**U.S.
      SECURITIES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




***FORM
      10-KSB***




**ANNUAL
      REPORT UNDER SECTION 13 OR 15 (d) OF**


**THE
      SECURITIES EXCHANGE ACT OF 1934**





**FOR
      FISCAL YEAR ENDED DECEMBER 31, 2006**





**Commission
      File Number: 000-30515**





**WESTSTAR
      FINANCIAL SERVICES CORPORATION**


(Exact
      Name of Registrant as specified in its charter)





**NORTH
      CAROLINA**


(State
      of
      Incorporation)





**56-2181423**


(I.R.S.
      Employer Identification No.)




**79
      Woodfin Place**




**Asheville,
      North Carolina 28801**


(Address
      of Principal Executive Office)





**(828)
      252-1735**


(Registrant’s
      telephone number, including area code)





**Securities
      registered pursuant to Section 12(g) of the Act:**





**COMMON
      STOCK, $1.00 PAR VALUE**





Check
      whether the Registrant is not required to file reports pursuant to Section
      13 or
      15(d) of the Exchange Act. o





Note:
      Checking the box above will not relieve any registrant required to file reports
      pursuant to Section 13 or 15(d) of the Exchange Act from their obligations
      under
      those Sections.





Check
      whether the Registrant (1) has filed all reports required to be filed by Section
      13 or 15(d) 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** ý **NO**  o





Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B contained in this form, and no disclosure will be contained,
      to
      the best of the Registrant’s knowledge, in definitive proxy or information
      statements incorporated by reference in Part III of this Form 10-KSB or any
      amendment to this Form 10-KSB.   ý





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yes o No ý





The
      Registrant’s revenues for the year ended December 31, 2006 were
      $12,533,733.





The
      aggregate market value of the voting stock held by non-affiliates of the
      Registrant at December 21, 2006 was approximately $24,897,892.





The
      number of shares of the Registrant’s Common Stock outstanding on December 31,
      2006 was 1,682,290.





**Documents
      Incorporated by Reference:**





PART
      III:
      Definitive Proxy Statement dated March 9, 2007 as filed pursuant to Section
      14
      of the Securities Exchange Act of 1934 for the 2007 Annual Meeting of
      Shareholders.





Transitional
      Small Business Disclosure Format   Yes o  No ý


1


**FORM
      10-KSB CROSS-REFERENCE INDEX**











**2007****2006**
            **Proxy****Form
                10-KSB**
            **Statement****Page**
            **Page****PART
                I**Item
                1 -
            Description
                of Business
            3
            n/aItem
                2 -
            Description
                of Property
            6
            n/aItem
                3 -
            Legal
                Proceedings
            6
            n/aItem
                4 -
            Submission
                of Matters to a Vote of Security
                Holders
            6
            n/a**PART
                II**Item
                5 -
            Market
                for Common Equity and Related Shareholder
                Matters
            6
            n/aItem
                6 -
            Management’s
                Discussion and Analysis
            8
            n/aItem
                7 -
            Financial
                Statements
            20
            n/aItem
                8 -
            Changes
                in and Disagreements with Accountants on Accounting
                and Financial Disclosure
            46
            n/aItem
                8A -
            Controls
                and Procedures
            46
            n/aItem
                8B -
            Other
                Information
            46
            n/a**PART
                III**Item
                9 -
            Directors
                and Executive Officers of the
                Registrant
            46
            5
                -
                10Item
                10 -
            Executive
                Compensation
            46
            10
                - 14Item
                11 -
            Security
                Ownership of Certain Beneficial Owners and Management
                and Related Stockholder Matters
            47
            3-5Item
                12 -
            Certain
                Relationships and Related
                Transactions
            47
            6,
                10 - 11Item
                13 -
            Exhibits
            47
            n/aItem
                14 -
            Principal
                Accountant Fees and Services
            48
            8
                -10, 21








*
      Exhibits, Financial Statement Schedules and Reports on Forms 8-K, included
      in or
      incorporated by reference into this filing were filed with the Securities and
      Exchange Commission. Weststar Financial Services Corporation provides these
      documents by mail upon request.








2
 *Index*


**PART
      I**


**ITEM
      1: DESCRIPTION OF BUSINESS**





**General**





Weststar
      Financial Services Corporation (the “Registrant” or the “Company”) is a bank
      holding company formed in April 2000 to own all of the common stock of The
      Bank
      of Asheville (the “Bank”), a North Carolina-chartered bank that opened for
      business as a community bank in Asheville, Buncombe County, North Carolina
      in
      December 1997. On October 8, 2003, the Company formed Weststar Financial
      Services Corporation I (the “Trust”), a Delaware statutory trust. The Trust has
      no operations subsequent to its formation in 2003 other than the issuance of
      trust preferred securities. At this time, the Company does not engage in any
      business activities on its own. It only owns the Bank, which engages in the
      commercial banking business, and the Trust, which was the legal entity formed
      for its issuance of $4.0 million in trust preferred securities in 2003. On
      October 19, 2004, the Company formed Bank of Asheville Mortgage Company, LLC,
      a
      mortgage broker, of which the Company owns 50% interest.





**Primary
      Market Area**





The
      Registrant’s market area consists of Asheville, Buncombe County, North Carolina
      and surrounding areas. Buncombe County is part of the Asheville Ranally
      Metropolitan area. Asheville is the county seat and the industrial center of
      Buncombe County with a population of approximately 69,300. In addition,
      Asheville is the commercial hub for several other prosperous towns in Buncombe
      County, including Arden, Biltmore Forest, Black Mountain, Montreat, Skyland,
      Weaverville and Woodfin. The total population of Buncombe County is 217,500.
      Statistics are the latest issued by the Asheville Metro Business Research
      Center.





**Competition**





Commercial
      banking in North Carolina is extremely competitive in large part due to a long
      history of statewide branching. Registrant competes in its market areas with
      some of the largest banking organizations in the state and the country and
      other
      financial institutions, such as federally and state-chartered savings and loan
      institutions and credit unions, as well as consumer finance companies, mortgage
      companies and other lenders engaged in the business of extending credit. Many
      of
      Registrant’s competitors have broader geographic markets and higher lending
      limits than Registrant and are also able to provide more services and make
      greater use of media advertising. In
      Buncombe County as of June 30, 2006 (the latest date for which statistics are
      available) there were 80 offices of 16 different commercial and savings banks
      (including the largest banks in North Carolina), as well as offices of credit
      unions and various other entities engaged in the extension of credit; the
      Registrant accounted for 3.57% of total deposits held by commercial banks and
      savings banks in Buncombe County.





The
      enactment of legislation authorizing interstate banking has caused great
      increases in the size and financial resources of some of Registrant’s
      competitors. In addition, as a result of interstate banking, out-of-state
      commercial banks have acquired North Carolina banks, which has heightened the
      competition among banks in North Carolina.





Despite
      the competition in its market area, Registrant believes that it has certain
      competitive advantages that distinguish it from its competition. Registrant
      believes that its primary competitive advantages are its strong local identity
      and affiliation with the community and its emphasis on providing specialized
      services to small and medium-sized business enterprises, as well as professional
      and upper-income individuals. Registrant is locally owned and managed, making
      credit and other decisions that have a direct bearing on faster service and
      more
      efficiently obtained credit. Registrant offers customers modern, high-tech
      banking without forsaking community values such as prompt, personal service
      and
      friendliness. Registrant offers many personalized services and attracts
      customers by being responsive and sensitive to their individualized needs.
      Registrant also relies on goodwill and referrals from shareholders and satisfied
      customers, as well as traditional newspaper and radio media to attract new
      customers. To enhance a positive image in the community, Registrant supports
      and
      participates in local events and its officers and directors serve on boards
      of
      local civic and charitable organizations.





**Employees**





The
      Bank
      currently employs 48 full-time equivalent employees. Registrant does not have
      any officers or employees who are not also officers or employees of the Bank.
      None of the Registrant’s employees are covered by a collective bargaining
      agreement. The Registrant believes its relations with its employees to be
      good.





**Regulation**





Registrant
      is extensively regulated under both federal and state law. Generally, these
      laws
      and regulations are intended to protect depositors and borrowers, not
      shareholders. To the extent that the following information describes statutory
      and regulatory provisions, it is qualified in its entirety by reference to
      the
      particular statutory and regulatory provisions. Any change in applicable law
      or
      regulation may have a material effect on the business of the
      Registrant.


3
 *Index*





THE
      BANK
      HOLDING COMPANY ACT .
      The
      Registrant is a bank holding company within the meaning of the Bank Holding
      Company Act of 1956, as amended (the “Bank Holding Company Act”), and is
      required to register as such with the Board of Governors of the Federal Reserve
      System (the “Federal Reserve Board” or “FRB”). A bank holding company is
      required to file with the FRB annual reports and other information regarding
      its
      business operations and those of its subsidiaries. It is also subject to
      examination by the Federal Reserve Board and is required to obtain Federal
      Reserve Board approval prior to acquiring, directly or indirectly, more than
      5%
      of the voting stock of any bank, unless it already owns a majority of the voting
      stock of such bank. Furthermore, a bank holding company must engage, with
      limited exceptions, in the business of banking or managing or controlling banks
      or furnishing services to or performing services for its subsidiary banks.
      One
      of the exceptions to this prohibition is the ownership of shares of a company
      the activities of which the FRB has determined to be so closely related to
      banking or managing or controlling banks as to be a proper incident thereto.





STATE
      LAW. The Bank
      is subject to extensive supervision and regulation by the North Carolina
      Commissioner of Banks (the “Commissioner”). The Commissioner oversees state laws
      that set specific requirements for bank capital and regulate deposits in, and
      loans and investments by, banks, including the amounts, types, and in some
      cases, rates. The Commissioner supervises and performs periodic examinations
      of
      North Carolina-chartered banks to assure compliance with state banking statutes
      and regulations, and the Bank is required to make regular reports to the
      Commissioner describing in detail its resources, assets, liabilities and
      financial condition. Among other things, the Commissioner regulates mergers
      and
      acquisitions of state-chartered banks, the payment of dividends, loans to
      officers and directors, record keeping, types and amounts of loans and
      investments, and the establishment of branches.





DEPOSIT
      INSURANCE. As a member institution of the FDIC, the Bank’s deposits are insured
      up to a maximum of $100,000 per depositor through the Deposit Insurance Fund
      (“DIF”), administered by the FDIC, and each member institution is required to
      pay semi-annual deposit insurance premium assessments to the FDIC. The DIF
      assessment rates vary based on institution’s capital position and other
      supervisory factors.





CAPITAL
      REQUIREMENTS. The federal banking regulators have adopted certain risk-based
      capital guidelines to assist in the assessment of the capital adequacy of a
      banking organization’s operations for both transactions reported on the balance
      sheet as assets and transactions, such as letters of credit, and recourse
      arrangements, which are recorded as off balance sheet items. Under these
      guidelines, nominal dollar amounts of assets and credit equivalent amounts
      of
      off balance sheet items are multiplied by one of several risk adjustment
      percentages which range from 0% for assets with low credit risk, such as certain
      U.S. Treasury securities, to 100% for assets with relatively high credit risk,
      such as business loans.





A
      banking
      organization’s risk-based capital ratios are obtained by dividing its qualifying
      capital by its total risk adjusted assets. The regulators measure risk-adjusted
      assets, which include off balance sheet items, against both total qualifying
      capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and
      Tier 1 capital. “Tier 1,” or core capital, includes common equity, qualifying
      noncumulative perpetual preferred stock, minority interests in certain equity
      accounts of consolidated subsidiaries, less goodwill and other intangibles,
      subject to certain exceptions and restricted core capital elements, including
      trust preferred securities. “Tier 2,” or supplementary capital, includes among
      other things, limited-life preferred stock, hybrid capital instruments,
      mandatory convertible securities, qualifying subordinated debt, and the
      allowance for loan and lease losses, subject to certain limitations and less
      required deductions. The inclusion of elements of Tier 2 capital is subject
      to
      certain other requirements and limitations of the federal banking agencies.
      Banks and bank holding companies subject to the risk-based capital guidelines
      are required to maintain a ratio of Tier 1 capital to risk-weighted assets
      of at
      least 4% and a ratio of total capital to risk-weighted assets of at least 8%.
      The appropriate regulatory authority may set higher capital requirements when
      particular circumstances warrant. As of December 31, 2006, the Company was
      classified as “well-capitalized” with Tier 1 and Total Risk - Based Capital of
      13.37%
      and 14.62%, respectively.





