##### Table of Contents





United States

Securities and Exchange Commission

Washington, D.C. 20549





FORM 10-Q





(MARK ONE)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15d OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
|- | -------------------------------------------------------------------------------------------------------

PERIOD ENDED MARCH 31, 2009



| ̈ | TRANSITION REPORT UNDER SECTION 13 OR 15d OF THE SECURITIES EXCHANGE ACT OF 1934
|- | --------------------------------------------------------------------------------





1STFINANCIAL SERVICES CORPORATION

(Exact name of the registrant as specified in its charter)







|                                                               |  |                          |  |                                  
|-------------------------------------------------------------- |  | ------------------------ |  | ---------------------------------
|NORTH CAROLINA                                                 |  | 000-53264                |  | 26-0207901                       
|(State or other Jurisdiction of incorporation or organization) |  | (Commission File Number) |  | (IRS Employer Identification No.)

101 Jack Street

Hendersonville, North Carolina 28792

(Address of Principal Executive Office)

(828) 697-3100

(Registrants
telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 of 15d of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports,) and (2) has been subject to such
filing requirements for the past 90 days.    YES  x    NO   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    YES   ̈    NO   ̈

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 definition of large accelerated filer, accelerated filer
and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):



|                        |  |   |  |                           |  |  
|----------------------- |  | - |  | ------------------------- |  | -
|Large accelerated filer |  |  ̈ |  | Accelerated filer         |  |  ̈
|                        |  |   | 
|Non-accelerated filer   |  |  ̈ |  | Smaller reporting company |  | x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    YES   ̈    NO  x

Common Stock, $5 par value

5,001,248 shares outstanding as of May 10, 2009









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##### Table of Contents

1stFinancial Services Corporation

Index





|                              |  |                                                                                                                           |  |      
|----------------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | -----
|                              |  | PageNumber                                                                                                               
|Part I. Financial Information |  |                                                                                                                          
|                              |  |                                                                                                                          
|Item 1.                       |  | Financial Statements                                                                                                      |  |      
|                              |  |                                                                                                                          
|                              |  | Consolidated Balance Sheets March 31, 2009 and December 31, 2008 (Unaudited)                                              |  | 1    
|                              |  |                                                                                                                          
|                              |  | Consolidated Statements of Income for the Three Months Ended March 31, 2009 and 2008 (Unaudited)                          |  | 2    
|                              |  |                                                                                                                          
|                              |  | Consolidated Statements of Changes in Stockholders Equity for the Three Months Ended March 31, 2009 and 2008 (Unaudited) |  | 3    
|                              |  |                                                                                                                          
|                              |  | Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2009 and 2008 (Unaudited)                      |  | 4    
|                              |  |                                                                                                                          
|                              |  | Notes to Consolidated Financial Statements                                                                                |  | 5-10 
|                              |  |                                                                                                                          
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                     |  | 11-22
|                              |  |                                                                                                                          
|Item 3.                       |  | Quantitative and Qualitative Disclosures about Market Risk                                                                |  | 23   
|                              |  |                                                                                                                          
|Item 4T.                      |  | Controls and Procedures                                                                                                   |  | 23   
|                              | 
|Part II. Other Information    |  |                                                                                                                          
|                              |  |                                                                                                                          
|Item 1.                       |  | Legal Proceedings                                                                                                         |  | 24   
|                              |  |                                                                                                                          
|Item 1A.                      |  | Risk Factors                                                                                                              |  | 24   
|                              |  |                                                                                                                          
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                               |  | 24   
|                              |  |                                                                                                                          
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                           |  | 24   
|                              |  |                                                                                                                          
|Item 4.                       |  | Submission of Matters to a Vote of Security Holders                                                                       |  | 24   
|                              |  |                                                                                                                          
|Item 5.                       |  | Other Information                                                                                                         |  | 25   
|                              |  |                                                                                                                          
|Item 6.                       |  | Exhibits                                                                                                                  |  | 25   
|                              | 
|Signatures                    |  | 26                                                                                                                       



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##### Table of Contents

PART I  FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

1stFinancial Services Corporation

Consolidated Balance Sheets

March 31, 2009 and December 31, 2008 (Unaudited)

(dollars in thousands)







|                                                                                                                                             |  |                |         |   |                   |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ----------------- | - | ------- | -
|                                                                                                                                             |  | March 31, 2009 |         |   | December 31, 2008 |  
|Assets                                                                                                                                       |  |                |         |   |                   |   |         |  
|                                                                                                                                             |  |               
|Cash and noninterest bearing bank deposits                                                                                                   |  | $              | 11,977  |   |                   | $ | 10,244  |  
|Interest bearing deposit with bank                                                                                                           |  |                | 28      |   |                   |   | 37      |  
|Federal funds sold                                                                                                                           |  |                | 5,864   |   |                   |   |        |  
|                                                                                                                                             |  |                |         |   |                   |   |         |  
|Total cash and cash equivalents                                                                                                              |  |                | 17,869  |   |                   |   | 10,281  |  
|Investment securities available for sale                                                                                                     |  |                | 85,927  |   |                   |   | 86,801  |  
|Investment securities held to maturity                                                                                                       |  |                | 807     |   |                   |   | 824     |  
|Restricted equity securities                                                                                                                 |  |                | 3,261   |   |                   |   | 5,140   |  
|Loans held for sale                                                                                                                          |  |                | 4,402   |   |                   |   | 4,177   |  
|Loans, net of allowance for loan losses of $9,766 at March 31, 2009 and $9,013 at December 31, 2008                                          |  |                | 575,519 |   |                   |   | 570,843 |  
|Bank owned life insurance                                                                                                                    |  |                | 11,661  |   |                   |   | 11,518  |  
|Property and equipment, net                                                                                                                  |  |                | 6,826   |   |                   |   | 7,140   |  
|Accrued interest receivable                                                                                                                  |  |                | 3,098   |   |                   |   | 3,138   |  
|Other assets                                                                                                                                 |  |                | 7,511   |   |                   |   | 7,274   |  
|                                                                                                                                             |  |                |         |   |                   |   |         |  
|Total assets                                                                                                                                 |  | $              | 716,881 |   |                   | $ | 707,136 |  
|                                                                                                                                             |  |                |         |   |                   |   |         |  
|                                                                                                                                             |  |               
|Liabilities and Stockholders Equity                                                                                                         |  |                |         |   |                   |   |         |  
|                                                                                                                                             |  |               
|Liabilities:                                                                                                                                 |  |                |         |   |                   |   |         |  
|Demand deposits                                                                                                                              |  | $              | 55,798  |   |                   | $ | 57,950  |  
|NOW accounts                                                                                                                                 |  |                | 56,753  |   |                   |   | 56,000  |  
|Savings deposits                                                                                                                             |  |                | 81,479  |   |                   |   | 76,899  |  
|Money market accounts                                                                                                                        |  |                | 45,216  |   |                   |   | 35,798  |  
|Time deposits under $100                                                                                                                     |  |                | 187,892 |   |                   |   | 187,843 |  
|Time deposits of $100 and greater                                                                                                            |  |                | 162,237 |   |                   |   | 176,524 |  
|                                                                                                                                             |  |                |         |   |                   |   |         |  
|Total deposits                                                                                                                               |  |                | 589,375 |   |                   |   | 591,014 |  
|Federal funds purchased and securities sold under agreements to repurchase                                                                   |  |                | 966     |   |                   |   | 1,372   |  
|                                                                                                                                             |  |               
|Borrowings                                                                                                                                   |  |                | 59,000  |   |                   |   | 48,000  |  
|Accrued interest payable                                                                                                                     |  |                | 2,950   |   |                   |   | 3,313   |  
|Other liabilities                                                                                                                            |  |                | 1,480   |   |                   |   | 867     |  
|                                                                                                                                             |  |                |         |   |                   |   |         |  
|Total liabilities                                                                                                                            |  |                | 653,771 |   |                   |   | 644,566 |  
|                                                                                                                                             |  |                |         |   |                   |   |         |  
|                                                                                                                                             |  |               
|Commitments and contingencies                                                                                                                |  |                |        |   |                   |   |        |  
|                                                                                                                                             |  |               
|Stockholders equity:                                                                                                                        |  |                |         |   |                   |   |         |  
|Preferred stock, no par value. Authorized 10,000,000 shares; 16,369 shares issued and outstanding at March 31, 2009 and December 31,
2008    |  |                | 15,429  |   |                   |   | 15,380  |  
|Common stock, $5.00 par value; 20,000,000 shares authorized; 4,997,027 shares issued and outstanding at March 31, 2009 and
December 31, 2008 |  |                | 24,985  |   |                   |   | 24,985  |  
|Common stock warrants                                                                                                                        |  |                | 1,016   |   |                   |   | 1,016   |  
|Additional paid-in capital                                                                                                                   |  |                | 17,787  |   |                   |   | 17,778  |  
|Retained earnings                                                                                                                            |  |                | 4,052   |   |                   |   | 3,933   |  
|Accumulated other comprehensive (loss)                                                                                                       |  |                | (159    | ) |                   |   | (522    | )
|                                                                                                                                             |  |                |         |   |                   |   |         |  
|Total stockholders equity                                                                                                                   |  |                | 63,110  |   |                   |   | 62,570  |  
|                                                                                                                                             |  |                |         |   |                   |   |         |  
|Total liabilities and stockholders equity                                                                                                   |  | $              | 716,881 |   |                   | $ | 707,136 |  
|                                                                                                                                             |  |                |         |   |                   |   |         |  

See accompanying notes to consolidated financial statements



1



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1stFinancial Services Corporation

Consolidated Statements of Income

For the Three Months Ended March 31, 2009 and 2008 (Unaudited)

(dollars in thousands except share and per share data)







