determined that it is in the best interests of their companies and their shareholders to consummate the transactions provided for herein and, subject to the provisions of Article VIII of this Agreement, recommend to the respective shareholders of AB&T and 1st Financial that they approve this Agreement and Plan of Merger and the transactions it contemplates.

NOW, THEREFORE, in consideration of the premises, the mutual benefits to be derived from this Agreement, and of the representations, warranties, conditions, covenants, and promises herein contained, and subject to the terms and conditions hereof, AB&T and 1st Financial hereby mutually agree as follows:

1.01. Names Of Merging Corporations. The name of the corporation whose shares will be acquired is “AB&T Financial Corporation” and the name of the acquiring corporation is “1st Financial Services Corporation.” Subject to the provisions of this Agreement and Plan of Merger, at the Effective Time (as defined in Paragraph 1.04 hereof), AB&T shall be merged with and into 1st Financial, pursuant to Article 11 of Chapter 55 of the General Statutes of North Carolina (the “Merger”), the separate corporate existence of AB&T shall cease and the corporate existence of 1st Financial, as the surviving corporation in the Merger, shall continue under the laws of the State of North Carolina. 1st Financial, as the surviving corporation in the Merger, is hereinafter sometimes referred to as the “Surviving Corporation.” The corporate existence of 1st Financial as the surviving corporation in the Merger shall continue with all of its purposes, objects, rights, privileges, powers and franchises, all of which shall be unaffected and unimpaired by the Merger, and the duration of its existence shall be perpetual and unlimited.

(a) Effect of the Merger. At the “Effective Time” (as defined in Paragraph 1.04 hereof), upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the North Carolina Business Corporation Act, as amended, each share of the $1.00 par value common stock of AB&T (“AB&T Stock”) (other than (i) any shares to which rights of dissent and appraisal are properly exercised as provided below and (ii) any shares held other than in a fiduciary capacity or as a result of debts previously contracted by AB&T, Alliance, 1st Financial, or Mountain 1st) and each share of the no par value Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of AB&T (“AB&T Preferred Stock”) shall be exchanged for the consideration provided in Paragraph 1.03 hereof (the “Consideration”). At the Effective Time and by reason of the Merger, and in accordance with applicable law, all of the property, assets and rights of every kind and character of AB&T including, without limitation, all real, personal or mixed property, all debts due on whatever account, all other choses in action and every other interest of or belonging to or due to AB&T, whether tangible or intangible, shall vest in the Surviving Corporation, and the Surviving Corporation shall succeed to all the rights, privileges, powers, purposes and franchises of a public or private nature of AB&T, all without any conveyance, assignment or further act or deed; and the Surviving Corporation shall become responsible for all of the liabilities, duties and obligations of every kind, nature and description of AB&T as of the Effective Time.

(b) Articles of Incorporation, Bylaws and Management. The Articles of Incorporation and Bylaws of 1st Financial in effect at the Effective Time shall be the Articles of Incorporation and Bylaws of the Surviving Corporation until thereafter amended in accordance with applicable law. The officers and directors of 1st Financial at the Effective Time shall continue to hold such offices and positions of the Surviving Corporation until removed as provided by law or until the election or appointment and qualification of their respective successors.

(a) Consideration. Except as otherwise provided in this Agreement, at the Effective Time all rights of AB&T’s shareholders with respect to all outstanding shares of AB&T Stock shall cease to exist and, as consideration for and to effect the Merger, each such outstanding share of AB&T Stock shall be converted, without any action by 1st Financial, AB&T or any AB&T shareholder, into the right to receive the number of shares of $5.00 par value common stock of 1st Financial (“1st Financial Stock”) provided in Paragraph 1.03(b)(1)(B) or cash as provided in Paragraph 1.03(i). Except as otherwise provided in this Agreement, at the Effective Time all rights of AB&T’s shareholders with respect to all outstanding shares of AB&T Preferred Stock shall cease to exist and, as consideration for and to effect the Merger, each such outstanding share of AB&T Preferred Stock shall be converted, without any action by 1st Financial, AB&T or any AB&T shareholder, into the right to receive the number of shares of Class B no par value Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of 1st Financial (“1st Financial Preferred Stock”) provided in Paragraph 1.03(b)(2)(B). No share of AB&T Stock or AB&T Preferred Stock shall be deemed to be outstanding or, other than shares as to which the holders have validly exercised “Dissenter’s Rights” (as defined in Paragraph 1.03(g) hereof), have any rights other than those set forth in this Paragraph 1.03(a) after the Effective Time.

(1) At the Effective Time, by virtue of the Merger and without any action on the part of 1st Financial, AB&T, or any holder of shares of AB&T Stock:

(A) Each share of 1st Financial Stock that is issued and outstanding at the Effective Time shall remain issued and outstanding and shall remain unchanged by the Merger.

(B) Subject to Paragraphs 1.03(c), 1.03(f), and 1.03(i), each share of AB&T Stock issued and outstanding immediately before the Effective Time shall be converted into, and shall be canceled in exchange for, the right to receive 1.1750 shares of 1st Financial Stock (the “Exchange Ratio”).

(2) At the Effective Time, by virtue of the Merger and without any action on the part of 1st Financial, AB&T, or any holder of shares of AB&T Preferred Stock:

(A) Each share of 1st Financial Preferred Stock that is issued and outstanding at the Effective Time shall remain issued and outstanding and shall remain unchanged by the Merger.

(B) Subject to Paragraph 1.03(c), each share of AB&T Preferred Stock issued and outstanding immediately before the Effective Time shall be converted into, and shall be canceled in exchange for, the right to receive one (1) share of 1st Financial Preferred Stock (the “Preferred Stock Exchange Ratio).

(3) At the Effective Time, by virtue of the Merger and without any action on the part of 1st Financial, AB&T, or the holder of the AB&T Warrant (as defined in Paragraph 2.02(a) hereof):

(A) The warrantholder’s right to receive shares upon exercise of the AB&T Warrant shall be converted into the right to acquire a number of shares of 1st Financial Stock equal to the Exchange Ratio for every one (1) shares of AB&T Stock covered by the AB&T Warrant prior to the Effective Time, with an appropriate adjustment to the per share exercise price for such AB&T Warrant.

(B) At or prior to the Effective Time, 1st Financial shall take all corporate action necessary to reserve for issuance sufficient shares of 1st Financial Stock for delivery upon exercise of the AB&T Warrant.

(c) Exchange and Payment Procedures; Surrender of Certificates. As promptly as is reasonably practicable following the Effective Time, 1st Financial shall send or cause to be sent to each former AB&T shareholder of record immediately prior to the Effective Time written instructions and transmittal materials (a “Transmittal Letter”) for use in surrendering certificates evidencing AB&T Stock or AB&T Preferred Stock (each a “AB&T Certificate”) to 1st Financial or to its Exchange Agent. Upon the proper surrender and delivery to 1st Financial or its Exchange Agent (in accordance with its instructions, and accompanied by a properly completed Transmittal Letter) by a former shareholder of AB&T of his or her AB&T Certificate(s), and in exchange therefor, 1st Financial shall as soon as practicable thereafter issue and deliver to the shareholder a certificate evidencing the 1st Financial Stock or 1st Financial Preferred Stock into which the shareholder’s AB&T Stock or AB&T Preferred Stock has been converted.

(d) AB&T Certificates. At the Effective Time, and without any action by 1st Financial, AB&T or any AB&T shareholder, AB&T’s stock transfer books shall be closed and there shall be no further transfers of AB&T Stock or AB&T Preferred Stock on its stock transfer books or the registration of any transfer of an AB&T Certificate by any holder thereof, and the holders of AB&T Certificates shall cease to be, and shall have no further rights as, shareholders of AB&T other than as provided in this Agreement. Following the Effective Time, AB&T Certificates shall evidence only the right of the registered holder thereof to receive the Consideration into which his or her AB&T Stock or AB&T Preferred Stock was converted at the Effective Time or, in the case of AB&T Stock held by shareholders who properly shall have exercised Dissenters’ Rights (as defined in Paragraph 1.03(g)), cash as provided in Article 13 of Chapter 55 of the General Statutes of North Carolina.

(e) Certificates and Dividends. Subject to Paragraph 1.03(h), no certificate evidencing 1st Financial Stock shall be issued or delivered to any former AB&T shareholder unless and until such shareholder shall have properly surrendered to 1st Financial or its Exchange Agent the AB&T Certificate(s) formerly representing his or her shares of AB&T Stock, together with a properly completed Transmittal Letter. Further, until a former AB&T

shareholder’s AB&T Certificates are so surrendered and certificates for the 1st Financial Stock into which his or her AB&T Stock was converted at the Effective Time actually are issued to him or her, no cash dividend or other distribution payable by 1st Financial with respect to that 1st Financial Stock as of any date subsequent to the Effective Time shall be paid or delivered to the former AB&T shareholder. However, upon the proper surrender of the shareholder’s AB&T Certificate, 1st Financial shall pay to the shareholder the amount of any such cash dividends or other distributions, without interest, that have accrued but remain unpaid with respect to that 1st Financial Stock.

(f) Antidilutive Adjustments. If, prior to the Effective Time, AB&T or 1st Financial shall declare any dividend payable in shares of AB&T Stock or 1st Financial Stock, respectively, or shall subdivide, split, reclassify or combine the presently outstanding shares of AB&T Stock or 1st Financial Stock then an appropriate and proportionate adjustment shall be made in the 1st Financial Stock to be issued in exchange for each of the shares of AB&T Stock.

(g) Dissenters. Any shareholder of AB&T or 1st Financial who properly exercises any right of dissent and appraisal with respect to the Merger as provided under North Carolina law (“Dissenter’s Rights”), shall be entitled to receive payment of the fair value of his or her shares of AB&T Stock, AB&T Preferred Stock, 1st Financial Stock, or 1st Financial Preferred Stock, as the case may be, in the manner and pursuant to the procedures provided in the North Carolina Business Corporation Act. Shares of AB&T Stock or AB&T Preferred Stock held by persons who properly exercise Dissenter’s Rights shall not be converted as described in Paragraph 1.03(a). However, if any shareholder of AB&T who exercises Dissenter’s Rights shall fail to perfect those rights, or effectively shall waive or lose such rights, then each of his or her shares of AB&T Stock shall be deemed to have been converted into the right to receive 1st Financial Stock, as of the Effective Time as provided in Paragraph 1.03(a) hereof.

(h) Lost Certificates. Shareholders of AB&T whose AB&T Certificates have been lost, destroyed, stolen or otherwise are missing shall be entitled to receive the certificates evidencing 1st Financial Stock or 1st Financial Preferred Stock to which they are entitled in accordance with and upon compliance with reasonable conditions imposed by 1st Financial, including, without limitation, a requirement that those shareholders provide lost instruments indemnities or surety bonds in form, substance and amounts satisfactory to 1st Financial.

(i) Fractional Shares. No fractional shares of 1st Financial Stock shall be issued or delivered in connection with the Merger. In lieu of any such fractional share, subject to the terms and conditions of this Paragraph 1.03, each holder of shares of AB&T Stock who would otherwise have been entitled to a fraction of a share of 1st Financial Stock shall be entitled to receive cash (without interest) in an amount determined by multiplying (i) the fractional share interest to which such holder would otherwise be entitled by (ii) the product obtained by multiplying the average of the last twenty (20) trading days prior to the Effective Time of the average sales price of the shares of common stock of 1st Financial by the Exchange Ratio, as calculated by 1st Financial based on available quotations as of the effective date, which calculations shall be conclusive absent manifest error.

1.04. Closing; Articles Of Merger; Effective Time. The closing of the transaction contemplated by this Agreement (the “Closing”) shall take place at the offices of 1st Financial in Hendersonville, North Carolina, or at such other place as 1st Financial and AB&T shall mutually designate, on a date mutually agreed upon by 1st Financial and AB&T (the “Closing Date”) after the expiration of any and all required waiting periods following the effective date of required approvals of the Merger by governmental or regulatory authorities having jurisdiction over AB&T, Alliance, 1st Financial or Mountain 1st (collectively, the “Regulatory Authorities”). At the Closing, AB&T and 1st Financial shall take such actions (including, without limitation, the delivery of certain closing documents) as are required herein and as shall otherwise be required by law to consummate the Merger and cause it to become effective, and 1st Financial shall execute and file Articles of Merger with the North Carolina Secretary of State under North Carolina law.

Subject to the terms and conditions set forth herein (including, without limitation, the receipt of all required approvals of Regulatory Authorities), the Merger shall be effective (the “Effective Time”) upon the later to occur of the following: (i) the filing of the Articles of Merger with the North Carolina Secretary of State; or (ii) such time specified in the Articles of Merger.

Except as otherwise specifically provided herein or as “Previously Disclosed” (as defined in Paragraph 10.13 hereof) to 1st Financial, AB&T hereby make the following representations and warranties to 1st Financial:

(a) AB&T (i) is duly organized and incorporated, validly existing, and in good standing under the laws of North Carolina; (ii) has all requisite power and authority (corporate and other) to own, lease, and operate its properties and to carry on its business as now being conducted; (iii) is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned, leased, or operated by it therein or in which the transaction of its business makes such qualification necessary, except where failure so to qualify would not have a Material Adverse Effect on AB&T, and (iv) is not transacting business or operating any properties owned or leased by it in violation of any provision of federal or state law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on AB&T. AB&T is registered as a bank holding company and is in good standing with the Board of Governors of the Federal Reserve System (the “FRB”).

(b) Alliance (i) is duly organized and incorporated, validly existing, and in good standing as a banking corporation under the laws of the State of North Carolina; (ii) has all requisite power and authority (corporate and other) to own, lease, and operate its properties and to carry on its business as now being conducted; (iii) is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned, leased, or operated by it therein or in which the transaction of its business makes such qualification

necessary, except where failure so to qualify would not have a Material Adverse Effect on AB&T, and (iv) is not transacting business or operating any properties owned or leased by it in violation of any provision of federal or state law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on AB&T. Alliance is an “insured depository institution” as defined in the Federal Deposit Insurance Act and applicable regulations thereunder. Alliance is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta.

(a) AB&T’s authorized capital stock consists of 10,000,000 shares of common stock, $1.00 par value per share, of which 2,678,205 shares are issued and outstanding, and 1,000,000 shares of preferred stock, no par value per share, of which 3,500 shares are issued and outstanding. These shares of common and preferred stock, together with the stock options described in Paragraph 2.04 below and the warrant to purchase 80,153 shares issued in connection with the issuance of the preferred stock (the “AB&T Warrant”), constitute AB&T’s only outstanding securities. The exercise prices of the stock options and the AB&T Warrant has not been changed since the original issuance of each option and the AB&T Warrant.

Each outstanding share of AB&T Stock (i) has been duly authorized and is validly issued and outstanding, and is fully paid and nonassessable, and (ii) has not been issued in violation of the preemptive rights of any shareholder. The AB&T Stock has been registered with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended (the “1934 Act”) and AB&T is subject to the registration and reporting requirements of the 1934 Act. The outstanding shares of common stock of Alliance are duly authorized, validly issued, fully paid and nonassessable, except to the extent set forth in N.C. Gen. Stat. § 53-42.

(b) Subsidiaries. AB&T has one wholly-owned subsidiary, Alliance, a North Carolina banking corporation. Alliance’s authorized capital stock consists of 10,000,000 shares of common stock, $5.00 par value per share, of which 2,678,205 shares are issued and outstanding and constitute Alliance’s only outstanding securities; and 1,000,000 shares of preferred stock, of which no shares are issued and outstanding. AB&T has no other subsidiaries, and Alliance has no subsidiaries. Except for equity securities included in their investment portfolios, neither AB&T nor Alliance owns any stock or other equity interest in any other corporation, service corporation, joint venture, partnership or other entity

2.03. Principal Shareholders Except as Previously Disclosed, no shareholder beneficially owns more than five percent of the outstanding shares of AB&T Stock. AB&T owns all of the issued and outstanding shares of common stock of Alliance.

2.04. Convertible Securities, Options, Etc. Except as Previously Disclosed and with the exception of options to purchase an aggregate of 369,636 shares of AB&T Stock which options have been issued and are outstanding under the AB&T Financial Corporation 2005 Incentive Stock Option Plan and the AB&T Financial Corporation 2005 Nonstatutory Stock Option Plan (“AB&T Stock Options”), and the AB&T Warrant, AB&T does not have any outstanding (i) securities or other obligations (including debentures or other debt instruments)

which are convertible into shares of AB&T Stock or any other securities of AB&T; (ii) options, warrants, rights, calls, or other commitments of any nature which entitle any person to receive or acquire any shares of AB&T Stock or any other securities of AB&T; or (iii) plans, agreements or other arrangements pursuant to which shares of AB&T Stock or any other securities of AB&T, or options, warrants, rights, calls, or other commitments of any nature pertaining thereto, have been or may be issued.

2.05. Authorization and Validity of Agreement. This Agreement has been duly and validly approved by AB&T’s Board of Directors in the manner required by law. Subject only to approval of this Agreement by the shareholders of AB&T in the manner required by law as contemplated by Paragraph 6.01(b) hereof and receipt of all required approvals of Regulatory Authorities as contemplated by Paragraph 6.02 hereof, (i) AB&T has the corporate power and authority to execute and deliver this Agreement and to perform its obligations and agreements and carry out the transactions described in this Agreement; (ii) all corporate action required to authorize AB&T to enter into this Agreement and to perform its obligations and agreements and carry out the transactions described herein has been duly and properly completed or obtained; and (iii) this Agreement has been duly executed on behalf of AB&T, and (assuming due authorization, execution and delivery by 1st Financial) constitutes the valid and binding agreement of AB&T, enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws from time to time in effect which affect creditors’ rights generally; and (B) by legal and equitable limitations on the availability of injunctive relief, specific performance, and other equitable remedies, and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions).

2.06. Validity of Transactions; Absence of Required Consents or Waivers. Subject to the approval of this Agreement by the shareholders of AB&T in the manner required by law and receipt of required approvals of Regulatory Authorities, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by AB&T with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, AB&T’s Articles of Incorporation or Bylaws, Alliance’s Articles of Incorporation or Bylaws, or any material contract, agreement, lease, mortgage, note, bond, indenture, license, or obligation or understanding (oral or written) to which AB&T or Alliance is bound or by which either AB&T or Alliance, their business, capital stock, or any properties or assets, may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction, or encumbrance upon any of AB&T’s or Alliance’s properties or assets; (iii) violate any applicable federal or state statute, law, rule, or regulation, or any judgment, order, writ, injunction, or decree of any court, administrative or regulatory agency, or governmental body which violation will or may have a Material Adverse Effect on AB&T or Alliance; (iv) result in the acceleration of any material obligation or indebtedness of AB&T or Alliance; or (v) interfere with or otherwise adversely affect AB&T’s or Alliance’s ability to carry on its business as presently conducted.

No consents, approvals, or waivers are required to be obtained from any person or entity in connection with AB&T’s execution and delivery of this Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for required approvals of AB&T’s shareholders and of Regulatory Authorities.

2.07. AB&T’s Books and Records. AB&T’s and Alliance’s books of account and business records have been maintained in material compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books and records are complete and reflect accurately in all material respects AB&T’s and Alliance’s items of income and expense and all of their assets, liabilities, and shareholders’ equity. The minute books of AB&T and Alliance accurately reflect in all material respects the corporate actions that their shareholders and Boards of Directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to 1st Financial and its representatives.

(a) AB&T and Alliance have filed all reports, registrations, registrations statements, and other filings, together with any amendments required to be made with respect thereto, that were required to be filed with (i) the SEC; (ii) the FRB; (iii) the Federal Deposit Insurance Corporation (“FDIC”); (iv) the Office of the North Carolina Commissioner of Banks (the “Commissioner”); and (v) any other Regulatory Authorities. All such reports, registrations, and statements filed by AB&T or Alliance with the SEC, the FRB, the FDIC, the Commissioner or other such Regulatory Authorities are collectively referred to herein as the “AB&T Reports.” Each AB&T Report complied in all material respects with all the statutes, rules, and regulations enforced or promulgated by the regulatory authority with which it was filed and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and AB&T has not been notified by any such governmental or regulatory authority that any such Report was deficient in any material respect as to form or content.

(b) Neither AB&T nor Alliance is required to file any report, registration, statement or other filing with the SEC or with any other Regulatory Authority pursuant to any federal or state laws pertaining to the purchase, sale or issuance of securities or the regulation thereof or the market therefor which has not been filed.

(c) AB&T’s officers who serve, and Alliance’s officers who served prior to Alliance’s holding company reorganization, as the “principal executive officer” and “principal financial officer” (as those terms are defined in the SEC’s rules and regulations) have made, and furnished to the SEC or FDIC, all certifications with respect to AB&T Reports filed under the 1934 Act that were required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, as amended (“SOX”) and rules and regulations thereunder, and those certifications contain no qualifications or exceptions to the matters certified therein and have not been modified or withdrawn Neither AB&T nor Alliance nor any of their officers has received notice from the SEC or FDIC questioning or challenging the accuracy, completeness, form or manner of filing or submission of such certifications.

2.09. Financial Statements of AB&T. AB&T has Previously Disclosed to 1st Financial a copy of its or Alliance’s audited statements of financial condition as of December 31, 2007, 2006, and 2005 and audited statements of income, shareholders’ equity and cash flows for the years ended December 31, 2007, 2006, and 2005, together with notes thereto (collectively, the “AB&T Audited Financial Statements”), together with copies of its unaudited statements of financial condition as of September 30, 2008, and unaudited statements of income and cash flows for the nine-month periods ended September 30, 2008 and 2007 (collectively, the “AB&T Interim Financial Statements”). All such financial statements of AB&T are consolidated financial statements. Following the date of this Agreement, AB&T will prepare timely all financial statements required, and promptly will deliver to 1st Financial those and all other annual or interim financial statements prepared by or for AB&T (the “Pending Financial Statements”). The AB&T Audited Financial Statements and the AB&T Interim Financial Statements and the Pending Financial Statements (including any related notes and schedules thereto) (i) are or will be in accordance with AB&T’s books and records; (ii) were or will have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) applied on a consistent basis throughout the periods indicated; and (iii) present or will present fairly in all material respects AB&T’s financial condition, assets and liabilities, results of operations, changes in shareholders’ equity, and changes in cash flows as of the dates indicated and for the periods specified therein. The AB&T Audited Financial Statements have been audited by AB&T’s independent certified public accountants, Elliott Davis PLLC.

2.10. Tax Returns and Other Tax Matters. (i) AB&T and Alliance have timely filed or caused to be filed all federal, state, and local tax returns and reports which are required by law to have been filed, and all such returns and reports were true, correct, and complete in all material respects and contained all material information required to be contained therein; (ii) all federal, state, and local income, profits, franchise, sales, use, occupation, property, excise, and other taxes (including interest and penalties), charges and assessments which have become due from or been assessed or levied against AB&T, Alliance or their property have been fully paid, or if not yet due, a reserve or accrual, which is adequate in all material respects for the payment of all such taxes to be paid and the obligation for such unpaid taxes, is reflected in the AB&T Interim Financial Statements; (iii) the income, profits, franchise, sales, use, occupation, property, excise, withholding, employment and other tax returns and reports of AB&T and Alliance have not been subjected to audit by the Internal Revenue Service (the “IRS”) or the North Carolina Department of Revenue or any other taxing authority and neither AB&T nor Alliance has received any indication of the pendency of any audit or examination in connection with any tax return or report and, to the Best Knowledge of AB&T, no such return or report is subject to adjustment; and (iv) neither AB&T nor Alliance executed any waiver or extended the statute of limitations (or been asked to execute a waiver or extend a statute of limitations) with respect to any tax year, the audit of any tax return or report or the assessment or collection of any tax. The aggregate unpaid taxes of AB&T and Alliance (i) did not, as of the most recent fiscal quarter end, exceed, in any material respect, the reserve for tax liability (as opposed to any reserve for deferred taxes established to reflect timing differences between book and tax income) set forth on the face of the most recent balance sheet delivered to 1st Financial (as opposed to in any notes thereto) and (ii) do not exceed, in any material respect, that reserve as adjusted for the passage of time through the Closing Date in accordance with the past custom and practice of AB&T and Alliance in filing their Tax Returns. Since the date of the most recent balance sheet delivered to

1st Financial, neither AB&T nor Alliance has incurred any liability for taxes arising from extraordinary gains or losses, as that term is used in GAAP, outside the ordinary course of business consistent with past custom and practice.

(a) Since September 30, 2008, AB&T and Alliance have conducted their business only in the ordinary course and there has been no Material Adverse Change, and there has occurred no event or development and there currently exists no condition or circumstance to the Best Knowledge of AB&T which, with the lapse of time or otherwise, is reasonably likely to cause, create, or result in a Material Adverse Change in or affecting AB&T or Alliance.

(b) Since September 30, 2008, and except as described in Paragraph 2.12 below, neither AB&T nor Alliance has incurred any material liability or engaged in any material transaction or entered into any material agreement, increased the salaries, compensation, or general benefits payable or provided to its employees (other than routine increases effected at such times and in such amounts as is consistent with past practices and salary administration and review procedures in effect prior to December 31, 2007), suffered any loss, destruction, or damage to any of its properties or assets, or made a material acquisition or disposition of any assets or entered into any material contract or lease.

2.12. Absence of Undisclosed Liabilities. Neither AB&T nor Alliance has any liabilities or obligations, whether known or unknown, matured or unmatured, accrued, absolute, contingent, or otherwise, whether due or to become due (including, without limitation, tax liabilities or unfunded liabilities under employee benefit plans or arrangements), other than (i) those reflected in the AB&T Audited Financial Statements or the AB&T Interim Financial Statements; (ii) increases in deposit accounts in the ordinary course of business since September 30, 2008; or (iii) loan commitments in the ordinary course of its business since September 30, 2008.

2.13. Compliance with Existing Obligations. AB&T and Alliance have performed in all material respects all obligations required to be performed by them under, and neither is in default in any material respect under, or in violation in any material respect of, the terms and conditions of its Articles of Incorporation or Bylaws, and/or any contract, agreement, lease, mortgage, note, bond, indenture, license, obligation, understanding, or other undertaking (whether oral or written) to which either is bound or by which either, their business, operations, capital stock, or any of their properties or assets may be affected, which default or violation would have a Material Adverse Effect on AB&T or Alliance.

(a) There are no actions, suits, arbitrations, controversies, or other proceedings or investigations (or, to the Best Knowledge of AB&T, any facts or circumstances which reasonably could result in such), including, without limitation, any such action by any Regulatory Authority, which currently exists or is ongoing, pending, or, to the Best Knowledge of AB&T, threatened, contemplated, or probable of assertion, against, relating to, or otherwise affecting AB&T, Alliance or any of their properties, assets or employees.

(b) AB&T and Alliance have all licenses, permits, orders, authorizations, or approvals (“AB&T Permits”) of any federal, state, local, or foreign governmental or regulatory body that are material to or necessary for the conduct of their business or to own, lease, and operate their properties. All such AB&T Permits are in full force and effect. No violations have occurred in respect of any such AB&T Permits. No proceeding is pending or, to the Best Knowledge of AB&T, threatened or probable of assertion to suspend, cancel, revoke, or limit any AB&T Permit.

(c) Neither AB&T nor Alliance is subject to any supervisory agreement, enforcement order, writ, injunction, capital directive, supervisory directive, memorandum of understanding, or other similar agreement, order, directive, memorandum, or consent of, with or issued by any regulatory or other governmental authority (including, without limitation, the FRB, the FDIC and the Commissioner) relating to its financial condition, directors or officers, operations, capital, regulatory compliance, or any other matter. There are no judgments, orders, stipulations, injunctions, decrees, or awards against AB&T or Alliance which in any manner limit, restrict, regulate, enjoin, or prohibit any present or past business or practice of AB&T or Alliance. Neither AB&T nor Alliance has been advised that any regulatory or other governmental authority or any court is contemplating, threatening, or requesting the issuance of any such agreement, order, injunction, directive, memorandum, judgment, stipulation, decree, or award.