The
      federal banking agencies have adopted regulations specifying that they will
      include, in their evaluations of a bank’s capital adequacy, an assessment of the
      bank’s interest rate risk (“IRR”) exposure. The standards for measuring the
      adequacy and effectiveness of a banking organization’s IRR management include a
      measurement of board of director and senior management oversight, and a
      determination of whether a banking organization’s procedures for comprehensive
      risk management are appropriate for the circumstances of the specific banking
      organization.





Failure
      to meet applicable capital guidelines could subject a banking organization
      to a
      variety of enforcement actions, including limitations on its ability to pay
      dividends, the issuance by the applicable regulatory authority of a capital
      directive to increase capital and, in the case of depository institutions,
      the
      termination of deposit insurance by the FDIC, as well as the measures described
      under the heading “Federal Deposit Insurance Corporation Improvement Act of
      1991” below, as applicable to undercapitalized institutions. In addition, future
      changes in regulations or practices could further reduce the amount of capital
      recognized for purposes of capital adequacy. Such a change could affect the
      ability of Registrant to grow and could restrict the amount of profits, if
      any,
      available for the payment of dividends to the shareholders.


4
 *Index*





FEDERAL
      DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In December, 1991,
      Congress enacted the Federal Deposit Insurance Corporation Improvement Act
      of
      1991 (“FDICIA”), which substantially revised the bank regulatory and funding
      provisions of the Federal Deposit Insurance Act and made significant revisions
      to several other federal banking statutes. FDICIA provides for, among other
      things:





·
            publicly
                available annual financial condition and management reports for certain
                financial institutions, including audits by independent accountants,





·
            the
                establishment of uniform accounting standards by federal banking
                agencies,





·
            the
                establishment of a “prompt corrective action” system of regulatory
                supervision and intervention, based on capitalization levels, with
                greater
                scrutiny and restrictions placed on depository institutions with
                lower
                levels of capital,





·
            additional
                grounds for the appointment of a conservator or receiver, and





·
            restrictions
                or prohibitions on accepting brokered deposits, except for institutions
                which significantly exceed minimum capital requirements.





FDICIA
      also provides for increased funding of the FDIC insurance funds and the
      implementation of risk-based premiums.





A
      central
      feature of FDICIA is the requirement that the federal banking agencies take
      “prompt corrective action” with respect to depository institutions that do not
      meet minimum capital requirements. Pursuant to FDICIA, the federal bank
      regulatory authorities have adopted regulations setting forth a five-tiered
      system for measuring the capital adequacy of the depository institutions that
      they supervise. Under these regulations, a depository institution is classified
      in one of the following capital categories: “well capitalized,” “adequately
      capitalized,” “undercapitalized,” “significantly undercapitalized” and
“critically undercapitalized.” An institution may be deemed by the regulators to
      be in a capitalization category that is lower than is indicated by its actual
      capital position if, among other things, it receives an unsatisfactory
      examination rating with respect to asset quality, management, earnings or
      liquidity.





FDICIA
      provides the federal banking agencies with significantly expanded powers to
      take
      enforcement action against institutions which fail to comply with capital or
      other standards. Such action may include the termination of deposit insurance
      by
      the FDIC or the appointment of a receiver or conservator for the institution.
      FDICIA also limits the circumstances under which the FDIC is permitted to
      provide financial assistance to an insured institution before appointment of
      a
      conservator or receiver.





MISCELLANEOUS.
      The dividends that may be paid by Registrant are subject to legal limitations.
      The Bank is the only source of dividends that may be paid by the Registrant.
      In
      accordance with North Carolina banking law, dividends may not be paid by the
      Bank unless its capital surplus is at least 50% of its paid-in capital.





The
      earnings of Registrant will be affected significantly by the policies of the
      Federal Reserve Board, which is responsible for regulating the United States
      money supply in order to mitigate recessionary and inflationary pressures.
      Among
      the techniques used to implement these objectives are open market transactions
      in United States government securities, changes in the rate paid by banks on
      bank borrowings, and changes in reserve requirements against bank deposits.
      These techniques are used in varying combinations to influence overall growth
      and distribution of bank loans, investments, and deposits, and their use may
      also affect interest rates charged on loans or paid for deposits.





The
      monetary policies of the Federal Reserve Board have had a significant effect
      on
      the operating results of commercial banks in the past and are expected to
      continue to do so in the future. In view of changing conditions in the national
      economy and money markets, as well as the effect of actions by monetary and
      fiscal authorities, no prediction can be made as to possible future changes
      in
      interest rates, deposit levels, loan demand or the business and earnings of
      Registrant.





Effective
      March 11, 2000, the Gramm-Leach-Bliley Act of 1999 allows a bank holding company
      to qualify as a “financial holding company” and, as a result, be permitted to
      engage in a broader range of activities that are “financial in nature” and in
      activities that are determined to be incidental or complementary to activities
      that are financial in nature. The Gramm-Leach-Bliley Act amends the BHC Act
      to
      include a list of activities that are financial in nature, and the list includes
      activities such as underwriting, dealing in and making a market in securities,
      insurance underwriting and agency activities and merchant banking. The Federal
      Reserve Board is authorized to determine other activities that are financial
      in
      nature or incidental or complementary to such activities. The Gramm-Leach-Bliley
      Act also authorizes banks to engage through financial subsidiaries in certain
      of
      the activities permitted for financial holding companies. The Registrant has
      elected not to register as a financial holding company.


5
 *Index*


Registrant
      cannot predict what legislation might be enacted or what regulations might
      be
      adopted, or if enacted or adopted, the effect thereof on Registrant’s
      operations.





**Recent
      Legislative Developments**





On
      October 26, 2001, the USA Patriot Act of 2001 was enacted. This act contains
      the
      International Money Laundering Abatement and Financial Anti-Terrorism Act of
      2001, which sets forth anti-money laundering measures affecting insured
      depository institutions, broker-dealers and other financial institutions. The
      Act requires U.S. financial institutions to adopt new policies and procedures
      to
      combat money laundering and grants the Secretary of the Treasury broad authority
      to establish regulations and to impose requirements and restrictions on the
      operation of financial institutions. This act has increased the overall cost
      of
      our regulatory compliance activities.





**ITEM
      2: DESCRIPTION OF PROPERTY**





The
      following table sets forth the location of the Registrant’s offices as of
      December 31, 2006.




APPROX.YEAR
            SQUAREOFFICE
                LOCATION
            OPENED
            FOOTAGE
            OWN/LEASEMain
                Office79
                Woodfin Place
            1997
            10,000
            OwnAsheville,
                NCCandler
                Office6
                Dogwood Road
            1999
            1,900
            Own
                building,Candler,
                NC
            
            
            lease
                landLeicester
                Highway Office
            2000
            2,500
            Own
                building,349
                New Leicester Highway
            
            
            lease
                landAsheville,
                NCSouth
                Asheville Office
            2003
            2,629
            Lease1985
                Hendersonville HighwayAsheville,
                NCReynolds
                Office
            2006
            3,212
            Lease199
                Charlotte HighwayAsheville,
                NC








**ITEM
      3: LEGAL PROCEEDINGS**





There
      were no known current or pending proceedings as of December 31,
      2006.





**ITEM
      4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**





Not
      applicable.


**PART
      II**





**ITEM
      5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
      MATTERS**





**Market
      Summary**





Weststar
      Financial Services Corporation stock is traded on the Over-The-Counter Bulletin
      Board under the symbol “WFSC.” There were 1,682,290 shares outstanding at
      December 31, 2006 owned by approximately 800 shareholders.





During
      2006, 310,740 shares of the Company’s common stock were traded. The closing
      price of the stock on December 31, 2006 was $16.50.





6
 *Index*


The
      following table represents stock prices during the trading periods.





**2006**
            
            **1****st**
            
            **2****nd**
            
            **3****rd**
            
            **4****th****Qtr.**
            
            **Qtr.**
            
            **Qtr.**
            
            **Qtr.**High
            
            $
            11.67
            
            $
            15.00
            
            $
            14.09
            
            $
            16.50Low
            
            $
            8.42
            
            $
            11.46
            
            $
            12.00
            
            $
            12.50Close
            
            $
            11.46
            
            $
            14.00
            
            $
            13.00
            
            $
            16.50





**2005**
            
            **1****st**
            
            **2****nd**
            
            **3****rd**
            
            **4****th****Qtr.**
            
            **Qtr.**
            
            **Qtr.**
            
            **Qtr.**High
            
            $
            12.50
            
            $
            10.63
            
            $
            9.79
            
            $
            9.79Low
            
            $
            9.09
            
            $
            9.17
            
            $
            8.75
            
            $
            8.33Close
            
            $
            9.70
            
            $
            9.17
            
            $
            9.38
            
            $
            9.33


No
      cash
      dividends were paid in 2006 or 2005. A 20% stock dividend effected in the form
      of a 6-for-5 stock split was paid to shareholders in May 2006 and January 2005.
      Stock prices in the table above have been adjusted to reflect the stock
      dividends.





**Stock
      Transfer Agent and Registrar**





Registrar
      and Transfer Company


10
      Commerce Drive


Cranford,
      NJ 07016


908.497.2300
      or 800.368.5948





**Shareholder
      Information**





For
      information, contact Randall C. Hall, Executive Vice President and Secretary,
      Weststar Financial Services Corporation, 79 Woodfin Place, Asheville, North
      Carolina, 28801 or rhall@bankofasheville.com.





**Annual
      Shareholders Meeting**





The
      Annual Meeting of the shareholders of Registrant will be held at 3:00 p.m.,
      Tuesday, April 17, 2007, at the Renaissance Asheville Hotel, One Thomas Wolfe
      Plaza, Asheville, North Carolina.





**Independent
      Auditors**





Dixon
      Hughes PLLC, 6525 Morrison Boulevard, Suite 516, Charlotte, NC
      28211-3563





See
      Item
      11 of this report for disclosure regarding securities authorized for issuance
      and equity compensation plans required by Item 201(d) of Regulation
      S-B.


7
 *Index*


**ITEM
      6 - MANAGEMENT’S DISCUSSION AND ANALYSIS**





MANAGEMENT’S
      DISCUSSION AND ANALYSIS





Management’s
      Discussion and Analysis is provided to assist in understanding and evaluating
      the Company’s results of operations and financial condition. The following
      discussion should be read in conjunction with the consolidated financial
      statements and related notes included elsewhere herein. Weststar Financial
      Services Corporation (the “Company”) is a holding company for The Bank of
      Asheville (the “Bank”), a state chartered commercial bank incorporated in North
      Carolina on October 29, 1997. The Bank provides consumer and commercial banking
      services in Buncombe County and surrounding areas. Common shares of the Bank
      were exchanged for common shares of Weststar Financial Services Corporation
      on
      April 29, 2000. Weststar Financial Services Corporation formed Weststar
      Financial Services Corporation I (the “Trust”) during October 2003 in order to
      facilitate the issuance of trust preferred securities. The Trust is a statutory
      business trust formed under the laws of the state of Delaware, of which all
      common securities are owned by Weststar Financial Services Corporation. On
      October 19, 2004, the Company formed Bank of Asheville Mortgage Company, LLC
      (the “Mortgage Company”), a mortgage broker, of which the Company owns a 50%
      interest. Because Weststar Financial Services Corporation has no material
      operations and conducts no business on its own other than owning the Bank,
      the
      discussion contained in Management’s Discussion and Analysis concerns primarily
      the business of the Bank. However, for ease of reading and because the financial
      statements are presented on a consolidated basis, Weststar Financial Services
      Corporation and the Bank are collectively referred to herein as the Company.