|                                                                           |  |                              |           |      |   |          
|-------------------------------------------------------------------------- |  | ---------------------------- | --------- | ---- | - | ---------
|                                                                           |  | Three Months Ended March 31,
|                                                                           |  | 2009                         |           | 2008
|Interest income                                                            |  |                              |           |      |   |          
|Loans and fees on loans                                                    |  | $                            | 7,797     |      | $ | 9,542    
|Investment securities                                                      |  |                              | 908       |      |   | 733      
|Federal funds sold                                                         |  |                              | 2         |      |   |         
|                                                                           |  |                              |           |      |   |          
|Total interest income                                                      |  |                              | 8,707     |      |   | 10,275   
|                                                                           |  |                              |           |      |   |          
|Interest expense                                                           |  |                              |           |      |   |          
|Deposits                                                                   |  |                              | 3,137     |      |   | 4,869    
|Federal funds purchased and securities sold under agreements to repurchase |  |                              | 3         |      |   | 123      
|Other borrowings                                                           |  |                              | 50        |      |   | 226      
|                                                                           |  |                              |           |      |   |          
|Total interest expense                                                     |  |                              | 3,190     |      |   | 5,218    
|                                                                           |  |                              |           |      |   |          
|Net interest income                                                        |  |                              | 5,517     |      |   | 5,057    
|Provision for loan losses                                                  |  |                              | 2,305     |      |   | 685      
|                                                                           |  |                              |           |      |   |          
|Net interest income after provision for loan losses                        |  |                              | 3,212     |      |   | 4,372    
|                                                                           |  |                              |           |      |   |          
|Noninterest income                                                         |  |                              |           |      |   |          
|Service charges on deposit accounts                                        |  |                              | 502       |      |   | 511      
|Mortgage origination income                                                |  |                              | 417       |      |   | 579      
|Other service charges and fees                                             |  |                              | 84        |      |   | 39       
|Increase in cash surrender value of life insurance                         |  |                              | 142       |      |   | 116      
|Net realized gain on sale of investment securities                         |  |                              | 387       |      |   | 89       
|Other income                                                               |  |                              | 59        |      |   | 24       
|                                                                           |  |                              |           |      |   |          
|Total noninterest income                                                   |  |                              | 1,591     |      |   | 1,358    
|                                                                           |  |                              |           |      |   |          
|Noninterest expense                                                        |  |                              |           |      |   |          
|Salaries and employee benefits                                             |  |                              | 2,324     |      |   | 2,427    
|Occupancy                                                                  |  |                              | 388       |      |   | 353      
|Equipment                                                                  |  |                              | 331       |      |   | 272      
|Advertising                                                                |  |                              | 166       |      |   | 279      
|Data processing and telecommunication                                      |  |                              | 257       |      |   | 508      
|Deposit insurance premiums                                                 |  |                              | 240       |      |   | 90       
|Professional fees                                                          |  |                              | 257       |      |   | 109      
|Printing and supplies expense                                              |  |                              | 69        |      |   | 56       
|Other general and administrative                                           |  |                              | 362       |      |   | 415      
|                                                                           |  |                              |           |      |   |          
|Total noninterest expense                                                  |  |                              | 4,394     |      |   | 4,509    
|                                                                           |  |                              |           |      |   |          
|Income before income taxes                                                 |  |                              | 409       |      |   | 1,221    
|Income tax expense                                                         |  |                              | 34        |      |   | 432      
|                                                                           |  |                              |           |      |   |          
|Net income                                                                 |  |                              | 375       |      |   | 789      
|Accretion of preferred stock to redemption value                           |  |                              | 49        |      |   |         
|Preferred dividends accrued                                                |  |                              | 205       |      |   |         
|                                                                           |  |                              |           |      |   |          
|Net income available to common stockholders                                |  | $                            | 121       |      | $ | 789      
|                                                                           |  |                              |           |      |   |          
|Basic income per share                                                     |  | $                            | 0.02      |      | $ | 0.16     
|                                                                           |  |                              |           |      |   |          
|Diluted income per share                                                   |  | $                            | 0.02      |      | $ | 0.15     
|                                                                           |  |                              |           |      |   |          
|Basic weighted average shares outstanding                                  |  |                              | 4,997,027 |      |   | 4,997,027
|                                                                           |  |                              |           |      |   |          
|Diluted weighted average shares outstanding                                |  |                              | 4,997,320 |      |   | 5,256,327
|                                                                           |  |                              |           |      |   |          

See accompanying notes to consolidated financial statements



2



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##### Table of Contents

1stFinancial Services Corporation

Consolidated Statements of Changes in
Stockholders Equity

For the Three Months Ended March 31, 2009 and 2008 (Unaudited)

(dollars in thousands except share data)







|                                                                                             |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        |             |   |       |       |  |   |      |   |  |   |        |  
|-------------------------------------------------------------------------------------------- |  | ------------ |  | --------------- | ------ | ------ | ------ | ------- | - | -------- |  | ---------- | ------------- | -------- | - | ------ | ----------- | - | ----- | ----- |  | - | ---- | - |  | - | ------ | -
|                                                                                             |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        | Accumulated |   |       |       | 
|                                                                                             |  |              |  |                 |        |        |        |         |   |          |  | Additional |               |          |   |        | Other       |   |       |       | 
|                                                                                             |  | Common Stock |  | Preferred Stock |        |        |        | Paid-in |   | Retained |  |            | Comprehensive |          |   |        |            
|                                                                                             |  | Shares       |  | Amount          |        | Shares |        | Amount  |   | Warrants |  | Capital    |               | Earnings |   |        | (Loss)      |   |       | Total | 
|Balance, December 31, 2007                                                                   |  | 4,997,027    |  | $               | 24,985 |        |       |         | $ |         |  | $          |              |          | $ | 17,734 |             | $ | 3,621 |       |  | $ | (128 | ) |  | $ | 46,212 |  
|Stock compensation expense                                                                   |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   | 16     |             |   |      |       |  |   |     |   |  |   | 16     |  
|Comprehensive income                                                                         |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        |             |   |       |       |  |   |      |   |  |   |       |  
|Net income                                                                                   |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   |       |             |   | 789   |       |  |   |     |   |  |   | 789    |  
|Net unrealized gain on investment securities available for sale, net of income taxes of $139 |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   |       |             |   |      |       |  |   | 271  |   |  |   | 271    |  
|Reclassification adjustment for gains included in net income, net of income taxes of $(5)    |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   |       |             |   |      |       |  |   | (10  | ) |  |   | (10    | )
|                                                                                             |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        |             |   |       |       |  |   |      |   |  |   |        |  
|Total comprehensive income                                                                   |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   |       |             |   |      |       |  |   |     |   |  |   | 1,050  |  
|                                                                                             |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        |             |   |       |       |  |   |      |   |  |   |        |  
|Balance, March 31, 2008                                                                      |  | 4,997,027    |  | $               | 24,985 |        |       |         | $ |         |  | $          |              |          | $ | 17,750 |             | $ | 4,410 |       |  | $ | 133  |   |  | $ | 47,278 |  
|                                                                                             |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        |             |   |       |       |  |   |      |   |  |   |        |  
|                                                                                             |  |              |  |                 |        |        |        |         |  
|Balance, December 31, 2008                                                                   |  | 4,997,027    |  | $               | 24,985 |        | 16,369 |         | $ | 15,380   |  | $          | 1,016         |          | $ | 17,778 |             | $ | 3,933 |       |  | $ | (522 | ) |  | $ | 62,570 |  
|Stock compensation expense                                                                   |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   | 9      |             |   |      |       |  |   |     |   |  |   | 9      |  
|Preferred dividend                                                                           |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   |       |             |   | (207  | )     |  |   |     |   |  |   | (207   | )
|Accretion of Preferred Stock to redemption value                                             |  |             |  |                 |       |        |       |         |   | 49       |  |            |              |          |   |       |             |   | (49   | )     |  |   |     |   |  |   |       |  
|Comprehensive income                                                                         |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        |             |   |       |       |  |   |      |   |  |   |        |  
|Net income                                                                                   |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   |       |             |   | 375   |       |  |   |     |   |  |   | 375    |  
|Net unrealized gain on investment securities available for sale, net of income taxes of $180 |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   |       |             |   |      |       |  |   | 348  |   |  |   | 348    |  
|Reclassification adjustment for gains included in net income, net of income taxes of $7      |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   |       |             |   |      |       |  |   | 15   |   |  |   | 15     |  
|                                                                                             |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        |             |   |       |       |  |   |      |   |  |   |        |  
|Total comprehensive income                                                                   |  |             |  |                 |       |        |       |         |   |         |  |            |              |          |   |       |             |   |      |       |  |   |     |   |  |   | 738    |  
|                                                                                             |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        |             |   |       |       |  |   |      |   |  |   |        |  
|Balance, March 31, 2009                                                                      |  | 4,997,027    |  | $               | 24,985 |        | 16,369 |         | $ | 15,429   |  | $          | 1,016         |          | $ | 17,787 |             | $ | 4,052 |       |  | $ | (159 | ) |  | $ | 63,110 |  
|                                                                                             |  |              |  |                 |        |        |        |         |   |          |  |            |               |          |   |        |             |   |       |       |  |   |      |   |  |   |        |  

































See accompanying notes to
consolidated financial statements



3



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##### Table of Contents

1stFinancial Services Corporation

Consolidated Statements of Cash Flows

For the Three Months Ended March 31, 2009 and 2008 (Unaudited)

(dollars in thousands)







|                                                                                                      |  |                             |         |   |      |   |         |  
|----------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                      |  | Three Months EndedMarch 31, |        
|                                                                                                      |  | 2009                        |         |   | 2008 |  
|Cash flows from operating activities                                                                  |  |                             |         |   |      |   |         |  
|Net income                                                                                            |  | $                           | 375     |   |      | $ | 789     |  
|Adjustments to reconcile net income to net cash provided by operations:                               |  |                             |         |   |      |   |         |  
|Depreciation                                                                                          |  |                             | 364     |   |      |   | 300     |  
|Provision for loan losses                                                                             |  |                             | 2,305   |   |      |   | 685     |  
|Deferred income taxes                                                                                 |  |                             | (198    | ) |      |   | (335    | )
|Amortization of premium on securities, net of discount accretion                                      |  |                             | 86      |   |      |   | 95      |  
|Origination of available for sale loans                                                               |  |                             | (29,508 | ) |      |   | (31,672 | )
|Sales of available for sale loans                                                                     |  |                             | 29,283  |   |      |   | 34,648  |  
|Net realized loss (gains) on sales of investment securities                                           |  |                             | (387    | ) |      |   | (89     | )
|Net realized gain on sale of repossessions acquired in settlement of loans                            |  |                             | (34     | ) |      |   |        |  
|Stock compensation expense                                                                            |  |                             | 9       |   |      |   | 16      |  
|Increase in cash surrender value of bank owned life insurance                                         |  |                             | (143    | ) |      |   | (117    | )
|Changes in assets and liabilities:                                                                    |  |                             |         |   |      |   |         |  
|Accrued interest receivable                                                                           |  |                             | 40      |   |      |   | 445     |  
|Other assets                                                                                          |  |                             | (192    | ) |      |   | (501    | )
|Accrued interest payable                                                                              |  |                             | (363    | ) |      |   | (505    | )
|Other liabilities                                                                                     |  |                             | 613     |   |      |   | (23     | )
|                                                                                                      |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                                             |  |                             | 2,250   |   |      |   | 3,736   |  
|                                                                                                      |  |                             |         |   |      |   |         |  
|                                                                                                      |  |                            
|Cash flows from investing activities                                                                  |  |                             |         |   |      |   |         |  
|Purchases of investment securities available for sale                                                 |  |                             | (37,855 | ) |      |   | (17,930 | )
|Sales of investment securities available for sale                                                     |  |                             | 33,996  |   |      |   | 14,868  |  
|Maturities and calls of investment securities                                                         |  |                             | 5,601   |   |      |   | 5,788   |  
|Purchases of restricted equity securities                                                             |  |                             | (281    | ) |      |   | (2,309  | )
|Sales of restricted equity securities                                                                 |  |                             | 2,160   |   |      |   |        |  
|Net increase in loans                                                                                 |  |                             | (6,981  | ) |      |   | (45,014 | )
|Purchase of bank owned life insurance                                                                 |  |                             |        |   |      |   | (5,000  | )
|Purchases of property and equipment                                                                   |  |                             | (50     | ) |      |   | (675    | )
|                                                                                                      |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                                 |  |                             | (3,410  | ) |      |   | (50,272 | )
|                                                                                                      |  |                             |         |   |      |   |         |  
|                                                                                                      |  |                            
|Cash flows from financing activities                                                                  |  |                             |         |   |      |   |         |  
|Net (decrease) increase in deposits                                                                   |  |                             | (1,639  | ) |      |   | 13,926  |  
|Net increase (decrease) in securities sold under agreements to repurchase and federal funds purchased |  |                             | (406    | ) |      |   | (2,289  | )
|Net increase in borrowings                                                                            |  |                             | 11,000  |   |      |   | 35,000  |  
|Dividends paid on preferred stock                                                                     |  |                             | (207    | ) |      |   |        |  
|                                                                                                      |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                                             |  |                             | 8,748   |   |      |   | 46,637  |  
|                                                                                                      |  |                             |         |   |      |   |         |  
|                                                                                                      |  |                            
|Net increase in cash and cash equivalents                                                             |  |                             | 7,588   |   |      |   | 101     |  
|                                                                                                      |  |                            
|Cash and cash equivalents, beginning                                                                  |  |                             | 10,281  |   |      |   | 9,279   |  
|                                                                                                      |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, ending                                                                     |  |                             | 17,869  |   |      |   | 9,380   |  
|                                                                                                      |  |                             |         |   |      |   |         |  
|                                                                                                      |  |                            
|Supplemental disclosure of cash flow information                                                      |  |                             |         |   |      |   |         |  
|Transfer of loans to real estate acquired in settlement of loans                                      |  | $                           | 1,978   |   |      | $ | 75      |  
|                                                                                                      |  |                             |         |   |      |   |         |  
|Transfer of loans to repossessions acquired in settlement of loans                                    |  | $                           | 44      |   |      | $ | 53      |  
|                                                                                                      |  |                             |         |   |      |   |         |  
|Interest paid                                                                                         |  | $                           | 3,553   |   |      | $ | 5,723   |  
|                                                                                                      |  |                             |         |   |      |   |         |  
|Taxes paid                                                                                            |  | $                           |        |   |      | $ | 49      |  
|                                                                                                      |  |                             |         |   |      |   |         |  