(d) Neither AB&T nor Alliance is in violation of, or default in any material respect under, and AB&T and Alliance have complied in all material respects with, all laws, statutes, ordinances, rules, regulations, orders, writs, injunctions, or decrees of any court or federal, state, municipal, or other Regulatory Authority having jurisdiction or authority over AB&T, Alliance or their business operations, properties, or assets (including, without limitation, all provisions of North Carolina law relating to usury, consumer protection laws, and all other laws and regulations applicable to extensions of credit by Alliance). To the Best Knowledge of AB&T, there is no basis for any claim by any person or authority for compensation, reimbursement, or damages or other penalties for any violations described in this Subparagraph (d).

(a) AB&T has Previously Disclosed to 1st Financial a listing of all real property owned or leased by AB&T or Alliance (including, without limitation, banking facilities and all other real estate or foreclosed properties, including improvements thereon, owned by AB&T or Alliance) (collectively the “AB&T Real Property”) and all leases, if any, pertaining to any such AB&T Real Property to which AB&T or Alliance is a party (the “AB&T Real Property Leases”). With respect to each parcel of the AB&T Real Property owned by AB&T or Alliance, AB&T or Alliance, as applicable, has good and marketable fee simple title to such AB&T Real Property and owns the same free and clear of all mortgages, liens, leases, encumbrances, title defects, and exceptions to title other than (i) the lien of current taxes not yet due and payable, and (ii) such imperfections of title and restrictions, covenants and easements (including utility easements) which do not materially and adversely affect the value of the AB&T Real Property and which do

not and will not materially detract from, interfere with, or restrict the present or future use of the AB&T Real Property. With respect to each AB&T Real Property Lease: (A) (i) AB&T or Alliance has unconditionally accepted occupancy of and currently is occupying the property to which the AB&T Real Property Lease pertains, (ii) the lease term, commencement date, expiration date, renewal terms, and current rent is as set forth in the AB&T Real Property Lease, (iii) the AB&T Real Property Lease is in full force and effect and has not been modified or amended, (iv) the terms and conditions of the AB&T Real Property Lease will continue without modification notwithstanding the Merger, and the Merger will not be deemed to be a transfer or assignment in violation of or otherwise to violate the AB&T Real Property Lease, to require the approval of the landlord under the AB&T Real Property Lease, or to prevent the exercise of or result in the loss of any right or option to renew or extend the AB&T Real Property Lease or to purchase the property to which the AB&T Real Property Lease pertains; (v) AB&T or Alliance has performed all of the lessee’s obligations (including the payment of rent) under the AB&T Real Property Lease, and no event of default by the lessee exists or has occurred under that AB&T Real Property Lease (including without limitation any default that would prevent the exercise of or result in the loss of any right or option to renew or extend the AB&T Real Property Lease or to purchase the property to which the AB&T Real Property Lease pertains); and (vi) to the Best Knowledge of AB&T, the landlord with respect to that parcel has performed all of the landlord’s obligations under the property to which the AB&T Real Property Lease pertains, and no event of default by the landlord exists or has occurred under that the property to which the AB&T Real Property Lease pertains.

(b) The AB&T Real Property complies in all material respects with all applicable federal, state, and local laws, regulations, ordinances, or orders of any governmental or regulatory authority, including those relating to zoning, building and use permits, and the Americans with Disabilities Act, and the parcels of AB&T Real Property upon which AB&T’s and Alliance’s banking or other offices are situated, or which are used by AB&T or Alliance in conjunction with their banking or other offices or for other purposes, may be used under applicable zoning ordinances for the purposes for which they are currently used as a matter of right rather than as a conditional or nonconforming use.

(c) All improvements and fixtures included in or on each parcel of AB&T Real Property are in good condition and repair, ordinary wear and tear excepted, and performing the functions for which they were intended, and there does not exist any condition which in any material respect interferes with the use of that parcel by AB&T and Alliance (or will interfere with 1st Financial’s or Mountain 1st’s use after the Merger) or adversely affects the economic value or marketability thereof.

(a) All loans, accounts, notes and other receivables reflected as assets on AB&T’s or Alliance’s books and records (i) have resulted from bona fide business transactions in the ordinary course of AB&T’s or Alliance’s operations; (ii) in all material respects were made in accordance with Alliance’s customary loan policies and procedures; (iii) in all respects were made in accordance with Regulation O of the FRB; and (iv) are owned by AB&T or Alliance free and clear of all liens, encumbrances, assignments, participation or repurchase agreements, or

other exceptions to title or to the ownership or collection rights of any other person or entity (other than Federal Home Loan Bank borrowings or repurchase agreements entered into in the ordinary course of business).

(b) All records of AB&T and Alliance regarding all outstanding loans, accounts, notes, and other receivables, and all other real estate owned, are accurate in all material respects, and, with respect to each loan which AB&T’s or Alliance’s loan documentation indicates is secured by any real or personal property or property rights (“Loan Collateral”), such loan is secured by valid, perfected, and enforceable liens on all such Loan Collateral having the priority described in AB&T’s or Alliance’s records of such loan.

(c) Each loan reflected as an asset on AB&T’s or Alliance’s books, and each guarantee therefor, is the legal, valid, and binding obligation of the obligor or guarantor thereon, and no defense, offset, or counterclaim has been asserted with respect to any such loan or guaranty, subject to bankruptcy, insolvency, fraudulent conveyance and other laws of general applicability relating to or affecting creditors’ rights and to general equity principles.

(d) AB&T has Previously Disclosed to 1st Financial a listing of (i) each loan, extension of credit, or other asset of AB&T or Alliance which, as of December 31, 2008, was classified by any Regulatory Authority, or by AB&T or Alliance as “Loss”, “Doubtful”, “Substandard”, or “Special Mention” (or otherwise by words of similar import), or which AB&T or Alliance has designated as a special asset or for special handling or placed on any “watch list” because of concerns regarding the ultimate collectibility or deteriorating condition of such asset or any obligor or Loan Collateral therefor, (ii) each loan or extension of credit of AB&T or Alliance which, as of December 31, 2008, was past due thirty (30) days or more as to the payment of principal and/or interest, or as to which any obligor thereon (including the borrower or any guarantor) otherwise was in default, is the subject of a proceeding in bankruptcy, or otherwise has indicated an inability or intention not to repay such loan or extension of credit; and (iii) each loan (A) held for resale for more than 90 days but not sold, (B) repurchased, to be repurchased, or identified as at risk of having to be repurchased, from any investor; (C) is on the balance sheet but has been or is to be repurchased by an investor; or (D) as to which any investor has requested indemnification or as to which there is any outstanding mortgage insurance claim.

(e) To the Best Knowledge of AB&T, each of AB&T’s or Alliance’s loans and other extensions of credit (with the exception of those loans and extensions of credit specified in the written listings described in Subparagraph (d) above) is collectible in the ordinary course of AB&T’s or Alliance’s business in an amount which is not less than the amount at which it is carried on AB&T’s or Alliance’s books and records.

(f) Alliance’s reserve for loan losses (the “Loan Loss Reserve”) has been established in conformity with GAAP, sound banking practices and all applicable requirements, rules and policies of the FDIC and the Commissioner and, in the best judgment of management and the Boards of Directors of AB&T and Alliance, is reasonable in view of the size and character of Alliance’s loan portfolio, current economic conditions and other relevant factors, and is adequate to provide for losses relating to or the risk of loss inherent in Alliance’s loan portfolios.

(g) Alliance’s reserves for possible loan repurchases (the “Loan Repurchase Reserve”) has been established in conformity with GAAP, sound banking practices and all applicable rules, requirements and policies of the FDIC and the Commissioner and, in the best judgment of management and the Boards of Directors of AB&T and Alliance, is reasonable in view of the amount and character of (i) loans which have been sold, (ii) loans which have been repurchased or are in process of being repurchased, (iii) loans which have been identified as being at risk of repurchase, (iv) potential losses related to current and future repurchased loans, and (v) current economic conditions, and other relevant factors.

2.17. Securities Portfolio and Investments. AB&T has Previously Disclosed to 1st Financial a listing of all securities owned, of record or beneficially, by AB&T or Alliance as of December 31, 2008. All securities owned are held free and clear of all mortgages, liens, pledges, encumbrances, or any other restriction or rights of any other person or entity, whether contractual or statutory (other than customary pledges in the ordinary course of its business to secure public funds deposits or Federal Home Loan Bank borrowings or repurchase agreements entered into in the ordinary course of business), which would materially impair the ability of AB&T or Alliance to dispose freely of any such security or otherwise to realize the benefits of ownership thereof at any time. There are no voting trusts or other agreements or undertakings to which AB&T or Alliance is a party with respect to the voting of any such securities. With respect to all “repurchase agreements” under which AB&T or Alliance has “sold” or “purchased” securities under agreement to repurchase, AB&T or Alliance, as applicable, has a valid, perfected first lien or security interest in the government securities or other collateral securing the repurchase agreement, and the value of the collateral securing each such repurchase agreement equals or exceeds the amount of the debt owed by AB&T or Alliance, as the case may be, which is secured by such collateral.

Since September 30, 2008, there has been no material deterioration or adverse change in the quality, or any material decrease in the value, of AB&T’s or Alliance’s securities portfolio as a whole.

2.18. Personal Property and Other Assets. All banking equipment, data processing equipment, vehicles, and other personal property used by AB&T or Alliance and material to the operation of their business are owned or leased by AB&T or Alliance free and clear of all liens, encumbrances, title defects, or exceptions to title. All personal property of AB&T and Alliance material to their business is in good operating condition and repair, ordinary wear and tear excepted.

2.19. Patents, Trademarks and Licenses. AB&T and Alliance own, possess or have the right to use any and all patents, licenses, trademarks, trade names, copyrights, trade secrets and proprietary and other confidential information necessary to conduct their business as now conducted. AB&T and Alliance have not violated, and currently are not in conflict with, any patent, license, trademark, trade name, copyright or proprietary right of any other person or entity. AB&T and Alliance own, possess or have the right to use any and all licenses necessary to lawfully use any and all software, applications and code currently installed or otherwise in use on any computer hardware of AB&T or Alliance or otherwise used by AB&T or Alliance in the conduct of its business.

(i) “Environmental Laws” shall mean, without limitation: all federal, state, and local statutes, regulations, ordinances, orders, decrees, common law, and similar provisions having the force or effect of law (including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act, the Superfund Amendment and Reauthorization Act, the Federal Insecticide, Fungicide and Rodenticide Act, the Hazardous Materials Transportation Act, the Resource Conservation and Recovery Act, the Clean Water Act, the Clean Air Act, the Toxic Substances Control Act, the Oil Pollutant Act, the Coastal Zone Management Act, any “Superfund” or “Superlien” law), concerning public health and safety, worker health and safety, and pollution or protection of the environment, including, without limitation, all standards of conduct and bases of obligations relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, discharge, release, threatened release, control, or clean-up of any Hazardous Substances (as defined below)

(ii) “Hazardous Substance” shall mean any materials, substances, wastes, chemical substances, or mixtures presently listed, defined, designated, or classified as hazardous, toxic, or dangerous, or otherwise regulated, under any Environmental Laws, whether by type, quantity or concentration, including without limitation pesticides, pollutants, contaminants, toxic chemicals, oil, or other petroleum products, byproducts or additives, asbestos or materials containing (or presumed to contain) asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, lead, radon, methyl tertiary butyl ether (“MTBE”) or radioactive material.

(b) AB&T has Previously Disclosed to 1st Financial copies of all written reports, correspondence, notices, or other materials, if any, in its possession pertaining to environmental reports, surveys, assessments, notices of violation, notices of regulatory requirements, penalty assessments, claims, actions, or proceedings, past or pending, of the AB&T Real Property and any improvements thereon, or pertaining to any violation or alleged violation of Environmental Laws on, affecting or otherwise involving the AB&T Real Property or involving AB&T or Alliance.

(c) To the Best Knowledge of AB&T, there has been no presence, use, production, generation, handling, transportation, treatment, storage, disposal, emission, discharge, release, or threatened release of any Hazardous Substances by any person on, from or relating to the AB&T Real Property which constitutes a violation of any Environmental Laws, or any removal, clean-up or remediation of any Hazardous Substances from, on or relating to the AB&T Real Property.

(d) Neither AB&T nor Alliance has violated any Environmental Laws, and, to the Best Knowledge of AB&T, there has been no violation of any Environmental Laws by any other person or entity for whose liability or obligation with respect to any particular matter or violation AB&T or Alliance is or may be responsible or liable.

(e) Neither AB&T nor Alliance is subject to any claims, demands, causes of action, suits, proceedings, losses, damages, penalties, liabilities, obligations, costs or expenses of any kind and nature which arise out of, under or in connection with, or which result from or are based upon the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any Hazardous Substances on, from or relating to the AB&T Real Property by any person or entity.

(f) To the Best Knowledge of AB&T, no facts, events or conditions relating to the AB&T Real Property or the operations of AB&T or Alliance at any of their office locations, will prevent, hinder or limit continued compliance with Environmental Laws, or give rise to any investigatory, emergency removal, remedial or corrective actions, obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental Laws.

(g) To the Best Knowledge of AB&T, (i) there has been no violation of any Environmental Laws by any person or entity (including any violation with respect to any Loan Collateral) for whose liability or obligation with respect to any particular matter or violation AB&T or Alliance is or may be responsible or liable; (ii) Neither AB&T nor Alliance is subject to any claims, demands, causes of action, suits, proceedings, losses, damages, penalties, liabilities, obligations, costs or expenses of any kind and nature which arise out of, under or in connection with, or which result from or are based upon, the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any Hazardous Substances on, from or relating to any Loan Collateral, by any person or entity; and (iii) there are no facts, events or conditions relating to any Loan Collateral that will give rise to any investigatory, emergency removal, remedial or corrective actions, obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental Laws.

2.21. Absence of Brokerage or Finder’s Commissions. AB&T has Previously Disclosed its engagement agreement with FIG Partners, LLC relative to this Agreement, and except for the engagement of FIG Partners, LLC by AB&T: (i) all negotiations relative to this Agreement and the transactions described herein have been carried on by AB&T directly (or through its legal counsel) and no person or firm has been retained by or has acted on behalf of, pursuant to any agreement, arrangement or understanding with, or under the authority of, AB&T or its Board of Directors, as a broker, finder or agent or has performed similar functions or otherwise is or may be entitled to receive or claim a brokerage fee or other commission in connection with or as a result of the transactions described herein; and (ii) AB&T has not agreed, or has any obligation, to pay any brokerage fee or other commission to any person or entity in connection with or as a result of the transactions described herein.

2.22. Material Contracts. Except as Previously Disclosed to 1st Financial pursuant to Paragraph 2.24 hereof, neither AB&T nor Alliance is a party to or bound by any agreement (i) involving money or other property in an amount or with a value in excess of $25,000 (ii) which is not to be performed in full within the six (6) month period following the date of this

Agreement; (iii) which calls for the provision of goods or services to AB&T or Alliance and cannot be terminated without material penalty upon no more than 30 days written notice to the other party thereto; (iv) which is material to AB&T or Alliance and was not entered into in the ordinary course of business; (v) which involves hedging, options or any similar trading activity, or interest rate exchanges or swaps; (vi) which commits AB&T or Alliance to extend any loan or credit (with the exception of letters of credit, lines of credit and loan commitments extended in the ordinary course of Alliance’s business for loans which do not exceed $100,000 in the case of one or more loan commitments to any one borrower or group of related borrowers); (vii) which involves the sale of any assets of AB&T or Alliance which are used in and material to the operation of their business; (viii) which involves any purchase of real property, or which involves the purchase of any other assets in the amount of $10,000 or more in the case of any single transaction or $25,000 or more in the case of all such transactions; (ix) which involves the purchase, sale, issuance, redemption or transfer of any capital stock or other securities of AB&T or Alliance, except for the AB&T Stock Options and the AB&T Warrant; or (x) with any director, officer or principal shareholder of AB&T (including without limitation any consulting agreement, but not including any agreements relating to loans or other banking services which were made in the ordinary course of Alliance’s business and on substantially the same terms and conditions as were prevailing at that time for similar agreements with unrelated persons).

Neither AB&T nor Alliance is in default in any material respect, and there has not occurred any event which with the lapse of time or giving of notice or both would constitute a default, under any contract, lease, insurance policy, commitment, or arrangement to which it is a party or by which it or its property is or may be bound or affected or under which it or its property receives benefits, where the consequences of such default would have a Material Adverse Effect on AB&T or Alliance.

2.23. Employment Matters; Employee Relations. AB&T has Previously Disclosed to 1st Financial a listing of the names, years of credited service and current base salary or wage rates of all of its employees and all employees of Alliance as of December 31, 2008. AB&T and Alliance (i) have in all material respects paid in full to or accrued on behalf of all their directors, officers and employees all wages, salaries, commissions, bonuses, fees and other direct compensation for all labor or services performed by them to the date of this Agreement, and all vacation pay, sick pay, severance pay, overtime pay and other amounts for which it is obligated under applicable law or its existing agreements, benefit plans, policies or practices; and (ii) are in compliance with all federal, state, and local laws, statutes, rules, and regulations with regard to employment and employment practices, terms and conditions, and wages and hours, and other compensation matters. No person has, to the Best Knowledge of AB&T, asserted that AB&T or Alliance is liable in any amount for any arrearages in wages or employment taxes or for any penalties for failure to comply with any of the foregoing.

There is no action, suit, or proceeding by any person pending or, to the Best Knowledge of AB&T, threatened, against AB&T or Alliance (or any of their employees), involving employment discrimination, sexual harassment, wrongful discharge, workers’ compensation or similar claims.

Neither AB&T nor Alliance is a party to or bound by any collective bargaining agreement with any of its employees, any labor union, or any other collective bargaining unit or organization. There is no pending or, to the Best Knowledge of AB&T, threatened labor dispute, work stoppage, or strike involving AB&T, Alliance or any of their employees, or any pending or, to the Best Knowledge of AB&T, threatened proceeding in which it is asserted that AB&T or Alliance has committed any unfair labor practice; and, to the Best Knowledge of AB&T, there is no activity involving AB&T, Alliance or any of their employees seeking to certify a collective bargaining unit or engaging in any other labor organization activity.

(a) Except as Previously Disclosed, neither AB&T nor Alliance is a party to or bound by any employment agreements with any of its directors, officers, or employees.

(1) “ERISA” means the Employee Retirement Income Security Act of 1974, as amended;

(2) “COBRA” means the provisions of Code Section 4980B and Part 6 of Subtitle B of Title I of ERISA; and

(3) “HIPPA” means the provisions of the Code and ERISA enacted by the Health Insurance Portability and Accountability Act of 1996.

(c) AB&T has Previously Disclosed a true and complete list of: (i) all bonus, deferred compensation, pension, retirement, salary continuation, profit-sharing, thrift, savings, employee stock ownership, stock bonus, stock purchase, restricted stock, stock appreciation rights, and stock option plans (including a listing of all outstanding AB&T Stock Options); (ii) all employment, change in control and severance contracts; (iii) all medical, dental, health, and life insurance plans; (iv) all vacation, sickness and other leave plans; (iv) all disability and death benefit plans; and (v) all other employee benefit plans, contracts, or arrangements (including any other stock-based plan or arrangements) maintained or contributed to by it for the benefit of any of its current or former officers, employees, contractors or directors or any of their beneficiaries, or for which either AB&T or Alliance may have any liability (collectively, the “Plans”). There are no other entities or other trades or businesses that can or should be treated as a single employer, together with either AB&T or Alliance, with respect to any Plan under Section 414 of the Code. All reports and returns with respect to the Plans (and any Plans previously maintained by either AB&T or Alliance) required to be filed with any governmental department, agency, service or other authority, including without limitation Internal Revenue Service Form 5500 (Annual Report) or the one-time filing with the United States Department of Labor (the “DOL”) in lieu of such Annual Report, or distributed to participants and their beneficiaries, have been properly and timely filed or distributed.

(d) All Plans currently are, and at all times have been, in compliance, in all material respects, with all provisions and requirements of applicable law, including the Code and ERISA

and the terms of the Plans. There is no pending or, to the Best Knowledge of AB&T, threatened litigation relating to any Plan. Neither AB&T nor Alliance have engaged in a transaction with respect to any Plan that could subject it, any of them or their directors or employees or any Plan to a tax or penalty imposed by either Section 4975 of the Code or Section 502(i) or (l) of ERISA.

(e) All Plans which are intended to be plans qualified under Section 401(a) of the Code (“Retirement Plans”), are qualified under the provisions of Section 401(a) of the Code, the trusts under the Retirement Plans are exempt trusts under Section 501(a) of the Code, and determination or opinion letters have been issued and may be relied upon, or have been applied for, with respect to each such qualification and exemption, including determination letters covering the current terms and provisions of the Retirement Plans unless the time period for applying for any such determination or opinion letters covering the current terms and provisions of the Retirement Plans has not yet expired. There is no reason why any such determination letter will or should be revoked or not be issued or reissued. There are no issues relating to said qualification or exemption of the Retirement Plans pending or threatened before the IRS, the DOL, the Pension Benefit Guaranty Corporation or any court. There are no claims, issues or disputes with respect to any of the Plans or the administration thereof currently existing between either AB&T or Alliance, or any trustee or other fiduciary thereunder, and any governmental agency, any current or former employee of either AB&T or Alliance or beneficiary of any such employee, or any other person or entity (other than claims for benefits in the ordinary course).

(f) All contributions, premiums or payments required to be made pursuant to the terms of each of the Plans have been timely made. All such contributions were fully deductible and not subject to excise taxes under the Code.

(g) There are no restrictions on the rights of either AB&T or Alliance to amend or terminate unilaterally any Plan with respect to prospective benefit accruals without incurring any liability thereunder (other than normal administrative expenses). Termination or liquidation of any Plan or any of the investments or insurance contracts relating to any Plan will not result in any material sales charge, surrender fee, interest rate adjustment or similar expense. Neither the execution and delivery of this Agreement nor the consummation of the transactions described herein (either alone or in combination with another event) will, except as otherwise specifically provided in this Agreement or as Previously Disclosed (i) result in any payment to any person (including without limitation any severance compensation or payment, unemployment compensation, “golden parachute” or “change in control” payment, or otherwise) becoming due under any Plan or agreement to any director, officer, employee or consultant, (ii) increase any benefits otherwise payable under any Plan or agreement, or (iii) result in any acceleration of the time of payment or vesting of any such benefit.

(h) With respect to each Plan, no event has occurred, and there exists no condition or set of circumstances in connection with which either AB&T or Alliance could, directly or indirectly, be subject to any liability under ERISA, the Code or any other applicable law, except for liability for benefit claims and funding obligations payable in the ordinary course and consistent with the terms of the Plan.

(i) Neither AB&T nor Alliance currently sponsors or maintains, and none of them have ever sponsored or maintained or been liable with respect to, any employee benefit plan that is or was (A) subject to Section 302 or Title IV of ERISA or Section 412 of the Code, (B) a multiemployer plan as defined in Code Section 414(f) or ERISA Sections 3(37) or 4001(a)(31), (C) a multiple employer plan within the meaning of Code Section 413(c) or ERISA Sections 4063, 4064 or 4066 or (D) a multiemployer welfare arrangement within the meaning of ERISA Section 3(40).

(j) No liability under subtitle C or D of Title IV of ERISA has been or is expected to be incurred by AB&T or Alliance with respect to the Plans or with respect to any other ongoing, frozen or terminated defined benefit pension plan currently or formerly maintained by AB&T or Alliance. All contributions required to be made pursuant to the terms of each of the Plans (including without limitation Retirement Plans and any other “pension plan” (as defined in Section 3(2) of ERISA, provided such plan is intended to qualify under the provisions of Section 401(a) of the Code) have been timely made. Neither Retirement Plans nor any other “pension plan” has an “accumulated funding deficiency” (whether or not waived) within the meaning of Section 412 of the Code or Section 302 of ERISA. Neither AB&T nor Alliance has provided, and neither is required to provide, security to any “pension plan” or to any “Single Employer Plan” pursuant to Section 401(a)(29) of the Code. Under Retirement Plans and any other “pension plan” maintained by AB&T or Alliance as of the last day of the most recent plan year ended prior to the date hereof, the actuarially determined present value of all “benefit liabilities,” within the meaning of Section 4001(a)(16) of ERISA (as determined on the basis of the actuarial assumptions contained in the plan’s most recent actuarial valuation) did not exceed the then current value of the assets of such plan, and there has been no material change in the financial condition of any such plan since the last day of the most recent plan year.

(k) Each Plan that is a “group health plan” has been operated at all times in compliance in all material respects with the provisions of COBRA, HIPPA and other applicable law and any similar state laws. None of the Plans provide for medical, life or other welfare benefits to employees, contractors or directors beyond their retirement or other termination of service (other than coverage mandated by COBRA, the cost of which is fully paid by the current or former employee, contractor, director or their beneficiaries).

(l) For purposes of the Plans, each person has been properly classified and treated as an employee or independent contractor for all applicable purposes.

(m) Each “deferred compensation plan” within the meaning of Code Section 409A to which either AB&T or Alliance is a party complies in form with the requirements of Section 409A of the Code and has been operated in good faith compliance with such requirements since January 1, 2005. The actuarial present values of all accrued deferred compensation entitlements (including entitlements under any executive compensation, supplemental retirement, or employment agreement) of employees and former employees of AB&T or Alliance and their beneficiaries have been fully reflected on the AB&T Audited Financial Statements to the extent required by and in accordance with GAAP.

(n) Neither AB&T nor Alliance has made any payment, is obligated to make any payment, or is a party to any contract that could obligate it to make any payment that could be disallowed as a deduction under Section 280G or 162(m) of the Code, or which would be subject to withholding under Section 4999 of the Code.

(o) To the Best Knowledge of AB&T, no fiduciary of any Plan maintained by either AB&T or Alliance has any liability for any breach of fiduciary duty or any other failure to act or comply in connection with the administration or investments of the assets of any such Plan.

2.25. Insurance. AB&T has Previously Disclosed to 1st Financial a listing of each blanket bond, liability insurance, life insurance or other insurance policy in effect on December 31, 2008, and in which it or Alliance was an insured party or beneficiary (each a “AB&T Policy” and collectively the “AB&T Policies”). AB&T Policies provide coverage in such amounts and against such liabilities, casualties, losses, or risks as is customary or reasonable for entities engaged in AB&T’s and Alliance’s businesses or as is required by applicable law or regulation. In the reasonable opinion of management of AB&T, the insurance coverage provided under the AB&T Policies is reasonable and adequate in all respects for AB&T and Alliance. Each of the AB&T Policies is in full force and effect and is valid and enforceable in accordance with its terms, and is underwritten by an insurer of recognized financial responsibility and which is qualified to issue those policies in North Carolina, and AB&T and Alliance have taken all requisite actions (including the giving of required notices) under each such AB&T Policy in order to preserve all rights thereunder with respect to all matters. Neither AB&T nor Alliance is in default under the provisions of, has received notice of cancellation or nonrenewal of or any material premium increase on, or has failed to pay any premium on any AB&T Policy, and, to the Best Knowledge of AB&T, there has not been any inaccuracy in any application for any AB&T Policy. There are no pending claims with respect to any AB&T Policy (and there are no facts which would form the basis of any such claim), and, to the Best Knowledge of AB&T, there is currently no condition, and there has occurred no event, that is reasonably likely to form the basis for any such claim.

2.26. Insurance of Deposits. All deposits of Alliance are insured by the Deposit Insurance Fund of the FDIC to the maximum extent permitted by law, all deposit insurance premiums due from Alliance to the FDIC have been paid in full in a timely fashion, and no proceedings have been commenced or, to the Best Knowledge of AB&T, are contemplated by the FDIC or otherwise to terminate such insurance.

2.27. Indemnification Obligations. Except to the extent provided by its Articles of Incorporation or Bylaws in effect on the date of this Agreement or in a contract or agreement Previously Disclosed, or as otherwise required by applicable law, neither AB&T nor Alliance has any obligation to indemnify or hold harmless any of their current or former directors, officers, employees or shareholders or, except as would not be reasonably likely to have a Material Adverse Effect on AB&T, any other person, against or from any costs or expenses (including attorneys’ fees), judgments, fines, amounts paid in settlement, losses, claims, damages or liabilities incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative. No claim, demand or request for payment of indemnification has been made or currently is pending or, to the Best Knowledge of

AB&T, threatened, against or with respect to either AB&T or Alliance, and, to the Best Knowledge of AB&T, no facts or circumstances exist which reasonably could be expected to result in such.