EXECUTIVE
      OVERVIEW





During
      2005, the Company focused significant attention on improving asset quality,
      asset growth and expansion within its markets. Management emphasized prudent
      underwriting standards, expanded periodic reviews of loans of $100,000 or more,
      and enhancement of its loan quality monitoring systems. Net charge-offs during
      2006 totaled $160,942 compared to $314,259 during 2005. Non-performing assets
      totaled $1,081,910 and $1,881,653 at December 31, 2006 and 2005, respectively.
      Loans outstanding grew by $21,970,118 or 22% to $122,463,720 from December
      31,
      2005 to December 31, 2006. Management balanced loan growth through liquidity
      by
      maintaining approximately 17% of the Company’s assets in the investment
      portfolio, which totaled $26,241,010 at December 31, 2006.





The
      Company held deposit market share in Buncombe County of approximately 3.6%
      as of
      June 30, 2006, according to the latest Federal Deposit Insurance Corporation
      statistics. From December 31, 2005 to December 31, 2006 the Company’s deposits
      grew to $134,871,081 - an increase of 13%. During 2006, rate sensitive customers
      continued shifting funds from lower interest paying NOW and money market demand
      accounts into time deposit accounts, which bear higher interest rates, as
      interest rates increased throughout the year.





During
      September 2006, the Company opened its fifth full-service office in Buncombe
      County. This office, known as the Reynolds office, is located approximately
      five
      miles from the Bank’s main office and extends the service area further
      east.





The
      Company increased its average interest rate spread from 3.6% to 4.2% during
      2006, which combined with net earning asset growth, resulted in a 34% increase
      in net interest income during 2006. As a result of improvements over historic
      charge-offs, loan growth and a significant improvement in nonperforming assets,
      the Company added $284,645 to its allowance for loan losses compared to $466,270
      in 2005. Non-interest income increased $80,153 primarily as a result of overall
      growth in deposit accounts bearing service charges. The Mortgage Company posted
      net operating income of $1,620 during 2006 of which $810 was the Company’s
      portion compared to a loss of $15,748 during 2005 of which $7,874 was the
      Company’s portion. Securities losses totaled $249,674 during 2006 compared to
      $92,012 during 2005. Non-interest expenses totaled $4,914,727 and $4,464,811
      in
      2006 and 2005, respectively. Operating expenses increased as a result of opening
      a new branch at 199 Charlotte Highway in Buncombe County and increased expenses
      associated with supporting loan and deposit growth. Management monitors expenses
      closely and reviews each expense relative to the benefit provided. Net income
      totaled $2,062,732 in 2006 compared to $1,078,751 in 2005 - a 91% increase.
      Comprehensive income, which is the change in equity during a period excluding
      changes resulting from investments by shareholders and distributions to
      shareholders, net of tax totaled $2,374,992 and $779,057 in 2006 and 2005,
      respectively.








8
 *Index*


RESULTS
      OF OPERATIONS





The
      following discussion relates to operations for the year ended December 31,
      2006
      compared to the year ended December 31, 2005.





2006
      COMPARED TO 2005








Net
      income for 2006 totaled $2,062,732 compared to $1,078,751 in 2005 or $1.13
      and
      $.60 per diluted share for 2006 and 2005, respectively. The return on average
      assets and equity, respectively, was 1.39% and 17.68% for 2006 compared to
      .81%
      and 10.67% in 2005. The increase in net income was primarily attributable to
      increased net interest income.





Interest
      income, the primary source of revenue for the Company, was derived from
      interest-earning assets such as loans, investments and federal funds sold.
      The
      rate earned on interest-earning assets and dollar volume of the interest-earning
      assets drive interest income. Interest income totaled $11,170,672 for the year
      ended December 31, 2006 compared to $7,726,454 in 2005. Growth in the average
      balance of interest-earning assets increased from $126,289,051 to $141,733,983
      or 12% and was complemented by a 180 basis point increase in the rate on
      interest-earning assets, which resulted in increased interest income. Interest
      expense, derived from interest-bearing liabilities such as deposits and borrowed
      funds, totaled $4,195,951 in 2006 compared to $2,538,483 in 2005. The increase
      in interest expense was primarily attributable to higher interest rates during
      2006 and growth in interest-bearing liabilities. The average balance of
      interest-bearing liabilities grew from $98,416,429 in 2005 to $109,178,499
      in
      2006 or 11%, while the cost of funds increased 120 basis points.





As
      a
      result of improvements in historic charge-offs, loan growth and a significant
      improvement in nonperforming assets, the Company added $284,645 to its allowance
      for loan losses compared to $466,270 in 2005. Charge-offs, net of recoveries,
      totaled $160,942 for 2006 compared to $314,259 for 2005. Nonperforming assets
      totaled $1,081,190 at the end of 2006 compared with $1,881,653 at the end of
      2005.





Other
      income totaled $1,363,061 in 2006 compared to $1,431,886 in 2005. Service charge
      fees on deposit accounts and other fees and commissions earned account for
      the
      majority of non-interest income. During 2006, the Company earned $1,194,696
      from
      service charges on deposit accounts compared to $1,183,798 in 2005. The increase
      resulted from overall growth in deposit accounts bearing service charges. Other
      service fees and commissions totaled $310,528 in 2006 compared to $287,568
      in
      2005. The increase was primarily a result of increased fees from Visa, Master
      Card and ATM interchange fees, which totaled $183,657 and $160,366 for 2006
      and
      2005, respectively. The Mortgage Company posted net income of $1,620 during
      2006
      of which $810 was the Company’s portion compared to an operating loss of $15,748
      during 2005 of which $7,874 was the Company’s portion.





The
      Company sold investment securities during 2006 and 2005, which resulted in
      realized losses of $249,674 and $92,012, respectively. Sales resulted from
      portfolio repositioning due to increased market rates.





Other
      income, primarily the fees from the sales of checks and deposit slips and
      recoveries other than loans, provided additional income of $106,701 in 2006
      compared to $60,406 in 2005.





Other
      expenses totaled $4,914,727 in 2006 compared to $4,464,811 in 2005. Expenses
      increased as a result of increased personnel expense, increased supplies expense
      to process the Bank’s growth in loans and deposits, increased marketing expenses
      related to growth and expenses associated with opening a new full-service
      banking location during the latter part of 2006. Salaries and benefits accounted
      for $2,398,631 in 2006 or 49% of other expenses compared to $2,140,632 or 48%
      in
      2005. Equipment expenses totaled $396,816 in 2006 compared to $373,560 in 2005.
      Net expenses associated with foreclosures totaled $28,324 during 2006 compared
      to $101,937 during 2005. Other non-interest expenses of $2,090,956 in 2006
      compared to $1,848,682 in 2005 included sundry items such as marketing,
      accounting, occupancy, and insurance. The Company evaluates the cost of each
      expense based upon the value generated.








NET
      INTEREST INCOME





Net
      interest income (the difference between interest earned on interest-earning
      assets and interest paid on interest-bearing liabilities, primarily deposits)
      represents the most significant portion of the Company’s earnings. It is
      management’s on-going policy to maximize net interest income, while maintaining
      an acceptable level of risk. Net interest income totaled $6,974,721 and
      $5,187,971 for 2006 and 2005, respectively, representing an increase of 34%
      for
      2006 over 2005. Interest rate spreads have been at least 3.6% over the last
      two
      years. The Company continues efforts to maximize this spread by management
      of
      both loan and deposit rates in order to support the overall earnings growth.
      The
      following table presents the daily average balances, interest income/expense
      and
      average rates earned and paid on interest-earning assets and interest-bearing
      liabilities of the Company for the last two years.


9
 *Index*


**AVERAGE
      BALANCES AND INTEREST INCOME ANALYSIS**


**For
      the Years Ended December 31,**


****    ****    ****


**2006**
              **Average**
            
            
            
            
            **2005**
              **Average****Average**
            
            **Yield/**
            **Income/**
            
            **Average**
            
            **Yield/**
            **Income/****Balance**
            
            **Cost**
            **Expense**
            
            **Balance**
            
            **Cost**
            **Expense**ASSETS:Loans
                (1)
            
            $
            111,294,892
            
            
            8.8
            %
            $
            9,836,640
            
            $
            90,595,910
            
            
            7.2
            %
            $
            6,561,312Taxable
                securities (2)
            
            
            18,758,635
            
            
            4.6
            %
            
            854,377
            
            
            22,908,714
            
            
            3.4
            %
            
            773,225Non-taxable
                securities (3)
            
            
            8,371,136
            
            
            5.8
            %
            
            317,439
            
            
            2,720,871
            
            
            5.2
            %
            
            92,723Federal
                funds sold
            
            
            2,125,593
            
            
            5.0
            %
            
            106,097
            
            
            8,888,644
            
            
            3.0
            %
            
            267,622Interest-bearing
                deposits
            
            
            1,183,727
            
            
            4.7
            %
            
            56,119
            
            
            1,174,912
            
            
            2.7
            %
            
            31,572Total
                interest-earning assets
            
            
            141,733,983
            
            
            8.0
            %
            
            11,170,672
            
            
            126,289,051
            
            
            6.2
            %
            
            7,726,454All
                other assets
            
            
            6,426,702
            
            
            
            
            
            
            
            
            6,160,463Total
                assets
            
            **$**
            **148,160,685**
            
            
            
            
            
            
            
            **$**
            **132,449,514**LIABILITIES
                AND
              SHAREHOLDERS’
                EQUITY:Interest-bearing
                deposits
            
            $
            99,429,058
            
            
            3.6
            %
            
            3,562,555
            
            $
            90,175,827
            
            
            2.3
            %
            
            2,092,944Short-term
                borrowings
            
            
            1,625,441
            
            
            5.4
            %
            
            87,335
            
            
            1,004,273
            
            
            1.8
            %
            
            17,739Long-term
                debt
            
            
            8,124,000
            
            
            6.7
            %
            
            546,061
            
            
            7,236,329
            
            
            5.9
            %
            
            427,800Total
                interest-bearing liabilities
            
            
            109,178,499
            
            
            3.8
            %
            
            4,195,951
            
            
            98,416,429
            
            
            2.6
            %
            
            2,538,483Other
                liabilities
            
            
            27,315,190
            
            
            
            
            
            
            
            
            23,918,497Shareholders’
                equity
            
            
            11,666,996
            
            
            
            
            
            
            
            
            10,114,588Total
                liabilities and shareholders’ equity
            
            **$**
            **148,160,685**
            
            
            
            
            
            
            
            **$**
            **132,449,514**Net
                yield on earning-assets and net interest income (4)
            
            
            
            
            
            5.0
            %
            **$**
            **6,974,721**
            
            
            
            
            
            4.2
            %
            **$**
            **5,187,971**Interest
                rate spread (5)
            
            
            
            
            
            4.2
            %
            
            
            
            
            
            
            
            3.6
            %




(1)
              Nonaccrual
                  loans have been included.
 (2)
              Includes
                  investment in Federal Home Loan
                  Bank.
 (3)
              Yields
                  on tax-exempt investments have been adjusted to the tax equivalent
                  basis
                  using 34%.
 (4)
              Net
                  yield on earning assets is computed by dividing net interest earned
                  by
                  average earning assets.
 (5)
              The
                  interest rate spread is the interest earning assets rate less the
                  interest
                  earning liabilities rate.


Changes
      in interest income and interest expense can result from changes in both volume
      and rates. The following table sets forth the dollar amount of increase
      (decrease) in interest income and interest expense resulting from changes in
      the
      volume of interest earning assets and interest bearing liabilities and from
      changes in yields and rates.