See accompanying notes to consolidated financial statements



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##### Table of Contents

1stFinancial Services Corporation

Notes to Consolidated Financial
Statements (Unaudited)

March 31, 2009





Note 1. Organization and Summary of Significant Accounting
Policies

Organization

1stFinancial
Services Corporation (the Company), formed in May 2008, is a North Carolina corporation and the sole owner of all of the capital stock of Mountain 1stBank & Trust Company. Mountain 1st Bank & Trust Company (the Bank) is a North Carolina state chartered, non-member bank which was organized and incorporated under the laws of the State
of North Carolina on April 30, 2004. The Bank commenced operations on May 14, 2004 and has experienced rapid growth since that time. The Bank is headquartered in Hendersonville, North Carolina and currently conducts business in ten western
North Carolina counties through fifteen full service branch offices. As a state chartered bank, the Bank is subject to regulation by the North Carolina State Banking Commission and the Federal Deposit Insurance Corporation. The Company is also
regulated, supervised and examined by the Federal Reserve Bank.

Principles of Consolidation

The consolidated financial statements include the accounts of 1stFinancial Services Corporation and its wholly-owned subsidiary Mountain 1st Bank & Trust. All intercompany transactions and balances have been eliminated in consolidation.

Basis of Presentation

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and therefore do not include all disclosures required by generally accepted accounting
principles for a complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments necessary to present fairly the financial condition of 1stFinancial Services Corporation as of March 31, 2009, its results of operations and its cash flows and changes in stockholders equity for the three month periods ended
March 31, 2009 and 2008. Management believes that all interim period adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the audited financial statements for the year ended
December 31, 2008, contained in the Companys filing on Form 10-K. The accounting policies of the Company and the Bank follow generally accepted accounting principles and practices within the financial services industry.

Estimates

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 amount of assets and liabilities and disclosure of contingent assets and
liabilities as of the date of the balance sheets and the reported amounts on income and expenses for the periods presented. Actual results could differ significantly from those estimates.

Presentation of Cash Flows

For purposes of reporting cash
flows, cash and cash equivalents includes cash, amounts due from depository institutions (including cash items in process of collection which are considered to be cash equivalents) and federal funds sold. Cash flows from demand deposits, NOW
accounts and savings accounts are reported net since their original maturities are less than three months. Loans and time deposits are reported net per Financial Accounting Standards Board (FASB) statement No. 104.

Investment Securities

Investments classified as available for
sale can be held for indefinite periods of time and include those securities that management may employ as part of asset/liability strategy or that may be sold in response to changes in interest rates, prepayments, regulatory capital requirements or
similar factors. These securities are carried at fair value and are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.



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##### Table of Contents

1stFinancial Services Corporation

Notes to Consolidated Financial
Statements (Unaudited)

March 31, 2009







Investment securities classified as held to maturity are those debt securities that the Bank has the ability and
intent to hold to maturity. Accordingly, these securities are carried at cost adjusted for amortization of premiums and accretion of discount, computed by the interest-method over their contractual lives.

Loans

Loans are stated at the amount of unpaid principal,
reduced by unearned fees and the allowance for loan losses. Interest on all loans is accrued daily on the outstanding balance. Accrual of interest is discontinued on a loan when management believes; after considering collection efforts and other
factors that the borrowers financial condition is such that the full collection of principal or interest is doubtful.

Property and Equipment

The Companys properties and equipment are stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method
over periods of two to twelve years for leasehold improvements and from two to twenty-five years for furniture and equipment.

Recent Accounting
Developments

The following is a summary of recent authoritative pronouncements that could impact the accounting, reporting and/or disclosure of
financial information by the Company.

In December 2008 the Financial Accounting Standards Board (FASB) issued FASB Staff Position
(FSP) SFAS 132(R)-1, Employers Disclosures about Postretirement Benefit Plan Assets, (FSP SFAS 132(R)-1). This FSP provides guidance on an employers disclosures about plan assets of a defined benefit
pension or other postretirement plan. The objective of the FSP is to provide the users of financial statements with an understanding of: (a) how investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies; (b) the major categories of plan assets; (c) the inputs and valuation techniques used to measure the fair value of plan assets; (d) the effect of fair value measurements using
significant unobservable inputs (Level 3) on changes in plan assets for the period; and (e) significant concentrations of risk within plan assets. The FSP also requires a nonpublic entity, as defined in Statement of Financial Accounting
Standard (SFAS) 132, to disclose net periodic benefit cost for each period for which a statement of income is presented. FSP SFAS 132(R)-1 is effective for fiscal years ending after December 15, 2009. The Staff Position will require
the Company to provide additional disclosures related to its benefit plans.

FSP EITF 99-20-1, Amendments to the Impairment Guidance of EITF Issue
No. 99-20, (FSP EITF 99-20-1) was issued in January 2009. Prior to the FSP, other-than-temporary impairment was determined by using either Emerging Issues Task Force (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 FSP 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 FSP was
effective for reporting periods ending after December 15, 2008.

On April 9, 2009, the FASB issued three staff positions related to fair value
which are discussed below.

FSP SFAS 115-2 and SFAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, (FSP SFAS
115-2 and SFAS 124-2) categorizes losses on debt securities available-for-sale or held-to-maturity determined by management to be other-than-temporarily impaired into losses due to credit issues and losses related to all other factors.
Other-than-temporary impairment (OTTI) exists when it is more likely than not that the security will mature or be sold before its amortized cost basis can be recovered. An OTTI related to credit losses should be recognized through earnings. An OTTI
related to other factors should be recognized in other comprehensive income. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary



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##### Table of Contents

1stFinancial Services Corporation

Notes to Consolidated Financial
Statements (Unaudited)

March 31, 2009







impairments of equity securities. Annual disclosures required in SFAS 115 and FSP SFAS 115-1 and SFAS 124-1 are also required for interim periods (including
the aging of securities with unrealized losses).

FSP SFAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That are Not Orderly recognizes that quoted prices may not be determinative of fair value when the volume and level of trading activity has significantly decreased. The
evaluation of certain factors may necessitate that fair value be determined using a different valuation technique. Fair value should be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction, not
a forced liquidation or distressed sale. If a transaction is considered to not be orderly, little, if any, weight should be placed on the transaction price. If there is not sufficient information to conclude as to whether or not the transaction is
orderly, the transaction price should be considered when estimating fair value. An entitys intention to hold an asset or liability is not relevant in determining fair value. Quoted prices provided by pricing services may still be used when
estimating fair value in accordance with SFAS 157; however, the entity should evaluate whether the quoted prices are based on current information and orderly transactions. Inputs and valuation techniques are required to be disclosed in addition to
any changes in valuation techniques.

FSP SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments requires
disclosures about the fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements and also requires those disclosures in summarized financial information at interim
reporting periods A publicly traded company includes any company whose securities trade in a public market on either a stock exchange or in the over-the-counter market, or any company that is a conduit bond obligor. Additionally, when a company
makes a filing with a regulatory agency in preparation for sale of its securities in a public market it is considered a publicly traded company for this purpose.

The three staff positions are effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, in which case all three must be adopted. The Company will adopt the staff
positions for its second quarter 10-Q but does not expect the staff positions to have a material impact on the consolidated financial statements.

Also on
April 1, 2009, the FASB issued FSP SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies. The FSP requires that assets acquired and liabilities assumed in a
business combination that arise from a contingency be recognized at fair value. If fair value cannot be determined during the measurement period as determined in SFAS 141 (R), the asset or liability can still be recognized if it can be determined
that it is probable that the asset existed or the liability had been incurred as of the measurement date and if the amount of the asset or liability can be reasonably estimated. If it is not determined to be probable that the asset/liability
existed/was incurred or no reasonable amount can be determined, no asset or liability is recognized. The entity should determine a rational basis for subsequently measuring the acquired assets and assumed liabilities. Contingent consideration
agreements should be recognized initially at fair value and subsequently reevaluated in accordance with guidance found in paragraph 65 of SFAS 141 (R). The FSP is effective for business combinations with an acquisition date on or after the beginning
of the Companys first annual reporting period beginning on or after December 15, 2008. The Company will assess the impact of the FSP if and when a future acquisition occurs.

The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 111 on April 9, 2009 to amend Topic 5.M., Other Than Temporary Impairment of Certain
Investments in Debt and Equity Securities and to supplement FSP SFAS 115-2 and SFAS 124-2. SAB 111 maintains the staffs previous views related to equity securities; however debt securities are excluded from its scope. The SAB provides
that other-than-temporary impairment is not necessarily the same as permanent impairment and unless evidence exists to support a value equal to or greater than the carrying value of the equity security investment, a
write-down to fair value should be recorded and accounted for as a realized loss. The SAB was effective upon issuance and had no impact on the Companys financial position.

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies are not expected to have a material impact on the Companys financial position, results of operations or
cash flows.



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##### Table of Contents

1stFinancial Services Corporation

Notes to Consolidated Financial
Statements (Unaudited)

March 31, 2009







|Note 2. | Net Income Per Share
|------- | --------------------

Basic income per share represents the
net income allocated to 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 are determined using the treasury stock method.

For the three months ended March 31, 2009, basic weighted average shares outstanding totaled 4,997,027 and diluted weighted average shares totaled 4,997,320 amounting to basic earnings per share (EPS) and diluted
earnings per share of $0.02 per share for the period. For the three months ended March 31, 2008, basic weighted average shares outstanding totaled 4,997,027 and basic earnings per share amounted to $0.16 per share. Diluted weighted average
shares totaled 5,256,327 which accounted for dilution of $0.01 per share and resulted in fully diluted EPS of $0.15 per share for the three months ended March 31, 2008.

Additionally, 888,582 shares attributable to outstanding stock options and 276,815 warrants to purchase common stock were excluded from the calculation of diluted earnings per share for the three month periods ended
March 31, 2009 because their inclusion would have been anti-dilutive. No shares were excluded from the diluted earnings per share calculations as of March 31, 2008.



|Note 3. | Off-Balance Sheet Items
|------- | -----------------------

The Company 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 Company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 Company uses the same credit policies in making
commitments and conditional obligations as for on-balance-sheet instruments. A summary of the Companys commitments at March 31, 2009 and December 31, 2008 is as follows (dollars in thousands):



|                             |  |               |        |                  |   |       
|---------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                             |  | March 31,2009 |        | December 31,2008
|Commitments to extend credit |  | $             | 79,743 |                  | $ | 91,086
|Standby letters of credit    |  |               | 2,758  |                  |   | 2,751 
|                             |  |               |        |                  |   |       
|                             |  | $             | 82,501 |                  | $ | 93,837
|                             |  |               |        |                  |   |       



|Note 4. | Stock-based Compensation
|------- | ------------------------

On January 1, 2006, we adopted the
provisions of, and account for stock-based compensation in accordance with, the Financial Accounting Standards Boards (FASB) Statement of Financial Accounting Standards No 123  revised 2004 (SFAS 123R),
Share-Based Payment, which replaced SFAS No. 123, Accounting for Stock Based Compensation, and supersedes APB No. 25, Accounting for Stock Issued to Employees, and its related interpretations. Under the
fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is
the vesting period. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. The valuation provisions of SFAS 123R apply to new grants and to grants that were outstanding as of the effective
date and are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model. The risk-free interest rate is based
on the U.S. Treasury rate for the expected life at the time of grant. Volatility is based on the volatility of our stocks trading history. The expected life is based on the average life of the options and the weighted average graded vesting
period, and forfeitures are estimated based on the Companys history.



