Board of Trustees
1st State Bank
445 S. Main Street
Burlington, North Carolina 27215

Board of Trustees:

The notice of intent to convert from mutual to stock form filed on behalf of 1st State Bank, Burlington, North Carolina ("Bank"), has been reviewed by the Federal Deposit Insurance Corporation ("FDIC") pursuant to the FDIC regulations at 12 C.F.R. Sections 303.163 and 333.4.

This notice was filed in connection with the 1st State Bank, Burlington, North Carolina "Plan of Conversion From Mutual to Stock Organization and From a Savings Bank to a Commercial Bank" ("Plan"). Pursuant to the Plan, the Bank will convert to a North Carolina-chartered stock savings bank and become a wholly-owned subsidiary of the newly formed 1st State Bancorp, Inc. ("Bancorp"), a Virginia corporation. Immediately following the conversion, the Bank will convert from a North Carolina-chartered stock savings bank to a North Carolina-chartered stock commercial bank. Concurrently, with the reorganization, Bancorp intends to offer for sale its common stock on a priority basis to qualifying depositors and to an employee stock ownership plan. In addition, the Bank will fund a charitable foundation ("Foundation") with 7.4 percent of the total shares of Bancorp common stock issued in the conversion.

The FDIC has relied on information provided in the Bank's notice of conversion and the accompanying business plan in reaching its decision regarding that notice. Management of the Bank and Bancorp has represented that the FDIC will be given 30 days prior written notice before implementing any material deviation from the business plan, such as a return of capital. Management has further represented that neither the Bank nor Bancorp will award a return of capital during the first year following the Bank's conversion to stock form. Management is reminded that payment of regular or special dividends by Bancorp must be made from the earnings of Bancorp; any distribution to Bancorp shareholders in excess of Bancorp's earnings would be considered a return of capital.

Based on the information and representations presented, the FDIC plans to issue a letter of non-objection to the proposed conversion transaction provided that the bank satisfies the following conditions:

1) The Bank must execute the enclosed Tolling Agreement and deliver it to this office on or before February 26, 1999;

2) The Foundation's organizers shall commit to the following oversight provisions:

a) Common stock of Bancorp held by the Foundation shall be voted by the Foundation at the same ratio as the shares voted on each and every proposal considered by the stockholders of Bancorp;

b) The Foundation shall be subject to examination by the FDIC;

c) The Foundation shall comply with all supervisory directives imposed by the FDIC;

d) The Foundation shall operate in accordance with written policies adopted by the Foundation's board of trustees; and

e) The Foundation shall provide annual reports to the FDIC describing the grants made and grant recipients.

3) The Bank must submit final disclosure materials acceptable to the FDIC Division of Supervision, Registration and Disclosure Section;

4) The Bank must provide written evidence that its Plan of Conversion has been approved by the affirmative vote of a majority of the votes eligible to be cast by depositors at a special meeting of the Bank's voting participants;

5) The Bank must advise this office of the results of the subscription offering and deliver an updated appraisal that:

(a) takes the results of the subscription offering into account;

(b) discusses any material occurrences during the subscription period; and

(c) explains any orders that may have been rejected.

6) The Bank must receive the necessary approvals from the Savings Institution Division of the State of North Carolina and the Federal Reserve.

Provided that Bank meets the foregoing conditions and that the FDIC is satisfied with the appraiser's determination in the updated appraisal that the results of the subscription offering represent the fair value for Bancorp, the FDIC will issue a letter of non-objection to the proposed conversion transaction.

Sincerely,

James L. Sexton
Director