2.28 Disclosure and Accounting Controls. AB&T maintains and Alliance maintained, prior to its holding company reorganization:

(a) disclosure controls and procedures as required by and defined in the SEC’s Rule 13a-15 under the 1934 Act which are reviewed quarterly by management, including officers who serve as its principal executive officer and principal financial officer, and which are designed to ensure that information required to be disclosed in reports it files with or submits under the 1934 Act is recorded, processed, summarized, communicated to management, and reported, within the time periods specified in the SEC’s rules; and

(b) internal control over financial reporting as required by and defined in the SEC’s Rule 13a-15 under the 1934 Act which provides reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP, including policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of assets of AB&T and Alliance, (ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in accordance with GAAP, and receipts and expenditures are made only in accordance with authorizations of management and Boards of Directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets that could have a material effect on financial statements.

2.29 Related Party Transactions. AB&T has disclosed in the AB&T Reports all existing transactions, investments and loans, including loan guarantees existing as of the date hereof, to which the AB&T or Alliance is a party with any director, executive officer or five percent (5%) shareholder of AB&T, any present or former spouse or family member of any the foregoing, or any person, corporation, or enterprise controlling, controlled by or under common control with any of the foregoing, in each case to the extent required to be so disclosed. All such transactions, investments and loans were negotiated at arm’s length and are on terms and conditions that are substantially the same as those prevailing for comparable transactions with other persons and do not involve more than the normal risk of repayment or present other unfavorable features.

2.30 Technology Systems. Since January 1, 2006, the electronic data processing, information, record keeping, communications, telecommunications, hardware, third party software, networks, peripherals, portfolio trading and computer systems, including any outsourced systems and processes, and related Intellectual Property (collectively, the “Technology Systems”) that are used by AB&T and Alliance have not suffered unplanned disruption causing a Material Adverse Effect with respect to the AB&T. Except for ongoing obligations under agreements with providers of the Technology Systems, AB&T’s and Alliance’s use of the Technology Systems is free from any liens. Access to business critical parts of the Technology Systems is not shared with any third party.

2.31 Bank Secrecy Act Compliance; USA PATRIOT Act. AB&T and Alliance are in compliance in all material respects with the provisions of the USA PATRIOT Act and the Bank Secrecy Act of 1970, and all regulations promulgated thereunder, including those provisions of the Bank Secrecy Act that address suspicious activity reports and compliance programs. AB&T and Alliance have implemented a Bank Secrecy Act compliance program that adequately covers all of the required program elements as required by 12 C.F.R. §21.21.

2.32 OFAC. Neither AB&T nor Alliance is, nor would either reasonably be expected to become, a person or entity with whom a United States person or entity is restricted from doing business under regulation of OFAC (including those named on OFAC’s Specially Designated and Blocked Persons List) or under any statute, executive order (including, without limitation, the September 24, 2001, Executive Order Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism), or other governmental action. AB&T and Alliance have implemented an OFAC compliance program that adequately covers all elements of OFAC compliance, and to the Best Knowledge of AB&T, neither AB&T nor Alliance is engaging nor has either engaged in any dealings or transactions with, and neither nor has been otherwise associated with, such persons or entities.

2.33 Noncompetes. No director or executive officer of AB&T or Alliance is, and, to the Best Knowledge of AB&T, no other officer or employee of the either is, a party to any contract that restricts or prohibits such officer, director or employee from engaging in activities competitive with any person or entity, including AB&T or Alliance.

2.34. Obstacles to Regulatory Approval or Tax Treatment. To the Best Knowledge of AB&T, there exists no fact or condition (including, but not limited to, Alliance’s record of compliance with the Community Reinvestment Act) relating to AB&T or Alliance that may reasonably be expected to (i) prevent or materially impede or delay 1st Financial from obtaining the regulatory approvals required in order to consummate the transactions described in this Agreement; or (ii) prevent the Merger from qualifying to be a reorganization under Section 368(a) of the Code; and, if any such fact or condition becomes known to AB&T or Alliance, AB&T shall promptly (and in any event within three (3) days after obtaining such knowledge) communicate such fact or condition to 1st Financial in writing.

2.35. Disclosure. To the Best Knowledge of AB&T, no written statement, certificate, schedule, list, or other written information furnished by or on behalf of AB&T or Alliance to 1st Financial in connection with this Agreement and the transactions described herein, when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading.

Except as otherwise specifically provided herein or as “Previously Disclosed” (as defined in Paragraph 10.13 hereof) to AB&T, 1st Financial hereby make the following representations and warranties to AB&T:

(a) 1st Financial (i) is duly organized and incorporated, validly existing, and in good standing under the laws of North Carolina; (ii) has all requisite power and authority (corporate and other) to own, lease, and operate its properties and to carry on its business as now being conducted; (iii) is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned, leased, or operated by it therein or in which the transaction of its business makes such qualification necessary, except where failure so to qualify would not have a Material Adverse Effect on 1st Financial, and (iv) is not transacting business or operating any properties owned or leased by it in violation of any provision of federal or state law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on 1st Financial. 1st Financial is registered as a bank holding company and is in good standing with the Board of Governors of the Federal Reserve System (the “FRB”).

(b) Mountain 1st (i) is duly organized and incorporated, validly existing, and in good standing as a banking corporation under the laws of the State of North Carolina; (ii) has all requisite power and authority (corporate and other) to own, lease, and operate its properties and to carry on its business as now being conducted; (iii) is duly qualified to do business and is in good standing in each other jurisdiction in which the character of the properties owned, leased, or operated by it therein or in which the transaction of its business makes such qualification necessary, except where failure so to qualify would not have a Material Adverse Effect on 1st Financial, and (iv) is not transacting business or operating any properties owned or leased by it in violation of any provision of federal or state law or any rule or regulation promulgated thereunder, which violation would have a Material Adverse Effect on 1st Financial. Mountain 1st is an “insured depository institution” as defined in the Federal Deposit Insurance Act and applicable regulations thereunder. Mountain 1st is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta.

(a) 1st Financial’s authorized capital stock consists of 20,000,000 shares of common stock, $5.00 par value per share, of which 4,997,027 shares are issued and outstanding, and 10,000,000 shares of preferred stock, no par value per share, of which 16,369 shares are issued and outstanding; These shares of common and preferred stock, together with the stock options issued to employees of Mountain 1st and directors of 1st Financial, and the warrant to purchase 276,815 shares issued in connection with the issuance of the preferred stock (the “1st Financial Warrant”), constitute 1st Financial’s only outstanding securities.

Each outstanding share of 1st Financial Stock (i) has been duly authorized and is validly issued and outstanding, and is fully paid and nonassessable, and (ii) has not been issued in violation of the preemptive rights of any shareholder. The 1st Financial Stock has been registered with the SEC under the Securities Exchange Act of 1934, as amended (the “1934 Act”) and 1st Financial is subject to the registration and reporting requirements of the 1934 Act. The outstanding shares of common stock of Mountain 1st are duly authorized, validly issued, fully paid and nonassessable, except to the extent set forth in N.C. Gen. Stat. § 53-42.

(b) Subsidiaries. 1st Financial has one wholly-owned subsidiary, Mountain 1st, a North Carolina banking corporation. Mountain 1st’s authorized capital stock consists of 20,000,000 shares of common stock, $5.00 par value per share, of which 6,157,027 shares are issued and outstanding and constitute Mountain 1st’s only outstanding securities. 1st Financial owns all of the issued and outstanding shares of common stock of Mountain 1st.

3.03. Authorization and Validity of Agreement. This Agreement has been duly and validly approved by 1st Financial’s Board of Directors in the manner required by law. Subject only to approval of this Agreement by the shareholders of 1st Financial in the manner required by law as contemplated by Paragraph 6.01(b) hereof and receipt of all required approvals of Regulatory Authorities as contemplated by Paragraph 6.02 hereof, (i) 1st Financial has the corporate power and authority to execute and deliver this Agreement and to perform its obligations and agreements and carry out the transactions described in this Agreement; (ii) all corporate action required to authorize 1st Financial to enter into this Agreement and to perform its obligations and agreements and carry out the transactions described herein has been duly and properly completed or obtained; and (iii) this Agreement has been duly executed on behalf of 1st Financial, and (assuming due authorization, execution and delivery by 1st Financial) constitutes the valid and binding agreement of 1st Financial, enforceable in accordance with its terms (except to the extent enforceability may be limited by (A) applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws from time to time in effect which affect creditors’ rights generally; and (B) by legal and equitable limitations on the availability of injunctive relief, specific performance, and other equitable remedies), and (C) general principles of equity and applicable laws or court decisions limiting the enforceability of indemnification provisions).

3.04 Convertible Securities Options, Etc. Except as Previously Disclosed and with the exception of (i) options to purchase an aggregate of 409,996 shares of 1st Financial Stock which options have been issued and are outstanding under the 1st Financial Director Stock Option Plan, the 1st Financial Employee Stock Option Plan and the 1st Financial 2008 Omnibus Equity Plan (the “1st Financial Stock Options”); (ii) 100,000 purchase options available under the 1st Financial Employee Stock Purchase Plan; and (iii) the 1st Financial Warrant, 1st Financial does not have any outstanding (i) securities or other obligations (including debentures or other debt instruments) which are convertible into shares of 1st Financial Stock or any other securities of 1st Financial; (ii) options, warrants, rights, calls or other commitments of any nature which entitle any person to receive or acquire any shares of 1st Financial Stock or any other securities of 1st Financial; or (iii) plans, agreements or other arrangements pursuant to which shares of 1st Financial stock or any other securities of 1st Financial, or options, warrants, rights, calls, or other commitments of any nature pertaining thereto, have been or may be issued.

3.05. Validity of Transactions; Absence of Required Consents or Waivers. Subject to the approval of this Agreement by the shareholders of 1st Financial in the manner required by law and receipt of required approvals of Regulatory Authorities, neither the execution and delivery of this Agreement, nor the consummation of the transactions described herein, nor compliance by 1st Financial with any of its obligations or agreements contained herein, will: (i) conflict with or result in a breach of the terms and conditions of, or constitute a default or violation under any provision of, 1st Financial’s Articles of Incorporation or Bylaws, Mountain 1st’s Articles of Incorporation or Bylaws, or any material contract, agreement, lease, mortgage,

note, bond, indenture, license, or obligation or understanding (oral or written) to which 1st Financial or Mountain 1st is bound or by which either 1st Financial or Mountain 1st, their business, capital stock, or any properties or assets, may be affected; (ii) result in the creation or imposition of any lien, claim, interest, charge, restriction, or encumbrance upon any of 1st Financial’s or Mountain 1st’s properties or assets; (iii) violate any applicable federal or state statute, law, rule, or regulation, or any judgment, order, writ, injunction, or decree of any court, administrative or regulatory agency, or governmental body which violation will or may have a Material Adverse Effect on 1st Financial or Mountain 1st; (iv) result in the acceleration of any material obligation or indebtedness of 1st Financial or Mountain 1st; or (v) interfere with or otherwise adversely affect 1st Financial’s or Mountain 1st’s ability to carry on its business as presently conducted.

No consents, approvals, or waivers are required to be obtained from any person or entity in connection with 1st Financial’s execution and delivery of this Agreement, or the performance of its obligations or agreements or the consummation of the transactions described herein, except for required approvals of 1st Financial’s shareholders and of Regulatory Authorities.

3.06. 1st Financial’s Books and Records. 1st Financial’s and Mountain 1st’s books of account and business records have been maintained in material compliance with all applicable legal and accounting requirements and in accordance with good business practices, and such books and records are complete and reflect accurately in all material respects 1st Financial’s and Mountain 1st’s items of income and expense and all of their assets, liabilities, and shareholders’ equity. The minute books of 1st Financial and Mountain 1st accurately reflect in all material respects the corporate actions that their shareholders and Boards of Directors, and all committees thereof, have taken during the time periods covered by such minute books. All such minute books have been or will be made available to AB&T and its representatives.

3.07. 1st Financial Reports. 1st Financial and Mountain 1st have filed all reports, registrations, and statements, together with any amendments required to be made with respect thereto, that were required to be filed with (i) the SEC; (ii) the FRB; (iii) the FDIC; (iv) the Commissioner; and (v) any other Regulatory Authorities. All such reports, registrations, and statements filed by 1st Financial or Mountain 1st with the SEC, the FRB, the FDIC and the Commissioner or other such Regulatory Authorities are collectively referred to herein as the “1st Financial Reports.” To the Best Knowledge (as such term is defined in Paragraph 10.14 hereof) of 1st Financial, as of their respective dates, each 1st Financial Report complied in all material respects with all the statutes, rules, and regulations enforced or promulgated by the regulatory authority with which it was filed and did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and 1st Financial has not been notified by any such governmental or regulatory authority that any such Report was deficient in any material respect as to form or content.

3.08. Financial Statements of 1st Financial. 1st Financial has Previously Disclosed to AB&T a copy of its and Mountain 1st’s audited statements of financial condition as of December 31, 2007, 2006, and 2005 and its audited statements of income, shareholders’ equity and cash flows for the years ended December 31, 2007, 2006, and 2005, together with notes thereto

(collectively, the “1st Financial Audited Financial Statements”), together with copies of its unaudited statements of financial condition as of September 30, 2008, and unaudited statements of income and cash flows for the nine-month periods ended September 30, 2008 and 2007 (collectively, the “1st Financial Interim Financial Statements”). All such financial statements of 1st Financial are consolidated financial statements. Following the date of this Agreement, 1st Financial promptly will deliver to AB&T all other annual or interim financial statements prepared by or for 1st Financial. The 1st Financial Audited Financial Statements and the 1st Financial Interim Financial Statements (including any related notes and schedules thereto) (i) are in accordance with 1st Financial’s books and records; (ii) were prepared in accordance with generally accepted accounting principles (“GAAP”) applied on a consistent basis throughout the periods indicated; and (iii) present fairly in all material respects 1st Financial’s financial condition, assets and liabilities, results of operations, changes in shareholders’ equity, and changes in cash flows as of the dates indicated and for the periods specified therein. The 1st Financial Audited Financial Statements have been audited by 1st Financial’s independent certified public accountants, Elliott Davis PLLC.

3.09. Tax Returns and Other Tax Matters. (i) 1st Financial and Mountain 1st have timely filed or caused to be filed all federal, state, and local tax returns and reports which are required by law to have been filed, and to the Best Knowledge of 1st Financial, all such returns and reports were true, correct, and complete in all material respects and contained all material information required to be contained therein; (ii) all federal, state, and local income, profits, franchise, sales, use, occupation, property, excise, and other taxes (including interest and penalties), charges and assessments which have become due from or been assessed or levied against 1st Financial, Mountain 1st or their property have been fully paid, or if not yet due, a reserve or accrual, which is adequate in all material respects for the payment of all such taxes to be paid and the obligation for such unpaid taxes, is reflected in the 1st Financial Interim Financial Statements; (iii) the income, profits, franchise, sales, use, occupation, property, excise, withholding, employment and other tax returns and reports of 1st Financial and Mountain 1st have not been subjected to audit by the Internal Revenue Service (the “IRS”) or the North Carolina Department of Revenue and neither 1st Financial nor Mountain 1st has received any indication of the pendency of any audit or examination in connection with any tax return or report and, to the Best Knowledge of 1st Financial, no such return or report is subject to adjustment; and (iv) neither 1st Financial nor Mountain 1st executed any waiver or extended the statute of limitations (or been asked to execute a waiver or extend a statute of limitations) with respect to any tax year, the audit of any tax return or report or the assessment or collection of any tax.

(a) Since December 31, 2008, 1st Financial and Mountain 1st have conducted their business only in the ordinary course and there has been no Material Adverse Change, and there has occurred no event or development and there currently exists no condition or circumstance to the Best Knowledge of 1st Financial which, with the lapse of time or otherwise, is reasonably likely to cause, create, or result in a Material Adverse Change in or affecting 1st Financial or Mountain 1st.

(b) Since December 31, 2008, and other than in the ordinary course of their business including normal salary review and adjustment, neither 1st Financial nor Mountain 1st has incurred any material liability or engaged in any material transaction or entered into any material agreement, increased the salaries, compensation, or general benefits payable or provided to its employees, suffered any loss, destruction, or damage to any of its properties or assets, or made a material acquisition or disposition of any assets or entered into any material contract or lease which, in the aggregate, could cause a Material Adverse Change in or affecting 1st Financial.

3.11. Absence of Undisclosed Liabilities. Neither 1st Financial nor Mountain 1st has any liabilities or obligations, whether known or unknown, matured or unmatured, accrued, absolute, contingent, or otherwise, whether due or to become due (including, without limitation, tax liabilities or unfunded liabilities under employee benefit plans or arrangements), other than (i) those reflected in the 1st Financial Audited Financial Statements or the 1st Financial Interim Financial Statements; (ii) increases in deposit accounts in the ordinary course of business since December 31, 2008; or (iii) loan commitments in the ordinary course of its business since December 31, 2008 which, in the aggregate, could cause a Material Adverse Change in or affecting 1st Financial.

3.12. Compliance with Existing Obligations. 1st Financial and Mountain 1st have performed in all material respects all obligations required to be performed by them under, and neither is in default in any material respect under, or in violation in any material respect of, the terms and conditions of its Articles of Incorporation or Bylaws, and/or any contract, agreement, lease, mortgage, note, bond, indenture, license, obligation, understanding, or other undertaking (whether oral or written) to which either is bound or by which either, their business, capital stock, or any of their properties or assets may be affected, which default or violation would have a Material Adverse Effect on 1st Financial or Mountain 1st.

(a) There are no actions, suits, arbitrations, controversies, or other proceedings or investigations (or, to the Best Knowledge of 1st Financial, any facts or circumstances which reasonably could result in such), including, without limitation, any such action by any Regulatory Authority, which currently exists or is ongoing, pending, or, to the Best Knowledge of 1st Financial or Mountain 1st, threatened, contemplated, or probable of assertion, against, relating to, or otherwise affecting 1st Financial, Mountain 1st or any of their properties, assets or employees which, in the aggregate, could cause a Material Adverse Change in or affecting 1st Financial.

(b) 1st Financial and Mountain 1st have all material licenses, permits, orders, authorizations, or approvals (“1st Financial Permits”) of any federal, state, local, or foreign governmental or regulatory body that are material to or necessary for the conduct of their business or to own, lease, and operate their properties. All such 1st Financial Permits are in full force and effect. No violations are or have been recorded in respect of any such 1st Financial Permits. No proceeding is pending or, to the Best Knowledge of 1st Financial, threatened or probable of assertion to suspend, cancel, revoke, or limit any 1st Financial Permit.

(c) Neither 1st Financial nor Mountain 1st is subject to any supervisory agreement, enforcement order, writ, injunction, capital directive, supervisory directive, memorandum of understanding, or other similar agreement, order, directive, memorandum, or consent of, with or issued by any regulatory or other governmental authority (including, without limitation, the FRB) relating to its financial condition, directors or officers, operations, capital, regulatory compliance, or any other matter. There are no judgments, orders, stipulations, injunctions, decrees, or awards against 1st Financial or Mountain 1st which in any manner limit, restrict, regulate, enjoin, or prohibit any present or past business or practice of 1st Financial or Mountain 1st. Neither 1st Financial nor Mountain 1st has been advised that any regulatory or other governmental authority or any court is contemplating, threatening, or requesting the issuance of any such agreement, order, injunction, directive, memorandum, judgment, stipulation, decree, or award.

(d) Neither 1st Financial nor Mountain 1st is in material violation of, or default in any material respect under, and 1st Financial and Mountain 1st have complied in all material respects with, all laws, statutes, ordinances, rules, regulations, orders, writs, injunctions, or decrees of any court or federal, state, municipal, or other Regulatory Authority having jurisdiction or authority over 1st Financial, Mountain 1st or their business operations, properties, or assets (including, without limitation, all provisions of North Carolina law relating to usury, consumer protection laws, and all other laws and regulations applicable to extensions of credit by Mountain 1st). To the Best Knowledge of 1st Financial, there is no basis for any claim by any person or authority for compensation, reimbursement, or damages or other penalties for any violations described in this subparagraph (d).

3.14. Patents, Trademarks and Licenses. 1st Financial and Mountain 1st have not violated, and currently are not in conflict with, any patent, license, trademark, trade name, copyright or proprietary right of any other person or entity.

(a) Neither 1st Financial nor Mountain 1st has violated any Environmental Laws, and, to the Best Knowledge of 1st Financial, there has been no violation of any Environmental Laws by any other person or entity for whose liability or obligation with respect to any particular matter or violation 1st Financial or Mountain 1st is or may be responsible or liable.

(b) Neither 1st Financial nor Mountain 1st is subject to any claims, demands, causes of action, suits, proceedings, losses, damages, penalties, liabilities, obligations, costs or expenses of any kind and nature which arise out of, under or in connection with, or which result from or are based upon, the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any Hazardous Substances on, from or relating to the 1st Financial real property by any person or entity.

(c) To the Best Knowledge of 1st Financial (i) there has been no violation of any Environmental Laws by any person or entity (including any violation with respect to any Loan Collateral) for whose liability or obligation with respect to any particular matter or violation 1st

Financial or Mountain 1st is or may be responsible or liable (ii) neither 1st Financial nor Mountain 1st is subject to any claims, demands, causes of action, suits, proceedings, losses, damages, penalties, liabilities, obligations, costs or expenses of any kind and nature which arise out of, under or in connection with, or which result from or are based upon, the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, reporting, testing, processing, emission, discharge, release, threatened release, control, removal, clean-up or remediation of any Hazardous Substances on, from or relating to any Loan Collateral by any person or entity; and (iii) there are no facts, events, or conditions relating to any Loan Collateral that will give rise to any investigatory, emergency removal, remedial or corrective actions, obligations or liabilities (whether accrued, absolute, contingent, unliquidated or otherwise) pursuant to Environmental Laws.

3.16. Absence of Brokerage or Finders Commissions. Except for the engagement of The Carson Medlin Company by 1st Financial: (i) all negotiations relative to this Agreement and the transactions described herein have been carried on by 1st Financial directly (or through its legal counsel) and no person or firm has been retained by or has acted on behalf of, pursuant to any agreement, arrangement or understanding with, or under the authority of, AB&T or its Board of Directors, as a broker, finder or agent or has performed similar functions or otherwise is or may be entitled to receive or claim a brokerage fee or other commission in connection with or as a result of the transactions described herein; and (ii) 1st Financial has not agreed, and has no obligation, to pay any brokerage fee or other commission to any person or entity in connection with or as a result of the transactions described herein.

3.17. Material Contracts. Neither 1st Financial nor Mountain 1st is in default in any material respect, and there has not occurred any event which with the lapse of time or giving of notice or both would constitute a default, under any contract, lease, insurance policy, commitment, or arrangement to which it is a party or by which it or its property is or may be bound or affected or under which it or its property receives benefits, where the consequences of such default would have a Material Adverse Effect on 1st Financial or Mountain 1st.

3.18 Employment Matters; Employment Relations. There is no action, suit or proceeding by any person pending or, to the best knowledge of 1st Financial, threatened, against 1st Financial or Mountain 1st (or any of their employees), involving employment discrimination, sexual harassment, wrongful discharge, workers’ compensation or similar claims.

Neither 1st Financial nor Mountain 1st is a party to or bound by any collective bargaining agreement with any of its employees, any labor union or any other collective bargaining unit or organization. There is no pending or, to the Best Knowledge of 1st Financial, threatened labor dispute, work stoppage or strike involving 1st Financial, Mountain 1st or any of their employees, or any pending or to the Best Knowledge of 1st Financial, threatened, proceeding in which it is asserted that 1st Financial or Mountain 1st has committed any unfair labor practice; and, to the Best Knowledge of 1st Financial, there is no activity involving 1st Financial, Mountain 1st or any of their employees seeking to certify a collective bargaining unit or engaging in any other labor organization activity.

3.19 Employment Agreements; Employee Benefit Plans. There currently exists no condition or circumstance related to the Plans maintained or contributed to by 1st Financial or Mountain 1st for the benefit of any of their current or former employees or directors or any of their beneficiaries which, with the lapse of time or otherwise, would or could cause, create or result in a Material Adverse Change or that would result in a material disadvantage to a “New Employee” (as such term is defined in Paragraph 5.01(d)(ii)) in connection with their participation in employee benefit plans under 5.01(d)(ii).

3.20 Insurance. The blanket bond, liability insurance, life insurance or other insurance policies in effect on December 31, 2008 and in which 1st Financial or Mountain 1st was an insured party or beneficiary (each a “1st Financial Policy” and collectively the “1st Financial Policies”), provide coverage in such amounts and against such liabilities, casualties, losses or risks as is customary or reasonable for entities engaged in 1st Financial’s and Mountain 1st businesses or as is required by applicable law or regulation. In the reasonable opinion of management of 1st Financial, the insurance coverage provided under the 1st Financial Policies is reasonable and adequate in all respects for 1st Financial and Mountain 1st. Each of the 1st Financial policies is in full force and effect and is valid and enforeable in accordance with its terms and is underwritten by an insurer of recognized financial responsibility and which is qualified to issue those policies in North Carolina, and 1st Financial and Mountain 1st have taken all requisite actions (including the giving of required notices) under each such 1st Financial policy in order to preserve all rights thereunder with respect to all matters. Neither 1st Financial nor Mountain 1st is in default under the provisions of, has received notice of cancellation or nonrenewal of or any material premium increase on, or has failed to pay any premium of any 1st Financial policy and, to the Best Knowledge of 1st Financial, there has not been any inaccuracy in any application for any 1st Financial policy. There are no pending claims with respect to any 1st Financial policy (and there are no facts which would form the basis of any such claim and), to the Best Knowledge of 1st Financial, there is currently no condition, and there has occurred no event, that is reasonably likely to form the basis for any such claim.

3.21. Insurance of Deposits. All deposits of Mountain 1st are insured by the Deposit Insurance Fund of the FDIC to the maximum extent permitted by law, all deposit insurance premiums due from Mountain 1st to the FDIC have been paid in full in a timely fashion, and no proceedings have been commenced or, to the Best Knowledge of 1st Financial, are contemplated by the FDIC or otherwise to terminate such insurance.

3.22. Obstacles to Regulatory Approval or Tax Treatment. To the Best Knowledge of 1st Financial, there exists no fact or condition (including, but not limited to, Mountain 1st’s record of compliance with the Community Reinvestment Act) relating to 1st Financial or Mountain 1st that may reasonably be expected to (i) prevent or materially impede or delay 1st Financial from obtaining the regulatory approvals required in order to consummate the transactions described in this Agreement; or (ii) prevent the Merger from qualifying to be a reorganization under Section 368(a) of the Code; and, if any such fact or condition becomes known to 1st Financial or Mountain 1st, 1st Financial shall promptly (and in any event within three (3) days after obtaining such knowledge) communicate such fact or condition to 1st Financial in writing.

3.23. Disclosure. To the Best Knowledge of 1st Financial, no written statement, certificate, schedule, list, or other written information furnished by or on behalf of 1st Financial or Mountain 1st to 1st Financial in connection with this Agreement and the transactions described herein, when considered as a whole, contains or will contain any untrue statement of a material fact or omits or will omit to state a material fact necessary in order to make the statements herein or therein, in light of the circumstances under which they were made, not misleading.

4.01. Affirmative Covenants of AB&T. AB&T hereby covenants and agrees as follows with 1st Financial:

(a) AB&T Shareholders’ Meeting. AB&T agrees to cause a meeting of its shareholders (the “AB&T Shareholders’ Meeting”) to be duly called and held as soon as practicable after the date of this Agreement for the purpose of voting by AB&T’s shareholders on the approval of the Merger and the ratification and adoption of this Agreement. In connection with the call and conduct of, and all other matters relating to, the AB&T Shareholders’ Meeting (including the solicitation of proxies), AB&T will comply in all material respects with all provisions of applicable law and regulations and with its Articles of Incorporation and Bylaws.

AB&T will solicit appointments of proxies from its shareholders for use at the AB&T Shareholders’ Meeting and, in connection with that solicitation, it will distribute to its shareholders proxy solicitation materials (a “Proxy Statement”) in the form of the “Proxy Statement/Prospectus” described in Paragraph 6.01 below.