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##### Table of Contents

1stFinancial Services Corporation

Notes to Consolidated Financial
Statements (Unaudited)

March 31, 2009







Fifteen thousand options were granted during the three-month period ended March 31, 2009 with the following weighted-average assumptions: expected
volatility of 32.95%; risk-free interest rate of 2.70%; and expected life of 10 years. During the first three months of 2009, no options were forfeited.

The Company recognized $9 thousand in stock compensation expense during the first three months of 2009, compared to $16 thousand during the first three months of 2008 which related to the vesting of outstanding options.

A summary of option activity under the Plans is as follows:



|                             |  |                    |  |                              |      |                                 |            |                   |   |  
|---------------------------- |  | ------------------ |  | ---------------------------- | ---- | ------------------------------- | ---------- | ----------------- | - | -
|                             |  | OptionsOutstanding |  | WeightedAverageExercisePrice |      | AverageRemainingContractualTerm |            | IntrinsicValue(1)
|Outstanding, January 1, 2009 |  | 888,582            |  | $                            | 8.58 |                                 |            |                   |   |  
|Granted                      |  | 15,000             |  |                              | 5.52 |                                 |            |                   |   |  
|Forfeited                    |  |                   |  |                              |     |                                 |            |                   |   |  
|Exercised                    |  |                   |  |                              |     |                                 |            |                   |   |  
|                             |  |                    |  |                              |      |                                 |            |                   |   |  
|Outstanding, March 31, 2009  |  | 903,582            |  | $                            | 8.53 |                                 | 5.81 Years |                   | $ | 2
|                             |  |                    |  |                              |      |                                 |            |                   |   |  
|                             |  |                    |  |                             
|Exercisable, March 31, 2009  |  | 871,082            |  | $                            | 8.43 |                                 | 5.68 Years |                   | $ | 
|                             |  |                    |  |                              |      |                                 |            |                   |   |  



|(1) | dollars in thousands
|--- | --------------------



|Note 5. | Fair Value Measurements
|------- | -----------------------

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:



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1stFinancial Services Corporation

Notes to Consolidated Financial
Statements (Unaudited)

March 31, 2009







|        |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include debt and equity securities and derivative contracts that are traded in an active
exchange market, as well as U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|        | 
|Level 2 |  | Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can
be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments, as
well as U.S. Government and agency mortgage backed debt securities and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by
observable market data. This category generally includes certain derivative contracts and impaired loans.
|        | 
|Level 3 |  | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include
financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
For example, this category generally includes certain private equity investments, retained residual interests in securitizations, residential mortgage servicing rights, and highly-structured or long-term derivative contracts.                                                                                                                            

Assets and liabilities measured at fair value on a recurring basis are as follows as of March 31, 2009
(dollars in thousands):



|                                                          |  |                                               |   |                                             |   |                                         |  |   |  
|--------------------------------------------------------- |  | --------------------------------------------- | - | ------------------------------------------- | - | --------------------------------------- |  | - | -
|                                                          |  | Quoted market pricein active markets(Level 1) |   | Significant otherobservableinputs (Level 2) |   | Significantunobservable inputs(Level
3)
|Available-for-sale investments                            |  | $                                             |  |                                             | $ | 85,927                                  |  | $ | 
|                                                          |  |                                               |  
|Mortgage loans held for sale                              |  |                                               |  |                                             |   | 4,402                                   |  |   | 
|                                                          |  |                                               |  
|Impaired loans                                            |  |                                               |  |                                             |   | 11,770                                  |  |   | 
|                                                          |  |                                               |  
|Real estate and other assets acquired through foreclosure |  |                                               |  |                                             |   | 2,236                                   |  |   | 
|                                                          |  |                                               |   |                                             |   |                                         |  |   |  
|Total                                                     |  | $                                             |  |                                             | $ | 104,335                                 |  | $ | 
|                                                          |  |                                               |   |                                             |   |                                         |  |   |  

The Company has no liabilities carried at fair value or measured at fair value on a recurring 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.

The Company has no assets or liabilities whose fair values are measured using level 3 inputs.



|Note 6. | Business Combination
|------- | --------------------

On February 16, 2009, 1st 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 1st 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 for 1.175 1st Financial common shares. The approximate 369,636 stock options outstanding would be
exchanged for options to purchase shares of 1st 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 38.6% and 61.4% for AB&T and 1st 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.



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##### Table of Contents

1stFinancial Services Corporation

Notes to Consolidated Financial
Statements (Unaudited)

March 31, 2009







|Note 7. | Subsequent Event
|------- | ----------------

On Friday, May 1, 2009, the Banks primary correspondent bank (Silverton Bank, N.A.), was closed by the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. The
FDIC created a bridge bank to take over the operations of Silverton Bank. The newly created bank is Silverton Bridge Bank, N.A. The creation of the bridge bank allows its client banks to transition their correspondent banking needs to other
providers with the least amount of disruptions. Mountain 1stis in the process of transitioning our correspondent banking services to other
providers and our customers should see no service disruptions. In addition, the Bank has a restricted equity investment in Silverton Bank in the amount of $423,528 which will be written off during the second quarter of 2009.



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

Introduction

1stFinancial Services Corporation is a North Carolina corporation headquartered in Hendersonville, North Carolina that in May 2008 became the sole owner of all of the capital stock of
Mountain 1st Bank & Trust Company (the Bank). The Bank is a North Carolina state chartered, non-member bank which was organized and incorporated under the laws of the State of North Carolina on April 30, 2004 and began
operations on May 14, 2004. Currently, the Bank conducts business through fifteen full-service branch offices located in ten western North Carolina counties.

Because the Company has no separate operations and conducts no business on its own other than owning the Bank, the discussion contained in this Managements Discussion and Analysis concerns primarily the business of the Bank. However,
because the financial statements are presented on a consolidated basis, the Company and the Bank are collectively referred to herein as the Company unless otherwise noted.

The Bank competes for loans and deposits throughout the markets it serves. The Bank, like other financial institutions, derives most of its revenue from net interest income, which is the difference between the income
it earns from loans and securities minus the interest expense it incurs on deposits and borrowings.

Management has provided the following discussion and
analysis to address information about the Companys financial condition and results of operations which may not otherwise be apparent from the financial statements included in this report. Reference should be made to those statements for an
understanding of the following discussion and analysis. The following discussion and analysis should be read in conjunction with the financial statements of the Company and the notes thereto located herein and in the Companys filing on Form
10-K for the year ended December 31, 2008.

Factors That May Affect Future Results

The following discussion contains certain forward-looking statements about the Companys financial condition and results of operations, which are subject to certain
risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Those statements may be identified by the use of terms such as may, will,
should, could, plans, intends, anticipates, expects, believes, estimates, predicts, forecasts, potential or
continue, or similar terms or the negative of these terms, or other statements concerning opinions or judgments of our management about future events. Readers are cautioned not to place undue reliance on these forward-looking statements,
which reflect managements judgment only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events and



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1stFinancial Services Corporation

Managements Discussion and Analysis

March 31, 2009







circumstances that arise after the date hereof. Factors that may cause actual results to differ materially from those contemplated by such forward looking
statements include, among others, the following possibilities: (1) projected business increases in connection with the implementation of our business plan are lower than expected; (2) competitive pressure among financial services companies
increases significantly; (3) expenses in general are greater than expected; (4) general economic conditions, in the markets in which the Company does business, are less favorable than expected; (5) risks inherent in making loans,
including repayment risks and risks associated with collateral values, are greater than expected; (6) changes in the interest rate environment reduce interest margins and affect funding sources; (7) changes in market rates and prices may
adversely affect the value of financial products; (8) any inability to generate liquidity necessary to meet loan demand or other cash needs; (9) any inability to accurately predict the adequacy of the loan loss allowance needs;
(10) legislation or regulatory requirements or changes that could adversely affect the businesses in which the Company is engaged; (11) decision to change the business mix of the Company; and (12) factors discussed in reports
previously filed by the Bank with the Federal Deposit Insurance Corporation and now filed by the Company with the Securities and Exchange Commission from time to time affect the Companys financial condition and results of operations.

Critical Accounting Policies

Allowance for
Loan Losses. The Companys most significant critical accounting policy is the determination of the Banks allowance for loan losses. A critical accounting policy is one that is both very important to the portrayal of the Company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 actual future loan losses differ significantly from those assumptions used in making a determination, the allowance for loan losses and resultant provisions for loan losses could materially impact the
Company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 audited financial statements for the year ended December 31, 2008 contained in the Companys filing on Form 10-K.

Off-Balance Sheet Arrangements.The Company 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 would be expected to be considered material to investors.

General Economic Conditions

Throughout most of its history,
the Bank has operated in an environment of rising interest rates. However, during the last four months of 2008, the Federal Reserves Federal Open Market Committee (FOMC) began to dramatically reduce short term interest rates in response to a
weakening economy. Heretofore, management had structured the Companys balance sheet to be relatively interest rate neutral within a normal band of interest rate fluctuations from 100 to 200 basis points up or down. However, the Federal Reserve
has elected to reduce rates in an extreme fashion that is unprecedented in recent history. As a result, the slightly asset sensitive bias maintained by the Company since its inception has become more pronounced as rates have rapidly fallen over the
past nine or ten months. Since the first drop in rates in late September 2007, rates have decreased 425 basis points (4.25%). Approximately seventy-three percent (73%) of the Companys loan portfolio are variable rate loans. The rates on
these loans dropped further and faster than did the costs associated with the Companys deposits. As a result, the Companys net interest margin declined substantially during 2008. The Companys net interest margin averaged 4.01%
during 2007 while the 2008 net interest margin fell to 3.24% as a result of the falling rate environment. As a result of the declining interest rate environment the net interest margins fell to 3.25% and 3.36%, respectively, for the three month
periods ended March 31, 2009 and 2008, respectively. As the Companys CD portfolio re-prices over the next several months, management expects the Companys net interest margin to improve somewhat. However, due to the low absolute
level of rates currently being experienced and unusually high CD rates within our local markets, we anticipate margin compression to continue throughout the remainder of 2009. We think this will likely prevent margins from expanding to 2007 levels
until interest rates once again begin to rise.



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##### Table of Contents

1stFinancial Services Corporation

Managements Discussion and Analysis

March 31, 2009







Overview

The Companys primary market area is located in the mountain region of southwestern North Carolina and predominately encompasses the Asheville/Hendersonville MSA. The principal business sectors in this region include service companies
directly or indirectly linked to tourism which is the largest economic driver of the region, small to mid-sized manufacturing companies, real estate development, particularly relating to the ongoing growth of the area as a retirement and second home
destination, the arts and crafts industry and to a lesser degree, agriculture.

The Bank believes that its current base of business is relatively well
diversified as is the general economic base of the region as a whole. The only concentration identified by management within the Banks lending portfolio is in loans secured by real estate. At March 31, 2009, loans collateralized by real
estate comprise approximately 83.0% of the Banks total loan portfolio. This total includes $161.7 million in loans classified as construction or acquisition and development and $192.0 million in loans classified as commercial real estate,
representing 27.4% and 32.6%, respectively of the total portfolio. Management believes that concentration risk within this sector of the loan portfolio is mitigated by the mix of different types of real estate held as collateral. These include
residential, multifamily and commercial properties.