**Interest
      and Rate/Volume Variance**


**For
      the Years Ended December 31,**





**2006
                Compared to 2005**
            
            **2005
                Compared to 2004****Volume
                (1)**
            
            **Rate(1)**
            
            **Total**
            
            **Volume
                (1)**
            
            **Rate
                (1)**
            
            **Total**Interest-bearing
                deposits in other banks
            
            $
            328
            
            $
            24,219
            
            $
            24,547
            
            $
            27,990
            
            $
            (7,341
            )
            $
            20,649Investment
                securities
            
            
            38,860
            
            
            267,008
            
            
            305,868
            
            
            139,303
            
            
            68,880
            
            
            208,183Federal
                funds sold
            
            
            (270,598
            )
            
            109,073
            
            
            (161,525)
            
            
            (29,952
            )
            
            155,518
            
            
            125,566Loans
            
            
            1,664,276
            
            
            1,611,052
            
            
            3,275,328
            
            
            763,333
            
            
            572,340
            
            
            1,335,673Increase
                in interest income
            
            $
            1,432,866
            
            $
            2,011,352
            
            $
            3,444,218
            
            $
            900,674
            
            $
            789,397
            
            $
            1,690,071Interest-bearing
                deposits
            
            $
            273,155
            
            $
            1,196,456
            
            $
            1,469,611
            
            $
            116,156
            
            $
            708,812
            
            $
            824,968Borrowings
            
            
            89,801
            
            
            98,056
            
            
            187,857
            
            
            90,308
            
            
            133,122
            
            
            223,430Increase
                in interest expense
            
            $
            362,956
            
            $
            1,294,512
            
            $
            1,657,468
            
            $
            206,464
            
            $
            841,934
            
            $
            1,048,398








(1)
            The
                rate/volume variance for each category has been allocated equally
                on a
                consistent basis between rate and volume variance.





LIQUIDITY,
      INTEREST RATE SENSITIVITY AND MARKET RISKS


(INCLUDING
      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS)





The
      objectives of the Company’s liquidity management policy include providing
      adequate funds to meet the cash needs of depositors and borrowers, as well
      as
      providing funds to meet the basic needs for on-going operations of the Company
      and regulatory requirements. Depositor cash needs, particularly those of
      commercial depositors, can fluctuate significantly depending on both business
      and economic cycles, while both retail and commercial deposits can fluctuate
      significantly based on the yields


10
 *Index*


and
      returns available from alternative investment opportunities. Borrower cash
      needs
      are also often dependent upon business and economic cycles. In addition, the
      Company’s liquidity is affected by off-balance sheet commitments to lend in the
      forms of unfunded commitments to extend credit and standby letters of credit.
      As
      of December 31, 2006, such unfunded commitments to extend credit were
      $30,044,210.





Neither
      the Company nor its subsidiaries have historically incurred off-balance sheet
      obligations through the use of or investment in off-balance sheet derivative
      financial instruments or structured finance or special purpose entities
      organized as corporations, partnerships, limited liability companies or trusts.
      However, the Bank had contractual off-balance sheet obligations in the form
      of
      noncancelable operating leases with unrelated vendors. As of December 31, 2006,
      payments due under such operating lease arrangements were $216,930, $184,530,
      $184,530, $184,530 and $188,280 in 2007 through 2011, respectively.





Liquidity
      requirements of the Company are met primarily through two categories of funds.
      The first is core deposits, which includes demand deposits, savings accounts
      and
      certificates of deposit. The Company considers these to be a stable portion
      of
      the Company’s liability mix and results of on-going stable commercial and
      consumer banking relationships. At December 31, 2006 and 2005, core deposits
      totaled $116,123,708 or 86%, and $105,872,861 or 89%, respectively, of the
      Company’s total deposits.





The
      other
      principal methods of funding utilized by the Company are through large
      denomination certificates of deposit, federal funds purchased and other
      short-term and long-term borrowings. Upstream correspondent banks, including
      the
      Federal Home Loan Bank of Atlanta, have made available to the Company lines
      of
      credit of approximately $14.7 million. Funding can also be borrowed from the
      Federal Reserve Bank’s discount window. Funds borrowed from the Federal Reserve
      Bank are based upon a percentage of the underlying collateral. The Company
      has
      incurred limited need to borrow from the Federal Reserve Bank; as a result
      no
      securities have been allocated to secure borrowings. The Company’s policy is to
      emphasize core deposit growth rather than purchased or brokered liabilities
      as
      the cost of these funds is greater.





In
      the
      normal course of business, there are various outstanding contractual obligations
      that will require future cash outflows. In addition there are commitments and
      contingent liabilities, such as commitments to extend credit, which may or
      may
      not require future cash outflows. It has been the experience of the Company
      that
      deposit withdrawals are generally replaced with new deposits, thus not requiring
      any cash outflow. Based on that assumption, management believes that it can
      meet
      its contractual cash obligations from normal operations. See Note 14 to the
      consolidated financial statements included elsewhere in this report for more
      information on commitments and contingent liabilities.





The
      Company’s asset/liability management, or interest rate risk management, program
      is focused primarily on evaluating and managing the composition of its assets
      and liabilities in view of various interest rate scenarios. Factors beyond
      the
      Company’s control, such as market interest rates and competition, may also have
      an impact on the Company’s interest income and interest expense.





In
      the
      absence of other factors, the yield or return associated with the Company’s
      earning assets generally will increase from existing levels when interest rates
      rise over an extended period of time and, conversely, interest income will
      decrease when interest rates decline. In general, interest expense will increase
      when interest rates rise over an extended period of time and, conversely,
      interest expense will decrease when interest rates decline.





As
      a part
      of its interest rate risk management policy, the Company calculates an interest
      rate “gap.” Interest rate “gap” analysis is a common, though imperfect, measure
      of interest rate risk, which measures the relative dollar amounts of
      interest-earning assets and interest-bearing liabilities which reprice within
      a
      specific time period, either through maturity or rate adjustment. The “gap” is
      the difference between the amounts of such assets and liabilities that are
      subject to repricing. A “positive” gap for a given period means that the amount
      of interest-earning assets maturing or otherwise repricing within that period
      exceeds the amount of interest-bearing liabilities maturing or otherwise
      repricing within the same period. Accordingly, in a declining interest rate
      environment, an institution with a positive gap would generally be expected,
      absent the effects of other factors, to experience a decrease in the yield
      on
      its assets greater than the decrease in the cost of its liabilities, and its
      net
      interest income should be negatively affected. Conversely, the cost of funds
      for
      an institution with a positive gap would generally be expected to increase
      more
      slowly than the yield on its assets in a rising interest rate environment,
      and
      such institution’s net interest income generally would be expected to be
      positively affected by rising interest rates. Changes in interest rates
      generally have the opposite effect on an institution with a “negative” gap.





The
      majority of the Company’s deposits are rate-sensitive instruments with rates
      which tend to fluctuate with market rates. These deposits, coupled with the
      Company’s short-term time deposits, have increased the opportunities for deposit
      repricing. The Company places great significance on monitoring and managing
      the
      Company’s asset/liability position. The Company’s policy of managing its
      interest margin (or net yield on interest-earning assets) is to maximize net
      interest income while maintaining a stable deposit base. The Company’s deposit
      base is not generally subject to volatility experienced in national financial
      markets in recent years; however, the Company does realize the importance of
      minimizing such volatility while at the same time maintaining and improving
      earnings. A common method used to manage interest rate sensitivity is to
      measure, over various time periods, the difference or gap between the volume
      of
      interest-earning assets and interest-bearing liabilities repricing over a
      specific time period. However, this method addresses only the magnitude of
      funding mismatches and does not address the magnitude or


11
 *Index*


relative
      timing of rate changes. Therefore, management prepares on a regular basis
      earnings projections based on a range of interest rate scenarios of rising,
      flat
      and declining rates in order to more accurately measure interest rate risk.





Interest-bearing
      liabilities and the loan portfolio are generally repriced to current market
      rates. The Company’s balance sheet is asset-sensitive, meaning that in a given
      period there will be more assets than liabilities subject to immediate repricing
      as the market rates change. Because most of the Company’s loans are at variable
      rates, they reprice more rapidly than rate sensitive interest-bearing deposits.
      During periods of rising rates, this results in increased net interest income.
      The opposite occurs during periods of declining rates .





The
      Company uses interest sensitivity analysis to measure the sensitivity of
      projected earnings to changes in interest rates. The sensitivity analysis takes
      into account the current contractual agreements that the Company has on
      deposits, borrowings, loans, investments and any commitments to enter into
      those
      transactions. The Company monitors interest sensitivity by means of computer
      models that incorporate the current volumes, average rates, scheduled maturities
      and payments and repricing opportunities of asset and liability portfolios.
      Using this information, the model estimates earnings based on projected
      portfolio balances under multiple interest rate scenarios. In an effort to
      estimate the effects of pure interest-rate risk, the Company assumes no growth
      in its balance sheet, because to do so could have the effect of distorting
      the
      balance sheet’s sensitivity to changing interest rates. The Company simulates
      the effects of interest rate changes on its earnings by assuming no change
      in
      interest rates as its base case scenario and either (1) gradually increasing
      or
      decreasing interest rates by over a twelve-month period or (2) immediately
      increasing or decreasing interest rates by .25%, .50%, 1% and 2%. Although
      these
      methods are subject to the accuracy of the assumptions that underlie the process
      and do not take into account the pricing strategies that management would
      undertake in response to sudden interest rate changes, the Company believes
      that
      these methods provide a better indication of the sensitivity of earnings to
      changes in interest rates than other analyses.





Income
      simulation through modeling is one tool that the Company uses in the
      asset/liability management process. The Company also considers a number of
      other
      factors in determining its asset/liability and interest rate sensitivity
      management strategies. Management strives to determine the most likely outlook
      for the economy and interest rates by analyzing external factors, including
      published economic projections and data, the effects of likely monetary and
      fiscal policies as well as any enacted or prospective regulatory changes. The
      Company’s current and prospective liquidity position, current balance sheet
      volumes and projected growth, accessibility of funds for short-term needs and
      capital maintenance are also considered. This data is combined with various
      interest rate scenarios to provide management with information necessary to
      analyze interest sensitivity and to aid in the development of strategies to
      manage the Company’s balance sheet.





The
      following table sets forth the amounts of interest-earning assets and
      interest-bearing liabilities outstanding at December 31, 2006, which are
      projected to reprice or mature in each of the future time periods shown. Except
      as stated below, the amounts of assets and liabilities shown which reprice
      or
      mature within a particular period were determined in accordance with the
      contractual terms of the assets or liabilities. Loans with adjustable rates
      are
      shown as being due at the end of the next upcoming adjustment period. In
      addition, the table reflects scheduled principal payments which will be received
      throughout the lives of the loans. The interest rate sensitivity of the
      Company’s assets and liabilities illustrated in the following table would vary
      substantially if different assumptions were used or if actual experience differs
      from that indicated by such assumptions.