AB&T will mail the Proxy Statement to its shareholders on a date mutually agreed upon by AB&T and 1st Financial, but in no event less than 30 days prior to the scheduled date of the AB&T Shareholders’ Meeting; provided, however, that no such materials shall be mailed to AB&T’s shareholders unless and until the Proxy Statement shall have been filed by AB&T with the SEC, the review period applicable thereto shall have expired, and AB&T shall have satisfactorily responded to and complied with any comments of the SEC thereon.

(b) Conduct of Business Prior to Effective Time. While the parties recognize that the operation of AB&T and Alliance until the Effective Time is the responsibility of AB&T’s and Alliance’s respective Boards of Directors and officers, AB&T and Alliance agree that, between the date of this Agreement and the Effective Time, and except as otherwise provided herein or expressly agreed to in writing by 1st Financial’s Chief Executive Officer, AB&T and Alliance will each carry on its business in and only in the regular and usual course in substantially the same manner as such business heretofore was conducted, and, to the extent consistent with such business and within its ability to do so, AB&T and Alliance each agrees that it will:

(i) preserve intact its present business organization, keep available its present officers and employees, and preserve its relationships with customers, depositors, creditors, correspondents, suppliers, and others having business relationships with it;

(ii) maintain all of its properties and equipment in customary repair, order and condition, ordinary wear and tear excepted;

(iii) maintain its books of account and records in the usual, regular and ordinary manner in accordance with sound business practices applied on a consistent basis;

(iv) comply in all material respects with all laws, rules and regulations applicable to it, its properties, assets or employees and to the conduct of its business;

(v) not change its policies or procedures, including existing loan underwriting guidelines, in any material respect except as may be required by law;

(vi) continue federal deposit insurance as described in Paragraph 2.26 and to maintain in force insurance such as is described in Paragraph 2.25 hereof; not modify any bonds or policies of insurance in effect as of the date hereof unless the same, as modified, provides substantially equivalent coverage; and, not cancel, allow to be terminated or fail to renew, any such bond or policy of insurance unless the same is replaced with a bond or policy providing substantially equivalent coverage; and

(vii) promptly provide to 1st Financial such information about its financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties, employees or operations, as 1st Financial reasonably shall request.

(c) Periodic Financial and Other Information. Following the date of this Agreement and from time to time as indicated below, to and including the Effective Time, AB&T will:

(i) within ten calendar days following each calendar month-end, deliver to 1st Financial a copy of AB&T’s unaudited year-to-date consolidated income statement and an unaudited consolidated statement of condition, each as of that month-end.

(ii) within ten calendar days following each calendar quarter-end, deliver to 1st Financial a copy of AB&T’s interim unaudited consolidated financial statements for and as of the end of that quarterly period;

(iii) promptly following the filing thereof, deliver to 1st Financial a copy of each report, registration, statement or other filing, and any amendments thereto (including without limitation each call report filed by AB&T or Alliance) made by either AB&T or Alliance with or to any Regulatory Authority; provided, however, that AB&T shall not be required to deliver to 1st Financial copies of reports filed electronically by it with the SEC under the 1934 Act which are available to the public on the SEC’s Internet website;

(iv) within ten calendar days following each calendar quarter-end, deliver to 1st Financial a copy of AB&T’s and Alliance’s management’s analysis of their Loan Loss Reserves and Loan Repurchase Reserves and any analysis performed by outside loan review firms during the most recently completed quarter;

(v) within ten calendar days following each calendar month-end, deliver to 1st Financial a listing of the aggregate dollar volume and number of loans and loan commitments made or issued by Alliance during that month;

(vi) within ten calendar days following each calendar month-end, deliver to 1st Financial lists of:

(vii) within ten calendar days following each calendar month-end, deliver to 1st Financial lists of:

As an alternative to physical delivery of the items described in this Paragraph 4.01(c), AB&T may make the information available by giving 1st Financial access to its “Banker’s Dashboard” management tool if that access provides substantially the same information in a readily accessible form within the approximate time frames stated in this Paragraph 4.01(c).

(d) Notice Of Certain Changes Or Events. Following the execution of this Agreement and up to the Effective Time, AB&T promptly will notify 1st Financial in writing of and provide to 1st Financial such information as it shall request regarding (i) any Material Adverse Change in of affecting it or Alliance or of the actual or prospective occurrence of any condition or event which, with the lapse of time or otherwise, is reasonably likely to cause, create or result in any such Material Adverse Change; (ii) the actual or prospective existence or occurrence of any condition or event which, with the lapse of time or otherwise, has caused or may or could cause any statement, representation, or warranty of AB&T or Alliance herein, to be or become materially inaccurate, misleading, or incomplete, or which has resulted or may or could cause, create, or result in the breach or violation in any material respect of any of AB&T’s or Alliance’s covenants or agreements contained herein or in the failure of any of the conditions described in Paragraphs 7.01 or 7.03 below; or (iii) the occurrence or existence of any event, fact or condition that may reasonably be expected to (A) prevent or materially impede or delay AB&T or 1st Financial from obtaining the approvals of Regulatory Authorities required in order to consummate, or otherwise from completing, the transactions described in this Agreement, or (B) adversely affect treatment of the Merger as a tax-free reorganization.

(e) Accruals for Loan Loss Reserve and Expenses; Loan Charge-Offs; Corrections.

(A) AB&T will cooperate with 1st Financial and will make such appropriate accounting entries in its and Alliance’s books and records and take such other actions as 1st Financial shall, in its sole discretion, deem to be necessary or desirable in anticipation of the Merger, including without limitation additional provisions to Alliance’s Loan Loss Reserve or accruals or the creation of reserves for employee benefit and expenses related to the transactions described in this Agreement; provided, however, that notwithstanding any provision of this Agreement to the contrary, and except as otherwise agreed to by AB&T and 1st Financial, AB&T shall not be required to make any such accounting entries until immediately prior to the Closing. AB&T’s representations, warranties and covenants contained in this Agreement shall not be deemed to be untrue or breached in any respect for any purpose as a consequence of any modifications or changes undertaken solely on account of this Paragraph 4.01(f).

(B) AB&T will make such appropriate accounting entries in its and Alliance’s books and records and take such other actions as 1st Financial, in its sole discretion, deems to be required by GAAP, or which 1st Financial otherwise deems to be necessary, appropriate or desirable in anticipation of the Merger, including without limitation additional provisions to Alliance’s Loan Loss Reserve or accruals or the creation of reserves for employee benefit and Merger-related expenses; provided, however, that notwithstanding any provision of this Agreement to the contrary, and except as otherwise agreed by AB&T and 1st Financial, AB&T shall not be required to make any such accounting entries until immediately prior to the Closing.

(C) If, during the course of its continuing review of AB&T’s credit files after the date of this Agreement, 1st Financial notifies AB&T of situations or circumstances relating to specific loans or credit files that 1st Financial has identified and that 1st Financial, in its discretion, considers to be deficiencies in loan documentation or to constitute violations of applicable banking rules or regulations relating to loans, AB&T will in good faith review such situations and circumstances and, to the extent it concurs, will promptly take all such actions as are necessary or that 1st Financial specifies in order to correct those deficiencies or violations, and each of those deficiencies or violations shall be corrected to 1st Financial’s reasonable satisfaction prior to the Effective Time.

(f) Consents to Assignment of Leases. With respect to each contract or other agreement, including without limitation each lease or rental agreement pertaining to real or personal property (including each of the AB&T Real Property Leases), to which AB&T or Alliance is a party and which 1st Financial reasonably believes requires the consent of any other contracting party in connection with an actual or deemed assignment or transfer of AB&T’s or Alliance’s interest or obligation thereunder as a result of the Merger, AB&T will use its reasonable best efforts to obtain the written consent of that other party to the assignment to 1st Financial or Mountain 1st of AB&T’s or Alliance’s rights and obligations under the agreement and, in the case of the AB&T Real Property Leases and without regard to any requirement of the lessor’s consent, AB&T will use its reasonable best efforts to obtain from each lessor of the property thereunder a landlord’s estoppel certificate, each of which consents or certificates shall be in a form reasonably satisfactory to 1st Financial.

(g) Access. AB&T and Alliance agree that, following the date of this Agreement and to and including the Effective Time, each will provide 1st Financial and its employees, accountants, legal counsel, environmental consultants or other representatives access to all books, records, files and other information (whether maintained electronically or otherwise), to all properties and facilities, and to all its employees, accountants, legal counsel and consultants, as 1st Financial shall, in its sole discretion, consider to be necessary or appropriate; provided, however, that any investigation or reviews conducted by or on behalf of 1st Financial shall be performed in such a manner as will not interfere unreasonably with AB&T’s or Alliance’s normal operations or with their relationships with their customers or employees, and shall be conducted in accordance with procedures established by the parties, each acting reasonably.

(h) Pricing. Following the date of this Agreement and up to the Effective Time, Alliance will make pricing decisions with respect to its deposit and credit accounts in a manner consistent with its past practices based on competition and prevailing market rates in its banking markets and will give 1st Financial notice of any proposed material changes in the pricing of its deposit and credit accounts.

(i) Further Action; Instruments of Transfer, Etc. AB&T covenants and agrees with 1st Financial that it (i) will use its reasonable best efforts in good faith to take or cause to be taken all action reasonably required of it hereunder as promptly as practicable so as to permit the consummation of the transaction described herein at the earliest possible date; (ii) shall perform all acts and execute and deliver to 1st Financial all documents or instruments reasonably required herein or as otherwise shall be reasonably necessary or useful to or reasonably requested by 1st Financial in consummating such transactions; and (iii) will cooperate with 1st Financial in every reasonable way in carrying out, and will pursue diligently the expeditious completion of, such transaction.

(j) Notice of Certain Loans or Other Extensions of Credit. AB&T covenants and agrees with 1st Financial that it will give (5) business days’ prior notice to 1st Financial before committing to making any loan, extension of credit, purchase of a loan participation, letter of credit or renewal of any existing loan, extension of credit or letter of credit which is secured, in whole or in part, by any of the following: (i) any hotel or motel property; (ii) any property on which a dry cleaner’s business is situated; (iii) any property on which any establishment engaged in the business of selling or storing petroleum products or distillates, including but not limited to any gas station, is located; (iv) any property on which underground storage tanks are presently, or were formerly, situated; (v) accounts receivable and/or inventory; (vi) any property located in excess of fifty (50) miles from any banking office of Alliance; or (vii) any collateral or property with which there may exist an environmental issue.

(k) Termination of Certain Agreements. AB&T and Alliance covenant and agree with 1st Financial that each will, immediately prior to the Effective Time, terminate any agreements or contracts as 1st Financial shall request, including, but not limited to, any data processing agreements, but not including any employment agreements to which AB&T or Alliance is a party.

4.02. Negative Covenants of AB&T. AB&T and Alliance hereby covenant and agree that, between the date hereof and the Effective Time, neither AB&T nor Alliance will do any of the following things or take any of the following actions without the prior written consent and authorization of 1st Financial’s CEO or CFO:

(a) Amendments to Articles of Incorporation or Bylaws. Amend its Articles of Incorporation or Bylaws.

(b) Change in Capital Stock. Make any change in its authorized capital stock, or create any other or additional authorized capital stock or other securities; or issue (including any issuance of shares pursuant to a stock dividend or any issuance of any securities convertible into capital stock), sell, purchase, redeem, retire, reclassify, combine, or split any shares of its capital stock or other securities, or enter into any agreement or understanding with respect to any such action. However, notwithstanding anything contained herein to the contrary, AB&T shall be permitted to issue shares of AB&T Stock upon the exercise of the Warrant or of stock options which are outstanding as of the date of this Agreement.

(c) Options, Warrants, and Rights. Grant or issue any options, warrants, calls, puts, or other rights of any kind relating to the purchase, redemption, or conversion of shares of its capital stock or any other securities (including securities convertible into capital stock) or enter into any agreement or understanding with respect to any such action.

(d) Dividends. Declare or pay any dividends or make any other distributions on or in respect of any shares of its capital stock or otherwise to its shareholders.

(e) Employment, Benefit, or Retirement Agreements or Plans; Increases and Bonuses. Except as required by law, (i) enter into or become bound by any contract, agreement, or commitment for the employment or compensation of any officer, employee, or consultant which is not immediately terminable by AB&T or Alliance without cost or other liability on no more than thirty (30) days notice; (ii) adopt, enter into, or become bound by any new or additional profit-sharing, bonus, incentive, change in control, “golden parachute,” stock option, stock purchase, pension, retirement, deferred compensation, insurance (hospitalization, life, or other), paid leave (sick, vacation, personal or other) or similar contract, agreement, commitment, understanding, plan, or arrangement (whether formal or informal) with respect to or which provides for benefits for any of its current or former directors, officers, employees, or consultants; or (iii) enter into or become bound by any contract with or commitment to any labor or trade union or association or any collective bargaining group. Neither AB&T nor Alliance will increase the compensation or benefits of, or pay any bonus or other special or additional compensation to, any of its current or former directors, officers, employees or consultants.

(f) Accounting Practices. Make any changes in its accounting methods, practices, or procedures or in depreciation or amortization policies, schedules, or rates heretofore applied (except as required by GAAP or governmental regulations).

(g) Changes in Business Practices. Except as may be required by the FDIC, the Commissioner, the SEC, the FRB, or any other governmental agency or other Regulatory Authority or as shall be required by applicable law, regulation, or this Agreement, (i) change in any material respect the nature of its business or the manner in which it conducts its business; (ii)

discontinue any material portion or line of its business; (iii) change in any material respect its lending, investment, asset-liability management, or other material banking or business policies, (iv) take any action that would adversely affect or delay its ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby; (v) take any action that is intended to or expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions to the Merger set forth in Article VII not being satisfied or in a violation of any provision of this Agreement; (vi) knowingly take any action that would prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the Code; (vii) take any action or enter into any agreement that could reasonably be expected to jeopardize or materially delay the receipt of the regulatory approvals described in Paragraph 6.02; or (viii) agree to take, make any commitment to take, or adopt any resolutions of its Board of Directors in support of, any of the actions prohibited by this Paragraph 4.02.

(i) Sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of, any real estate in any amount other than real estate owned;

(ii) Sell or lease (as lessor), or enter into or become bound by any contract, agreement, option or commitment relating to the sale, lease (as lessor) or other disposition of, any equipment or any other fixed or capital asset (other than real estate) having a book value or a fair market value, whichever is greater, of more than $10,000 for any individual item or asset, or more than $25,000 in the aggregate for all such items or assets;

(iii) Purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment relating to the purchase, lease (as lessee) or other acquisition of, any real property in any amount;

(iv) Purchase or lease (as lessee), or enter into or become bound by any contract, agreement, option or commitment relating to the purchase, lease (as lessee) or other acquisition of, any equipment or any other fixed asset (other than real estate) having a purchase price, or involving aggregate lease payments, in excess of $10,000 for any individual item or asset, or more than $25,000 in the aggregate for all such items or assets;

(v) Enter into any purchase or other commitment or contract for supplies or services which obligates AB&T or Alliance for a period longer than one hundred eighty (180) days;

(vi) Except in the ordinary course of its business consistent with its past practices and only after first providing 1st Financial the opportunity to participate, sell, or enter into or become bound by any contract, agreement, option or commitment to sell any loan or other receivable or any participation in any loan or other receivable;

(vii) Except in the ordinary course of its business consistent with its past practices and only with the prior approval of 1st Financial, purchase or repurchase, or enter into or become bound by any contract, agreement, option or commitment to purchase or repurchase any loan or other receivable or any participation in any loan or other receivable;

(viii) Sell or dispose of, or enter into or become bound by any contract, agreement, option or commitment relating to the sale or other disposition of, any other asset (whether tangible or intangible, and including without limitation any trade name, trademark, copyright, service mark or intellectual property right or license), except for dispositions of assets in the ordinary course of its lending business consistent with its past practices; or assign its right to or otherwise give any other person its permission or consent to use or do business under the corporate name of AB&T or Alliance or any name similar thereto; or release, transfer or waive any license or right granted to it by any other person to use any trademark, trade name, copyright, service mark or intellectual property right; or

(ix) Directly or indirectly (A) acquire (whether by merger or otherwise), or acquire any branch or all or any significant part of the assets of, any other person or entity, (B) open any new branch office, or (C) enter into or become bound by any contract, agreement, commitment or letter of intent relating to, or otherwise take or agree to take any action in furtherance of, any such transaction or the opening of a new branch office.

(i) Debt; Liabilities. With the exceptions of Alliance’s acceptance of deposits, entering into repurchase agreements, Fed funds purchases, borrowings from the Federal Home Loan Bank of no more than thirty days maturity, and direct investments in Alliance by the Federal Reserve Bank of Richmond pursuant to its Treasury Tax and Loan Investment Program, in any such case in the ordinary course of Alliance’s business consistent with its past practices, (i) enter into or become bound by any promissory note, loan agreement or other agreement or arrangement pertaining to the borrowing of money; (ii) except for standby letters of credit issued by Alliance in the ordinary course of its lending business consistent with past practices, assume, guarantee, endorse or otherwise become responsible or liable for any obligation of any other person or entity; or (iii) except in the ordinary course of its business consistent with its past practices, incur any other liability or obligation (absolute or contingent).

(j) Liens; Encumbrances. Mortgage, pledge or subject any of its assets to, or permit any of its assets to become or, except for those liens or encumbrances Previously Disclosed to 1st Financial, remain subject to, any lien or any other encumbrance (other than in the ordinary course of business consistent with its past practices in connection with securing public funds deposits, repurchase agreements, or Federal Home Loan Bank borrowings).

(k) Waiver of Rights. Waive, release or compromise any rights in its favor against or with respect to any of its officers, directors, shareholders, employees, consultants, or agents or members of their families or entities controlled by them or in which they have a significant interest, nor waive, release or compromise any material rights against or with respect to any other person or entity except in the ordinary course of business and in good faith for fair value in money or money’s worth.

(l) Other Contracts. Enter into or become bound by any contracts, agreements, commitments or understandings (other than those permitted elsewhere in this Paragraph 4.02) (i) for or with respect to any charitable contributions exceeding the amounts budgeted prior to the beginning of negotiation of this Agreement; (ii) with any governmental agency or Regulatory Authority; (iii) pursuant to which AB&T or Alliance would assume, guarantee, endorse or otherwise become liable for the debt, liability or obligation of any other person or entity; (iv) which is entered into other than in the ordinary course of its business; or (v) which, in the case of any one contract, agreement, commitment or understanding, and whether or not in the ordinary course of its business, would obligate or commit AB&T or Alliance to make expenditures over any period of time of more than $50,000 (other than contracts, agreements, commitments or understandings entered into in the ordinary course of Alliance’s lending operations).

(m) Aggregate Deposit Liabilities. Take any actions designed to materially increase or decrease the aggregate level of Alliance’s deposits as they exist on the date of this Agreement.

(n) Foreclosures. Except in the ordinary course of business in connection with any foreclosure of a mortgage or deed of trust securing a loan, bid for or purchase any real property which is covered by that mortgage or deed of trust or which is the subject of that foreclosure.

(o) Loans and Other Extensions of Credit. Make or renew any loan or other extension of credit in an amount in excess of $425,000.

(p) Swaps and Hedges. Enter into or become bound by any contract or agreement whereby AB&T or Alliance agrees to engage in any interest rate or other swap or hedge.

(q) Changes in Lease Agreements. Surrender its leasehold interest in any property held under, or seek or agree to the termination of any, AB&T Real Property Lease other than at the end of the term of a Lease Agreement under the terms of which it does not have an option to renew, or (ii) modify or amend an AB&T Real Property Lease other than in connection with the renewal at the end of its term. Prior to renewing or amending an AB&T Real Property Lease as described above, AB&T will consult with 1st Financial and permit 1st Financial to express its views regarding the terms of the renewal or amendment.

(a) From the date of this Agreement through the Effective Time, except as otherwise permitted by this Section 4.03, AB&T shall not, and shall not authorize or permit any of its directors, officers, agents, employees, investment bankers, attorneys, accountants, advisors, agents, affiliates or representatives (collectively, “Representatives”) to, directly or indirectly, (i) initiate, solicit, encourage or take any action to facilitate, including by way of furnishing information, any Acquisition Proposal (as defined below) or any inquiries with respect to the making of any Acquisition Proposal, (ii) enter into, continue or otherwise participate in any discussions or negotiations with, furnish any information relating to AB&T or afford access to the business, properties, assets, books or records of AB&T to any third party, or otherwise cooperate in any way with, or knowingly assist, participate in, facilitate or encourage any effort

by any third party that is seeking to make, or has made, an Acquisition Proposal or (iii) except in accordance with Section 8.02(a)(vi), approve, endorse, recommend or enter into any letter of intent or similar document or any contract, agreement or commitment contemplating or otherwise relating to an Acquisition Proposal.

The term “Acquisition Proposal” means any inquiry, proposal or offer, filing of any regulatory application or notice, whether in draft or final form, or disclosure of an intention to do any of the foregoing from any person relating to any (i) direct or indirect acquisition or purchase of (A) a branch office, (B) a substantial portion of AB&T’s or Alliance’s assets, or (C) a business that constitutes a substantial portion of the net revenues, net income or net assets of AB&T, (ii) the direct or indirect acquisition or purchase of any class of equity securities representing 10% or more of the voting power of AB&T’s Stock, (iii) tender offer or exchange offer that if consummated would result in any person beneficially owning 10% or more of any class of equity securities of AB&T, or (iv) merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving AB&T other than the transactions contemplated by this Agreement.

(b) Notwithstanding anything herein to the contrary, AB&T and its board of directors shall be permitted (i) to comply with Rule 14d-9 and Rule 14e-2 promulgated under the 1934 Act with regard to an Acquisition Proposal, provided that the board of directors of AB&T shall not withdraw or modify in a manner adverse to 1st Financial its Approval Recommendation (as defined in Paragraph 6.01(c)) except as set forth in clause (iii) below; (ii) to initiate any discussions or negotiations with, or provide any information to, any person in response to a Superior Proposal (as defined below) by any such person, if and only to the extent that (x) AB&T’s board of directors concludes in good faith, after consultation with outside counsel, that failure to do so would breach its fiduciary duties to AB&T’s shareholders under applicable law, (y) prior to providing any information or data to any person in connection with a Superior Proposal by any such person, AB&T’s board of directors receives from such person an executed confidentiality agreement, a copy of which executed confidentiality agreement shall have been provided to 1st Financial for informational purposes, and (z) at least 72 hours prior to providing any information or data to any person or entering into discussions or negotiations with any person, AB&T promptly notifies 1st Financial in writing of the name of such person and the material terms and conditions of any such Superior Proposal, and (iii) to withdraw, modify, qualify in a manner adverse to 1st Financial, condition or refuse to make its Approval Recommendation (the “Change in Recommendation”) if AB&T’s board of directors concludes in good faith, after consultation with outside counsel and financial advisers, that failure to do so would be reasonably likely to result in a breach of its fiduciary duties to AB&T’s shareholders under applicable law.

The term “Superior Proposal” means any bona fide, unsolicited written Acquisition Proposal made by a third party to acquire more than 50% of the combined voting power of the shares of AB&T Stock then outstanding or all or substantially all of AB&T’s assets for consideration consisting of cash or securities or both that is on terms that the board of directors of AB&T in good faith concludes, after consultation with its financial advisors and outside counsel, taking into account, among other things, all legal, financial, regulatory and other aspects of the proposal and the person making the proposal, including any break-up fees, expense

reimbursement provisions and conditions to consummation, (A) is on terms that the board of directors of AB&T in its good faith judgment believes to be more favorable from a financial point of view to its shareholders than the Merger; (B) for which financing, to the extent required, is then fully committed or reasonably determined to be available by the board of directors of AB&T, and (C) is reasonably capable of being completed.

(c) AB&T will promptly, and in any event within 24 hours, notify 1st Financial in writing of the receipt of any Acquisition Proposal or any information related thereto, which notification shall describe the Acquisition Proposal and identify the third party making such proposal.

(d) If a Payment Event (as hereinafter defined) occurs, AB&T shall pay to 1st Financial by wire transfer of immediately available funds, within two business days following such Payment Event, a fee of $745,000 (the “Break-up Fee”). The term “Payment Event” means any of the following:

(i) the termination of this Agreement by 1st Financial pursuant to Paragraph 8.02(b)(vi);

(ii) the termination of this Agreement by AB&T pursuant to Paragraph 8.02(a)(vi);

(iii) a tender offer or exchange offer for 25% or more of the outstanding common stock of AB&T is commenced and AB&T shall not have sent to its shareholders, within 10 business days after the commencement of such tender offer or exchange offer, a statement that the board of directors of AB&T recommends rejection of such tender offer or exchange offer; or

(iv) the occurrence of any of the following events within eighteen months of the termination of this Agreement pursuant to Paragraph 8.02(a)(iv) (but only if by reason of AB&T’s shareholders’ failure to approve this Agreement and Plan of Merger) or 8.02(b)(iv), provided that an Acquisition Proposal shall have been made by a Third Party after the date hereof and prior to such termination that shall not have been withdrawn in good faith prior to such termination: (A) AB&T enters into an agreement to merge with or into, or be acquired, directly or indirectly, by merger or otherwise by, such Third Party; (B) such Third Party, directly or indirectly, acquires substantially all of the assets of AB&T; (C) such Third Party, directly or indirectly, acquires more than 50% of the outstanding AB&T Stock or (D) AB&T adopts or implements a plan of liquidation, recapitalization or share repurchase relating to more than 50% of the outstanding AB&T Stock or an extraordinary dividend relating to substantially all of the outstanding AB&T Stock or substantially all of the assets of AB&T. As used herein, “Third Party” means any person as defined in Section 13(d) of the 1934 Act other than 1st Financial or its affiliates.

AB&T acknowledges that the agreements contained in this Paragraph 4.03 are an integral part of the transactions contemplated in this Agreement and that without these agreements 1st

Financial would not enter into this Agreement. Accordingly, in the event AB&T fails to pay to 1st Financial the Break-up Fee, promptly when due, AB&T shall, in addition thereto, pay to 1st Financial all costs and expenses, including attorneys’ fees and disbursements, incurred in collecting such Break-up Fee together with interest on the amount of the Break-up Fee or any unpaid portion thereof, from the date such payment was due until the date such payment is received by 1st Financial, accrued at the fluctuating prime rate as quoted in The Wall Street Journal as in effect from time to time during the period.

5.01. Affirmative Covenants of 1st Financial . 1st Financial hereby covenants and agrees as follows with AB&T:

(a) 1st Financial Shareholders’ Meeting. 1st Financial agrees to cause a meeting of its shareholders (the “1st Financial Shareholders’ Meeting”) to be duly called and held as soon as practicable after the date of this Agreement for the purpose of voting by 1st Financial’s shareholders on the approval of the Merger and the ratification and adoption of this Agreement. In connection with the call and conduct of, and all other matters relating to the 1st Financial Shareholders’ Meeting (including the solicitation of proxies), 1st Financial will comply in all material respects with all provisions of applicable law and regulations and with its Articles of Incorporation and Bylaws.

1st Financial will solicit appointments of proxies from its shareholders for use at the 1st Financial Shareholders’ Meeting and, in connection with that solicitation, it will distribute to its shareholders proxy solicitation materials (a “Proxy Statement”) in the form of the “Proxy Statement/Prospectus” described in Paragraph 6.01 below.

1st Financial will mail the Proxy Statement to its shareholders on a date mutually agreed upon by AB&T and 1st Financial, but in no event less than 30 days prior to the scheduled date of the 1st Financial Shareholders’ Meeting; provided, however, that no such materials shall be mailed to 1st Financial ‘s shareholders unless and until the Proxy Statement shall have been filed by 1st Financial with the SEC, the review period applicable thereto shall have expired, and 1st Financial shall have satisfactorily responded to and complied with any comments of the SEC thereon.

(b) Access. 1st Financial agrees that, following the date of this Agreement and to and including the Effective Time, it will provide AB&T and its employees, accountants, legal counsel, environmental consultants or other representatives access to all books, records, files and other information (whether maintained electronically or otherwise), to all properties and facilities, and to all its employees, accountants, legal counsel and consultants, as AB&T shall, in its sole discretion, consider to be necessary or appropriate; provided, however, that any investigation or reviews conducted by or on behalf of AB&T shall be performed in such a manner as will not interfere unreasonably with 1st Financial’s or Mountain 1st’s normal operations or with their relationships with their customers or employees, and shall be conducted in accordance with procedures established by the parties, each acting reasonably.