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 with high loan-to-value ratios. In prior quarters, management had determined that the Bank had a
concentration of real estate loans that exceeded the regulatory guidelines for loan-to-value ratios. As a result, management determined to reduce this risk factor within the loan portfolio. At December 31, 2008 and March 31, 2009, loans
exceeding regulatory loan to value guidelines had been reduced to 55.0% and 62.7%, respectively, of risk-based capital, well below the regulatory threshold of 100% of capital.

Recently, banking regulators have continued to issue guidance to banks concerning their perception of general risks levels associated with higher concentrations of commercial real estate loans (CRE) as a
proportion of total loans and as a percentage of capital within bank loan portfolios. It remains managements understanding that regulatory interpretations of this guidance would not necessarily prohibit future growth for banks with
concentrations of CRE, however, additional monitoring and risk management procedures are likely to be required for portfolios with higher levels of CRE and additional CRE lending may also be curtailed. Management has continued efforts to refine
enhanced monitoring systems pertaining to the Banks CRE portfolio, with particular emphasis on construction and acquisition and development lending which comprises a material portion of the Banks CRE portfolio. In addition to continued
enhanced monitoring of this portion of the loan portfolio, management has curtailed lending to new acquisition and development projects and anticipates this component of the portfolio to decline substantially over time.

The Bank has experienced growth of approximately 1.4% during the first three months of 2009. However, overall growth has now been purposely slowed in response to
uncertainties with respect to the national economy, national and local real estate markets, the domestic interest rate environment and global currency markets. A sizeable portion of our outstanding loans were attributable to a relationship that has
been established with Live Oak Bank, a de novo state chartered bank in eastern North Carolina. The Bank has worked with this bank during its organization phase to originate loans to their existing customers and has agreed to sell these loans back to
the new institution once they began operations. At March 31, 2009, such loans had been reduced from a high of over $80 million to approximately $33 million. Management had anticipated the entire transfer of these loans would commence in the
second quarter of 2008 and be completed by the end of the fourth quarter. However, it is now expected that will be allowed to retain these loans indefinitely. It is anticipated that this will be an ongoing relationship and that the Bank will
continue to participate in the lending activities of Live Oak on a regular basis.

The Companys primary source of revenue is derived from interest
income produced through traditional banking activities such as generating loans and earning interest on securities. Additional sources of income are derived from fees on deposit accounts and from mortgage origination services. Deposit and loan
growth as well as expansion of the Banks branch network have continued to be managements primary goals to date. It is expected that expansion of the Companys geographic footprint will continue to be a primary focus for the
foreseeable future. However, as discussed above, management has slowed the growth of the Banks core loan portfolio in response to current economic trends. We expect a considerably slower growth rate over the next four to six quarters as the
duration and depth of the current economic slowdown becomes more ascertainable.



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1stFinancial Services Corporation

Managements Discussion and
Analysis

March 31, 2009







In its first four years of operation, fifteen full-service branch offices have been opened. Managements
business plan has been predicated upon the relatively rapid growth and establishment of an initial branch network within the Companys primary delineated market area. As a part of this growth strategy, management expects to continue to open new
branch offices to augment the current branch network over at least the next two years while continuing to grow existing branches and markets. Additionally, management has begun to consider other avenues for expansion in addition to de novo
branching. Assuming the effective execution of the Companys current strategies, management expects its anticipated growth and expansion to have a favorable long-term impact on the Companys profitability and shareholder value. However,
management does expect such growth to constrain near-term earnings in and of itself and also presents unique managerial challenges. It remains managements opinion that attaining an above average growth rate while continuing to grow earnings is
a sound and achievable business plan which should enhance the Companys overall franchise value over time. To that end, the Company recently executed a definitive merger agreement with AB&T as described in Note 6 of this report.

Maintaining sound asset quality is another key focal point for the Company as it grows. To date, the Company has been able to maintain favorable asset quality ratios.
However as a result of the current economic environment, the Bank experienced an increase in nonperforming assets (nonaccruing loans and accruing loans past due 90 or more days) during the first quarter. This development is further discussed under
the heading Asset Quality below. The business of lending to small businesses and consumers carries with it significant credit risks, which must be continually managed. Management monitors asset quality and credit risk on an ongoing basis and
fully expects to experience credit losses in the future. While it is managements goal to minimize credit losses to the extent possible, as the Companys loan portfolio continues to grow and season, management expects loan losses to
increase. Management continues to engage third party consultants to assist in monitoring and evaluating the quality of the portfolio.

Financial
Overview

The Company experienced continued asset growth during the three months of 2009. At March 31, 2009, the Companys assets totaled
$716.9 million compared to $707.1 million on December 31, 2008, an increase of $9.8 million or 1.39%. As discussed previously, management has proactively slowed overall growth in response to current economic conditions. However, in addition to
the current anticipated merger with AB&T, we do expect to continue to grow both existing retail offices as well as selectively adding new offices as opportunities to do so arise. Investment securities decreased by $891 thousand or 1.0%, from
$87.6 million at December 31, 2008 to $86.7 million at March 31, 2009. During the first three months of 2009, gross loans increased by $5.7 million, or 0.97% from $584.0 million on December 31, 2008 to $589.7 million at March 31,
2009. During the same period, deposits decreased slightly to $589.4 million on March 31, 2009 compared with $591.0 million at the end of 2008. The increase in loans was the major factor in the Companys increase in total borrowings which
increased by $11.0 million, or 22.9% from $48.0 million at December 31, 2008 to $59.0 million at March 31, 2009. Managements goal remains to attain overall balanced growth of the Companys balance sheet to the extent possible.
At March 31, 2009, net loan growth had out paced deposit growth by $7.3 million, principally as a result of the loans currently being warehoused for Live Oak Bank as discussed elsewhere in this discussion. The Companys loan to asset ratio
decreased slightly to 82.3 % from 82.6% at December 31, 2008, which is slightly above managements targeted range of 75% to 82%. Excluding loans warehoused for Live Oak, the ratio of loans to assets would have been 77.7%.

During the first quarter of 2009, the Companys net income decreased $414 thousand or 52.5% as compared with the same period during 2008. The primary causal
factor of this decline was the severe decline in the Banks net interest margin as a result of the dramatic reduction in short term interest rates orchestrated by the Federal Reserve beginning in the fourth quarter of 2008. As compared with the
Banks net interest margin in the first quarter of 2009, the Banks margin for the same period in 2008 declined by more than 11 basis points. Management expects margins to remain depressed over the remainder of 2009. Margin compression
based on the current low rate environment and the unusually high CD rates being paid by competitors within the Banks markets are expected to limit the recovery of the Banks margins until markets settle further and/or short term interest
rates begin to rise. Basic and diluted earnings per share totaled $0.02 for the first quarter of 2009. This compares with $0.16 and $0.15 respectively for the first quarter of 2008.



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##### Table of Contents

1stFinancial Services Corporation

Managements Discussion and
Analysis

March 31, 2009







Investments

The Company maintains a portfolio of investment securities as part of its asset/liability and liquidity management programs which emphasize effective yields and maturities to match its needs. The composition of the investment portfolio is
examined periodically and appropriate realignments are initiated to meet liquidity and interest rate sensitivity needs for the Company.

Held to maturity
securities are bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity and which are reported at cost, adjusted by premiums and discounts that are recognized in interest income using the interest
method over the period to maturity or to call dates. Investments in held to maturity securities at March 31, 2009 and December 31, 2008 are as follows:



|                     |  |                |     |                  |   |               |  |           |     |  |   |    
|-------------------- |  | -------------- | --- | ---------------- | - | ------------- |  | --------- | --- |  | - | ---
|                     |  | March 31, 2009 |     | December 31,2008
|                     |  | AmortizedCost  |     | FairValue        |   | AmortizedCost |  | FairValue
|Municipal securities |  | $              | 807 |                  | $ | 813           |  | $         | 824 |  | $ | 831

Available for sale securities are reported at fair value and consist of bonds, notes, debentures and certain
equity securities not classified as trading securities or as held to maturity securities. Investments in available for sale securities at March 31, 2009 and December 31, 2008 are as follows (dollars in thousands):



|                                 |  |                   |        |                 |   |                  |  |           |       |  |   |       
|-------------------------------- |  | ----------------- | ------ | --------------- | - | ---------------- |  | --------- | ----- |  | - | ------
|                                 |  | March 31, 2009   
|                                 |  | AmortizedCost     |        | UnrealizedGains |   | UnrealizedLosses |  | FairValue
|Available for Sale               |  |                   |        |                 |   |                  |  |           |       |  |   |       
|                                 |  |                   |        |                
|U.S. Government agencies         |  | $                 | 14,394 |                 | $ |                 |  | $         | 359   |  | $ | 14,035
|Government-sponsored enterprises |  |                   | 3,023  |                 |   | 1                |  |           |      |  |   | 3,024 
|Mortgage backed securities       |  |                   | 68,749 |                 |   | 385              |  |           | 266   |  |   | 68,868
|                                 |  |                   |        |                 |   |                  |  |           |       |  |   |       
|                                 |  | $                 | 86,166 |                 | $ | 386              |  | $         | 625   |  | $ | 85,927
|                                 |  |                   |        |                 |   |                  |  |           |       |  |   |       
|                                 | 
|                                 |  | December 31, 2008
|                                 |  | AmortizedCost     |        | UnrealizedGains |   | UnrealizedLosses |  | FairValue
|Available for Sale               |  |                   |        |                 |   |                  |  |           |       |  |   |       
|                                 |  |                   |        |                
|U.S. Government agencies         |  | $                 | 15,829 |                 | $ |                 |  | $         | 403   |  | $ | 15,426
|Government-sponsored enterprises |  |                   | 2,000  |                 |   |                 |  |           |      |  |   | 2,000 
|Mortgage backed securities       |  |                   | 69,762 |                 |   | 224              |  |           | 611   |  |   | 69,375
|                                 |  |                   |        |                 |   |                  |  |           |       |  |   |       
|                                 |  | $                 | 87,591 |                 | $ | 224              |  | $         | 1,014 |  | $ | 86,801
|                                 |  |                   |        |                 |   |                  |  |           |       |  |   |       

Unrealized holding gains and losses, net of tax, on available for sale securities are reported as a net amount in
a separate component of stockholders equity. Realized gains and losses on the sale of available for sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the
interest method over the period to maturity or to call dates.

Declines in the fair value of individual held to maturity and available for sale securities
below cost that are other than temporary are reflected as write-downs of the individual securities to fair value. Related write-downs are included in earnings as realized losses. To date the Company has experienced no declines in the value of
securities that were considered to be other than temporary in nature.



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##### Table of Contents

1stFinancial Services Corporation

Managements Discussion and
Analysis

March 31, 2009







The following table details unrealized losses and related fair values in the Companys available for sale
investment securities portfolio. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2009 (dollars in thousands).



|                                      |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|------------------------------------- |  | ------------------- | ------ | ----------------- | - | --------- |  | ---------------- | ----- | --------- | - | ---------------- |  | - | ------ |  | - | ---
|                                      |  | Less Than 12 Months |        | 12 Months or More |   | Total    
|                                      |  | FairValue           |        | UnrealizedLosses  |   | FairValue |  | UnrealizedLosses |       | FairValue |   | UnrealizedLosses
|U.S. Government agencies              |  | $                   | 5,923  |                   | $ | 141       |  | $                | 8,612 |           | $ | 218              |  | $ | 14,535 |  | $ | 359
|Mortgage backed securities            |  |                     | 24,371 |                   |   | 250       |  |                  | 1,207 |           |   | 16               |  |   | 25,578 |  |   | 266
|                                      |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    
|Total temporarily impaired securities |  | $                   | 30,294 |                   | $ | 391       |  | $                | 9,819 |           | $ | 234              |  | $ | 40,113 |  | $ | 625
|                                      |  |                     |        |                   |   |           |  |                  |       |           |   |                  |  |   |        |  |   |    

Seventeen individual securities were in a continuous unrealized loss position for twelve months or more at
March 31, 2009. 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
Companys ability and intent to hold these securities to maturity, these securities are not considered to be permanently impaired.