**INTEREST
      RATE SENSITIVITY (GAP ANALYSIS)**


**DECEMBER
      31, 2006**





**1
                - 90**
            
            **91
                - 180**
            
            **181
                - 365**
            
            **Total**
            
            **Non-****Days**
            
            **Days**
            
            **Days**
            
            **One
                Year**
            
            **Sensitive**
            
            **Total**Interest-earning
                assets:Interest
                bearing deposits
            
            $
            512,438
            
            $
            -
            
            $
            -
            
            $
            512,438
            
            $
            -
            
            $
            512,438Investment
                securities
            
            
            1,134,512
            
            
            634,572
            
            
            2,269,144
            
            
            4,038,228
            
            
            22,376,772
            
            
            26,415,000Federal
                Home LoanBank
                stock
            
            
            457,000
            
            
            -
            
            
            -
            
            
            457,000
            
            
            -
            
            
            457,000Loans(1)
            
            
            95,825,346
            
            
            3,024,424
            
            
            3,984,146
            
            
            102,833,916
            
            
            18,654,614
            
            
            121,488,530Total
                interest-earning assets
            
            
            97,929,296
            
            
            3,658,996
            
            
            6,253,290
            
            
            107,841,582
            
            
            41,031,386
            
            
            148,872,918Interest-bearing
                liabilities:Time
                deposits
            
            
            21,342,577
            
            
            19,645,394
            
            
            9,032,918
            
            
            50,020,889
            
            
            8,863,475
            
            
            58,884,364All
                other deposits
            
            
            48,523,000
            
            
            -
            
            
            -
            
            
            48,523,000
            
            
            -
            
            
            48,523,000Short-term
                borrowings
            
            
            306,000
            
            
            -
            
            
            -
            
            
            306,000
            
            
            -
            
            
            306,000Long-term
                debt
            
            
            4,124,000
            
            
            -
            
            
            -
            
            
            4,124,000
            
            
            4,000,000
            
            
            8,124,000Total
                interest-bearing liabilities
            
            
            74,295,577
            
            
            19,645,394
            
            
            9,032,918
            
            
            102,973,889
            
            
            12,863,475
            
            
            115,837,364Interest
                sensitivity gap
            
            $
            23,633,719
            
            $
            (15,986,398
            )
            $
            (2,779,628
            )
            $
            4,867,693Cumulative
                interestsensitivity
                gap
            
            $
            23,633,719
            
            $
            7,647,321
            
            $
            4,867,693Interest-earning
                assetsas
                a percent of interestsensitive
                liabilities
            
            
            131.8
            %
            
            18.6
            %
            
            69.2
            %
            
            104.7
            %





(1) Nonaccrual loans have been excluded.


12
 *Index*





The
      Company has established an acceptable range of 80% to 120% for interest-earning
      assets as a percent of interest sensitive liabilities for the total one year
      gap.





The
      following table presents the maturity distribution of the Company’s loans by
      type, including fixed rate loans.





**MATURITIES
      AND SENSITIVITIES OF CERTAIN LOANS TO CHANGES IN INTEREST RATES**


**AS
      OF DECEMBER 31, 2006**





**Within**
            
            **One
                to**
            
            **Five****One**
            
            **Five**
            
            **Years
                or****Year**
            
            **Years**
            
            **More**Commercial,
                financial and agricultural
            
            $
            19,514,920
            
            $
            3,215,092
            
            $
            588,845Real
                estate - mortgage
            
            
            49,634,751
            
            
            14,507,134
            
            
            3,192,535Predetermined
                rate, maturitygreater
                than one year
            
            
            -
            
            
            17,722,226
            
            
            3,781,380Variable
                rate or maturing withinone
                year
            
            
            69,149,671
            
            
            -
            
            
            -





The
      Company paid an average rate of 3.6% on interest-bearing deposits during 2006
      compared to 2.3% during 2005. Significant growth in deposits came from
      interest-bearing accounts. As interest rates demonstrated signs of increase
      during the period, customers continued shifting funds from lower rate bearing
      NOW and money market accounts to higher yielding time deposits. Interest-bearing
      deposits increased $13,458,930 to $107,407,364. Increased customer awareness
      of
      interest rates increases the importance of rate management by the Company.
      The
      Company’s management continuously monitors market pricing, competitor rates, and
      profitability. Deposits continue to be the principal source of funds for
      continued growth, so the Company attempts to structure its rates so as to
      promote deposit and asset growth while at the same time increasing overall
      profit management. The daily average amounts of deposits of the Company are
      summarized below.





**Average
      Deposits**


**For
      the Year Ended December 31, 2006**





Non-interest
                bearing deposits
            
            $
            26,152,829Interest-bearing
            
            
            99,429,058Total
            
            $
            125,581,887


The
      above
      table includes deposits of $100,000 or more, which at December 31, 2006 totaled
      $18,747,373. The table below presents the maturities of deposits of $100,000
      or
      more.





**Maturities
      of Time Deposits of $100,000 or More**


**December
      31, 2006**


GreaterWithin
            
            Within
            
            Within
            
            ThanThree
            
            Six
            
            Twelve
            
            OneMonths
            
            Months
            
            Months
            
            YearTime
                deposits of $100,000 or more
            
            $
            8,140,422
            
            $
            7,281,709
            
            $
            3,114,829
            
            $
            210,413





CAPITAL
      RESOURCES





As
      of
      December 31, 2006 and 2005, the Company’s ratio of total capital to
      risk-adjusted assets was 14.62%, and 15.33%, respectively. Average capital
      to
      average assets totaled 7.87% and 7.64% at December 31, 2006 and 2005,
      respectively. The Company remains well capitalized and fully expects to be
      able
      to meet future capital needs caused by growth and expansion as well as
      regulatory requirements. The Company is not aware of any current recommendation
      by regulatory authorities which if implemented would materially affect the
      Company’s liquidity, capital resources or operations.





As
      of
      December 31, 2006, the Trust had the following Trust Preferred Securities
      outstanding, and the Company had the following issues of junior subordinated
      debentures, all held by the Trust, outstanding:








13
 *Index*





Trust
            
            
            
            JuniorPreferred
            
            
            
            SubordinatedDate
                of
            
            Securities
            
            Interest
            
            Debt
                Owed
            
            Final
                MaturityIssuing
                Entity
            
            Issuance
            
            Outstanding
            
            Rate
            
            To
                Trust
            
            DateWeststar
                Financial Ser-vices
                Corporation I 10/10/2003
            
            $
            4,000,000
            
            
            Floating
            
            
            -
            
            
            10/07/2033Weststar
                Financial Ser-vices
                Corporation
            
            
            10/10/2003
            
            
            -
            
            
            Floating
            
            $
            4,124,000
            
            
            10/07/2033







The
      Company owns all of the common stock of the Trust, which has issued trust
      preferred securities in conjunction with the Company issuing junior subordinated
      debentures to the Trust. The terms of the junior subordinated debentures are
      substantially the same as the terms of the trust preferred securities. The
      Company’s obligations under the debentures and a separate guarantee agreement
      constitute a full and unconditional guarantee by the Company of the obligations
      of the Trust.





Currently,
      regulatory capital rules allow trust preferred securities to be included as
      a
      component of regulatory capital. This treatment has continued despite the
      deconsolidation of these instruments for financial reporting
      purposes.





The
      trust
      preferred securities bear a rate of LIBOR plus 315 basis points and pay
      dividends quarterly. The rate is subject to quarterly resets. The Company’s
      source of funds for the required interest payments is derived from dividends
      paid by the Bank. The trust preferred securities mature 30 years from the
      original date of issuance, and are callable 5 years from the date of issuance.
      At this time, there are no plans to call the securities.





The
      Company used funds from the trust preferred securities to inject approximately
      $3.8 million of capital into the Bank during 2003. Additional capital allows
      the
      Bank to support growth within its existing offices and through opening
      additional offices within its market. Shortly after the issuance of the trust
      preferred securities, the Bank opened its fourth full-service banking office
      in
      Buncombe County and another during 2006.





LOANS





The
      Company makes loans within its market area, defined as Asheville and Buncombe
      County, North Carolina. It makes both commercial and consumer loans. Total
      loans
      outstanding at December 31, 2006 and 2005 were $122,463,720 and $100,493,602,
      respectively. The Company places emphasis on consumer loans and commercial
      loans
      to small businesses and professionals. The Company has a diversified loan
      portfolio with no concentration to any one borrower or industry. The amounts
      and
      types of loans outstanding for the past five years ended December 31 are shown
      on the following table.





**LOANS**


**December
      31,**











**2006******
            
            
            
            **2005**
            
            
            
            **2004**
            
            
            
            **2003**
            
            
            
            **2002****%
                of**
            
            
            
            **%
                of**
            
            
            
            **%of**
            
            
            
            **%
                of**
            
            
            
            **%
                of****Total**
            
            
            
            **Total**
            
            
            
            **Total**
            
            
            
            **Total**
            
            
            
            **Total****Amount**
            
            **Loans**
            
            **Amount**
            
            **Loans**
            
            **Amount**
            
            **Loans**
            
            **Amount**
            
            **Loans**
            
            **Amount**
            
            **Loans**LOANSReal
                estate -Construction
            
            $
            30,224,993
            
            
            25
            %
            $
            19,350,978
            
            
            19
            %
            $
            11,470,223
            
            
            13
            %
            $
            8,372,934
            
            
            11
            %
            $
            12,334,543
            
            
            18
            %Mortgage
            
            
            67,334,420
            
            
            55
            %
            
            59,187,153
            
            
            59
            %
            
            51,633,458
            
            
            61
            %
            
            46,014,134
            
            
            61
            %
            
            37,214,677
            
            
            55
            %Commercial,
                financial andagricultural
            
            
            23,318,857
            
            
            19
            %
            
            19,635,598
            
            
            19
            %
            
            20,162,307
            
            
            24
            %
            
            18,603,317
            
            
            25
            %
            
            16,367,306
            
            
            24
            %Consumer
            
            
            1,851,043
            
            
            1
            %
            
            2,531,935
            
            
            3
            %
            
            1,747,694
            
            
            2
            %
            
            1,909,709
            
            
            3
            %
            
            2,188,840
            
            
            3
            %Total
                loans
            
            
            122,729,313
            
            
            100
            %
            
            100,705,664
            
            
            100
            %
            
            85,013,682
            
            
            100
            %
            
            74,900,274
            
            
            100
            %
            
            68,105,366
            
            
            100
            %Deferred
                originations fees, net
            
            
            (265,593
            )
            
            
            
            
            (212,062
            )
            
            
            
            
            (161,612
            )
            
            
            
            
            (147,208
            )
            
            
            
            
            (127,387
            )Total
                loans, net of deferred fees
            
            $
            122,463,720
            
            
            
            
            $
            100,493,602
            
            
            
            
            $
            84,852,070
            
            
            
            
            $
            74,753,066
            
            
            
            
            $
            67,977,979











14
 *Index*


**NONPERFORMING
      ASSETS**


**December
      31,**





**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**NONPERFORMING
                ASSETSNonaccrual
                loans
            
            $
            975,190
            
            $
            1,754,653
            
            $
            2,567,816
            
            $
            2,145,772
            
            $
            1,079,750Other
                real estate owned
            
            
            106,000
            
            
            127,000
            
            
            401,345
            
            
            1,145,186
            
            
            724,986Repossessions
            
            
            -
            
            
            -
            
            
            42,241
            
            
            121,783
            
            
            67,204Total
            
            $
            1,081,190
            
            $
            1,881,653
            
            $
            3,011,402
            
            $
            3,412,741
            
            $
            1,871,940





Real
      estate loans comprised 80% of the portfolio in 2006 compared to 78% in 2005.
      Commercial loans comprised 19% of the portfolio in 2006 and 2005, while consumer
      loans comprised 1%  in
      2006
      compared to 3% in 2005. Commercial loans of $23,185,857, consumer loans of
      $1,851,043 and real estate mortgage loans of $67,334,420 are loans for which
      the
      principal source of repayment is derived from the ongoing cash flow of the
      business. Real estate construction loans of $30,224,993 are loans for which
      the
      principal source of repayment comes from the sale of real estate or from
      obtaining permanent financing.





The
      Company has various financial instruments (outstanding commitments) with
      off-balance sheet risk that are issued 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. Commitments to
      extend credit are legally binding agreements to lend to a customer as long
      as
      there is no violation of any condition established in the contract. Commitments
      generally are issued at then current market rates and have fixed expiration
      dates of 1 year or other termination clauses. Since many of the commitments
      are
      expected to expire without being drawn upon, the total commitment amounts
      outstanding do not necessarily represent future cash requirements. Standby
      letters of credit represent conditional commitments issued by the Company to
      assure the performance of a customer to a third party. The unused portion of
      commitments to extend credit was $30,044,210 and $25,580,877 at December
      31, 2006 and 2005, respectively.