(c) Further Action; Instruments of Transfer. 1st Financial covenants and agrees with AB&T that it (i) will use its best efforts in good faith to take or cause to be taken all action required of it under this Agreement as promptly as practicable so as to permit the consummation of the transaction described herein at the earliest possible date; (ii) shall perform all acts and execute and deliver to AB&T all documents or instruments required herein, or as otherwise shall be reasonably necessary or useful to or requested by AB&T, in consummating such transactions; (iii) will cooperate with AB&T in every reasonable way in carrying out, and will pursue diligently the expeditious completion of, such transactions; and (iv) shall take such corporate action as is necessary to authorize the issuance of additional shares of 1st Financial Stock as necessary to complete the Merger.

(i) Subject to the availability of suitable positions within Mountain 1st, 1st Financial will endeavor, but will not be obligated, to offer employment to current employees of Alliance who remain employed by Alliance at the Effective Time. Except to the extent otherwise provided in a written agreement between Mountain 1st and an employee of Alliance, the employment offered by Mountain 1st to Alliance’s employees will be on an “at will” basis in such a position, at such location within Mountain 1st’s system, and for such rate of compensation, as shall be determined by Mountain 1st in the ordinary course of its business following the Effective Time, and nothing in this Agreement shall be deemed to constitute an employment agreement between 1st Financial or Mountain 1st and any such person or to obligate 1st Financial or Mountain 1st to employ any such person for any specific term or period of time, in any specific position, or at any specific salary or rate of compensation, or at all, or to restrict 1st Financial’s right to terminate the employment of any such person at any time following the Effective Time and for any reason satisfactory to it.

(ii) Following the Effective Time, except as otherwise provided in this Agreement, any employee of AB&T or Alliance who becomes an employee of 1st Financial or Mountain 1st (a “New Employee”) shall be entitled to receive all employee benefits and to participate in all benefit plans provided by 1st Financial or Mountain 1st, as applicable, on the same basis (including cost) and subject to the same eligibility and vesting requirements, and to the same conditions, restrictions and limitations, as generally are in effect and applicable to other newly hired employees of 1st Financial or Mountain 1st, as applicable, except that New Employees shall be immediately eligible to participate in all benefit plans of 1st Financial or Mountain 1st, as applicable, but only to the extent that such New Employees would have been eligible to participate in corresponding benefit plans of AB&T or Alliance. Each New Employee shall be given credit for his or her full years of service with AB&T or Alliance for purposes of, including but not limited to eligibility for participation and vesting in 1st Financial’s Section 401(k) savings plan; and for all purposes under 1st Financial’s other benefit plans (including entitlement to vacation and sick leave). A New Employee’s participation will be without regard to pre-existing condition requirements under 1st Financial’s health insurance plan, provided that any such pre-existing condition was covered under AB&T’s or Alliance’s health insurance plan(s) at the effective date of coverage under AB&T’s or Alliance’s health insurance plan and the New Employee provides evidence of such previous coverage in a form satisfactory to 1st Financial’s or Mountain 1st’s health insurance carrier, as applicable.

(e) Additions to Board of Directors. 1st Financial agrees to add to its Board of Directors, effective immediately after the Effective Time, two (2) additional directors one (1) of whom shall be Wayne F. Shovelin and one (1) of whom shall be another member of AB&T’s Board of Directors, provided that both of the individuals so appointed shall be serving as directors of AB&T immediately prior to the Effective Time. Each such director appointed to the 1st Financial Board of Directors (“Appointed Directors”) shall serve until the next annual meeting of the shareholders at which directors are elected. 1st Financial agrees to nominate for election at such annual meeting of shareholders one of the Appointed Directors to serve a three-year term, and the other Appointed Directors to serve a two-year term.

(f) Employment and Consulting Agreements Provided he remains employed by AB&T at the Effective Time in his current position, 1st Financial shall enter into an employment agreement with Daniel C. Ayscue in the form as attached as Exhibit 5.01(f) to this Agreement.

(g) Indemnification of Directors and Officers; “Tail” Coverage. (i) After the Effective Time, without releasing any insurance carrier and after exhaustion of all applicable director and liability insurance coverage for AB&T and its directors and officers, 1st Financial shall indemnify, hold harmless and defend the directors and officers of AB&T in office on the date hereof or the Effective Time, to the same extent and in the same manner as AB&T or Alliance would have been obligated to indemnify their own directors and officers, prior to the Effective Time, from and against any and all claims, disputes, demands, causes of action, suits, proceedings, losses, damages, liabilities, obligations, costs and expenses of every kind and nature including, without limitation, reasonable attorneys’ fees and legal costs and expenses therewith whether known or unknown and whether now existing or hereafter arising which may be threatened against, incurred, undertaken, received or paid by such persons in connection with or which arise out of or result from or are based upon any action or failure to act by such person in the ordinary scope of his duties as a director or officer of AB&T or Alliance (including service as a director or officer of any AB&T subsidiary or fiduciary of any of the AB&T Plans (as defined in Paragraph 2.24(b)) through the Effective Time; provided, however, that 1st Financial shall not be obligated to indemnify such person for (i) any act not available for statutory or permissible indemnification under North Carolina law, (ii) any penalty, decree, order, finding or other action imposed or taken by any regulatory authority, (iii) any violation or alleged violation of federal or state securities laws to the extent that indemnification is prohibited by law, or, provided, however, that (A) 1st Financial shall have the right to assume the defense thereof and upon such assumption 1st Financial shall not be liable to any director or officer of AB&T or Alliance for any legal expenses of other counsel or any other expenses subsequently incurred by such director or officer in connection with the defense thereof, except that if 1st Financial elects not to assume such defense or counsel for such director or officer reasonably advises such director or officer that there are issues which raise conflicts of interest between 1st Financial and such director or officer, such director or officer may retain counsel reasonably satisfactory to him, and 1st Financial shall pay the reasonable fees and expenses of such counsel, (B) 1st Financial shall not be liable for any settlement effected without its prior written consent, and (C)

1st Financial shall have no obligation hereunder to any director or officer of AB&T or Alliance when and if a court of competent jurisdiction shall determine that indemnification of such director or officer in the manner contemplated hereby is prohibited by applicable law.

(ii) Immediately prior to the Effective Time, 1st Financial will cooperate reasonably with AB&T and Alliance to arrange for AB&T or Alliance to purchase “tail” coverage with respect to their directors’ and officers’ liability and errors and omissions liability insurance, effective at the Effective Time for a three year term and in the same amount of coverage as is provided by their then current directors’ and officers’ and errors and omissions liability insurance policy, provided that the total costs of such tail coverage shall not exceed an aggregate of $50,000 without 1st Financial’s prior written approval.

(h) Notice Of Certain Changes Or Events. Following the execution of this Agreement and up to the Effective Time, 1st Financial promptly will notify AB&T in writing of and provide to AB&T such information as it shall request regarding (i) any Material Adverse Change in of affecting it or Mountain 1st or of the actual or prospective occurrence of any condition or event which, with the lapse of time or otherwise, is reasonably likely to cause, create or result in any such Material Adverse Change; (ii) the actual or prospective existence or occurrence of any condition or event which, with the lapse of time or otherwise, has caused or may or could cause any statement, representation, or warranty of 1st Financial or Mountain 1st herein, to be or become materially inaccurate, misleading, or incomplete, or which has resulted or may or could cause, create, or result in the breach or violation in any material respect of any of 1st Financial’s or Mountain 1st’s covenants or agreements contained herein or in the failure of any of the conditions described in Paragraphs 7.02 or 7.03 below; or (iii) the occurrence or existence of any event, fact or condition that may reasonably be expected to (A) prevent or materially impede or delay 1st Financial or AB&T from obtaining the approvals of Regulatory Authorities required in order to consummate, or otherwise from completing, the transactions described in this Agreement, or (B) adversely affect treatment of the Merger as a tax-free reorganization.

5.02. Negative Covenants of 1st Financial. 1st Financial covenants and agrees that, between the date hereof and the Effective Time, neither 1st Financial nor Mountain 1st will, without the prior written consent and authorization of AB&T’s CEO, and except as may be required by the FDIC, the Commissioner, the SEC, the FRB, or any other governmental agency or other Regulatory Authority or as shall be required by applicable law, regulation, or this Agreement:

(a) Take any action that would adversely affect or delay its ability to perform its obligations under this Agreement or to consummate the transactions contemplated hereby;

(b) Take any action that is intended to or expected to result in any of its representations and warranties set forth in this Agreement being or becoming untrue in any material respect at any time prior to the Effective Time, or in any of the conditions to the Merger set forth in Article VII not being satisfied or in a violation of any provision of this Agreement;

(c) Knowingly take any action that would prevent or impede the Merger from qualifying as a reorganization within the meaning of Section 368 of the Code;

(d) Take any action or enter into any agreement that could reasonably be expected to jeopardize or materially delay the receipt of the regulatory approvals described in Paragraph 6.02; or

(e) Agree to take, make any commitment to take, or adopt any resolutions of its Board of Directors in support of, any of the actions prohibited by this Paragraph 5.02.

(a) Registration Statement. As soon as practicable following the execution of this Agreement, 1st Financial and AB&T shall in consultation with each other prepare, and 1st Financial shall file with the SEC, a registration statement on Form S-4 (or on such other form as 1st Financial shall determine to be appropriate) (the “Registration Statement”) covering the 1st Financial Stock to be issued to shareholders of AB&T pursuant to this Agreement, and will use their respective reasonable best efforts in good faith to see that the Registration Statement is declared effective by the SEC under the 1933 Act. Additionally, 1st Financial and AB&T shall in consultation with each other take all such other actions, if any, as shall be required by applicable state securities or “blue sky” laws (i) to cause the 1st Financial Stock to be issued upon consummation of the Merger, at the time of the issuance thereof, to be duly qualified or registered (unless exempt) under such laws; (ii) to cause all conditions to any exemptions from qualification or registration under such laws to have been satisfied; and (iii) to obtain any and all required approvals or consents to the issuance of such stock.

(b) Preparation and Distribution of Joint Proxy Statement/Prospectus. 1st Financial and AB&T jointly will prepare a “Proxy Statement/Prospectus” for distribution to both AB&T’s and 1st Financial’s shareholders as the proxy statement relating to their solicitation of proxies for use at the AB&T Shareholders’ Meeting, the 1st Financial Shareholders’ Meeting, and as 1st Financial’s prospectus relating to the offer and distribution of 1st Financial Stock as described herein. The Proxy Statement/Prospectus shall be in such form and shall contain or be accompanied by such information regarding the AB&T Shareholders’ Meeting, the 1st Financial Shareholders’ Meeting, this Agreement, the parties hereto, and the transactions described or contemplated herein as is required by applicable law and regulations of the SEC applicable to 1st Financial and otherwise as shall be agreed upon by AB&T and 1st Financial. 1st Financial shall include the Proxy Statement/Prospectus as the prospectus in the Registration Statement. Each party hereto will cooperate with the other in good faith and will use its respective reasonable best efforts in good faith to respond to any comments of the SEC thereon.

AB&T and 1st Financial will each mail the Proxy Statement/Prospectus to its respective shareholders as soon as practicable following the date on which, and in the form in which, the Registration Statement is declared effective by the SEC.

(1) Except in the circumstances described in Paragraph 4.03, and provided that 1st Financial is then in compliance with its obligations under this Agreement, AB&T covenants that its directors, individually and collectively as AB&T’s Board of Directors, and its officers, will (A) recommend to and actively encourage AB&T’s shareholders to vote their shares of AB&T Stock at the AB&T Shareholders’ Meeting in favor of ratification and approval of this Agreement and the Merger, and the Proxy Statement distributed to AB&T’s shareholders in connection with the AB&T Shareholders’ Meeting will so indicate and state that AB&T’s Board of Directors considers the Merger to be advisable and in the best interests of AB&T and its shareholders; and (B) executive officers and directors will refrain from making any statement or taking any action designed or intended to discourage AB&T’s shareholders from voting their shares of AB&T Stock at the AB&T Shareholders’ Meeting in favor of ratification and approval of this Agreement and the Merger (the “Approval Recommendation”).

(2) Unless there is a material change in circumstances which causes 1st Financial’s Board of Directors to reasonably believe, based on a written opinion of outside counsel, that such a recommendation would violate the directors’ duties or obligations to 1st Financial or its shareholders under applicable law, 1st Financial’s Board of Directors will unanimously recommend to and actively encourage 1st Financial’s shareholders to vote their shares of 1st Financial Stock at the 1st Financial Shareholders’ Meeting to approve and adopt this Agreement and the Merger, and the Proxy Statement/Prospectus mailed to 1st Financial’s shareholders will so indicate and state that 1st Financial’s Boards of Directors considers the Merger to be advisable and in the best interests of AB&T, 1st Financial and their respective shareholders.

6.02. Regulatory Approvals. Promptly following the date of this Agreement, 1st Financial and AB&T each shall use their respective reasonable best efforts in good faith to (i) prepare and file, or cause to be prepared and filed, all applications for regulatory approvals and actions as may be required of them, respectively, by applicable law and regulations with respect to the transactions described herein (including applications to the FRB, the Commissioner, and to any other Regulatory Authority as may be required), and (ii) obtain all necessary regulatory approvals required for consummation of the transactions described herein. Before the filing thereof, each party to this Agreement (and its counsel) shall have the right to review and comment on the form and content of any such application to be filed by the other party. Should the appearance of any of the officers, directors, employees, or counsel of any of the parties hereto be requested by any other party or by any governmental agency at any hearing in connection with any such application, such party shall promptly use its best efforts to arrange for such appearance.

6.03. Information for Proxy Statement/Prospectus and Regulatory Approvals. 1st Financial and AB&T each agrees to respond promptly, and to use its reasonable best efforts to cause its directors, officers, counsel, accountants, and affiliates to respond promptly, to requests by any other party or its counsel for information for inclusion in the various applications for regulatory approvals and in the Proxy Statement/Prospectus and the Registration Statement. 1st Financial and AB&T each hereby covenants that none of the information provided by it for inclusion in such documents and applications will, at the time of mailing of those materials to

their respective shareholders, or at the time of receipt of any such required approval of a Regulatory Authority, as the case may be, contain any untrue statement of a material fact or omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading.

6.04. Expenses. Subject to the provisions of Paragraph 8.03, whether or not this Agreement shall be terminated or the Merger shall be consummated, AB&T and 1st Financial each shall pay its own legal, accounting, and financial advisory fees and all its other costs and expenses incurred or to be incurred in connection with the execution and performance of its obligations under this Agreement or otherwise in connection with this Agreement and the transactions described herein (including, without limitation all accounting fees, legal fees, consulting and advisory fees, filing fees, printing costs, and travel expenses). All costs incurred in connection with the printing and mailing of the Proxy Statement/Prospectus shall be deemed to be incurred and shall be paid equally by AB&T and 1st Financial.

(a) AB&T and 1st Financial each agrees that no persons other than the parties to this Agreement are authorized to make any public announcements or statements about this Agreement or any of the transactions described herein, and that, without the prior review and consent of the other parties (which consent shall not unreasonably be denied or delayed), it will not make any public announcement, statement or disclosure as to the terms and conditions of this Agreement or the transactions described herein, except for such disclosures as may be required incidental to obtaining the required approval of any Regulatory Authority to the consummation of the transactions described herein.

(b) For purposes of this Paragraph 6.05, “Confidential Information” refers to any information (including business and financial information) that a party to whom the information pertains (an “Informing Party”) provides or makes available, in connection with this Agreement, to a party for whose benefit the information is provided, or to that party’s affiliates, directors, officers, employees, attorneys, advisors, consultants, representatives and agents (a “Receiving Party”), or which a Receiving Party may otherwise obtain from any examination of an Informing Party’s documents, books, records, files or other written materials or from any discussions with any of the Informing Party’s directors, officers, employees, attorneys, advisors, consultants, representatives and agents, and shall be deemed to include, without limitation, (i) all such documents, books, records, files or other written materials themselves and all information contained therein (whether maintained in writing, electronically, on microfiche or otherwise), (ii) all corporate minutes, financial projections and budgets, historical and projected sales reports, acquisition or other expansion analyses or plans, pro forma financial data, capital spending budgets and plans, market studies and business plans, (iii) all information relative to financial results and condition, operations, policies and procedures, computer systems and software, shareholders, employees, officers, and directors, and (iv) all information relative to customers and former or prospective customers.

(c) Prior to the Effective Time, all Confidential Information of an Informing Party is proprietary to the Informing Party and constitutes either trade secrets or

confidential information of the Informing Party. Without the Informing Party’s express written consent, the Receiving Party shall not remove any Confidential Information of the Informing Party in written or other recorded form from the Informing Party’s premises.

(d) Prior to the Effective Time, all Confidential Information of an Informing Party is to be held in strict confidence by a Receiving Party and, except as otherwise provided herein, may not be disclosed by a Receiving Party to any person or entity not a party to this Confidentiality Agreement, unless the Receiving Party:

(i) can demonstrate that the same information as the Confidential Information to be disclosed already was in its possession prior to such Confidential Information being obtained;

(ii) can demonstrate that the same information as the Confidential Information to be disclosed is already publicly available or, at that time, has become publicly available through no fault of, or violation of this Paragraph 6.05 by, the Receiving Party or any other person that the Receiving Party knows, or has reason to know, is obligated to protect such Confidential Information; or

(iii) demonstrates that the same information as the Confidential Information to be disclosed was developed independently by or for the Receiving Party, without the use of the Confidential Information disclosed to or obtained by the Receiving Party.

(e) Prior to the Effective Time, the Receiving Party (i) may disclose Confidential Information of the Informing Party to the Receiving Party’s affiliates, directors, officers, employees, agents, attorneys, advisors and consultants who are directly involved in discussions of a potential transaction, only on a need to know basis and only if such persons or entities agree for the benefit of the other party to be bound by the restrictions and obligations of this Paragraph 6.05; and (ii) will enforce its obligations under this Paragraph 6.05 against all persons to whom it discloses Confidential Information and shall be responsible and liable to the Informing Party for any disclosure of Confidential Information by such persons or entities in violation of such restrictions and obligations.

(f) Upon termination of this Agreement the Receiving Party will deliver or cause to be delivered to the Informing Party all written Confidential Information of the Informing Party in the possession of the Receiving Party, or provide an officer’s affidavit as to the destruction of all copies of such Confidential Information.

(g) Prior to the Effective Time, the Receiving Party shall not use any Confidential Information of the Informing Party in an unlawful manner, to interfere with or attempt to terminate or otherwise adversely affect any actual or proposed contractual or business relationship of the Informing Party, or for any other purposes other than in conjunction with the transactions described herein. Without limiting the generality of the foregoing, in no event shall the Receiving Party use any Confidential Information of the Informing Party, directly or indirectly, for the purpose of competing against the Informing Party.

(h) Notwithstanding anything contained in this Paragraph 6.05 to the contrary, neither AB&T nor 1st Financial shall be required to obtain the prior consent of the

other party for any such disclosure which it, in good faith and upon the advice of its legal counsel, believes is required by law; provided, however, that before any such disclosure may be made by a Receiving Party upon the advice of its legal counsel, it shall, except where such notice is prohibited by law, give the Informing Party reasonable notice of its intent to make such disclosure, the form of content of that disclosure, and the basis upon which its legal counsel has advised it that such disclosure is required by law, so that the Informing Party may seek a protective order or other similar or appropriate relief, and the Receiving Party also shall undertake in good faith to have the Confidential Information to be disclosed treated confidentially by the party to whom the disclosure is made.

(i) The provisions of this Paragraph 6.05 supersede the provisions of that certain “Mutual Confidentiality Agreement” dated November 26, 2008, between AB&T and 1st Financial.

(j) This Paragraph 6.05 shall survive and remain in effect following any termination of this Agreement.

6.06. Section 16 Matters. Prior to the Effective Time, 1st Financial and AB&T shall take all such steps as may be required and available to cause any dispositions of AB&T Common Stock (including AB&T Stock Options or acquisitions of 1st Financial Common Stock resulting from the transactions contemplated by this Agreement by each individual who is subject to the reporting requirements of Section 16(a) of the 1934 Act with respect to AB&T to be exempt under Rule 16b-3 promulgated under the 1934 Act. AB&T agrees to promptly furnish 1st Financial with all requisite information necessary for 1st Financial to take the actions contemplated by this Paragraph 6.06.

(a) From and after the Effective Time, all options granted under the AB&T Financial Corporation 2005 Incentive Stock Option Plan and the AB&T Financial Corporation 2005 Nonstatutory Stock Option Plan to purchase shares of AB&T Stock (each, an “AB&T Stock Option”), that are then outstanding and unexercised, shall be converted into and become options to purchase shares of 1st Financial Stock, and 1st Financial shall assume each such AB&T Stock Option in accordance with the terms of the plan and agreement by which it is evidenced; provided, however, that from and after the Effective Time (i) each such AB&T Stock Option assumed by 1st Financial may be exercised solely to purchase shares of 1st Financial Stock; (ii) the number of shares of 1st Financial Stock purchasable upon exercise of such AB&T Stock Option shall be equal to the number of shares of AB&T Stock that were purchasable under such AB&T Stock Option immediately prior to the Effective Time multiplied by the Exchange Ratio, rounded down to the nearest whole share, and (iii) the per share exercise price under each such AB&T Stock Option shall be adjusted by dividing the per share exercise price of each such AB&T Stock Option by the Exchange Ratio, rounded up to the nearest cent. The terms of each AB&T Stock Option shall, in accordance with its terms, be subject to further adjustment as appropriate to reflect any stock split, stock dividend, recapitalization or other similar transaction with respect to shares of 1st Financial Stock on or subsequent to the Effective Time. The adjustment provided in this Paragraph 6.07(a) with respect to any AB&T Stock Options (whether or not “incentive stock options” (as defined in section 422 of the Code)) shall be and is intended

to be effected in a manner which is consistent with section 424(a) of the Code and, to the extent it is not so consistent, the provisions of such section 424(a) of the Code shall override anything to the contrary contained herein.

(b) At or prior to the Effective Time, 1st Financial shall take all corporate action necessary to reserve for issuance sufficient shares of 1st Financial Stock for delivery upon exercise of the AB&T Stock Options assumed by it in accordance with this Paragraph 6.07. As soon as practicable after the Effective Time, 1st Financial shall file an amendment to the registration statement on Form S-8 (or such other form as may be required), with respect to the shares of 1st Financial Stock subject to such options and shall use its reasonable efforts to maintain the effectiveness of such registration statement (and maintain the current status of the prospectus or prospectuses contained therein) for so long as such options remain outstanding.

(a) At its option and expense, following the date of this Agreement 1st Financial may cause to be conducted (i) a title examination, physical survey, zoning compliance review, and structural inspection of any or all of the AB&T Real Property and improvements thereon (collectively, the “Property Examination”), and (ii) site inspections, environmental assessments, historic reviews, and regulatory analyses of any or all of the AB&T Real Property, together with such other studies, testing and intrusive sampling and analyses as 1st Financial shall deem necessary or desirable (collectively, the “Environmental Survey”); provided, however, that any investigations or reviews conducted by or on behalf of 1st Financial shall be performed in such a manner as will no interfere unreasonably with AB&T’s and Alliance’s normal operations.

If, in the course of the Property Examination or Environmental Survey, 1st Financial identifies one or more “Material Defects” (as defined below), 1st Financial will give prompt written notice thereof to AB&T describing the facts or conditions constituting each such Material Defect.

(i) the existence of any lien (other than the lien of real property taxes not yet due and payable), encumbrance, title imperfection or title irregularity relating to any of the Real Property, including without limitation the existence of any facts or circumstances that adversely affect any of either AB&T’s or Alliance’s ability to enforce any Lease Agreement or its rights in any leasehold interest thereunder;

(ii) the existence of any zoning restriction, easement, covenant or other restriction, or the existence of any facts or conditions that constitute a breach of representations and warranties contained in Paragraph 2.15 or 2.20, relating or with respect to any of the AB&T Real Property, in either such case that 1st Financial reasonably believes will materially and adversely affect its use of that Real Property for the purpose for which and in the manner in which it currently is used or the value or marketability of that AB&T Real Property;

(iii) the existence of any structural defects or conditions of disrepair in the improvements on any parcel of the AB&T Real Property (including any equipment, fixtures or other components related thereto); or

(iv) the existence of facts or circumstances relating to any of the AB&T Real Property and indicating that (A) there likely has been a discharge, disposal, release, threatened release, or emission by any person of any Hazardous Substance on, from, under, at, or relating to that AB&T Real Property, or (B) any action has been taken or not taken, or a condition or event likely has occurred or exists, with respect to that AB&T Real Property (including, without limitation, any removal or disposal of materials from the AB&T Real Property) which constitutes or would constitute a violation of any Environmental Law or any contract or other agreement between either AB&T or Alliance and any other person or entity, as to which, in either such case, 1st Financial reasonably believes, based on the advice of legal counsel or other consultants, that, before or after the Effective Time, either AB&T or Alliance, or 1st Financial, respectively, could incur costs or become responsible or liable for assessment, removal, remediation, monetary damages (including without limitation any liability to other persons for property damage or personal injury), or civil, criminal or administrative penalties or other corrective action.

(i) 1st Financial reasonably believes that (A) the total of the costs and expenses that either AB&T or Alliance or 1st Financial could incur in fully correcting all Material Defects identified by 1st Financial that are described in Paragraphs 6.08(b)(i), (iii) and/or (iv) above, plus (B) all other amounts for which either AB&T or Alliance or 1st Financial could become responsible or liable related to all those Material Defects as described in Paragraph 6.08(b), in either case whether before or after the Effective Time, exceeds an aggregate of $500,000, or

(ii) 1st Financial identifies one or more Material Defects described in Paragraph 6.08(b)(ii) above,

then 1st Financial shall have the right and option, exercisable upon written notice to AB&T, to terminate this Agreement. In the event that, following its investigation of any such Material Defects, 1st Financial concludes that it will terminate this Agreement as provided in the preceding sentence, it will give prompt notice of termination to AB&T; provided, however, that 1st Financial shall not be obligated to give any such notice while it continues in good faith to investigate, or to determine the nature and cost of potential corrective actions, if any, to remedy, any such Material Defect.

(d) It is contemplated that 1st Financial will conduct the Property Examination and the Environmental Survey following the date of this Agreement and prior to the Effective Time. It is the intent of this Agreement, and AB&T understands and agrees that, upon completion of the Property Examination and Environmental Survey, if any of the facts, conditions, circumstances or other matters revealed by the Property Examination or Environmental Survey reveal a Material Defect, then 1st Financial may exercise its rights under

this Paragraph 6.08 without regard to any actual knowledge on or prior to the date of this Agreement on the part of 1st Financial or its officers or advisers of that Material Defect or the facts, conditions, circumstances or other matters pertaining thereto and without regard to any Previous Disclosure to 1st Financial, or any other communication to 1st Financial or any of its officers or advisers, prior to the date of this Agreement, or otherwise.

6.09. Tax Opinion. 1st Financial and AB&T agree to use their best efforts to cause the Merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, and to obtain a written opinion from a qualified accounting or law firm (the “Tax Opinion”), addressed jointly to the Boards of Directors of 1st Financial and AB&T, to the foregoing effect. Each further agrees that it will not intentionally take any action that would cause the Merger to fail to so qualify.

6.10 Treatment of 401(k) Plan. At 1st Financial’s option, AB&T or Alliance’s Section 401(k) plan(s) will be terminated, effective immediately prior to the Effective Time. Each participant in such plan at the time it is terminated may elect, upon completion of the termination and the final liquidation of the plan, (a) to receive a distribution of the assets credited to his or her plan account at that time, (b) to have those assets credited as a direct “roll-over” to the participant’s individual retirement plan account, or, (c) if the participant will become a participant in Mountain 1st’s Section 401(k) plan, to have those assets credited as a “roll-over” to the participant’s plan account under Mountain 1st’s plan.