Loans

Net loans outstanding (excluding loans held for sale) were $575.5 million on March 31, 2009, compared to $570.8 million on December 31,
2008, an increase of $4.7 million or 0.82%. The major components of loans on the balance sheet at March 31, 2009 and December 31, 2008 are illustrated in the following table (dollars in thousands):



|                                |  |               |         |   |                  |   |         |  
|------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                |  | March 31,2009 |         |   | December 31,2008 |  
|Real estate:                    |  |               |         |   |                  |   |         |  
|Construction and development    |  | $             | 161,736 |   |                  | $ | 165,017 |  
|1-4 family residential          |  |               | 123,284 |   |                  |   | 117,835 |  
|Multifamily                     |  |               | 7,718   |   |                  |   | 9,018   |  
|Nonfarm, nonresidential         |  |               | 192,032 |   |                  |   | 193,010 |  
|                                |  |               |         |   |                  |   |         |  
|Total real estate               |  |               | 484,770 |   |                  |   | 484,880 |  
|Commercial and industrial loans |  |               | 93,886  |   |                  |   | 88,471  |  
|Consumer                        |  |               | 6,629   |   |                  |   | 6,505   |  
|                                |  |               |         |   |                  |   |         |  
|                                |  |               | 585,285 |   |                  |   | 579,856 |  
|Allowance for loan losses       |  |               | (9,766  | ) |                  |   | (9,013  | )
|                                |  |               |         |   |                  |   |         |  
|                                |  | $             | 575,519 |   |                  | $ | 570,843 |  
|                                |  |               |         |   |                  |   |         |  

Management expects that loan growth will be more muted during the remainder of 2009 as a result of the economic
uncertainties expected to persist for at least the duration of 2009.

Deposits

One of the primary goals for the Company is to increase non-CD deposits as a percentage of total deposits. By so doing, management believes this will enhance both the profitability and franchise value of the Company
and will further solidify the banking relationships of the Banks customer base. Beginning the first half of 2008, significant progress has been made toward this goal. At March 31, 2009, approximately 59.4% of the Banks total
deposits were comprised of CDs. At the same date one year ago, that percentage amounted to 61.2%. Total deposits on March 31, 2009 were $589.4 million compared to $591 million on December 31, 2008, a decrease of $1.6 million or 0.28%.
Demand deposits decreased $2.2 million or 3.7% during the three months of 2009, to end the period at $55.8 million while NOW accounts increased by $753 thousand or 1.3%. Through the first three months of 2009, savings account balances increased by
$4.6 million or 6.0% to end the period at $81.5 million compared to $76.9 million at December 31, 2008. Money market account balances increased by $9.4 million or $26.3% for the three months ended March 31, 2009 to end the period at $45.2
million, compared to $35.8 at December 31, 2008. Certificates of deposit decreased during the first three months of 2009, decreasing $14.2 million or 3.9%.



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##### Table of Contents

1stFinancial Services Corporation

Managements Discussion and
Analysis

March 31, 2009







Certificates under $100 thousand remained relatively static while jumbo CDs decreased $14.3 million or 8.1%. The Companys DDA to total deposit ratio
decreased slightly from 9.8% at December 31, 2008 to 9.5% at March 31, 2009 while the Companys CD to total deposit ratio decreased to 59.4% from 61.7% during the same period.

Borrowings

As of March 31, 2009, the Company had total
borrowings of $60 million compared to $49.4 million at December 31, 2008, an increase of $10.6 million or 21.5%. During the first quarter of 2009, the Bank entered into a borrowing arrangement through the Federal Reserve Banks (FRB)
discount window which offered more advantageous rates than the Federal Homeloan Bank of Atlanta (FHLB). Consequently, the $48.0 million in borrowings at the FHLB at December 31, 2008 were replaced by advances from the FRBs discount
window. These advances totaled $59.0 million at March 31, 2009. Securities sold under agreements to repurchase balances were $966 thousand at March 31, 2009, down from $1.1 million at December 31, 2008. As discussed previously, the
Company has entered into a relationship with Live Oak Bank to warehouse a portion of their loan production. The Bank has relied primarily upon wholesale funding sources to fund these loans. At March 31, 2009 these loans totaled approximately
$33.1 million and accounted for the majority of the usage of the outstanding borrowings.

Stockholders Equity

Principally as a result of the Companys earnings for the first three months of 2009, stockholders equity increased to $63.1 million or approximately 8.8% of
total assets at March 31, 2009 as compared to $62.6 million or 8.9% of total assets at December 31, 2008. A $363 thousand increase in unrealized losses on available for sale securities (net of income taxes) and a $207 thousand decrease
resulting from the payment of our preferred dividend were the other primary factors contributing to the change in stockholders equity.

Plans are
also being formed as to the form and amount of an additional equity infusion. Given the state of equity markets currently, a capital raise during the next six months is expected to be limited. Management currently anticipates any such capital
raising effort which could occur in the next twelve months to range between $5 million to $10 million. While management expects any capital raise conducted any time in the future to be successfully completed, it should be noted that if additional
equity cannot be generated, this could adversely affect the rate of future growth of the Company.

Although an initial annual cash dividend was paid on
common stock during the first quarter of 2008, management expects the Company to maintain an above average growth rate for the foreseeable future. Therefore, it is anticipated that future cash dividends on common stock, if any, will continue to be
nominal and that the majority of the Companys earnings will be retained to support expected growth. No cash dividends, other than those required on the preferred stock issued under TARP have been declared to date during 2009. The actual
capital amounts and ratios for the Company and the Bank at March 31, 2009 are presented in the following table (dollars in thousands):



|                                         |  |        |        |       |                        |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|---------------------------------------- |  | ------ | ------ | ----- | ---------------------- | - | ------ | -------------------------------------------------------------------- | ------ |  | ---- | ------ |  | ----- | ------ |  | ----- | -
|                                         |  | Actual |        |       | MinimumCapitalRequired |   |        | MinimumTo Be WellCapitalized UnderPrompt
CorrectiveAction Provisions |       
|                                         |  | Amount |        | Ratio |                        |   | Amount |                                                                      | Ratio  |  |      | Amount |  | Ratio |       
|March 31, 2009                           |  |        |        |       |                        |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Total Capital (to Risk-Weighted Assets)  |  |        |        |       |                        |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Company                                  |  | $      | 70,282 |       | 12.59                  | % |        | $                                                                    | 44,664 |  | 8.00 | %      |  | $     | 55,829 |  | 10.00 | %
|Bank                                     |  | $      | 64,981 |       | 11.64                  | % |        | $                                                                    | 44,662 |  | 8.00 | %      |  | $     | 55,828 |  | 10.00 | %
|Tier I Capital (to Risk-Weighted Assets) |  |        |        |       |                        |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Company                                  |  | $      | 63,269 |       | 11.33                  | % |        | $                                                                    | 22,332 |  | 4.00 | %      |  | $     | 33,498 |  | 6.00  | %
|Bank                                     |  | $      | 57,968 |       | 10.38                  | % |        | $                                                                    | 22,331 |  | 4.00 | %      |  | $     | 33,497 |  | 6.00  | %
|Tier I Capital (to Average Assets)       |  |        |        |       |                        |   |        |                                                                      |        |  |      |        |  |       |        |  |       |  
|Company                                  |  | $      | 63,269 |       | 8.93                   | % |        | $                                                                    | 28,340 |  | 4.00 | %      |  | $     | 35,425 |  | 5.00  | %
|Bank                                     |  | $      | 57,968 |       | 8.18                   | % |        | $                                                                    | 28,340 |  | 4.00 | %      |  | $     | 35,425 |  | 5.00  | %



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##### Table of Contents

1stFinancial Services Corporation

Managements Discussion and
Analysis

March 31, 2009







Asset Quality

The provision for loan losses charged to operations during the first three months of 2009 totaled $2.3 million, while net charge offs during the period amounted to $1.6 million, resulting in a net increase in the allowance for loan losses
of $753 thousand to $9.8 million or 1.67% of period end loans, excluding loans held for sale at March 31, 2009. The increase in the loan loss allowance was due to an increase in delinquencies in the loan portfolio. At March 31, 2009, the
Company had approximately $11.8 million in loans 30 to 90 days delinquent, non-accruing loans totaling $11.8 million, $2.2 million in foreclosed assets and $44 thousand in repossessed personal property. At March 31, 2009, there were no loans
past due over 90 days and still accruing interest. Management has taken what it believes to be a relatively aggressive stance on identifying problems with credits and placing them on non-accruing status relatively early in its evaluation process. As
a result, non-performing assets increased during the first quarter. Management has evaluated these credits and their ultimate collectibility and believes that any potential losses which may be incurred on these credits in the future are manageable
and are incorporated into its analysis of the adequacy of the Banks existing allowance for loan losses.

Impaired Loans. Loans
for which it is probable that the ultimate payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. Once a loan is identified as individually impaired, management
measures impairment in accordance with SFAS 114, Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair value of impaired loans is estimated using one of several methods including collateral value, market value of similar
debt, enterprise value, liquidation value and discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investment in such loans. At
March 31, 2009, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance is established based on the fair value of collateral require
classification in the fair value hierarchy. Collateral values for impaired loans are estimated using Level 2 inputs based on independent appraisals. At March 31, 2009, impaired loans totaled $11.8 million. Allocations within the Banks
allowance for loan losses specifically ascribed to these individual loans totaled $2.9 million in the aggregate.

Credit loss experience for the three
months ended March 31, 2009 and 2008 is presented below (dollars in thousands).