Any
      loans
      classified by regulatory examiners as loss, doubtful, substandard or special
      mention that have not been disclosed hereunder, or under “loans” or “Asset
      Quality” narrative discussions do not (i) represent or result from trends or
      uncertainties that management expects will materially impact future operating
      results, liquidity or capital resources, or (ii) represent material credits
      about which management is aware of any information that causes management to
      have serious doubts as to the ability of such borrowers to comply with the
      loan
      repayment terms.





The
      recorded investment in loans that are considered to be impaired in accordance
      with criteria set forth in Statement of Financial Accounting Standards No.
      114
      of the Financial Accounting Standards Board was $980,646 and
      $1,792,486 at
      December 31, 2006 and 2005, respectively. The related allowance for loan losses
      determined in accordance with SFAS No. 114 for impaired loans was $3,000
      and $210,044 at December 31, 2006 and 2005, respectively. The average recorded
      investment in impaired loans during the years ended December 31, 2006 and 2005
      was $1,320,500 and $1,576,007, respectively. For the years ended December 31,
      2006 and 2005, the Company recognized interest income from impaired loans of
      $5,270 and $3,451, respectively.








PROVISION
      AND ALLOWANCE FOR LOAN LOSSES





The
      allowance for loan losses is established as losses are estimated to have
      occurred through a provision for loan losses charged to earnings. The provision
      for loan losses is based upon management’s best estimate of the amount needed to
      maintain the allowance for loan losses at an adequate level. Loan losses are
      charged against the allowance when management believes the uncollectibility
      of a
      loan balance is confirmed. Subsequent recoveries, if any, are credited to the
      allowance.




The
      allowance for loan losses is evaluated on a regular basis by management and
      is
      based upon management’s periodic review of the collectibility of the loans in
      light of the current status of the portfolio, historical experience, the nature
      and volume of the loan portfolio, adverse situations that may affect the
      borrower’s ability to repay, estimated value of any underlying collateral, and
      prevailing economic conditions. Management segments the loan portfolio by loan
      type in considering each of the aforementioned factors and their impact upon
      the
      level of the allowance for loan losses.




This
      evaluation is inherently subjective, as it requires estimates that are
      susceptible to significant revision as more information becomes available.
      Therefore, while management uses the best information available to make
      evaluations, future adjustments to the allowance may be necessary if conditions
      differ substantially from the assumptions used in making the evaluations. In
      addition, regulatory examiners may require the Company to recognize changes
      to
      the allowance for loan losses based on their judgments about information
      available to them at the time of their examination.


15
 *Index*


A
      loan is
      considered impaired when, based on current information and events, it is
      probable that the Company will be unable to collect the scheduled payments
      of
      principal or interest when due according to the contractual terms of the loan
      agreement. Factors considered by management in determining impairment include
      payment status, collateral value, and the probability of collecting scheduled
      principal and interest payments when due. Loans that experience insignificant
      payment delays and payment shortfalls generally are not classified as impaired.
      Management determines the significance of payment delays and payment shortfalls
      on a case-by-case basis, taking into consideration all of the circumstances
      surrounding the loan and the borrower, including the length of the delay, the
      reasons for the delay, the borrower’s prior payment record, and the amount of
      the shortfall in relation to the principal and interest owed. Impairment is
      measured on a loan by loan basis for commercial and construction loans by either
      the present value of expected future cash flows discounted at the loan’s
      effective interest rate, the loan’s obtainable market price, or the fair value
      of the collateral if the loan is collateral dependent.




Large
      groups of smaller balance homogeneous loans are collectively evaluated for
      impairment. Accordingly, the Company does not separately identify individual
      consumer and residential loans for impairment disclosures.




The
      provision for loan losses represents a charge against income in an amount
      necessary to maintain the allowance at an appropriate level. The monthly
      provision for loan losses may fluctuate based on the results of this analysis.
      The allowance for loan losses at December 31, 2006 and 2005 was $1,884,080
      and
      $1,760,377 or 1.54% and 1.75%, respectively, of gross loans outstanding. The
      ratio of net charge-offs to average loans outstanding was .14% and .35% during
      2006 and 2005, respectively. Primarily because of a recessionary economy,
      charge-offs in 2003 and 2002 exceeded that of prior historical experiences.





**CHANGES
      IN THE ALLOWANCE FOR LOAN LOSSES**




**2006**
            
            **2005**
            
            **2004**
            
            **2003**
            
            **2002**Balance
                at beginning of year
            
            $
            1,760,377
            
            $
            1,608,366
            
            $
            1,174,003
            
            $
            1,020,198
            
            $
            978,467Loans
                charged-off:Commercial,
                financial and agricultural
            
            
            (163,191
            )
            
            (207,106
            )
            
            (579,930
            )
            
            (1,075,792
            )
            
            (568,710
            )Real
                estate:Construction
            
            
            -
            
            
            -
            
            
            -
            
            
            -
                (127,810
            )Mortgage
            
            
            (14,160
            )
            
            (129,401
            )
            
            (48,000
            )
            
            (157,142
            )
            
            (33,574
            )Consumer
            
            
            (41,104
            )
            
            (33,339
            )
            
            (69,682
            )
            
            (124,680
            )
            
            (159,471
            )Total
                charge-offs
            
            
            (218,455
            )
            
            (369,846
            )
            
            (697,612
            )
            
            (1,357,614
            )
            
            (889,565
            )Recoveries
                of loans previously charged -off:Commercial,
                financial and agricultural
            
            
            22,538
            
            
            28,488
            
            
            73,054
            
            
            71,942
            
            
            19,753Real
                estate:Construction
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            1,531Mortgage
            
            
            -
            
            
            -
            
            
            25,000
            
            
            -
            
            
            13,322Consumer
            
            
            34,975
            
            
            27,099
            
            
            23,621
            
            
            33,677
            
            
            18,770Total
                recoveries
            
            
            57,513
            
            
            55,587
            
            
            121,675
            
            
            105,619
            
            
            53,376Net
                charge-offs
            
            
            (160,942
            )
            
            (314,259
            )
            
            (575,937
            )
            
            (1,251,995
            )
            
            (836,189
            )Provision
                for loan losses
            
            
            284,645
            
            
            466,270
            
            
            1,010,300
            
            
            1,405,800
            
            
            877,920Balance
                at end of year
            
            $
            1,884,080
            
            $
            1,760,377
            
            $
            1,608,366
            
            $
            1,174,003
            
            $
            1,020,198Ratio
                of net charge-offs during the year toaverage
                loans outstanding during the year
            
            
            .14
            %
            
            .35
            %
            
            .72
            %
            
            1.82
            %
            
            1.26
            %





Sustained
      improvements in economic conditions, asset quality and charge-offs have
      justified a lower percentage loan loss reserve at the end of 2006. Management
      has reviewed each non-performing loan, supporting collateral, financial
      stability of each borrower and the relevant loan loss allowance. Based upon
      this
      analysis, management believes the allowance is adequate to support current
      loans
      outstanding. Management has continued its in-depth underwriting analysis,
      training and loan monitoring.





The
      Company does not have any significant loan concentrations. During the period,
      loan terms remained relatively unchanged; however, loan quality reflected
      significant improvement throughout most of the year. Growth in the allowance
      has
      been based upon our formula allowance. Due to the overall consistency of the
      loan portfolio, there has been no reallocation of the allowance among different
      parts of the portfolio.





During
      2006, there were no changes in the estimation methods or assumptions that
      affected our methodology for assessing the appropriateness of the formula and
      specific allowance for credit losses. Changes in estimates and assumptions
      regarding the effects of economic and business conditions on borrowers affect
      the assessment of the allowance.





The
      following table allocates the allowance for loan losses by loan category at
      the
      dates indicated. The allocation of the allowance to each category is not
      necessarily indicative of future losses and does not restrict the use of the
      allowance to absorb losses in any category.


16
 *Index*


**ALLOCATION
      OF THE ALLOWANCE FOR LOAN LOSSES**





**December
      31,**


**2006**
            
            
            
            **2005**
            
            
            
            **2004**
            
            
            
            **2003**
            
            
            
            **2002**%
                of
            
            
            
            %of
            
            
            
            %of
            
            
            
            %of
            
            
            
            %ofTotal
            
            
            
            Total
            
            
            
            Total
            
            
            
            Total
            
            
            
            TotalAmount
            
            Loans
            
            Amount
            
            Loans
            
            Amount
            
            Loans
            
            Amount
            
            Loans
            
            Amount
            
            LoansReal
                estate
            
            $
            1,443,604
            
            
            80
            %
            $
            1,350,460
            
            
            78
            %
            $
            1,139,769
            
            
            74
            %
            $
            863,606
            
            
            72
            %
            $
            690,842
            
            
            73
            %Commercial,
                financialand
                agricultural
            
            
            401,777
            
            
            19
            %
            
            341,925
            
            
            19
            %
            
            388,559
            
            
            24
            %
            
            267,584
            
            
            25
            %
            
            287,860
            
            
            24
            %Consumer
            
            
            38,699
            
            
            1
            %
            
            67,992
            
            
            3
            %
            
            54,528
            
            
            2
            %
            
            3,722
            
            
            3
            %
            
            19,184
            
            
            3
            %Unallocated
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            25,510
            
            
            -
            
            
            19,091
            
            
            -
            
            
            22,312
            
            
            -Total
                allowance
            
            $
            1,884,080
            
            
            100
            %
            $
            1,760,377
            
            
            100
            %
            $
            1,608,366
            
            
            100
            %
            $
            1,174,003
            
            
            100
            %
            $
            1,020,198
            
            
            100
            %




INVESTMENT
      SECURITIES





At
      December 31, 2006 and 2005, securities carried at market value totaled
      $26,241,010 and $27,824,748, respectively, with amortized costs of $26,415,000
      and $28,506,889, respectively. All investment securities are available for
      sale.
      Securities available for sale are securities which will be held for an
      indefinite period of time, including securities that management intends to
      use
      as part of its asset/liability management strategy, or that may be sold in
      response to changes in interest rates, changes in prepayment risk or the need
      to
      increase regulatory capital or other similar factors.





MATURITIES
      AND YIELDS OF DEBT SECURITIES





December
      31, 2006


Available
      for sale: (1)


**Amortized**TYPE
            
            **Cost**
            
            **Yield**(2)U.S.
                Government agencies - within 1year
            
            $
            1,500,000
            
            
            3.9
            %Mortgage-backed
                securities - within 1 to 5 years
            
            
            2,897,219
            
            
            3.8
            %Municipal
                bonds - due within 1 to 5 years
            
            
            557,215
            
            
            5.0
            %Total
                - within 1 to 5 years
            
            
            3,454,434
            
            
            4.0
            %U.S.
                Government agencies - within 5 to 10 years
            
            
            3,421,665
            
            
            5.4
            %Mortgage-backed
                securities - within 5 to 10 years
            
            
            2,761,099
            
            
            4.1
            %Municipal
                bonds - within 5 to 10 years
            
            
            727,973
            
            
            5.0
            %Total
                - within 5 to 10 years
            
            
            6,910,737
            
            
            4.8
            %Mortgage-backed
                securities - greater than 10 years
            
            
            7,202,599
            
            
            5.0
            %Municipal
                bonds - greater than 10 years
            
            
            7,347,230
            
            
            6.3
            %Total
                - greater than 10 years
            
            
            14,549,829
            
            
            5.7
            %Total
            
            $
            26,415,000
            
            
            5.1
            %




December
      31, 2005


Available
      for sale: (1)


**Amortized**TYPE
            
            **Cost**
            
            **Yield**(2)U.S.
                Government agencies - within 1year
            
            $
            1,500,000
            
            
            2.0
            %U.S.
                Government agencies - within 1 to 5 years
            
            $
            10,005,602
            
            
            3.8
            %Mortgage-backed
                securities - within 1 to 5 years
            
            
            3,618,068
            
            
            3.8
            %Municipal
                bonds - due within 1 to 5 years
            
            
            251,883
            
            
            5.6
            %Total
                - within 1 to 5 years
            
            
            13,875,553
            
            
            3.8
            %U.S.
                Government agencies - within 5 to 10 years
            
            
            1,921,409
            
            
            4.8
            %Mortgage-backed
                securities - within 5 to 10 years
            
            
            3,527,693
            
            
            4.0
            %Municipal
                bonds - within 5 to 10 years
            
            
            1,054,856
            
            
            4.8
            %Total
                - within 5 to 10 years
            
            
            6,503,958
            
            
            4.3
            %Mortgage-backed
                securities - greater than 10 years
            
            
            1,781,885
            
            
            4.5
            %Municipal
                bonds - greater than 10 years
            
            
            4,845,493
            
            
            6.3
            %Total
                - greater than 10 years
            
            
            6,627,378
            
            
            5.8
            %Total
            
            $
            28,506,889
            
            
            4.3
            %


(1)
            Securities
                available for sale are stated at amortized
                cost.