AB&T and Alliance each will take or cause to be taken such actions as Mountain 1st shall reasonably consider to be necessary or desirable in connection with or to effect or facilitate such plan termination. As successor to AB&T and Alliance, Mountain will, as of the Effective Time, it will assume any and all administrative and fiduciary duties of AB&T and Alliance with respect to completion of the termination and liquidation of their 401(k) plan(s), including, without limitation, duties relating to filings with the Internal Revenue Service relating to the plan.

7.01. Conditions to All Parties’ Obligations. Notwithstanding any other provision of this Agreement to the contrary, the obligations of each of the parties to this Agreement to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date:

(a) Approval by Regulatory Authorities; No Disadvantageous Conditions. (i) The Merger and the other transactions described herein shall have been approved, to the extent required by law, by the FRB and by all other Regulatory Authorities having jurisdiction over such transaction, (ii) no Regulatory Authority shall have withdrawn its approval of such transactions or imposed any condition on such transactions or conditioned its approval thereof, which condition is reasonably deemed by 1st Financial or AB&T to be materially disadvantageous or burdensome or to impact so adversely the economic or business benefits of

this Agreement as to render it inadvisable for such party to consummate the transactions contemplated herein; (iii) all waiting periods required following necessary approvals by Regulatory Authorities shall have expired, and, in the case of any waiting period imposed by law or regulation following approval by the FRB, or other governmental agency or Regulatory Authority, no unwithdrawn objection to the transactions contemplated herein shall have been raised by the U.S. Department of Justice; (iv) all other consents, approvals, and permissions, and the satisfaction of all of the requirements prescribed by law or regulation, necessary to the carrying out of the transactions contemplated herein shall have been procured; and (v) no legislative or regulatory development shall have occurred that is reasonably deemed by 1st Financial or AB&T to impact so adversely the economic or business benefits of this Agreement as to render it inadvisable for such party to consummate the transactions contemplated herein.

(b) Effectiveness of Registration Statement, Compliance with Securities and Other “Blue Sky” Requirements. The Registration Statement shall be effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been initiated or threatened by the SEC. 1st Financial shall have taken all such actions, if any, as required by applicable state securities laws (i) to cause the 1st Financial Stock to be issued upon consummation of the Merger, at the time of the issuance thereof, to be duly qualified or registered (unless exempt) under such laws; (ii) to cause all conditions to any exemptions from qualification or registration under such laws to have been satisfied; and (iii) to obtain any and all required approvals or consents with respect to the issuance of such stock, and any such required approvals or consents shall have been obtained and shall remain in effect.

(c) Adverse Proceedings, Injunction, Etc. There shall not be (i) any order, decree, or injunction of any court or agency of competent jurisdiction which enjoins or prohibits the Merger or any of the other transactions described herein or any of the parties hereto from consummating any such transaction; (ii) any pending or threatened investigation of the Merger or any of such other transactions contemplated herein by the U.S. Department of Justice, or any actual or threatened litigation under federal antitrust laws relating to the Merger or any other such transactions; or (iii) any suit, action, or proceeding by any person (including any governmental, administrative, or regulatory agency), pending or threatened before any court or governmental agency in which it is sought to restrain or prohibit AB&T, 1st Financial, Alliance or Mountain 1st from consummating the transactions contemplated herein or carrying out any of the terms or provisions of this Agreement; or (iv) any other suit, claim, action, or proceeding pending or threatened against AB&T, 1st Financial, Alliance or Mountain 1st or any of their officers or directors which shall reasonably be considered by AB&T or 1st Financial to be materially burdensome in relation to the proposed transactions or materially adverse in relation to the financial condition of such corporation, and which has not been dismissed, terminated, or resolved to the satisfaction of all parties hereto within ninety (90) days of the institution or threat thereof.

(d) Approval by Shareholders. The shareholders of AB&T and 1st Financial shall have duly approved, ratified, and confirmed this Agreement and the transactions contemplated herein, all to the extent required by and in accordance with the provisions of this Agreement, applicable law, and applicable provisions of their respective Articles of Incorporation and Bylaws.

(i) 1st Financial shall have received from The Carson Medlin Company a written opinion (the “1st Financial Fairness Opinion”) to the effect that payment of the Consideration is fair, from a financial point of view, to 1st Financial and its shareholders as of the date of approval of this Agreement by its Board of Directors; and The Carson Medlin Company shall have delivered a letter to 1st Financial, updated as of a date within five business days preceding the mailing date of the Joint Proxy Statement/Prospectus, to the effect that it remains its opinion that payment of the Consideration is fair, from a financial point of view, to 1st Financial and its shareholders.

(ii) AB&T shall have received from FIG Partners, LLC a written opinion (the “AB&T Fairness Opinion”) to the effect that the Consideration received by AB&T’s shareholders is fair, from a financial point of view, to AB&T and its shareholders as of the date of approval of this Agreement by its Board of Directors; and FIG Partners, LLC shall have delivered a letter to AB&T, updated as of a date within five business days preceding the mailing date of the Joint Proxy Statement/Prospectus, to the effect that it remains its opinion that the Consideration received by AB&T’s shareholders is fair, from a financial point of view, to AB&T and its shareholders.

(f) Tax Opinion. 1st Financial and AB&T shall have received the Tax Opinion in form satisfactory to each of them.

(g) Articles of Merger; Other Actions. Articles of Merger described in Paragraph 1.04 of this Agreement pertaining to the Merger shall have been duly executed by 1st Financial and AB&T and filed with the North Carolina Secretary of State as provided in Paragraph 1.04.

7.02. Additional Conditions to AB&T’s Obligations. Notwithstanding any other provision of this Agreement to the contrary, AB&T’s obligations to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date:

(a) Material Adverse Change. There shall not have been any Material Adverse Change in or affecting 1st Financial or Mountain 1st, and there shall not have occurred any event or development and there shall not exist any condition or circumstance which, with the lapse of time or otherwise, is reasonably likely to cause, create, or result in any such Material Adverse Change.

(b) Compliance with Laws. 1st Financial shall have complied in all material respects with all federal and state laws and regulations applicable to the transactions described herein and where the violation of or failure to comply with any such law or regulation is reasonably likely to have a Material Adverse Effect on 1st Financial.

(c) 1st Financial’s Representations and Warranties and Performance of Agreements; Officers’ Certificate. Unless waived in writing by AB&T as provided in Paragraph 10.02 below, each of the representations and warranties of 1st Financial contained in this Agreement shall have been true and correct as of the date hereof and shall remain true and correct in all material respects on and as of the Effective Time with the same force and effect as though made on and as of such date, except (i) for changes which are not, in the aggregate, material and adverse to the financial condition and results of operations of 1st Financial; and (ii) as otherwise contemplated by this Agreement; and 1st Financial shall have performed in all material respects all of its respective obligations, covenants, and agreements hereunder to be performed by it on or before the Closing Date.

AB&T shall have received a certificate dated as of the Closing Date and executed by 1st Financial’s President and Chief Financial Officer to the foregoing effect and as to any other matter as AB&T may reasonably request.

(d) Legal Opinion of 1st Financial’s Counsel. AB&T shall have received from 1st Financial’s counsel, Ward and Smith, P.A., New Bern, North Carolina, a written opinion, dated as of the Closing Date and in form and substance reasonably satisfactory to AB&T.

(e) Other Documents and Information from 1st Financial. 1st Financial and Mountain 1st shall have provided to AB&T correct and complete copies of their respective Bylaws, Articles of Incorporation, and board of directors and shareholder resolutions approving this Agreement and the transactions contemplated herein (all certified by their respective secretaries), together with a certificate of the incumbency of its officers and such other closing documents and information as may be reasonably requested by AB&T or its counsel.

(f) Acceptance by AB&T’s Counsel. The form and substance of all legal matters described herein or related to the transactions contemplated herein shall be reasonably acceptable to AB&T’s legal counsel, Gaeta & Eveson, P.A., Raleigh, North Carolina.

(g) No Termination or Abandonment. This Agreement shall not have been terminated or abandoned by 1st Financial.

7.03. Additional Conditions to 1st Financial’s Obligations. Notwithstanding any other provision of this Agreement to the contrary, 1st Financial’s obligation to consummate the transactions described herein shall be conditioned upon the satisfaction of each of the following conditions precedent on or prior to the Closing Date:

(a) Material Adverse Change. There shall not have been any Material Adverse Change in or affecting AB&T or Alliance, and there shall not have occurred any event or development and there shall not exist any condition or circumstance which, with the lapse of time or otherwise, is reasonably likely to cause, create, or result in any such Material Adverse Change.

(b) Compliance with Laws. AB&T shall have complied in all material respects with all federal and state laws and regulations applicable to the transactions described herein and where the violation of or failure to comply with any such law or regulation is reasonably likely to have a Material Adverse Effect on AB&T.

(c) AB&T’s Representations and Warranties and Performance of Agreements; Officers’ Certificate. Unless waived in writing by 1st Financial as provided in Paragraph 10.02 below, each of the representations and warranties of AB&T and Alliance contained in this Agreement shall have been true and correct in all material respects as of the date hereof and shall remain true and correct in all material respects on and as of the Effective Time with the same force and effect as though made on and as of such date, except (i) for changes which do not, in the aggregate, result in a Material Adverse Effect on AB&T; and (ii) as otherwise contemplated by this Agreement; and AB&T shall have performed in all material respects all its obligations, covenants, and agreements hereunder to be performed by it on or before the Closing Date.

1st Financial shall have received a certificate dated as of the Closing Date and executed by AB&T’s President and Chief Financial Officer to the foregoing effect and as to such other matters as may be reasonably requested by 1st Financial.

(d) Legal Opinion of AB&T’s Counsel. 1st Financial shall have received from AB&T’s counsel, Gaeta & Eveson, P.A., Raleigh, North Carolina, a written opinion, dated as of the Closing Date and in the form and substance reasonably satisfactory to 1st Financial.

(e) Other Documents and Information from AB&T. AB&T and Alliance shall have provided to 1st Financial correct and complete copies of their respective Articles of Incorporation, Bylaws, and board of directors and shareholder resolutions approving this Agreement and the transactions contemplated herein (all certified by their respective secretaries), together with certificates of the incumbency of AB&T’s officers and such other closing documents and information as may be reasonably requested by 1st Financial or its counsel.

(f) Acceptance by 1st Financial’s Counsel. The form and substance of all legal matters described herein or related to the transactions contemplated herein shall be reasonably acceptable to 1st Financial’s legal counsel, Ward and Smith, P.A., New Bern, North Carolina.

(g) Consents to Assignment; Estoppel Certificates. AB&T shall have obtained and delivered to 1st Financial the consents to assignments of leases and contracts and landlords’ estoppel certificates requested by 1st Financial as described in Paragraph 4.01(g) above.

(h) Director Resignations. AB&T shall have obtained and delivered to 1st Financial the resignations of all of its directors in form and substance reasonably satisfactory to 1st Financial.

(i) Officer Agreement. Dan Ayscue shall have entered into the agreement set forth in Paragraph 5.01(f) hereof.

(j) No Termination or Abandonment. This Agreement shall not have been terminated or abandoned by AB&T.

8.01. Mutual Termination. At any time prior to the Effective Time (and whether before or after approval hereof by the shareholders of 1st Financial or AB&T), this Agreement may be terminated by the mutual agreement of 1st Financial and AB&T. Upon any such mutual termination, all obligations of 1st Financial and AB&T hereunder shall terminate and each party shall pay its own costs and expenses as provided in Paragraph 6.04 hereof.

8.02. Unilateral Termination. This Agreement may be terminated by either 1st Financial or AB&T (whether before or after approval hereof by AB&T’s or 1st Financial’s shareholders) upon written notice to the other party in the manner provided herein and under the circumstances described below.

(a) Termination by AB&T. This Agreement may be terminated by AB&T by action of its Board of Directors:

(i) if any of the conditions to the obligations of AB&T set forth in Paragraphs 7.01(e),(f) and (g) and 7.02 shall not have been satisfied in all material respects or effectively waived in writing by AB&T within 30 days of the satisfaction of the conditions set forth Paragraphs 7.01(a),(b), (c) and (d) (except to the extent that the failure of such condition to be satisfied has been caused by the failure of AB&T to satisfy any of its obligations, covenants or agreements contained herein);

(ii) if 1st Financial shall have violated or failed to fully perform any of its obligations, covenants or agreements contained in Articles V or VI herein in any material respect;

(iii) if AB&T determines at any time that any of 1st Financial’s representations or warranties contained in Article III hereof or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made or would have been false or misleading in any material respect except for the fact that the representation or warranty was limited to or qualified based on the Best Knowledge of any person, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect or that would cause any such representation or warranty to become false or misleading in any material respect except for the fact that the representation or warranty was limited to or qualified based on the Best Knowledge of any person, in each case such that the conditions set forth in Paragraph 7.02(b) would not be satisfied;

(iv) if, notwithstanding AB&T’s satisfaction of its obligations under Paragraphs 6.01 and 6.03, AB&T’s shareholders do not ratify and approve this Agreement and the Merger at the AB&T Shareholders’ Meeting, or if the 1st Financial Shareholders’ Meeting is not held by June 30, 2009, or such later date as shall be mutually agreed upon in writing by AB&T and 1st Financial;

(v) if the Merger shall not have become effective on or before September 30, 2009 or such later date as shall be mutually agreed upon in writing by AB&T and 1st Financial (except to the extent that the failure of such condition to be satisfied has been caused by the failure of AB&T to satisfy any of its obligations, covenants or agreements contained herein); or

(vi) at any time prior to the date of mailing of the Joint Proxy Statement/Prospectus by AB&T in order for AB&T to enter into an Acquisition Proposal that has been received by AB&T and the AB&T board of directors in compliance with Paragraph 4.03, concludes in good faith, in consultation with its financial and legal advisors, that such Acquisition Proposal is a Superior Proposal; provided, however, that this Agreement may be terminated by AB&T pursuant to this Paragraph 8.02(a)(vi only after the tenth Business Day following AB&T ’s provision of written notice to 1st Financial advising 1st Financial that the AB&T board of directors is prepared to accept a Superior Proposal and only if (x) during such seven-Business Day period, AB&T has caused its financial and legal advisors to negotiate with 1st Financial in good faith to make such adjustments in the terms and conditions of this Agreement such that such Acquisition Proposal would no longer constitute a Superior Proposal, and (y) AB&T ’s board of directors has considered such adjustments in the terms and conditions of this Agreement resulting from such negotiations and has concluded in good faith, based upon consultation with its financial and legal advisers, that such Acquisition Proposal remains a Superior Proposal even after giving effect to the adjustments proposed by 1st Financial.

However, before AB&T may terminate this Agreement for any of the reasons specified above in (i) or (ii) of this Paragraph 8.02(a), it shall give written notice to 1st Financial in the manner provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and such termination by AB&T shall not become effective if, within thirty (30) days following the giving of such notice, 1st Financial shall cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of AB&T. In the event 1st Financial cannot or does not cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of AB&T within such notice period, termination of this Agreement by AB&T thereafter shall be effective upon its giving of written notice thereof to 1st Financial in the manner provided herein.

(b) Termination by 1st Financial. Prior to the Effective Time, this Agreement may be terminated by 1st Financial:

(i) if any of the conditions to the obligations of 1st Financial set forth in Paragraphs 7.01(e) and (f) and 7.03 shall not have been satisfied in all material respects or effectively waived in writing by 1st Financial within 30 days of the satisfaction of the conditions set forth Paragraphs 7.01(a),(b), (c) and (d) (except to the extent that the failure of such condition to be satisfied has been caused by the failure of 1st Financial to satisfy any of its obligations, covenants or agreements contained herein);

(ii) if AB&T shall have violated or failed to fully perform any of its obligations, covenants or agreements contained in Articles IV or VI herein in any material respect;

(iii) if 1st Financial determines that any of AB&T’s respective representations and warranties contained in Article II hereof or in any other certificate or writing delivered pursuant to this Agreement shall have been false or misleading in any material respect when made or would have been false or misleading in any material respect except for the fact that the representation or warranty was limited to or qualified based on the Best Knowledge of any person, or that there has occurred any event or development or that there exists any condition or circumstance which has caused or, with the lapse of time or otherwise, may or could cause any such representations or warranties to become false or misleading in any material respect or that would cause any such representation or warranty to become false or misleading in any material respect except for the fact that the representation or warranty was limited to or qualified based on the Best Knowledge of any person, in each case such that the conditions set forth in Paragraph 7.03(b) would not be satisfied;

(iv) if, notwithstanding 1st Financial’s satisfaction of its obligations contained in Paragraphs 6.01 and 6.03, its shareholders do not ratify and approve this Agreement and approve the Merger at the 1st Financial Shareholders’ Meeting, or the AB&T Shareholders’ Meeting is not held by June 30, 2009, or such later date as shall be mutually agreed upon in writing by AB&T and 1st Financial;

(v) if the Merger shall not have become effective on or before September 30, 2009, or such later date as shall be mutually agreed upon in writing by AB&T and 1st Financial (except to the extent that the failure of such condition to be satisfied has been caused by the failure of 1st Financial to satisfy any of its obligations, covenants or agreements contained herein); or

(vi) if (A) AB&T shall have breached Paragraph 4.03 in any respect materially adverse to 1st Financial, (B) AB&T shall have breached its obligation set forth in Paragraph 6.01(c) to make its Approval Recommendation or shall have effected a Change in Recommendation, (C) the AB&T board of directors shall have recommended approval of an Acquisition Proposal, or (D) AB&T shall have breached its obligation set forth in Paragraph 4.01(b) to hold the meeting of shareholders to approve and adopt the Plan of Merger.

However, before 1st Financial may terminate this Agreement for any of the reasons specified above in clause (i) or (ii) of this Paragraph 8.02(b), it shall give written notice to AB&T in the manner provided herein stating its intent to terminate and a description of the specific breach, default, violation or other condition giving rise to its right to so terminate, and, such termination by 1st Financial shall not become effective if, within 30 days following the giving of such notice, AB&T shall cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of 1st Financial. In the event AB&T cannot or does not cure such breach, default or violation or satisfy such condition to the reasonable satisfaction of 1st Financial within such notice period, termination of this Agreement by 1st Financial thereafter shall be effective upon its giving of written notice thereof to AB&T in the manner provided herein;

(viii) if the holders of AB&T Stock or of 1st Financial Stock exercise any applicable rights of dissent and appraisal under Article 13 of the North Carolina Business Corporation Act, with respect to an aggregate number of shares of AB&T Stock or 1st Financial Stock such as would result in a reduction of three percent or more in the aggregate number of shares of 1st Financial Stock that otherwise would have been outstanding following the Effective Time, or if the holders of AB&T Preferred Stock or 1st Financial Preferred Stock exercise any such right of dissent.

(a) Except as otherwise provided below, in the event of a breach by 1st Financial of any of its representations or warranties contained in Article III of this Agreement or in any other certificate or writing delivered pursuant to this Agreement, or in the event of its failure to perform or violation of any of its obligations, agreements or covenants contained in Articles V or VI of this Agreement, then AB&T’s sole rights and remedies shall be (i) to terminate this Agreement prior to the Effective Time as provided in Paragraph 8.02(a) or, in the case of a failure to perform or violation of any obligations, agreements or covenants, to seek specific performance thereof; and (ii) in the event of any such termination of this Agreement by AB&T due to a failure by 1st Financial to perform any of its obligations, agreements or covenants contained in Articles V or VI of this Agreement, to obtain reimbursement from 1st Financial for up to (but not more than) $250,000 in expenses described in Paragraph 6.04 which actually have been incurred and are reasonably documented by AB&T.

(b) Likewise, and except as otherwise provided below, in the event of a breach by AB&T of any of its representations or warranties contained in Article II of this Agreement, or in the event of its failure to perform or violation of any of its obligations, agreements or covenants contained in Articles IV or VI of this Agreement, then 1st Financial’s sole rights and remedies shall be (i) to terminate this Agreement prior to the Effective Time as provided in Paragraph 8.02(b) or, in the case of a failure to perform or violation of any obligations, agreements or covenants, to seek specific performance thereof; and (ii) in the event of any such termination of this Agreement by 1st Financial due to a failure by AB&T to perform any of its obligations, agreements or covenants contained in Articles IV or VI of this Agreement, to obtain reimbursement from AB&T for up to (but not more than) $250,000 in expenses described in Paragraph 6.04 which actually have been incurred and are reasonably documented by 1st Financial.

(c) Notwithstanding any provision of this Agreement to the contrary, if any party to this Agreement breaches this Agreement by willfully or intentionally failing to perform or violating any of its obligations, agreements or covenants contained in Articles IV, V or VI of this Agreement, such party shall be obligated to pay all expenses of the other parties described in Paragraph 6.04, together with other damages recoverable at law or in equity.

(a) By 1st Financial. 1st Financial agrees that, in the event this Agreement is terminated for any reason and the Merger is not consummated, it will indemnify, hold harmless and defend AB&T and its officers, directors, attorneys and financial advisors from and against any and all claims, disputes, demands, causes of action, suits or proceedings of any third party (including any Regulatory Authority), together with all losses, damages, liabilities, obligations, costs and expenses of every kind and nature in connection therewith (including without limitation reasonable attorneys’ fees and legal costs and expenses in connection therewith), whether known or unknown, and whether now existing or hereafter arising, which may be threatened against, incurred, undertaken, received or paid by AB&T:

(i) in connection with or which arise out of, result from, or are based upon (A) 1st Financial’s operations or business transactions or its relationship with any of its employees; (B) 1st Financial’s failure to comply with any statute or regulation of any federal, state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement; or (C) actions, suits, proceedings, injunctions or any other type of legal action brought by shareholders of 1st Financial in connection with the Merger;

(ii) in connection with or which arise out of, result from, or are based upon any fact, condition or circumstance that constitutes a breach by 1st Financial of, or any inaccuracy, incompleteness or inadequacy in, any of its representations or warranties under or in connection with this Agreement, or any failure of 1st Financial to perform any of its covenants, agreements or obligations under or in connection with this Agreement; or

(iii) in connection with or which arise out of, result from, or are based upon any information provided by 1st Financial which is included in the Proxy Statement/Prospectus and which information causes the Proxy Statement/Prospectus, at the time of its mailing to 1st Financial’s shareholders and AB&T’s shareholders, to contain any untrue statement of a material fact or to omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading.

(b) By AB&T. AB&T agrees that, in the event this Agreement is terminated for any reason and the Merger is not consummated, it will indemnify, hold harmless and defend 1st Financial and its officers, directors, attorneys and financial advisors from and against any and all claims, disputes, demands, causes of action, suits, proceedings of any third party (including any Regulatory Authority), together with all losses, damages, liabilities, obligations, costs and expenses of every kind and nature in connection therewith (including without limitation reasonable attorneys’ fees and legal costs and expenses in connection therewith), whether known or unknown, and whether now existing or hereafter arising, which may be threatened against, incurred, undertaken, received or paid by 1st Financial:

(i) in connection with or which arise out of, result from, or are based upon (A) AB&T’s operations or business transactions or its relationship with any of its employees; (B) AB&T’s failure to comply with any statute or regulation of any federal, state or local government or agency (or any political subdivision thereof) in connection with the transactions described in this Agreement; or (C) actions, suits, proceedings, injunctions or any other type of legal action brought by shareholders of AB&T in connection with the Merger;

(ii) in connection with or which arise out of, result from, or are based upon any fact, condition or circumstance that constitutes a breach by AB&T of, or any inaccuracy, incompleteness or inadequacy in, any of its representations or warranties under or in connection with this Agreement, or any failure of AB&T to perform any of its covenants, agreements or obligations under or in connection with this Agreement; or

(iii) in connection with or which arise out of, result from, or are based upon any information provided by AB&T which is included in the Proxy Statement/Prospectus and which information causes the Proxy Statement/Prospectus, at the time of its mailing to 1st Financial’s shareholders and AB&T’s shareholders, to contain any untrue statement of a material fact or to omit any material fact required to be stated therein or necessary in order to make the statements contained therein, in light of the circumstances under which they were made, not false or misleading.

9.02. Procedure for Claiming Indemnification. If any matter subject to indemnification under this Article IX arises in the form of a claim (herein referred to as a “Third Party Claim”) against AB&T or 1st Financial, or their respective successors and assigns, or any of their respective subsidiary corporations, officers, directors, attorneys or financial advisors (collectively, the “Indemnitees”), the Indemnitee promptly shall give notice and details thereof, including copies of all pleadings and pertinent documents, to the party obligated for indemnification hereunder (the “Indemnitor”). Within 15 days of such notice, the Indemnitor either (i) shall pay the Third Party Claim either in full or upon agreed compromise; or (ii) shall notify the applicable Indemnitee that the Indemnitor disputes the Third Party Claim and intends to defend against it, and thereafter shall so defend and pay any adverse final judgment or award in regard thereto. Such defense shall be controlled by the Indemnitor and the cost of such defense shall be borne by it, except that the Indemnitee shall have the right to participate in such defense at its own expense and provided that the Indemnitor shall have no right in connection with any such defense or the resolution of any such Third Party Claim to impose any cost, restriction, limitation or condition of any kind that compromises the Indemnitee hereunder. In the case of an Indemnitee that is an officer, director, financial advisor or attorney of a party to this Agreement, then that party agrees that it shall cooperate in all reasonable respects in the defense of any such Third Party Claim, including making personnel, books and records relevant to the Third Party Claim available to the Indemnitor without charge therefor except for out-of-pocket expenses. If the Indemnitor fails to take action within 15 days as hereinabove provided or, having taken such action, thereafter fails diligently to defend and resolve the Third Party Claim, the Indemnitee shall have the right to pay, compromise or defend the Third Party Claim and to assert the indemnification provisions hereof. The Indemnitee also shall have the right, exercisable in good faith, to take such action as may be necessary to avoid a default prior to the assumption of the defense of the Third Party Claim by the Indemnitor.

10.01. Survival of Representations, Warranties, Indemnification and Other Agreements.

(a) Representations, Warranties and Other Agreements. None of the representations, warranties or agreements contained in this Agreement shall survive the effectiveness of the Merger, and no party shall have any right after the Effective Time to recover damages or any other relief from any other party to this Agreement by reason of any breach of representation or warranty, any nonfulfillment or nonperformance of any agreement contained herein, or otherwise.

(b) Indemnification. The parties’ indemnification agreements and obligations pursuant to Paragraph 9.01 shall become effective only in the event this Agreement is terminated and shall survive any such termination, and neither of the parties shall have any obligations under Paragraph 9.01 in the event of or following consummation of the Merger.

10.02. Waiver. Any term or condition of this Agreement may be waived (except as to matters of regulatory approvals and other approvals required by law), either in whole or in part, at any time by the party which is, and whose shareholders are, entitled to the benefits thereof; provided, however, that any such waiver shall be effective only upon a determination by the waiving party (through action of its Board of Directors or, in the case of 1st Financial, its CEO) that such waiver would not adversely affect the interests of the waiving party or its shareholders; and, provided further, that no waiver of any term or condition of this Agreement by any party shall be effective unless such waiver is in writing and signed by the waiving party, nor shall any such waiver be construed to be a waiver of any succeeding breach of the same term or condition or a waiver of any other or different term or condition. No failure or delay of any party to exercise any power, or to insist upon a strict compliance by any other party of any obligation, and no custom or practice at variance with any terms hereof, shall constitute a waiver of the right of any party to demand full and complete compliance with such terms.

10.03. Amendment. This Agreement may be amended, modified or supplemented at any time or from time to time prior to the Effective Time (either before or after its approval by the shareholders of 1st Financial or the shareholders of AB&T) by an agreement in writing approved by both the Board of Directors of AB&T and either the Board of Directors or the CEO of 1st Financial and executed in the same manner as this Agreement; provided however, that, unless such amendment is approved by 1st Financial’s shareholders and AB&T’s shareholders, after approval of this Agreement by 1st Financial’s shareholders and AB&T’s shareholders, no change may be made in the amount of Consideration into which each share of AB&T Stock will be converted.

10.04. Notices. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or by courier, or by U.S. mail, first class postage prepaid, and addressed as follows:

or to such other or different addresses as may be furnished by one party to the other by like notice.

10.05. Further Assurance. 1st Financial and AB&T agree to furnish to each other party such further assurances with respect to the matters contemplated in this Agreement and their respective agreements, covenants, representations and warranties contained herein, including the opinion of legal counsel, as such other party may reasonably request.

10.06. Headings and Captions. Headings and captions of the Paragraphs of this Agreement have been inserted for convenience of reference only and do not constitute a part hereof.