18



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##### Table of Contents

1stFinancial Services Corporation

Managements Discussion and
Analysis

March 31, 2009







Loan Loss and Recovery



|                                                                             |  |                                      |         |   |      |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ---- | - | ------- | -
|                                                                             |  | For the Three Months Ended March 31, |        
|                                                                             |  | 2009                                 |         |   | 2008 |  
|Balance at beginning of the period                                           |  | $                                    | 9,013   |   |      | $ | 7,571   |  
|Provision for loan losses                                                    |  |                                      | 2,305   |   |      |   | 685     |  
|Charge-offs                                                                  |  |                                      |        |   |      |   |        |  
|Construction and development                                                 |  |                                      | 918     |   |      |   |         |  
|1-4 family residential                                                       |  |                                      | 539     |   |      |   |        |  
|Multifamily                                                                  |  |                                      |        |   |      |   |        |  
|Nonfarm, non residential                                                     |  |                                      |        |   |      |   |        |  
|                                                                             |  |                                      |         |   |      |   |         |  
|Total real estate                                                            |  |                                      | 1,457   |   |      |   |        |  
|Commercial                                                                   |  |                                      | 89      |   |      |   | 7       |  
|Consumer                                                                     |  |                                      | 7       |   |      |   |        |  
|                                                                             |  |                                      |         |   |      |   |         |  
|Total charge-offs                                                            |  |                                      | 1,553   |   |      |   | 7       |  
|Recoveries                                                                   |  |                                      |         |   |      |   |         |  
|Construction and development                                                 |  |                                      |        |   |      |   |        |  
|1-4 family residential                                                       |  |                                      | 1       |   |      |   |        |  
|Multifamily                                                                  |  |                                      |        |   |      |   |        |  
|Nonfarm, non residential                                                     |  |                                      |        |   |      |   |        |  
|                                                                             |  |                                      |         |   |      |   |         |  
|Total real estate                                                            |  |                                      | 1       |   |      |   |        |  
|Commercial                                                                   |  |                                      |         |   |      |   | 1       |  
|Consumer                                                                     |  |                                      |        |   |      |   | 3       |  
|                                                                             |  |                                      |         |   |      |   |         |  
|Total recoveries                                                             |  |                                      | 1       |   |      |   | 4       |  
|                                                                             |  |                                      |         |   |      |   |         |  
|Net charge-offs                                                              |  |                                      | 1,552   |   |      |   | 3       |  
|                                                                             |  |                                     
|Balance at end of period                                                     |  | $                                    | 9,766   |   |      | $ | 8,253   |  
|                                                                             |  |                                      |         |   |      |   |         |  
|Average loans, excluding loans held for sale                                 |  | $                                    | 580,831 |   |      | $ | 537,847 |  
|                                                                             |  |                                      |         |   |      |   |         |  
|Period end loans, excluding loans held for sale                              |  | $                                    | 585,285 |   |      | $ | 561,919 |  
|                                                                             |  |                                      |         |   |      |   |         |  
|Net charge-offs to average loans, excluding loans held for sale              |  |                                      | 0.27    | % |      |   | 0.00    | %
|                                                                             |  |                                      |         |   |      |   |         |  
|Allowance for loan losses to period end loans, excluding loans held for sale |  |                                      | 1.67    | % |      |   | 1.47    | %
|                                                                             |  |                                      |         |   |      |   |         |  

The level of the allowance for loan losses is established based upon managements evaluation of portfolio
composition, current and projected national and local economic conditions and results of independent reviews of the loan portfolio by internal and external examination. Management recognizes the inherent risk associated with commercial and consumer
lending, including whether or not a borrowers actual results of operations will correspond to those projected by the borrower when the loan was funded; economic factors such as the number of housing starts and fluctuations in interest rates;
possible depression of collateral values; and completion of projects within the original cost and time estimates. As a result, management continues to actively monitor the Companys asset quality and lending policies. Management currently
believes that its loan portfolio is diversified so that a downturn in a particular market or industry will not have a crucially material impact on the loan portfolio as a whole or the Companys financial condition. However, given the current
conditions observed within real estate markets in other parts of the country, no assurances can be given that if local real estate markets undergo similar conditions, potential losses sustained by the Company may not be material.

Based on its current evaluation and upon data presently available, management believes that the Companys allowance for loan losses is adequate.



19



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##### Table of Contents

1stFinancial Services Corporation

Managements Discussion and
Analysis

March 31, 2009







Results of Operations

Three Months Ended March 31, 2009 compared to the Three Months Ended March 31, 2008

Net income for
the first quarter of 2009 totaled $375 thousand or $0.02 per basic weighted average share and diluted share compared to $789 thousand or $0.16 per basic share and $0.15 per diluted share for the three months ended March 31, 2008 representing a
decrease of $414 thousand or 52.5%. Interest income for the first quarter of 2009 totaled $8.7 million while interest expense totaled $3.2 million, resulting in net interest income of $5.5 million for the quarter. This compares to the same period in
2008 when interest income totaling $10.3 million, combined with interest expense of $5.2 million, resulted in net interest income of $5.1 million. The decline in interest income quarter over quarter is attributable to the decline in the
Companys net interest margin, which decreased from 3.36% for the three months ended March 31, 2008 to 3.25% for the three months ended March 31, 2009.

Provisions for loan losses for the quarter totaled $2.3 million compared to $685 thousand for the same period in 2008. Due to fluctuations in net income resulting from varying growth rates and differing marginal tax
rates between 2009 and 2008, management uses a non-GAAP measure, pre-tax, pre-provision income, to provide a more comparable view of earnings. During the first quarter of 2009, pre-tax, pre-provision income totaled $2.7 million with provision for
loan losses amounting to $2.3 million and tax expense totaling $34 thousand. This compares to $1.9 million, $685 thousand and $432 thousand, respectively for the same period in 2008, resulting in an increase in pre-tax, pre-provision income of $808
thousand or 42.4%.

Noninterest income for the quarter amounted to $1.6 million and was comprised primarily of fees generated from mortgage origination
activities of $417 thousand and service charges on deposit accounts of $502 thousand. This compares favorably with the first quarter of 2008 during which time the Company generated noninterest income of $1.4 million, of which $579 thousand was
generated through mortgage origination activities and $511 thousand resulted from fees and service charges on deposit accounts. Noninterest income for the three months ended March 31, 2009 also included $142 thousand from increases in the cash
surrender value of bank-owned insurance policies and $387 thousand in realized gains from the sale of investment securities. Noninterest expense amounted to $4.4 million during the quarter, comprised of compensation expense totaling approximately
$2.3 million which accounts for 52.3% of noninterest expenditures. Marketing and advertising expenses during the quarter totaled $166 thousand, which declined by $113 thousand or 40.5% from the same quarter in 2008. Data processing and
telecommunication expense amounted to $257 thousand or 5.8% of noninterest expense for the period while occupancy expense increased to $388 thousand or 8.8%. Income tax expense for the quarter ended March 31, 2009 totaled $34 thousand compared
to $432 thousand for the same period in 2008.



20



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##### Table of Contents

1stFinancial Services Corporation

Managements Discussion and
Analysis

March 31, 2009







The following tables illustrate the Companys yield on earning assets and cost of funds for the three months
period ending March 31, 2009 and 2008.

Average Balances and Net Interest Income

(Dollars in thousands)



|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|-------------------------------------------------------------------------------- |  | ------------------------------------ | ------- | - | ------------------------- | - | ------------------ |  | ---- | -------------- |  | - | ------------------------- | - | ------------------ | - | ------ |  | ---- | -
|                                                                                 |  | For the Three Months Ended March 31, |        
|                                                                                 |  | 2009                                 |         |   | 2008                      |  
|                                                                                 |  | AverageBalance                       |         |   | InterestIncome/Expense(2) |   | AverageRate (1)(3) |  |      | AverageBalance |  |   | InterestIncome/Expense(2) |   | AverageRate (1)(3) |  
|Interest-earning assets:                                                         |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Loans, including loans held for sale                                             |  | $                                    | 583,734 |   |                           | $ | 7,797              |  | 5.34 | %              |  | $ | 542,983                   |   |                    | $ | 9,542  |  | 7.03 | %
|Investment securities                                                            |  |                                      | 90,677  |   |                           |   | 908                |  | 4.01 | %              |  |   | 58,441                    |   |                    |   | 733    |  | 5.02 | %
|Federal funds sold                                                               |  |                                      | 4,006   |   |                           |   | 2                  |  | 0.20 | %              |  |   |                          |   |                    |   |       |  | 0    | %
|Interest-earning cash deposits                                                   |  |                                      | 29      |   |                           |   |                   |  | 0.15 | %              |  |   | 35                        |   |                    |   |       |  | 3.65 | %
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Total interest-earning assets                                                    |  |                                      | 678,446 |   |                           |   | 8,707              |  | 5.13 | %              |  |   | 601,459                   |   |                    |   | 10,275 |  | 6.83 | %
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |  
|Noninterest-earning assets:                                                      |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Cash and due from banks                                                          |  |                                      | 10,144  |   |                           |   |                    |  |      |                |  |   | 9,543                     |   |                    |   |        |  |      |  
|Property and equipment                                                           |  |                                      | 7,038   |   |                           |   |                    |  |      |                |  |   | 6,737                     |   |                    |   |        |  |      |  
|Interest receivable and other                                                    |  |                                      | 12,873  |   |                           |   |                    |  |      |                |  |   | 8,777                     |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Total noninterest-earning assets                                                 |  |                                      | 30,055  |   |                           |   |                    |  |      |                |  |   | 25,057                    |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Total assets                                                                     |  | $                                    | 708,501 |   |                           |   |                    |  |      |                |  | $ | 626,516                   |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |  
|Interest-bearing liabilities:                                                    |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|NOW accounts                                                                     |  |                                      | 55,207  |   |                           |   | 54                 |  | 0.39 | %              |  |   | 53,104                    |   |                    |   | 179    |  | 1.35 | %
|Money markets                                                                    |  |                                      | 37,225  |   |                           |   | 155                |  | 1.67 | %              |  |   | 29,063                    |   |                    |   | 202    |  | 2.78 | %
|Savings deposits                                                                 |  |                                      | 78,695  |   |                           |   | 289                |  | 1.47 | %              |  |   | 58,213                    |   |                    |   | 419    |  | 2.88 | %
|Time deposits                                                                    |  |                                      | 353,028 |   |                           |   | 2,639              |  | 2.99 | %              |  |   | 340,110                   |   |                    |   | 4,069  |  | 4.79 | %
|Federal funds purchased/repurchase agreements                                    |  |                                      | 1,453   |   |                           |   | 3                  |  | 0.83 | %              |  |   | 13,556                    |   |                    |   | 123    |  | 3.63 | %
|Borrowings                                                                       |  |                                      | 59,707  |   |                           |   | 50                 |  | 0.33 | %              |  |   | 26,264                    |   |                    |   | 226    |  | 3.44 | %
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Total interest-bearing liabilities                                               |  |                                      | 585,315 |   |                           |   | 3,190              |  | 2.18 | %              |  |   | 520,310                   |   |                    |   | 5,218  |  | 4.01 | %
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |  
|Noninterest-bearing liabilities:                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Demand deposits                                                                  |  |                                      | 60,957  |   |                           |   |                    |  |      |                |  |   | 52,852                    |   |                    |   |        |  |      |  
|Interest payable and other                                                       |  |                                      | 4,238   |   |                           |   |                    |  |      |                |  |   | 6,361                     |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Total noninterest-bearing liabilities                                            |  |                                      | 65,195  |   |                           |   |                    |  |      |                |  |   | 59,213                    |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Total liabilities                                                                |  |                                      | 650,510 |   |                           |   |                    |  |      |                |  |   | 579,523                   |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |  
|Stockholders equity                                                             |  |                                      | 57,991  |   |                           |   |                    |  |      |                |  |   | 49,633                    |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|Total liabilities and stockholders equity                                       |  | $                                    | 708,501 |   |                           |   |                    |  |      |                |  | $ | 629,156                   |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |  
|Net interest income and interest rate spread                                     |  |                                      |         |   |                           | $ | 5,517              |  | 2.95 | %              |  |   |                           |   |                    | $ | 5,057  |  | 2.82 | %
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |  
|Net yield on average interest-earning assets                                     |  |                                      |         |   |                           |   |                    |  | 3.25 | %              |  |   |                           |   |                    |   |        |  | 3.36 | %
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |  
|Ratio of average interest-earning assets to average interest-bearing liabilities |  |                                      | 115.91  | % |                           |   |                    |  |      |                |  |   | 115.60                    | % |                    |   |        |  |      |  
|                                                                                 |  |                                      |         |   |                           |   |                    |  |      |                |  |   |                           |   |                    |   |        |  |      |  



|(1) | Annualized
|--- | ----------

|(2) | Interest income includes deferred loan fees
|--- | -------------------------------------------

|(3) | For amounts under $1 yields are calculated using actual interest income and actual average asset totals not rounded values
|--- | --------------------------------------------------------------------------------------------------------------------------



21



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##### Table of Contents

1stFinancial Services Corporation

Managements Discussion and
Analysis

March 31, 2009







The following tables illustrate the impact of changes in both rate and volume on the net interest income realized by
the Company for the three month periods ending March 31, 2009 and 2008.