(2)
            Yields
                on tax-exempt securities have been adjusted to the tax equivalent
                basis
                using 34%.


17
 *Index*


SIGNIFICANT
      ACCOUNTING POLICIES AND ESTIMATES





Management’s
      discussion and analysis of the Company’s financial condition and results of
      operations are based upon the Company’s consolidated financial statements, which
      have been prepared in accordance with accounting principles generally accepted
      in the United States. The preparation of these financial statements requires
      the
      Company to make estimates and judgments regarding uncertainties that affect
      the
      reported amounts of assets, liabilities, revenues and expenses. On an ongoing
      basis, the Company evaluates its estimates which are based upon historical
      experience and on other assumptions that are believed to be reasonable under
      the
      circumstances. Actual results may differ from these estimates under different
      assumptions or conditions.





The
      Company’s significant accounting policies are described in Note 1 to the
      consolidated financial statements. The Company considers the following
      accounting policies to be most critical in their potential effect on its
      financial position or results of operations:





ALLOWANCE
      FOR LOAN LOSSES





The
      most
      critical estimate concerns the Company’s allowance for loan losses. The Company
      records provisions for loan losses based upon known problem loans and estimated
      deficiencies in the existing loan portfolio. The Company’s methodology for
      assessing the appropriations of the allowance for loan losses consists of two
      key components, which are a specific allowance for identified problem or
      impaired loans and a formula allowance for the remainder of the portfolio. ****





Identified
      problem and impaired loans are measured for impairment based on the present
      value of expected future cash flows discounted at the loan’s effective interest
      rate, the loan’s observable market price or the fair value of the collateral, if
      the loan is collateral dependent. This evaluation is inherently subjective,
      as
      it requires material estimates that may be susceptible to significant change.
      The adequacy of the allowance is also reviewed by management based upon its
      evaluation of then-existing economic and business conditions affecting the
      key
      lending areas of the Company and other conditions, such as new loan products,
      collateral values, loan concentrations, changes in the mix and volume of the
      loan portfolio; trends in portfolio credit quality, including delinquency and
      charge-off rates; and current economic conditions that may affect a borrower’s
      ability to repay. Although management believes it has established and maintained
      the allowance for loan losses at appropriate levels, future adjustments may
      be
      necessary if economic, real estate and other conditions differ substantially
      from the current operating environment.





INTEREST
      INCOME RECOGNITION





Interest
      on loans is included in income as earned based upon interest rates applied
      to
      unpaid principal. Interest is not accrued on commercial and mortgage loans
      90
      days or more past due. Interest is not accrued on other loans when management
      believes collection is doubtful. Interest accrued during the current calendar
      year but not collected for loans that are charged-off is reversed against
      interest income. Accrued but uncollected interest from prior periods is
      charged-off against the allowance for loan losses. Interest on nonaccrual loans
      is accounted for on the cash-basis or cost-recovery method until qualifying
      for
      return to accrual. Loans are returned to accrual status when all the principal
      and interest amounts contractually due are brought current and future payments
      are reasonably assured.





INFLATION





Since
      the
      assets and liabilities of a bank are primarily monetary in nature (payable
      in
      fixed, determinable amounts), the performance of a bank is affected more by
      changes in interest rates than inflation. Interest rates generally increase
      as
      the rate of inflation increases, but the magnitude of the change in rates may
      not be the same.





While
      the
      effect of inflation is normally not as significant as it is on those businesses
      that have large investments in plant and inventories, it does have an effect.
      There are normally corresponding increases in the money supply, and banks will
      normally experience above average growth in assets, loans and deposits. Also,
      general increases in the prices of goods and services will result in increased
      operating expense.





18
 *Index*


**SELECTED
      FINANCIAL INFORMATION AND OTHER DATA**





**SELECTED
                AVERAGE BALANCES:****2006**
            
            **Yield**
            
            **2005**
            
            **Yield**Non-interest
                bearing demand deposits
            
            $
            26,152,829
            
            
            
            
            $
            23,062,027Interest-bearing
                demand deposits
            
            
            45,304,319
            
            
            2.4
            %
            
            52,990,891
            
            
            1.2
            %Savings
                deposits
            
            
            2,177,100
            
            
            .5
            %
            
            2,258,496
            
            
            .3
            %Time
                deposits
            
            
            51,947,639
            
            
            4.7
            %
            
            34,926,440
            
            
            2.1
            %Total
                deposits
            
            $
            125,581,887
            
            
            
            
            $
            113,237,854**SELECTED
                PERFORMANCE RATIOS:**Return
                on average assets
            
            
            1.39
            %
            
            
            
            
            .81
            %Return
                on average equity
            
            
            17.68
            %
            
            
            
            
            10.67
            %Dividend
                payout ratio
            
            
            0
            %
            
            
            
            
            0
            %Equity
                to assets ratio
            
            
            7.87
            %
            
            
            
            
            7.64
            %


FORWARD
      LOOKING STATEMENTS





The
      discussions presented in this annual report contain statements that could be
      deemed forward looking statements within the meaning of the Securities Exchange
      Act of 1934 and the Private Securities Litigation Reform Act of 1995, which
      statements are inherently subject to risks and uncertainties. Forward looking
      statements are statements that include projections, predictions, expectations
      or
      beliefs about future events or results or otherwise are not statements of
      historical fact. Such statements are often characterized by the use of
      qualifying words (and their derivatives) such as “expects,” “anticipates,”
“believes,” “estimates,” “plans,” “projects,” or other statements concerning
      opinions or judgments of the Company and its management about future events.
      Factors that could influence the accuracy of such forward looking statements
      include, but are not limited to, the financial success or changing strategies
      of
      the Company’s customers or vendors, actions of government regulators, the level
      of market interest rates, and general economic conditions.





OFF-BALANCE
      SHEET ARRANGEMENTS





The
      Company has various financial instruments (outstanding commitments) with
      off-balance sheet risk that are issued in the normal course of business to
      the
      meet the financing needs of its customers. See Note 14 to the consolidated
      financial statements included elsewhere in this report for more information
      regarding these commitments and contingent liabilities.





19
 *Index*


**ITEM
      7: FINANCIAL STATEMENTS**








**WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY**


**INDEX
      TO THE CONSOLIDATED FINANCIAL STATEMENTS**





Page
                No.Report
                of Independent Registered Public Accounting
                Firm
            21Consolidated
                Balance Sheets as of December 31, 2006 and
                2005
            22Consolidated
                Statements of Operations and Comprehensive
                Incomefor
                the years ended December 31, 2006 and
                2005
            23Consolidated
                Statements of Changes in Shareholders’ Equityfor
                the years ended December 31, 2006 and
                2005
            25Consolidated
                Statements of Cash Flowsfor
                the years ended December 31, 2006 and
                2005
            26Notes
                to Consolidated Financial Statements
            27








20
 *Index*










***REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
      FIRM***











Board
      of
      Directors and Shareholders of


Weststar
      Financial Services Corporation:





We
      have
      audited the accompanying consolidated balance sheets of Weststar Financial
      Services Corporation and Subsidiary (the “Company”) as of December 31, 2006 and
      2005 and the related consolidated statements of operations and comprehensive
      income, changes in shareholders’ equity, and cash flows for the years then
      ended. These consolidated financial statements are the responsibility of the
      Company’s management. Our responsibility is to express an opinion on these
      financial statements based on our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. We were not engaged to perform
      an
      audit of the Company’s internal control over financial reporting. Our audit
      included consideration of internal control over financial reporting as a basis
      for designing audit procedures that are appropriate in the circumstances, but
      not for the purpose of expressing an opinion on the effectiveness of the
      Company’s internal control over financial reporting. Accordingly, we express no
      such opinion. An audit also includes examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      as
      well as evaluating the overall financial statement presentation. We believe
      that
      our audits provide a reasonable basis for our opinion.





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of the Weststar Financial
      Services Corporation and Subsidiary as of December 31, 2006 and 2005 and
      the results of their operations and their cash flows for the years then ended
      in
      conformity with accounting principles generally accepted in the United States
      of
      America.











*Charlotte,
      North Carolina*


*February
      23, 2007*





21
 *Index*


***WESTSTAR
      FINANCIAL SERVICES CORPORATION &
SUBSIDIARY***


***CONSOLIDATED
      BALANCE SHEETS***


***December
      31, 2006 and 2005***





**ASSETS**
            
            2006
            
            2005Cash
                and cash equivalents:Cash
                and due from banks
            
            $
            4,514,189
            
            $
            6,243,192Interest-bearing
                deposits
            
            
            512,438
            
            
            350,770Federal
                funds sold
            
            
            -
            
            
            267,000Total
                cash and cash equivalents
            
            
            5,026,627
            
            
            6,860,962Investment
                securities - available for sale, at fair value(amortized
                cost of $26,415,000 and $28,506,889 atDecember
                31, 2006 and 2005, respectively)
            
            
            26,241,010
            
            
            27,824,748Loans
            
            
            122,463,720
            
            
            100,493,602Allowance
                for loan losses
            
            
            (1,884,080
            )
            
            (1,760,377
            )Net
                loans
            
            
            120,579,640
            
            
            98,733,225Premises
                and equipment, net
            
            
            3,004,590
            
            
            2,584,841Accrued
                interest receivable
            
            
            922,880
            
            
            707,771Federal
                Home Loan Bank stock, at cost
            
            
            457,000
            
            
            531,500Deferred
                income taxes
            
            
            519,456
            
            
            715,307Foreclosed
                properties
            
            
            106,000
            
            
            127,000Other
                assets
            
            
            787,259
            
            
            668,181TOTAL
            
            $
            157,644,462
            
            $
            138,753,535**LIABILITIES
                AND SHAREHOLDERS’ EQUITY**LIABILITIES:Deposits:Demand
            
            $
            27,463,717
            
            $
            25,164,465NOW
                accounts
            
            
            14,198,547
            
            
            18,102,736Money
                market accounts
            
            
            32,367,876
            
            
            29,901,364Savings
            
            
            1,956,577
            
            
            2,382,672Time
                deposits of $100,000 or more
            
            
            18,747,373
            
            
            13,240,038Other
                time deposits
            
            
            40,136,991
            
            
            30,321,624Total
                deposits
            
            
            134,871,081
            
            
            119,112,899Short-term
                borrowings
            
            
            306,000
            
            
            -Accrued
                interest payable
            
            
            498,390
            
            
            266,835Other
                liabilities
            
            
            872,138
            
            
            653,258Long-term
                debt
            
            
            8,124,000
            
            
            8,124,000Total
                liabilities
            
            
            144,671,609
            
            
            128,156,992COMMITMENTS
                AND CONTINGENCIES (Note 14)SHAREHOLDERS’
                EQUITY:Preferred
                stock, no par value, authorized - 1,000,000 shares;no
                shares issued and outstanding
            
            
            -
            
            
            -Common
                stock, $1 par value, authorized - 9,000,000 shares;outstanding
                shares - 1,682,290 and 1,401,266 atDecember
                31, 2006 and 2005, respectively
            