10.07. Gender and Number. As used herein, the masculine gender shall include the feminine and neuter, the singular number, the plural, and vice versa, whenever such meanings are appropriate.

10.08. Entire Agreement. This Agreement (including all schedules and exhibits attached hereto and all documents incorporated herein by reference) contains the entire agreement of the parties with respect to the transactions described herein and supersedes any and all other oral or written agreement(s) heretofore made, and there are no representations or inducements by or to, or any agreements between, any of the parties hereto other than those contained herein in writing.

10.09. Severability of Provisions. The invalidity or unenforceability of any term, phrase, clause, paragraph, restriction, covenant, agreement or other provision hereof shall in no way affect the validity or enforceability of any other provision or part hereof, and in the event of such invalidity or unenforceability a valid and enforceable term that most nearly approximates the intent of the invalid or unenforceable term shall, if practicable and reasonable, be substituted.

10.10. Assignment. This Agreement may not be assigned by any party hereto except with the prior written consent of each of the other party hereto.

10.11. Counterparts. Any number of counterparts of this Agreement may be signed and delivered, each of which shall be considered an original and which together shall constitute one agreement.

10.12. Governing Law. This Agreement is made in and shall be construed and enforced in accordance with the laws of the State of North Carolina.

10.13. Previously Disclosed Information. As used in this Agreement, “Previously Disclosed” shall mean the disclosure of information by 1st Financial to AB&T, or by AB&T to 1st Financial, in a letter delivered by the disclosing party or parties to the other parties prior to the date hereof, specifically referring to this Agreement, and arranged in paragraphs corresponding to the Paragraphs, Subparagraphs and items of this Agreement applicable thereto. Information shall be deemed Previously Disclosed for the purpose of a given Paragraph, Subparagraph or item of this Agreement only to the extent that a specific reference thereto is made in connection with disclosure of such information at the time of such delivery.

10.14 Best Knowledge. The term “Best Knowledge” as used in this Agreement with reference to certain facts or information shall be deemed to refer to facts or information of which directors or executive officers of 1st Financial or Mountain 1st, or directors or executive officers of AB&T or Alliance as the case may be, are consciously aware or of which they should have become consciously aware in the ordinary course of business and the performance of their duties as directors or executive officers.

10.15 Material Adverse Effect and Material Adverse Change. As used in this Agreement, the term “Material Adverse Effect” shall mean a material and adverse effect on financial condition, results of operations, prospects, businesses, assets, loan portfolio, investments, properties or operations, or a material and adverse effect on ability to consummate the transactions described herein or carry on business as presently conducted, or the acceleration of any material obligation or indebtedness, and the term “Material Adverse Change” shall mean a material adverse change in or affecting financial condition results of operations, prospects, business, assets, loan portfolio, investments, properties or operations, or the acceleration of any material obligation or indebtedness; provided, however, that these terms shall not include any change or effect resulting directly or indirectly from: (a) the transactions contemplated by this Agreement or their announcement, (b) general economic, industry or financial conditions or events that affect the banking industry as a whole, including changes in GAAP or accounting changes imposed by regulators, (c) the impact of laws, rules, regulations, and court decisions (other than court decisions related to litigation in which a party is involved), or (d) acts of war or terrorism.

(a) Any right of AB&T under this Agreement to investigate or inspect the assets, books, records, files and other information of 1st Financial in no way shall establish any presumption that AB&T should have conducted any investigation or that such right has been exercised by AB&T, its agents, representatives or others. Any investigations or inspections actually made by AB&T or its agents, representatives or others prior to the date of this Agreement or otherwise prior to the Effective Time shall not be deemed in any way in derogation or limitation of the covenants, representations and warranties made by or on behalf of 1st Financial in this Agreement.

(b) Any right of 1st Financial under this Agreement to investigate or inspect the assets, books, records, files and other information of AB&T in no way shall establish any presumption that 1st Financial should have conducted any investigation or that such right has been exercised by 1st Financial, its respective agents, representatives or others. Any investigations or inspections actually made by 1st Financial or its respective agents, representatives or others prior to the date of this Agreement or otherwise prior to the Effective Time shall not be deemed in any way in derogation or limitation of the covenants, representations and warranties made by or on behalf of AB&T in this Agreement.

[The remainder of this page intentionally left blank; Signatures on following page.]

IN WITNESS WHEREOF, AB&T and Alliance and 1st Financial and Mountain 1st have each caused this Agreement to be executed in its name by its duly authorized officers as of the date first above written.

(1) “Corporation” means the issuer of the shares held by a dissenter before the corporate action, or the surviving or acquiring corporation by merger or share exchange of that issuer.

(2) “Dissenter” means a shareholder who is entitled to dissent from corporate action under G.S. 55-13-02 and who exercises that right when and in the manner required by G.S. 55-13-20 through 55-13-28.

(3) “Fair value”, with respect to a dissenter’s shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable.

(4) “Interest” means interest from the effective date of the corporate action until the date of payment, at a rate that is fair and equitable under all the circumstances, giving due consideration to the rate currently paid by the corporation on its principal bank loans, if any, but not less than the rate provided in G.S. 24-1.

(5) “Record shareholder” means the person in whose name shares are registered in the records of a corporation or the beneficial owner of shares to the extent of the rights granted by a nominee certificate on file with a corporation.

(6) “Beneficial shareholder” means the person who is a beneficial owner of shares held in a voting trust or by a nominee as the record shareholder.

(7) “Shareholder” means the record shareholder or the beneficial shareholder. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)

(a) In addition to any rights granted under Article 9, a shareholder is entitled to dissent from, and obtain payment of the fair value of his shares in the event of, any of the following corporate actions:

(1) Consummation of a plan of merger to which the corporation (other than a parent corporation in a merger whose shares are not affected under G.S. 55-11-04) is a party unless (i) approval by the shareholders of that corporation is not required under G.S. 55-11-03(g) or (ii) such shares are then redeemable by the corporation at a price not greater than the cash to be received in exchange for such shares;

(2) Consummation of a plan of share exchange to which the corporation is a party as the corporation whose shares will be acquired, unless such shares are then redeemable by the corporation at a price not greater than the cash to be received in exchange for such shares;

(3) Consummation of a sale or exchange of all, or substantially all, of the property of the corporation other than as permitted by G.S. 55-12-01, including a sale in dissolution, but not including a sale pursuant to court order or a sale pursuant to a plan by which all or substantially all of the net proceeds of the sale will be distributed in cash to the shareholders within one year after the date of sale;

(4) An amendment of the articles of incorporation that materially and adversely affects rights in respect of a dissenter’s shares because it (i) alters or abolishes a preferential right of the shares; (ii) creates, alters, or

abolishes a right in respect of redemption, including a provision respecting a sinking fund for the redemption or repurchase, of the shares; (iii) alters or abolishes a preemptive right of the holder of the shares to acquire shares or other securities; (iv) excludes or limits the right of the shares to vote on any matter, or to cumulate votes; (v) reduces the number of shares owned by the shareholder to a fraction of a share if the fractional share so created is to be acquired for cash under G.S. 55-6-04; or (vi) changes the corporation into a nonprofit corporation or cooperative organization; or

(5) Any corporate action taken pursuant to a shareholder vote to the extent the articles of incorporation, bylaws, or a resolution of the board of directors provides that voting or nonvoting shareholders are entitled to dissent and obtain payment for their shares.

(b) A shareholder entitled to dissent and obtain payment for his shares under this Article may not challenge the corporate action creating his entitlement, including without limitation a merger solely or partly in exchange for cash or other property, unless the action is unlawful or fraudulent with respect to the shareholder or the corporation.

(c) Notwithstanding any other provision of this Article, there shall be no right of shareholders to dissent from, or obtain payment of the fair value of the shares in the event of, the corporate actions set forth in subdivisions (1), (2), or (3) of subsection (a) of this section if the affected shares are any class or series which, at the record date fixed to determine the shareholders entitled to receive notice of and to vote at the meeting at which the plan of merger or share exchange or the sale or exchange of property is to be acted on, were (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealer, Inc., or (ii) held by at least 2,000 record shareholders. This subsection does not apply in cases in which either:

(1) The articles of incorporation, bylaws, or a resolution of the board of directors of the corporation issuing the shares provide otherwise; or

(2) In the case of a plan of merger or share exchange, the holders of the class or series are required under the plan of merger or share exchange to accept for the shares anything except:

b. Shares, or shares and cash in lieu of fractional shares of the surviving or acquiring corporation, or of any other corporation which, at the record date fixed to determine the shareholders entitled to receive notice of and vote at the meeting at which the plan of merger or share exchange is to be acted on, were either listed subject to notice of issuance on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc., or held by at least 2,000 record shareholders; or

c. A combination of cash and shares as set forth in sub-subdivisions a. and b. of this subdivision. (1925, c. 77, s. 1; c. 235; 1929, c. 269; 1939, c. 279; 1943, c. 270; G.S., ss. 55-26, 55-167; 1955, c. 1371, s. 1; 1959, c. 1316, ss. 30, 31; 1969, c. 751, ss. 36, 39; 1973, c. 469, ss. 36, 37; c. 476, s. 193; 1989, c. 265, s. 1; 1989 (Reg. Sess., 1990), c. 1024, s. 12.18; 1991, c. 645, s. 12; 1997-202, s. 1.)

(a) A record shareholder may assert dissenters’ rights as to fewer than all the shares registered in his name only if he dissents with respect to all shares beneficially owned by any one person and notifies the corporation in writing of the name and address of each person on whose behalf he asserts dissenters’ rights. The rights of a partial dissenter under this subsection are determined as if the shares as to which he dissents and his other shares were registered in the names of different shareholders.

(b) A beneficial shareholder may assert dissenters’ rights as to shares held on his behalf only if:

(1) He submits to the corporation the record shareholder’s written consent to the dissent not later than the time the beneficial shareholder asserts dissenters’ rights; and

(2) He does so with respect to all shares of which he is the beneficial shareholder. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)

(a) If proposed corporate action creating dissenters’ rights under G.S. 55-13-02 is submitted to a vote at a shareholders’ meeting, the meeting notice must state that shareholders are or may be entitled to assert dissenters’ rights under this Article and be accompanied by a copy of this Article.

(b) If corporate action creating dissenters’ rights under G.S. 55-13-02 is taken without a vote of shareholders, the corporation shall no later than 10 days thereafter notify in writing all shareholders entitled to assert dissenters’ rights that the action was taken and send them the dissenters’ notice described in G.S. 55-13-22.

(c) If a corporation fails to comply with the requirements of this section, such failure shall not invalidate any corporate action taken; but any shareholder may recover from the corporation any damage which he suffered from such failure in a civil action brought in his own name within three years after the taking of the corporate action creating dissenters’ rights under G.S. 55-13-02 unless he voted for such corporate action. (1925, c. 77, s. 1, c. 235; 1929, c. 269; 1939, c. 5, c. 279; 1943, c. 270; G.S., ss. 55-26, 55-165, 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265. s. 1.)

(a) If proposed corporate action creating dissenters’ rights under G.S. 55-13-02 is submitted to a vote at a shareholders’ meeting, a shareholder who wishes to assert dissenters’ rights:

(1) Must give to the corporation, and the corporation must actually receive, before the vote is taken written notice of his intent to demand payment for his shares if the proposed action is effectuated; and

(b) A shareholder who does not satisfy the requirements of subsection (a) is not entitled to payment for his shares under this Article. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)

(a) If proposed corporate action creating dissenters’ rights under G.S. 55-13-02 is authorized at a shareholders’ meeting, the corporation shall mail by registered or certified mail, return receipt requested, a written dissenters’ notice to all shareholders who satisfied the requirements of G.S. 55-13-21.

(b) The dissenters’ notice must be sent no later than 10 days after shareholder approval, or if no shareholder approval is required, after the approval of the board of directors, of the corporate action creating dissenters’ rights under G.S. 55-13-02, and must:

(1) State where the payment demand must be sent and where and when certificates for certificated shares must be deposited;

(2) Inform holders of uncertificated shares to what extent transfer of the shares will be restricted after the payment demand is received;

(4) Set a date by which the corporation must receive the payment demand, which date may not be fewer than 30 nor more than 60 days after the date the subsection (a) notice is mailed; and

(5) Be accompanied by a copy of this Article. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 1997-485, s. 4.)

(a) A shareholder sent a dissenters’ notice described in G.S. 55-13-22 must demand payment and deposit his share certificates in accordance with the terms of the notice.

(b) The shareholder who demands payment and deposits his share certificates under subsection (a) retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action.

(c) A shareholder who does not demand payment or deposit his share certificates where required, each by the date set in the dissenters’ notice, is not entitled to payment for his shares under this Article. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55- 167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)

(a) The corporation may restrict the transfer of uncertificated shares from the date the demand for their payment is received until the proposed corporate action is taken or the restrictions released under G.S. 55-13-26.

(b) The person for whom dissenters’ rights are asserted as to uncertificated shares retains all other rights of a shareholder until these rights are cancelled or modified by the taking of the proposed corporate action. (1925, c. 77, s. 1;1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)

(a) As soon as the proposed corporate action is taken, or within 30 days after receipt of a payment demand, the corporation shall pay each dissenter who complied with G.S. 55-13-23 the amount the corporation estimates to be the fair value of his shares, plus interest accrued to the date of payment.

(1) The corporation’s most recent available balance sheet as of the end of a fiscal year ending not more than 16 months before the date of payment, an income statement for that year, a statement of cash flows for that year, and the latest available interim financial statements, if any;

(2) An explanation of how the corporation estimated the fair value of the shares;

(4) A statement of the dissenter’s right to demand payment under G.S. 55-13-28; and

(5) A copy of this Article. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; c. 770, s. 69; 1997-202, s. 2.)

(a) If the corporation does not take the proposed action within 60 days after the date set for demanding payment and depositing share certificates, the corporation shall return the deposited certificates and release the transfer restrictions imposed on uncertificated shares.

(b) If after returning deposited certificates and releasing transfer restrictions, the corporation takes the proposed action, it must send a new dissenters’ notice under G.S. 55-13-22 and repeat the payment demand procedure. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)

§ 55-13-28. Procedure if shareholder dissatisfied with corporation’s payment or failure to perform.

(a) A dissenter may notify the corporation in writing of his own estimate of the fair value of his shares and amount of interest due, and demand payment of the amount in excess of the payment by the corporation under G.S. 55-13-25 for the fair value of his shares and interest due, if:

(1) The dissenter believes that the amount paid under G.S. 55-13-25 is less than the fair value of his shares or that the interest due is incorrectly calculated;

(3) The corporation, having failed to take the proposed action, does not return the deposited certificates or release the transfer restrictions imposed on uncertificated shares within 60 days after the date set for demanding payment.

(b) A dissenter waives his right to demand payment under this section unless he notifies the corporation of his demand in writing (i) under subdivision (a)(1) within 30 days after the corporation made payment for his shares or (ii) under subdivisions (a)(2) and (a)(3) within 30 days after the corporation has failed to perform timely. A dissenter who fails to notify the corporation of his demand under subsection (a) within such 30-day period shall be deemed to have withdrawn his dissent and demand for payment. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 1997-202, s. 3.)

(a) If a demand for payment under G.S. 55-13-28 remains unsettled, the dissenter may commence a proceeding within 60 days after the earlier of (i) the date payment is made under G.S. 55-13-25, or (ii) the date of the dissenter’s payment demand under G.S. 55-13-28 by filing a complaint with the Superior Court Division of the General Court of Justice to determine the fair value of the shares and accrued interest. A dissenter who takes no action within the 60-day period shall be deemed to have withdrawn his dissent and demand for payment.

(c) The court shall have the discretion to make all dissenters (whether or not residents of this State) whose demands remain unsettled parties to the proceeding as in an action against their shares and all parties must be served with a copy of the complaint. Nonresidents may be served by registered or certified mail or by publication as provided by law.

(d) The jurisdiction of the superior court in which the proceeding is commenced under subsection (a) is plenary and exclusive. The court may appoint one or more persons as appraisers to receive evidence and recommend decision on the question of fair value. The appraisers have the powers described in the order

appointing them, or in any amendment to it. The parties are entitled to the same discovery rights as parties in other civil proceedings. The proceeding shall be tried as in other civil actions. However, in a proceeding by a dissenter in a corporation that was a public corporation immediately prior to consummation of the corporate action giving rise to the right of dissent under G.S. 55-13-02, there is no right to a trial by jury.

(e) Each dissenter made a party to the proceeding is entitled to judgment for the amount, if any, by which the court finds the fair value of his shares, plus interest, exceeds the amount paid by the corporation. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1; 1997-202, s. 4; 1997-485, ss. 5, 5.1.)

(a) The court in an appraisal proceeding commenced under G.S. 55-13-30 shall determine all costs of the proceeding, including the reasonable compensation and expenses of appraisers appointed by the court, and shall assess the costs as it finds equitable.

(b) The court may also assess the fees and expenses of counsel and experts for the respective parties, in amounts the court finds equitable:

(1) Against the corporation and in favor of any or all dissenters if the court finds the corporation did not substantially comply with the requirements of G.S. 55-13-20 through 55-13-28; or

(2) Against either the corporation or a dissenter, in favor of either or any other party, if the court finds that the party against whom the fees and expenses are assessed acted arbitrarily, vexatiously, or not in good faith with respect to the rights provided by this Article.

(c) If the court finds that the services of counsel for any dissenter were of substantial benefit to other dissenters similarly situated, and that the fees for those services should not be assessed against the corporation, the court may award to these counsel reasonable fees to be paid out of the amounts awarded the dissenters who were benefited. (1925, c. 77, s. 1; 1943, c. 270; G.S., s. 55-167; 1955, c. 1371, s. 1; 1969, c. 751, s. 39; 1973, c. 469, ss. 36, 37; 1989, c. 265, s. 1.)

This letter serves as an update to our letter dated February 12, 2009 regarding the proposed transaction between AB&T Financial Corp. a North Carolina corporation (“AB&T”), and its wholly owned subsidiary, Alliance Bank & Trust, an North Carolina banking corporation (the “Alliance”), and 1^st Financial Services Corporation, an North Carolina corporation (“1^st Financial”). The companies entered into an Agreement and Plan of Merger (the “Agreement”) dated February 16, 2009, pursuant to which at the Effective Time, and in accordance with the North Carolina Business Corporation Act, as amended, each share of the $1.00 par value common stock of AB&T (“AB&T Stock”) (other than (i) any shares to which rights of dissent and appraisal are properly exercised as provided below and (ii) any shares held other than in a fiduciary capacity or as a result of debts previously contracted by AB&T, Alliance, 1^st Financial, or Mountain 1^st) and each share of the no par value Fixed Rate Cumulative Perpetual Preferred Stock, Series A, of AB&T (“AB&T Preferred Stock”) shall be exchanged for the consideration provided in Paragraph 1.03 of the Agreement. Pursuant to Paragraph 1.03, each share of AB&T Stock issued and outstanding immediately before the Effective Time shall be converted into, and shall be canceled in exchange for, the right to receive 1.175 shares of 1^st Financial Stock (the “Exchange Ratio”).

The forgoing shall be referred to herein as the Merger Consideration. In connection therewith, you have requested our opinion as to the fairness, from a financial point of view, of the Merger Consideration and the Exchange Ratio to the shareholders of AB&T.

FIG Partners LLC (“FIG”), as part of its investment banking business, is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bidding, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. As you are aware, in the course of its daily trading activities, investment funds controlled by an affiliate (as such term is defined in Regulation 12G-2 promulgated under the Securities Exchange Act of 1934, as amended) of FIG and their affiliates may from time to time effect transactions and hold securities of AB&T and/or 1^st Financial.

We were retained by AB&T to act as its financial advisor in connection with the Merger. We will receive compensation from AB&T in connection with our services. AB&T has agreed to indemnify us for certain liabilities arising out of our engagement.

During the course of our engagement and for the purposes of the opinion set forth herein, we have:

(ii) reviewed certain historical publicly available business and financial information concerning AB&T and 1^st Financial;

(iii) reviewed certain internal financial statements and other financial and operating data concerning AB&T and 1^st Financial;

(v) held discussions with members of the senior managements of AB&T for the purpose of reviewing the future prospects of AB&T, including financial forecasts related to its businesses, earnings, assets, liabilities and the amount and timing of cost savings (the “Synergies”) expected to be achieved as a result of the Merger;

(vi) reviewed the terms of recent merger and acquisition transactions, to the extent publicly available, involving banks, thrifts and bank and thrift holding companies that we considered relevant; and

(vii) performed such other analyses and considered such other factors as we have deemed appropriate.

We also took into account our assessment of general economic, market and financial conditions and our experience in other transactions as well as our knowledge of the banking industry and our general experience in securities valuations.

In rendering this opinion, we have assumed, without independent verification, the accuracy and completeness of the financial and other information and representations contained in the materials provided to us by AB&T and 1^st Financial and in the discussions with AB&T and 1^st Financial managements. In that regard, we have assumed that the financial forecasts, including, without limitation, the synergies and projections regarding under-performing and nonperforming assets and net charge-offs have been reasonably prepared on a basis reflecting the best currently available information and judgments and estimates of AB&T and that such forecasts will be realized in the amounts and at the times contemplated thereby. We are not experts in the evaluation of loan and lease portfolios for purposes of assessing the adequacy of the allowances for losses with respect thereto and have assumed that such allowances for AB&T and 1^st Financial are in the aggregate adequate to cover such losses. We were not retained to and did not conduct a physical inspection of any of the properties or facilities of AB&T, 1^st Financial or their respective subsidiaries. In addition, we have not reviewed individual credit files nor have we made an independent evaluation or appraisal of the assets and liabilities of AB&T, 1^st Financial or any of their respective subsidiaries and we were not furnished with any such evaluations or appraisals.

We have assumed that the Merger will be consummated substantially in accordance with the terms set forth in the Agreement. We have further assumed that the Merger will be accounted for as a purchase under generally accepted accounting principles. We have assumed that the Merger is, and will be, in compliance with all laws and regulations that are applicable to AB&T, the Alliance, and 1^st Financial. In rendering this opinion, we have been advised by AB&T and 1^st Financial and we have assumed that there are no factors that would impede any necessary regulatory or governmental approval of the Merger and we have further assumed that, in the course of obtaining the necessary regulatory and governmental approvals, no restriction will be imposed on 1^st Financial or the surviving corporations that would have a material adverse effect on the surviving corporations or the contemplated benefits of the Merger. We have also assumed that there would not occur any change in applicable law or regulation that would cause a material adverse change in the prospects or operations of 1^st Financial or any of the surviving corporations after the Merger.

Our opinion is based solely upon the information available to us and the economic, market and other circumstances, as they exist as of the date hereof. Events occurring and information that becomes available after

the date hereof could materially affect the assumptions and analyses used in preparing this opinion. We have not undertaken to reaffirm or revise this opinion or otherwise comment upon any events occurring or information that becomes available after the date hereof, except as otherwise agreed in our engagement letter.

This letter is solely for the information of the Board of Directors of AB&T and is not to be used, circulated, quoted or otherwise referred to for any other purpose, nor is it to be filed with, included in or referred to in whole or in part in any registration statement, proxy statement or any other document, except in each case in accordance with our prior written consent which shall not be unreasonably withheld; provided, however, that we hereby consent to the inclusion and reference to this letter in any registration statement, proxy statement, information statement or tender offer document to be delivered to the holders of AB&T Common Stock in connection with the Merger if and only if this letter is quoted in full or attached as an exhibit to such document and this letter has not been withdrawn prior to the date of such document.

Subject to the foregoing and based on our experience as investment bankers, our activities and assumptions as described above, and other factors we have deemed relevant, as of the date hereof we reaffirm our opinion dated February 12, 2009 that the Merger Consideration to be received pursuant to the Agreement is fair, from a financial point of view, to the shareholders of AB&T.

We understand that 1^st Financial Services Corporation (the “Company”) has proposed to enter into an Agreement and Plan of Reorganization dated February 16, 2009 (the “Agreement”) with AB&T Financial Corp. (“AB&T”) (the “Merger”). Under the terms of the Agreement, the Company will issue approximately 3,146,891 shares of stock, based on an exchange ratio of 1.175 shares of the Company for each share of AB&T, in exchange for all AB&T’s 2,678,205 outstanding common shares and 369,636 stock options. You have requested our opinion as to the fairness, from a financial point of view, of said consideration to be paid by the Company under the terms of the Agreement. The foregoing summary of the Merger is qualified in its entirety by reference to the Agreement.

The Carson Medlin Company is a National Association of Securities Dealers, Inc. (NASD) member investment banking firm, which specializes in the securities of financial institutions in the United States. As part of our investment banking activities, we are regularly engaged in the valuation of financial institutions in the United States and transactions relating to their securities. We regularly publish our research on independent community banks regarding their financial and stock price performance. We are familiar with the commercial banking industry in North Carolina and the major commercial banks operating in that market. We will receive a fee for our services as financial advisor to the Company and for rendering this opinion. We do not have an investment banking relationship with AB&T.

In reaching our opinion, we have analyzed the respective financial positions, both current and historical, of AB&T and the Company. We have reviewed: (i) the Agreement; (ii) audited financial statements of AB&T for the five years ended December 31, 2007; (iii) audited financial statements of the Company for five years ended December 31, 2007; (iv) unaudited financial statements of AB&T for the nine months ended September 30, 2008; (v) unaudited financial statements of the Company for the nine months ended September 30, 2008; (vi) any available unaudited bank-level financial statements of AB&T and the Company for the fourth quarter ended December 31, 2008; and (vii) certain other financial and operating information with respect to the business, operations and prospects of AB&T and the Company. We also: (a) held discussions with members of managements of both AB&T and the Company regarding historical and current business operations, financial condition and future prospects of their respective companies; (b) reviewed the historical market prices and trading activity for the common stocks of both AB&T and the Company; (c) compared the results of operations of AB&T and the Company with those of certain banking companies which we deemed to be relevant; (d) compared the financial terms of the Merger with the financial terms, to the extent publicly available, of certain other recent business combinations of commercial banking organizations; (e) computed the relative contribution of AB&T and the Company to various elements of the combined company; and (f) conducted such other studies, analyses, inquiries and examinations as we deemed appropriate.

We have relied upon and assumed, without independent verification, the accuracy and completeness of all information provided to us. We have not performed or considered any independent appraisal or evaluation of the

assets of AB&T. The opinion we express herein is necessarily based upon market, economic and other relevant considerations as they exist and can be evaluated as of the date of this letter.

Based upon the foregoing, it is our opinion that the consideration provided for in the Agreement is fair, from a financial point of view, to the shareholders of 1^st Financial Services Corporation.

The North Carolina Business Corporation Act (the “NCBCA”) generally provides for the indemnification of officers and directors of corporations in the manner described below.

Permissible Indemnification. The NCBCA allows corporations, by charter, bylaw, contract or resolution, to indemnify or agree to indemnify their officers, directors, employees and agents and any persons who are or were serving at the corporations’ request as directors, officers, employees or agents of other entities or enterprises or as trustees or administrators under employee benefit plans, against liability and expenses, including reasonable attorneys’ fees, in any proceedings (including without limitation proceedings brought by or on behalf of the corporations themselves) arising out of their status as such or their activities in any of the foregoing capacities. A corporation’s charter or bylaws, or a contract or resolution, may include provisions for recovery from the corporation of reasonable costs, expenses and attorneys’ fees in connection with the enforcement of rights to indemnification and may include provisions establishing reasonable procedures for determining and enforcing those rights.

Corporations may indemnify persons against liability expenses incurred only where those persons conducted themselves in good faith and reasonably believed (1) in the case of conduct in their official corporate capacity, that their conduct was in the corporation’s best interests, and (2) in all other cases, that their conduct was at least not opposed to the corporations’ best interests; and, in the case of criminal proceedings, they had no reasonable cause to believe their conduct was unlawful. However, corporations may not indemnify persons either in connection with proceedings by or in the right of the corporations in which persons were adjudged liable to the corporations, or in connection with other proceeding charging improper personal benefit to the persons (whether or not involving action in an official capacity) in which the persons were adjudged liable on the basis that personal benefit was improperly received.

Mandatory Indemnification. Unless limited by a corporation’s charter, the NCBCA requires corporations to indemnify their directors or officers who are wholly successful (on the merits or otherwise) in the defense of proceedings to which they were a party because they were directors or officers of the corporations against reasonable expenses incurred in connection with the proceedings.