Volume and Rate Variance Analysis

(dollars in thousands)



|                                                                           |  |                            |        |   |                                      |   |       |       |  |   |         |   |  |           |      |   |       |   |       |   |  |   |       |  
|-------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------------------ | - | ----- | ----- |  | - | ------- | - |  | --------- | ---- | - | ----- | - | ----- | - |  | - | ----- | -
|                                                                           |  |                            |        |   | For the Three Months Ended March 31, |   |       |       | 
|                                                                           |  | 2009 vs. 2008              |        |   | 2008 vs.2007                         |  
|                                                                           |  | Increase (Decrease) Due to |        |   | Increase (Decrease) Due to           |  
|                                                                           |  | Rate(1)                    |        |   | Volume(1)                            |   |       | Total |  |   | Rate(1) |   |  | Volume(1) |      |   | Total |  
|Interest Income:                                                           |  |                            |        |   |                                      |   |       |       |  |   |         |   |  |           |      |   |       |   |       |   |  |   |       |  
|Loans, including loans held for sale                                       |  |                            | (2,549 | ) |                                      |   | 804   |       |  |   | (1,745  | ) |  |           | (845 | ) |       |   | 2,380 |   |  |   | 1,535 |  
|Investment securities                                                      |  |                            | (105   | ) |                                      |   | 280   |       |  |   | 175     |   |  |           | 34   |   |       |   | (283  | ) |  |   | (249  | )
|Federal funds sold                                                         |  |                            |       |   |                                      |   | 2     |       |  |   | 2       |   |  |           | (1   | ) |       |   | (1    | ) |  |   | (2    | )
|Interest-earning cash deposits                                             |  |                            |       |   |                                      |   |      |       |  |   |        |   |  |           |     |   |       |   |      |   |  |   |      |  
|                                                                           |  |                            |        |   |                                      |   |       |       |  |   |         |   |  |           |      |   |       |   |       |   |  |   |       |  
|Total interest income                                                      |  |                            | (2,654 | ) |                                      |   | 1,086 |       |  |   | (1,568  | ) |  |           | (812 | ) |       |   | 2,096 |   |  |   | 1,284 |  
|                                                                           |  |                            |        |   |                                      |  
|Interest expense:                                                          |  |                            |        |   |                                      |   |       |       |  |   |         |   |  |           |      |   |       |   |       |   |  |   |       |  
|NOW accounts                                                               |  |                            | (125   | ) |                                      |   |      |       |  |   | (125    | ) |  |           | 6    |   |       |   | (7    | ) |  |   | (1    | )
|Money markets                                                              |  |                            | (141   | ) |                                      |   | 94    |       |  |   | (47     | ) |  |           | 14   |   |       |   | 108   |   |  |   | 122   |  
|Savings deposits                                                           |  |                            | (520   | ) |                                      |   | 390   |       |  |   | (130    | ) |  |           |     |   |       |   | 74    |   |  |   | 74    |  
|Time deposits                                                              |  |                            | (1,586 | ) |                                      |   | 156   |       |  |   | (1,430  | ) |  |           | (224 | ) |       |   | 653   |   |  |   | 429   |  
|Federal funds purchased and securities sold under agreements to repurchase |  |                            | (60    | ) |                                      |   | (60   | )     |  |   | (120    | ) |  |           | (14  | ) |       |   | 34    |   |  |   | 20    |  
|Borrowings                                                                 |  |                            | (8     | ) |                                      |   | (168  | )     |  |   | (176    | ) |  |           |     |   |       |   | 226   |   |  |   | 226   |  
|                                                                           |  |                            |        |   |                                      |   |       |       |  |   |         |   |  |           |      |   |       |   |       |   |  |   |       |  
|Total interest expense                                                     |  |                            | (2,440 | ) |                                      |   | 412   |       |  |   | (2,028  | ) |  |           | (218 | ) |       |   | 1,088 |   |  |   | 870   |  
|                                                                           |  |                            |        |   |                                      |   |       |       |  |   |         |   |  |           |      |   |       |   |       |   |  |   |       |  
|Net increase in net interest income                                        |  | $                          | (214   | ) |                                      | $ | 674   |       |  | $ | 460     |   |  | $         | (594 | ) |       | $ | 1,008 |   |  | $ | 414   |  
|                                                                           |  |                            |        |   |                                      |   |       |       |  |   |         |   |  |           |      |   |       |   |       |   |  |   |       |  



|(1) | The changes for each category of income and expense are divided between the portion of change attributable to the variance in rate or volume for that category. The amount of
change that cannot be seperated is all allocated to each variance proportionately.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Interest Sensitivity and Liquidity

One of the principal duties of the Companys Asset/Liability Management Committee is management of interest rate risk. The Company regularly utilizes
computer simulation modeling to assess the Companys overall interest rate risk. The results of this modeling are then used to evaluate the possible need for adjustment of the duration of assets and/or liabilities and to implement strategies to
accomplish such adjustments. The Committee reviews and approves comprehensive risk management strategies as well as significant individual transactions executed to modify the Companys interest rate risk profile. Historically, management has
viewed the maintaining of near neutral interest rate risk within a 100 basis point up or down band to be optimal. As a result of the current compressed margin environment, the Companys asset sensitivity increased which in turn adversely
impacted our net interest margin and consequently net income. Management believes that this situation will moderate as the Companys CD portfolio continues to reprice downward. However, some residual impact of the recent significant decrease in
rates is expected to linger for at least a portion of the remainder of 2009. In addition to management of interest rate risk, another function of the Asset/Liability Committee is evaluating the current liquidity of the Company and identifying and
planning for future liquidity needs. Such needs primarily consist of insuring sufficient liquidity to meet current or expected needs for deposit withdrawals and the funding of investing activities, principally the making of loans and purchasing of
securities. Liquidity is provided by cash flows from maturing investments, loan payments and maturities, federal funds sold, and unpledged investment securities. On the liability side of the balance sheet, liquidity sources include core deposits,
the ability to increase large denomination certificates of deposit and borrowings from the FRB discount window and the Federal Home Loan Bank, as well as the ability to generate funds through the issuance of long-term debt and equity. In addition,
the Company has established various credit facilities to provide additional liquidity if and as needed. These include unsecured lines of credit with correspondent banks totaling $26.0 million and secured lines of credit of $5.0 million. At
March 31, 2009, there were no outstanding balances on any of these credit facilities. The Companys on balance sheet liquidity ratio was 7.0% at March 31, 2009. Management considers this ratio to be adequate to meet known or
anticipated liquidity needs based upon our abundant off balance sheet liquidity, through the FHLB and FRB discount window borrowing availability.



22



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##### Table of Contents

|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

The
Companys profitability is dependent to a large extent upon its net interest income, which is the difference between its interest income on interest-earning assets, such as loans and investments, and its interest expense on interest-bearing
liabilities, such as deposits and borrowings. The Companys primary market risk is interest rate risk, which is the result of differing maturities or repricing intervals of interest-earning assets and interest-bearing liabilities.

The Companys Asset/Liability Committee (ALCO) meets on a quarterly basis in order to assess interest rate risk, liquidity, capital and overall
balance sheet management through rate shock analysis measuring various interest rate scenarios over the future 12 months. Through ALCO, the Company strives to determine the impact on net interest income from changes in interest rates in a range from
100 to 300 basis points up or down during a 12-month period. ALCO also reviews policies and procedures related to fund management and interest rate risk based on local, national and global economic conditions along with funding strategies and
balance sheet management to minimize the potential impact of earnings and liquidity from interest rate movements.

Additional information regarding
interest rate risk for the year ended December 31, 2008 is included in the Companys filing on Form 10-K. The Company has not had any material changes in the overall interest rate risk since December 31, 2008.



|Item 4T. | Controls and Procedures
|-------- | -----------------------

The Companys management, under the
supervision and with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures in accordance with Rule 13a-15 of the Securities
Exchange Act of 1934 (the Exchange Act). Based on the evaluation, our chief executive officer and chief financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were
effective in enabling us to provide reasonable assurance that we were able to record, process, summarize and report in a timely manner the information required to be disclosed in periodic reports we file under the Exchange Act.

It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

No change in our
internal control over financial reporting was identified that occurred during the Companys first fiscal quarter of 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



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##### Table of Contents

PART II  OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

None



|Item 1A. | Risk Factors
|-------- | ------------

In addition to the other
information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2008, which could materially
affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks facing the Company. The recent disruptions in the credit markets and problems encountered in the financial
services industry generally has increased the degree of the Risks Related to our Business discussed in our 10-K for 2008. Such increased risks includes risks related to raising additional capital, managing interest rate risk, attracting
and retaining deposits, maintaining and increasing the Companys net interest margin, dealing with enhanced regulation, collecting loans, and maintaining adequate liquidity. Additional risks and uncertainties not currently known to us or that
we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.



|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds
|------- | -----------------------------------------------------------

None



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

Not
Applicable



|Item 4. | Submission of Matters to a Vote of Security Holders
|------- | ---------------------------------------------------

Not Applicable

































































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PART II  OTHER INFORMATION



|Item 5. | Other Information
|------- | -----------------

Not Applicable



|Item 6. | Exhibits
|------- | --------



|        |  |                                                                                                                                                                                                                                           
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.01   |  | Section 302 Certification  Chief Executive Officer                                                                                                                                                                                       
|        | 
|31.02   |  | Section 302 Certification  Chief Financial Officer                                                                                                                                                                                       
|        | 
|32.01   |  | Section 906 Certification                                                                                                                                                                                                                 
|        | 
|10.01   |  | Agreement and Plan of Merger, dated as of February 16, 2009, by and between 1stFinancial Services Corporation and AB&T Financial Corporation (incorporated by reference from exhibits to the Registrants 2008 Annual Report on Form 10-K)
|        | 
|10.02   |  | Employment Agreement between Registrant and Roger A. Mobley (incorporated by reference from exhibits to Registrants Current Report on Form 8-K filed February 2, 2009)                                                                   
|        | 
|10.03   |  | Amended Endorsement Split Dollar Agreement between the Bank and Gregory L. Gibson (incorporated by reference from exhibits to Registrants Current Report on Form 8-K filed February 2,
2009)                                             
|        | 
|10.04   |  | Amended Endorsement Split Dollar Agreement between the Bank and Vincent K. Rees (incorporated by reference from exhibits to Registrants Current Report on Form 8-K filed February 2,
2009)                                               
|        | 
|10.05   |  | Amended Endorsement Split Dollar Agreement between the Bank and Peggy H. Denny (incorporated by reference from exhibits to Registrants Current Report on Form 8-K filed February 2,
2009)                                                
|        | 
|10.06   |  | Amended Endorsement Split Dollar Agreement between the Bank and B. Lee Beason (incorporated by reference from exhibits to Registrants Current Report on Form 8-K filed February 2,
2009)                                                 
|        | 
|10.07.1 |  | Non-Qualified Stock Option Agreement between Registrant and Roger A. Mobley (incorporated by reference from exhibits to Registrants Current Report on Form 8-K filed February 2, 2009)                                                   



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SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                   |  |  |  |                                   |  |                        
|------------------ |  |  |  | --------------------------------- |  | -----------------------
|                   |  |  |  | 1stFinancial Services Corporation
|                   |  |  | 
|Date: May 15, 2009 |  |  |  | By:                               |  | /s/ Gregory L. Gibson  
|                   |  |  |  |                                   |  | Gregory L. Gibson      
|                   |  |  |  |                                   |  | Chief Executive Officer
|                   |  |  | 
|Date: May 15, 2009 |  |  |  | By:                               |  | /s/ Roger A. Mobley    
|                   |  |  |  |                                   |  | Roger A. Mobley        
|                   |  |  |  |                                   |  | Chief Financial Officer



26