Advance for Expenses. Expenses incurred by directors, officers, employees or agents of corporations in defending proceedings may be paid by the corporations in advance of the final disposition of the proceedings as authorized by their boards of directors in the specific case, or as authorized by their charters or bylaws or by any applicable resolutions or contracts, upon receipt of undertakings to repay amounts advanced unless it ultimately is determined that the persons are entitled to be indemnified against those expenses.

Court-Ordered Indemnification. Unless otherwise provided in a corporation’s charter, directors or officers of corporations who are parties to proceedings may apply for indemnification to the courts conducting the proceedings or to other courts of competent jurisdiction. On receipt of an application, the courts, after giving any notice they deem necessary, may order indemnification if they determine either (1) that the directors or officers are entitled to mandatory indemnification as described above, in which case the courts also will order the corporations to pay the reasonable expenses incurred to obtain the court-ordered indemnification, or (2) that the directors or officers are fairly and reasonably entitled to indemnification in view of all the relevant circumstances, whether or not they met the requisite standard of conduct or were adjudged liable to the corporations in connection with proceedings by or in the right of the corporations or on the basis that personal benefit was improperly received in connection with any other proceedings so charging (but if adjudged so liable, indemnification is limited to reasonable expenses incurred).

Parties Entitled to Indemnification. The NCBCA defines “director” to include ex-directors and the estate or personal representative of a director. Unless their charters provide otherwise, corporations may indemnify and advance expenses to their officers, employees or agents to the same extent as to their directors and also may indemnify and advance expenses to officers, employees or agents who are not directors to the extent, consistent with public policy, as may be provided in their charters or bylaws, by general or specific action of their boards of directors, or by contract.

Registrant’s Bylaws provide for indemnification of its directors and officers to the fullest extent permitted by North Carolina law and require Registrant’s board of directors to take all actions necessary and appropriate to authorize such indemnification. Under North Carolina law, corporations may purchase insurance on behalf of persons who are or were their directors or officers against liability arising out of their status as such. Registrant currently maintains a directors’ and officers’ liability insurance policy covering its directors and executive officers.

Registrant’s Articles of Incorporation provide that, to the extent permitted by the NCBCA, individuals serving as directors will not be personally liable in an action by or in the right of Registrant or otherwise for monetary damages for breach of their duties as directors. Under this charter provision, if the North Carolina statutes are amended to authorize corporate action further eliminating or limiting the personal liability of directors, the liability of Registrant’s directors will be eliminated or limited to the fullest extent permitted by the statutes as amended.

(a) Exhibits. The following exhibits are filed or furnished herewith or incorporated herein by reference as part of this Registration Statement:

Financial Statement Schedules. No separate financial statement schedules are being filed as all required schedules either are not applicable or are contained in the financial statements included in the Prospectus.

(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement to:

(i) include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

(ii) reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; and,

(iii) include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement;

(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; and

(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

(b) The undersigned Registrant undertakes that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form.

(c) The undersigned Registrant undertakes that every prospectus (i) that is filed pursuant to paragraph (a) immediately preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(d) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registration pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or

proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

(e) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective.

Pursuant to the requirements of the Securities Act of 1933, Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Hendersonville, State of North Carolina, on April 27, 2009.

KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned directors or officers of 1ST FINANCIAL SERVICES CORPORATION, by his or her signature below, hereby constitutes and appoints each of GREGORY L. GIBSON and ROGER A. MOBLEY, or any substitute appointed by either of them, jointly and severally, as his or her true and lawful attorney-in-fact and agent for him or her, and in his or her name, place and stead, to execute and sign any and all amendments, including post-effective amendments, to this Registration Statement on Form S-4, and to file the same, together will exhibits and schedules thereto and all other documents in connection therewith, with the Securities and Exchange Commission, with respect to the offer and sale of shares of 1st Financial Services Corporation’s common stock to the shareholders of AB&T Financial Corporation pursuant to Agreement and Plan of Merger dated February 16, 2009; granting unto each said attorney-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as the undersigned might or could do in person, and hereby ratifying and confirming all the acts of each said attorney-in-fact and agent, or their substitutes, which they may lawfully do in the premises or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the date indicated.


Price / LTM EPS	NM
Price / Book Value	70.7x
Price / Tangible Book Value	70.7x
Core Deposit Premium	-16.2	%


Company Name		Assets ($000)
Bank of the Carolinas Corporation		563,578
Carolina Bank Holdings, Inc.		616,611
Citizens South Banking Corporation		817,213
Cooperative Bankshares, Inc.		982,379
Crescent Financial Corporation		968,311
ECB Bancorp, Inc.		767,768
First South Bancorp, Inc.		876,140
Four Oaks Fincorp, Inc.		924,500
High Point Bank Corporation		791,939
MidCarolina Financial Corporation		540,847
New Century Bancorp, Inc.		605,767
North State Bancorp		687,581
Peoples Bancorp of North Carolina, Inc.		968,762
Waccamaw Bankshares, Inc.		537,257


Company Name		Assets ($000)
1^st United Bancorp, Inc.		621,927
Access National Corporation		702,324
American National Bankshares Inc.		789,184
Auburn National Bancorporation, Inc.		745,970
Carolina Bank Holdings, Inc.		616,611
Citizens Holding Company		766,047
ECB Bancorp, Inc.		767,768
First Community Corporation		650,616
Henderson Bancshares, Inc.		723,291
High Point Bank Corporation		791,939
Highlands Bankshares, Inc.		672,608
Jefferson Bancshares, Inc.		658,625
Mountain National Bancshares, Inc.		606,112
SouthCrest Financial Group, Inc.		620,535
Southern First Bancshares, Inc.		692,979
Tidelands Bancshares, Inc.		716,104
Valley Financial Corporation		674,479


	Stock Price	Price/ TBV (%)	Implied Deposit Prem (%)	Price/ LTM EPS (x)	Price/ LTM Pre-Tax Pre-Provision EPS (x)	Mkt. Cap ($m)	Yield (%)
1^st Financial	4.75	50.3	-6.5	70.0	3.3	23.7	0.0
Regional Peers	NM	67.9	-3.6	10.6	5.5	39.7	2.1
Nationwide Peers	NM	71.0	-2.8	10.3	6.3	45.2	2.6


	ROAE (%)	ROAA (%)	Pre-Tax Pre- Provision ROAE (%)	Pre-Tax Pre- Provision ROAA (%)	Tangible Equity Ratio (%)	Net Interest Margin (%)	NPAs/ Assets (%)
1^st Financial	0.73	0.05	15.05	1.12	6.67	3.31	1.62
Regional Peers	6.30	0.19	10.18	0.97	6.88	2.98	1.63
Nationwide Peers	5.95	0.41	12.06	1.07	8.41	3.43	1.25


		PAGE
SUMMARY		5
General Information		5
Selected Financial Information		13
Selected Unaudited Pro Forma Combined Financial Information		15
Comparative Per Share Data		17
RISK FACTORS		18
Factors Relating to the Merger Consideration		18
Factors Relating to the Merger		19
Factors Relating to 1st Financial and the Banking Industry		20
A WARNING ABOUT FORWARD-LOOKING STATEMENTS AND OTHER MATTERS		30
THE SHAREHOLDER’S MEETINGS		32
Special Meeting of AB&T’s Shareholders		32
Special Meeting of 1st Financial’s Shareholders		35
THE MERGER		39
General		39
Background of the Merger		39
Recommendations of Boards of Directors and Reasons for the Merger		40
Conversion of AB&T Capital Stock		43
Treatment of Fractional Shares		43
Surrender and Exchange of Certificates		43
Effect of the Merger on Outstanding 1st Financial Stock		44
Opinion of FIG Partners LLC, Financial Advisor to AB&T		44
Opinion of The Carson Medlin Company, Financial Advisor to 1st Financial		52
Required Shareholder Approval		58
Required Regulatory Approvals		58
Conduct of Business Pending the Merger		58
Dividends		59
Prohibition on Solicitation		60
Accounting Treatment		60
Material Federal Income Tax Consequences		60
Conditions to the Merger		62
Waiver; Amendment of the Agreement		63
Termination of the Agreement		63
Closing Date and Effective Time		63
Special Interests of AB&T’s Directors and Officers		64
Restrictions on 1st Financial Common Stock Received by Certain Persons		65
Expenses		65
RIGHTS OF DISSENTING AB&T SHAREHOLDERS		66
MARKET AND DIVIDEND INFORMATION		68
AB&T’s Common Stock		68
1st Financial’s Common Stock		68
CAPITALIZATION		71
INFORMATION ABOUT 1ST FINANCIAL		72
Business		72
Consolidated Financial Statements		80
Beneficial Ownership of Common Stock		80


		PAGE
Board of Directors		81
Director Independence		83
Director Compensation		83
Executive Officers		84
Executive Compensation		85
Transactions with Related Persons		94
Proposal to Authorize Management to Adjourn the 1st Financial Special Meeting		95
Other Available Information		96
Proposals for 2009 Annual Meeting		96
1ST FINANCIAL’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		98
INFORMATION ABOUT AB&T		121
Business		121
Consolidated Financial Statements		122
Beneficial Ownership of Capital Stock		122
Directors		123
Director Compensation		124
Executive Officers		125
Executive Compensation		125
Transactions with Related Persons		127
Proposal to Authorize Management to Adjourn the AB&T Special Meeting		128
Other Available Information		128
Proposals for 2009 Special Meeting		129
AB&T’S MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		131
SUPERVISION AND REGULATION		148
CAPITAL STOCK OF 1ST FINANCIAL		159
Description of Capital Stock		159
Differences in Capital Stock of 1st Financial and AB&T		161
INDEMNIFICATION OF 1ST FINANCIAL’S DIRECTORS AND OFFICERS		163
LEGAL MATTERS		164
EXPERTS		164
CONSOLIDATED FINANCIAL STATEMENTS OF 1ST FINANCIAL SERVICES CORPORATION		F-1
CONSOLIDATED FINANCIAL STATEMENTS OF AB&T CORPORATION		F-39
UNAUDITED *PRO FORMA* SELECTED COMBINED CONSOLIDATED FINANCIAL STATEMENTS		F-66
APPENDIX A—Agreement and Plan of Merger		A-1
APPENDIX B—Article 13 of the North Carolina Business Corporation Act		B-1
APPENDIX C—Opinion of FIG Partners, LLC		C-1
APPENDIX D—Opinion of The Carson Medlin Company		D-1


Offer Price / Shares Outstanding	$	6.46
Total Transaction Value	$	17,307,900


	1^st Financial	AB&T
2010E Earnings	80.8%	19.2%
2011E Earnings	82.7%	17.3%


Loans	80.3%	19.7	%
Assets	80.6%	19.4	%
Deposits	83.0%	17.0	%
Equity	71.9%	28.1	%
Tangible Equity	71.9%	28.1	%


Company Name		Announcement Date
Hampton Roads Bankshares Inc./Gateway Financial Holdings		09/23/2008
Yadkin Valley Financial/American Community Bancshares		09/09/2008
Village Bank & Trust Finl Corp/River City Bk		03/09/2008
Hampton Roads Bankshares Inc./Shore Financial Corp.		01/08/2008
First National Bancshares Inc./Carolina National Corp.		08/26/2007
Pinnacle Financial Partners/Mid-America Bancshares Inc.		08/15/2007
LSB Bancshares Inc./FNB Financial Services Corp.		02/26/2007
Renasant Corp./Capital Bancorp Inc.		02/05/2007
Greene County Bancshares Inc./Civitas BankGroup		01/25/2007


	Target Assets/ Pro Forma Assets		Target Ownership of Pro Forma Company		Target Tangible Equity/ Pro Forma Tangible Equity
Nine Transactions Average	35.2	%	37.2	%	37.4	%
AB&T	20.6	%	38.6	%	33.9	%


	Offer Value to
	Total Assets (%)	Tangible Book Value (%)	12 Months Preceding Earnings (x)		Ratio of Tangible Book Value Premium to Core Deposits (%)

AB&T	11.0	70.7	35.1	*	-16.2

Group 1 average	12.9	147.4	21.1		6.6

Group 2 average	10.2	136.5	32.7		4.4

Group 3 average	11.1	124.4	18.8		4.3


Deal Value Considerations:
Offer Price / Shares Outstanding	$	6.46


Discounted Cash Flow Valuation Ranges (Per Share):
Present Value of Future Earnings	$	5.36 – $6.59
Trading P/E Multiple	$	4.92 – $5.37
Price / Tangible Book Value	$	6.40 – $6.98
Core Deposit Premium	$	7.12 – $7.78


Transaction Value:			*Transaction multiples:**
Purchase Price per Share	$	6.46	Price to AB&T’s Tangible Equity	70.7	%
Total Purchase Price	$	17,307,900	Price to AB&T’s Total Assets	10.2	%


Transaction Values Indicated by Comparable Transactions
($000’s)			Tg. Bk. Value			LTM Earnings		Assets			Deposits			Core Deposits (for C.D. premium)

ABTO (12/31/08)			$	24,490		-$	176	$	170,211		$	121,318		$	44,404

	*Multiples*	x		129.3	%		17.7		9.2	%		10.9	%		3.0	%
25^th	Indicated Values	=	$	31,663			NM	$	15,693		$	13,212		$	25,818
Percentile

		Range of Values = $13,212 to $31,673
		Average Value = $21,596

	*Multiples*	x		156.9	%		29.8		14.5	%		16.7	%		7.8	%
Median	Indicated Values	=	$	38,422			NM	$	24,630		$	20,224		$	27,945

		Range of Values = $20,224 to $38,422
		Average Value = $27,805

	*Multiples*	x		195.6	%		45.8		17.7	%		21.7	%		14.5	%
75^th	Indicated Values	=	$	47,902			NM	$	30,144		$	26,362		$	30,911
Percentile

		Range of Values = $26,362 to $47,902
		Average Value = $33,830


($000’s, 9/30/08)	1^st Financial			Alliance
Assets	$	670,167	79%	$	174,055	21%
Gross loans		569,273	80%		142,194	20%
Deposits		529,442	82%		119,005	18%
Shareholders’ equity		47,961	66%		24,720	34%
Tangible shareholders’ equity		47,961	66%		24,720	34%
Adjusted tangible equity		47,961	70%		20,590	30%
Net income (2006+2007+YTD 9/08)		8,127	85%		1,457	15%
# of branches		15	79%		4	21%
Current market capitalization	$	23,736	56%	$	18,480	44%

Ownership after Merger (diluted)			63%			37%


	Balance Sheet Highlights				Performance Ratios
	Assets ($ mil)	Loans ($ mil)	Deposits ($ mil)	Equity ($ mil)	ROA %		ROE %		Margin %	Equity /Assets %	NPA Ratio %	Effic. Ratio %
SIBR Average	978	742	753	94	(0.06	)	(1.3	)	3.51	8.9	3.30	70.3
1^st Financial	707	584	591	63	0.05		0.7		3.24	8.9	1.82	73.1
AB&T	170	140	121	24	(0.32	)	(2.1	)	2.76	14.2	3.52	84.4


Quarterly Period	High		Low
2008
First quarter	$	9.70	$	6.75
Second quarter		8.25		7.00
Third quarter		8.40		5.50
Fourth quarter		7.50		4.00

2007
First quarter	$	12.45	$	9.00
Second quarter		11.50		9.75
Third quarter		10.50		8.65
Fourth quarter		10.50		9.50


	Price				Cash Dividends Declared Per Share
Quarterly Period	High		Low		Cash Dividends Declared Per Share
2008
Fourth quarter	$	9.70	$	5.05	$	—
Third quarter	$	11.00	$	9.25	$	—
Second quarter	$	14.75	$	8.25	$	—
First quarter	$	14.26	$	12.00	$	—

2007
Fourth quarter	$	16.87	$	12.50	$	0.10
Third quarter	$	20.10	$	15.98	$	—
Second quarter	$	22.93	$	17.87	$	—
First quarter	$	25.80	$	22.34	$	—

2006
Fourth quarter	$	27.74	$	20.36	$	—
Third quarter	$	24.40	$	20.20	$	—
Second quarter	$	27.20	$	22.60	$	—
First quarter	$	25.60	$	20.80	$	—


	FFIS (actual)			AB &T (actual)			Pro Forma Combined
	(dollars in thousands)
Shareholders’ equity:
Preferred stock(2)	$	15,380		$	—		$	18,615	(a)
Common stock(3)		24,985			2,678			40,719	(b)
Common stock warrants		1,016			—			1,281	(c)
Additional paid-in capital(3)		17,778			21,607			22,499	(d)
Retained earnings (accumulated deficit)		3,933			(157	)		3,332	(e)
Accumulated other comprehensive (loss)		(522	)		66			(522	)(f)

Total shareholders’ equity	$	62,570		$	24,194		$	85,924


	FFIS (actual)			AB &T (actual)			Pro Forma Combined
	(dollars in thousands)
Shareholders’ equity:
Preferred stock (2)	$	15,380		$	—		$	18,615	(a)
Common stock (3)		24,985			2,678			40,719	(b)
Common stock warrants		1,016			—			1,281	(c)
Additional paid-in capital (3)		17,778			21,607			22,499	(d)
Retained earnings (accumulated deficit)		3,933			(157	)		3,332	(e)
Accumulated other comprehensive (loss)		(522	)		66			(522	)(f)

Total shareholders’ equity	$	62,570		$	24,194		$	85,924


Office location	Opening date of original banking office	Owned/Leased (1)		Date current facility leased or purchased
140 Airport Road, Suite P Arden, NC	October 2004	Leased	(1)	2004

52 Coxe Avenue Asheville, NC	May 2005	Leased	(1)	2005

379 New Market Blvd., Suite 2A Boone, NC	August 2007	Leased	(1)	2007

19 Chestnut St., Suite 7 Brevard, NC	December 2005	Leased	(1)	2005

80 Walker Street Columbus, NC	January 2005	Leased	(1)	2005

6534 Brevard Road Etowah, NC	May 2006	Leased	(1)	2006

3270 Hendersonville Road Fletcher, NC	September 2005	Leased	(2)	2005

102 West Main St. Forest City, NC	July 2007	Leased	(1)	2007


		Percent of class (2)
Name of beneficial owner	Amount and nature of beneficial ownership (1)	Before the merger		Adjusted for effect of the merger
B. Lee Beason	63,177	1.25	%	0.77	%
William H. Burton	172,668	3.41	%	2.11	%
Peggy H. Denny	51,031	1.01	%	0.63	%
Michael D. Foster	95,271	1.88	%	1.16	%
Gregory L. Gibson	98,927	1.96	%	1.21	%
James C. Kirkpatrick	111,555	2.21	%	1.36	%
H. Steve McManus	163,167	3.23	%	1.99	%
Van F. Phillips	170,665	3.38	%	2.08	%
Vincent K. Rees	99,337	1.97	%	1.22	%
Bradley B. Schnyder	106,531	2.11	%	1.30	%
Catherine H. Schroeder	163,279	3.23	%	1.99	%
John S. Sheiry	67,185	1.33	%	0.82	%
All current directors and executive officers as a group (14 people)	1,386,441	24.68	%	15.84	%


Name and Age	Position	First elected/ current term expires (1)	Principal occupation and business experience
B. Lee Beason (51)	Chief Operating Officer and Director	2004/2012	1^st Financial’s executive officer

William H. Burton (55)	Vice Chairman	2004/2011	Owner and Chairman, Cafe Enterprises, Inc., Taylors, SC (parent company of Fatz Cafe restaurants); President, Old Mill Stream, LLC (real estate development); previously served as director and Audit Committee Chairman of MountainBank and MountainBank Financial Corporation, Hendersonville, NC

Michael D. Foster (67)	Director	2004/2010	Owner and President, Foster Real Estate Appraisers, Inc., Asheville, NC (real estate appraisal firm)


Description	Amount
Per diem fee for attendance at meetings of 1^st Financial’s Board	$	400
Per diem fee for attendance at committee meetings		100
Additional per diem for attendance at Committee meetings by the Committee Chairman		100
Additional per diem for attendance at Audit Committee meetings by financial expert		100


Name (1)	Fees Earned or Paid in Cash		Option Awards (2)	All Other Compensation	Total
William H. Burton	$	7,200.00	-0-	-0-	$	7,200.00
Michael D. Foster		6,800.00	-0-	-0-		6,800.00
James C. Kirkpatrick		8,000.00	-0-	-0-		8,000.00
H. Steve McManus		6,300.00	-0-	-0-		6,300.00
Van F. Phillips		9,400.00	-0-	-0-		9,400.00
Bradley B. Schnyder		12,400.00	-0-	-0-		12,400.00
Catherine H. Schroader		6,700.00	-0-	-0-		6,700.00
John S. Sheiry		6,900.00	-0-	-0-		6,900.00


Name and Principal Position	Year	Salary (2)		Bonus		Option Awards (3)		Non-Equity Incentive Plan Compensation (4)		All Other Compensation (5)		Total
Gregory L. Gibson (1)	2008	$	173,250	$	-0-	$	-0-	$	-0-	$	9,515	$	182,765
Chief Executive Officer	2007		165,000		-0-		-0-		61,322		10,771		237,093

Vincent K. Rees (1)	2008		157,500		-0-		-0-				4,878		162,378
President	2007		150,000		-0-		-0-		61,322		12,658		223,980

B. Lee Beason (1)	2008		131,250		-0-		-0-				8,206		139,456
Executive Vice President and Chief Operating Officer	2007		125,000		-0-		-0-		50,896		8,373		184,269


Description	G. L. Gibson		V. K. Rees		B. L. Beason		P. H. Denny
Mountain 1^st’s matching contributions for the officer’s accounts under Section 401(k) plan	$	8,277	$	4,203	$	7,286	$	5,973
Imputed income for the officer’s interest under a split dollar arrangement in insurance polices owned by Mountain 1^st	$	1,238	$	675	$	920	$	1,080


	Option Awards
Name	Number of Securities Underlying Unexercised Stock Options (Exercisable)	Number of Securities Underlying Unexercised Stock Options (Unexercisable)	Option Exercise Price		Option Expiration Date
Gregory L. Gibson	37,108	-0-	$	5.63	07/26/2014
Vincent K. Rees	37,108	-0-		5.63	07/26/2014
B. Lee Beason	37,108	-0-		5.63	07/26/2014
Peggy H. Denny	37,108	-0-		5.63	07/26/2014


Type of Termination Event and Description of Payment or Benefit	G.L. Gibson		V. K. Rees		B. L. Beason		P. H. Denny
INVOLUNTARY TERMINATION WITHOUT CAUSE, OR VOLUNTARY TERMINATION WITH “GOOD REASON,” OTHER THAN AFTER A CHANGE IN CONTROL
Aggregate cash payments (1)	$	512,474	$	465,885	$	388,238	$	388,238
Continued insurance coverage (2)		34,666		20,021		27,179		33,182
CHANGE IN CONTROL, WITHOUT REGARD TO TERMINATION OF EMPLOYMENT
Lump sum cash payment	$	519,750	$	472,500	$	393,750	$	393,750
Continued insurance coverage (2)		36,174		20,892		28,362		34,626
Additional 280G “gross-up payment” (3)		-0-		-0-		-0-		-0-


Name	Yearly payment following termination at normal retirement age (1)		Yearly payment following termination or disability before normal retirement age (2)		Lump-sum payment following death (3)		Lump-sum payment following change in control (4)
Gregory L. Gibson	$	134,000	$	11,737	$	74,933	$	750,000
Vincent K. Rees		186,000		8,391		28,151		750,000
B. Lee Beason		100,000		8,054		48,430		750,000
Peggy H. Denny		72,000		14,644		137,951		750,000


	For The Years Ended December 31,
	2008							2007							2006
	Average Balance			Interest Income/ Expense (1)(2)		Average Rate		Average Balance			Interest Income/ Expense (1)(2)		Average Rate		Average Balance			Interest Income/ Expense (1)		Average Rate
Interest-earning assets:
Loans, including loans held for sale	$	570,997		$	35,635	6.24	%	$	450,200		$	36,861	8.19	%	$	311,171		$	25,533	8.21	%
Taxable investment securities		64,800			2,897	4.47	%		74,943			3,844	5.13	%		70,693			3,120	4.41	%
Federal funds sold		1,391			17	1.22	%		672			34	5.06	%		11,740			608	5.18	%
Interest-earning cash deposits		34			1	2.00	%		25			1	5.19	%		613			27	4.40	%

Total interest-earning assets		637,222			38,550	6.05	%		525,840			40,740	7.75	%		394,217			29,288	7.43	%
Noninterest-earning assets:
Cash and due from banks		10,213							11,828							8,725
Property and equipment		6,972							5,592							3,944
Allowance for loan loss and other		9,184							258							516

Total noninterest-earning assets		26,369							17,678							13,185

Total assets	$	663,591						$	543,518						$	407,402

Interest-bearing liabilities:
NOW accounts	$	56,257		$	557	0.99	%	$	51,401		$	876	1.70	%	$	36,992		$	499	1.35	%
Money markets		31,649			831	2.63	%		16,715			499	2.99	%		12,810			242	1.89	%
Savings deposits		68,173			1,687	2.47	%		50,662			1,483	2.93	%		43,644			1,275	2.92	%
Time deposits		337,037			13,404	3.98	%		311,160			16,277	5.23	%		228,761			11,313	4.95	%
Federal funds purchased and securities sold under agreements to repurchase		8,833			255	2.89	%		7,115			382	5.37	%		1,946			100	5.14	%
Borrowings		49,003			1,171	2.39	%		3,192			158	4.95	%		—			—	n/a

Total interest-bearing liabilities		550,952			17,905	3.25	%		440,245			19,675	4.47	%		324,153			13,429	4.14	%
Noninterest-bearing liabilities:
Demand deposits		57,885							52,220							37,694
Interest payable and other		5,509							5,933							3,900

Total noninterest-bearing liabilities		63,394							58,153							41,594

Total liabilities		614,346							498,398							365,747
Stockholders’ equity		49,245							45,120							41,655

Total liabilities and stockholders’ equity	$	663,591						$	543,518						$	407,402

Net interest income and interest rate spread				$	20,645	2.80	%				$	21,065	3.28	%				$	15,859	3.29	%

Net yield on average interest-earning assets						3.24	%						4.01	%						4.02	%

Ratio of average interest-earning assets to average interest-bearing liabilities		115.66	%						119.44	%						121.61	%


	Year Ended December 31, 2008 vs. Year Ended December 31, 2007									Year Ended December 31, 2007 vs. Year Ended December 31, 2006									Year Ended December 31, 2006 vs. Year Ended December 31, 2005
	Increase (Decrease) Due to									Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume (1)			Rate (1)			Total			Volume (1)			Rate (1)			Total			Volume (1)			Rate (1)		Total
Interest income:
Loans, including loans held for sale	$	9,890		$	(11,143	)	$	(1,253	)	$	11,390		$	(62	)	$	11,328		$	10,316		$	2,589	$	12,905
Taxable investment securities		(520	)		(427	)		(947	)		195			529			724			1,270			371		1,641
Federal funds sold		36			(26	)		10			(560	)		(14	)		(574	)		68			232		300
Interest-earning cash deposits		0			—			0			(32	)		6			(26	)		(47	)		9		(38	)

Total interest income		9,406			(11,569	)		(2,163	)		10,993			459			11,452			11,607			3,201		14,808
Interest expense:
NOW accounts	$	93		$	(412	)	$	(319	)	$	227		$	150		$	377		$	195		$	152	$	347
Money markets		384			(52	)		332			88			169			257			(201	)		20		(181	)
Savings deposits		368			(164	)		204			204			4			208			636			13		649
Time deposits		1,527			(4,400	)		(2,873	)		4,290			674			4,964			4,790			2,145		6,935
Federal funds purchased and securities sold under agreements to repurchase		137			(264	)		(127	)		278			4			282			38			25		63
Borrowings		1,095			(82	)		1,013			158			—			158			—			—		—

Total interest expense		3,604			(5,374	)		(1,770	)		5,245			1,001			6,246			5,458			2,355		7,813

Net increase (decrease) in net interest income	$	5,802		$	(6,222	)	$	(420	)	$	5,748		$	(542	)	$	5,206		$	6,149		$	846	$	6,995