            
            1,682,290
            
            
            1,401,266Additional
                paid-in capital
            
            
            6,528,387
            
            
            6,805,331Retained
                earnings
            
            
            4,869,092
            
            
            2,809,122Accumulated
                other comprehensive loss
            
            
            (106,916
            )
            
            (419,176
            )Total
                shareholders’ equity
            
            
            12,972,853
            
            
            10,596,543TOTAL
            
            $
            157,644,462
            
            $
            138,753,535





See
          Notes
          to Consolidated Financial Statements.
 22
 *Index*


***WESTSTAR
      FINANCIAL SERVICES CORPORATION &******SUBSIDIARY***


***CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME***


***Years
      Ended December 31, 2006 and 2005***








2006
            
            2005INTEREST
                AND DIVIDEND INCOME:Interest
                and fees on loans
            
            $
            9,836,640
            
            $
            6,561,312Federal
                funds sold
            
            
            106,097
            
            
            267,622Interest-bearing
                deposits
            
            
            56,119
            
            
            31,572Investments:Taxable
                interest income
            
            
            825,639
            
            
            756,853Non-taxable
                interest income
            
            
            317,439
            
            
            92,723Dividends
            
            
            28,738
            
            
            16,372Total
                interest and dividend income
            
            
            11,170,672
            
            
            7,726,454INTEREST
                EXPENSE:Time
                deposits of $100,000 or more
            
            
            836,061
            
            
            325,505Other
                time and interest bearing-deposits
            
            
            2,726,494
            
            
            1,767,439Short-term
                borrowings
            
            
            87,335
            
            
            17,739Long-term
                debt
            
            
            546,061
            
            
            427,800Total
                interest expense
            
            
            4,195,951
            
            
            2,538,483NET
                INTEREST INCOME
            
            
            6,974,721
            
            
            5,187,971PROVISION
                FOR LOAN LOSSES
            
            
            284,645
            
            
            466,270NET
                INTEREST INCOME AFTER PROVISION FORLOAN
                LOSSES
            
            
            6,690,076
            
            
            4,721,701OTHER
                INCOME:Service
                charges on deposit accounts
            
            
            1,194,696
            
            
            1,183,798Other
                service fees and commissions
            
            
            310,528
            
            
            287,568Securities
                losses
            
            
            (249,674
            )
            
            (92,012
            )Equity
                in income (loss) of Bank of Asheville Mortgage Company, LLC
            
            
            810
            
            
            (7,874
            )Other
            
            
            106,701
            
            
            60,406Total
                other income
            
            
            1,363,061
            
            
            1,431,886OTHER
                EXPENSES:Salaries
                and wages
            
            
            2,087,074
            
            
            1,821,107Employee
                benefits
            
            
            311,557
            
            
            319,525Occupancy
                expense, net
            
            
            395,132
            
            
            310,683Equipment
                rentals, depreciation and maintenance
            
            
            396,816
            
            
            373,560Supplies
            
            
            261,603
            
            
            247,863Data
                processing fees
            
            
            658,704
            
            
            514,876Professional
                fees
            
            
            223,986
            
            
            282,328Marketing
            
            
            250,948
            
            
            228,036Net
                expenses from foreclosed properties
            
            
            28,324
            
            
            101,937Other
            
            
            300,583
            
            
            264,896Total
                other expenses
            
            
            4,914,727
            
            
            4,464,811INCOME
                BEFORE INCOME TAX PROVISION
            
            
            3,138,410
            
            
            1,688,776INCOME
                TAX PROVISION
            
            
            1,075,678
            
            
            610,025NET
                INCOME
            
            $
            2,062,732
            
            $
            1,078,751


See
          Notes
          to Consolidated Financial Statements.
 23
 *Index*


***WESTSTAR
      FINANCIAL SERVICES CORPORATION &*** ***SUBSIDIARY***


***CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
      (Continued)***


***Years
      Ended December 31, 2006 and 2005***





2006
            
            2005OTHER
                COMPREHENSIVE INCOME (LOSS) BEFORE TAX:Unrealized
                holding gains (losses) on securitiesavailable
                for sale
            
            $
            258,478
            
            $
            (579,716
            )Tax
                effect
            
            
            (99,643
            )
            
            223,481Unrealized
                holding gains (losses) on securitiesavailable
                for sale, net of tax
            
            
            158,835
            
            
            (356,235
            )Reclassification
                adjustment for realized losses
            
            
            249,674
            
            
            92,012Tax
                effect
            
            
            (96,249
            )
            
            (35,471
            )Reclassification
                adjustment for realized losses,net
                of tax
            
            
            153,425
            
            
            56,541OTHER
                COMPREHENSIVE INCOME (LOSS), NET OF TAX
            
            
            312,260
            
            
            (299,694
            )COMPREHENSIVE
                INCOME
            
            $
            2,374,992
            
            $
            779,057BASIC
                NET INCOME PER COMMON SHARE
            
            $
            1.23
            
            $
            .64DILUTED
                NET INCOME COMMON PER SHARE
            
            $
            1.13
            
            $
            .60








See
            Notes
            to Consolidated Financial Statements.
 24
 *Index*


***WESTSTAR
      FINANCIAL SERVICES CORPORATION &
SUBSIDIARY***


***CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY***


***Years
      Ended December 31, 2006 and 2005***





AccumulatedOtherAdditional
            
            Compre-
            
            TotalCommon
                Stock
            
            Paid-In
            
            Retained
            
            hensive
            
            Shareholders’Shares
            
            Amount
            
            Capital
            
            Earnings
            
            Loss
            
            EquityBALANCE,
                DECEMBER 31, 2004
            
            
            1,166,208
            
            
            1,166,208
            
            $
            7,030,589
            
            $
            1,732,872
            
            $
            (119,482
            )
            $
            9,810,187Six-for-five
                stock split
            
            
            233,058
            
            
            233,058
            
            
            (233,058
            )
            
            -
            
            
            -
            
            
            -Net
                unrealized lossessecurities
                available for sale
            
            
            -
            
            
            -
            
            
            -
            
            
            -
            
            
            (299,694
            )
            
            (299,694
            )Issuance
                of common stock pursuantto
                the exercise of stock options
            
            
            2,000
            
            
            2,000
            
            
            7,800
            
            
            -
            
            
            -
            
            
            9,800Cash
                paid in lieu of fractional shares
            
            
            -
            
            
            -
            
            
            -
            
            
            (2,501
            )
            
            -
            
            
            (2,501
            )Net
                income
            
            
            -
            
            
            -
            
            
            -
            
            
            1,078,751
            
            
            -
            
            
            1,078,751BALANCE,
                DECEMBER 31, 2005
            
            
            1,401,266
            
            
            1,401,266
            
            
            6,805,331
            
            
            2,809,122
            
            
            (419,176
            )
            
            10,596,543Six-for-five
                stock split
            
            
            280,024
            
            
            280,024
            
            
            (280,024
            )Net
                unrealized gainssecurities
                available for sale
            
            
            
            
            
            
            
            
            
            
            
            312,260
            
            
            312,260Issuance
                of common stock pursuantto
                the exercise of stock options
            
            
            1,000
            
            
            1,000
            
            
            3,080
            
            
            
            
            
            4,080Cash
                paid in lieu of fractional shares
            
            
            
            
            
            
            
            
            (2,762
            )
            
            
            
            
            (2,762
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            
            2,062,732
            
            
            
            
            
            2,062,732BALANCE,
                DECEMBER 31, 2006
            
            
            1,682,290
            
            $
            1,682,290
            
            $
            6,528,387
            
            $
            4,869,092
            
            $
            (106,916
            )
            $
            12,972,853








See
            Notes
            to Consolidated Financial Statements.
 25
 *Index*


***WESTSTAR
      FINANCIAL SERVICES CORPORATION &
SUBSIDIARY***


***CONSOLIDATED
      STATEMENTS OF CASH FLOWS***


***Years
      Ended December 31, 2006 and 2005***





2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            2,062,732
            
            $
            1,078,751Adjustments
                to reconcile net income to netcash
                provided by operating activities:Depreciation
            
            
            367,972
            
            
            359,782Provision
                for loan losses
            
            
            284,645
            
            
            466,270Premium
                amortization and discount accretion, net
            
            
            12,873
            
            
            89,401Deferred
                income tax provision
            
            
            (42
            )
            
            (137,157
            )Net
                expenses from foreclosed properties
            
            
            25,110
            
            
            91,438Loss
                on disposals of premises and equipment
            
            
            2,067
            
            
            4,500Losses
                on sales of securities
            
            
            249,674
            
            
            92,012Increase
                in accrued interest receivable
            
            
            (215,105
            )
            
            (142,955
            )(Increase)
                decrease in other assets
            
            
            (119,081
            )
            
            85,296Increase
                in accrued interest payable
            
            
            231,555
            
            
            128,473Increase
                in other liabilities
            
            
            218,880
            
            
            160,848Net
                cash provided by operating activities
            
            
            3,121,280
            
            
            2,276,659CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of securities available for sale
            
            
            (10,653,655
            )
            
            (13,683,285
            )Maturities
                of securities available for sale
            
            
            2,480,092
            
            
            2,779,880Net
                increase in loans
            
            
            (22,304,987
            )
            
            (16,000,743
            )Proceeds
                from the sales of foreclosed properties
            
            
            169,817
            
            
            195,100Proceeds
                from sales of securities
            
            
            10,002,906
            
            
            5,516,201Proceeds
                from sales of premises and equipment
            
            
            50
            
            
            2,143Additions
                to premises and equipment
            
            
            (789,838
            )
            
            (301,110
            )Purchase
                of Federal Home Loan Bank Stock
            
            
            (341,800
            )
            
            (223,600
            )FHLB
                Stock Redemption
            
            
            416,300
            
            
            -Net
                cash used in investing activities
            
            
            (21,021,115
            )
            
            (21,715,414
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                increase (decrease) in demand deposits, NOWaccounts
                and savings accounts
            
            
            435,480
            
            
            (10,121,830
            )Net
                increase in certificates of deposits
            
            
            15,322,702
            
            
            14,792,981Net
                increase in overnight borrowings
            
            
            306,000
            
            
            -Cash
                paid in lieu of fractional shares
            
            
            (2,762
            )
            
            (2,501
            )Issuance
                of common stock
            
            
            4,080
            
            
            9,800Proceeds
                from FHLB advances
            
            
            14,820,000
            
            
            4,000,000Maturities
                of FHLB advances
            
            
            (14,820,000
            )
            
            (2,000,000
            )Net
                cash provided by financing activities
            
            
            16,065,500
            
            
            6,678,450NET
                DECREASE IN CASH AND CASH EQUIVALENTS
            
            
            (1,834,335
            )
            
            (12,760,305
            )CASH
                AND CASH EQUIVALENTS:Beginning
                of year
            
            
            6,860,962
            
            
            19,621,267End
                of year
            
            $
            5,026,627
            
            $
            6,860,962SUPPLEMENTAL
                DISCLOSURE:Cash
                paid for interest
            
            $
            3,964,396
            
            $
            2,410,010Cash
                paid for income taxes
            
            $
            1,115,472
            
            $
            749,144NONCASH
                TRANSACTIONS:Loans
                transferred to foreclosed properties
            
            $
            173,927
            
            $
            44,952Loans
                receivable to finance other real estate owned
            
            $
            -
            
            $
            75,000Net
                unrealized gain (loss) on investment securities availablefor
                sale, net of deferred income tax expense (benefit)
            
            $
            (106,916
            )
            $
            (419,176
            )




See
                Notes
                to Consolidated Financial Statements.
 26
 *Index*
  ***WESTSTAR
        FINANCIAL SERVICES CORPORATION &
SUBSIDIARY***
 ***NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
        Ended December 31, 2006 and 2005***


**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING
                POLICIES**





***Organization*** -
      Weststar Financial Services Corporation is a holding company with one
      subsidiary, The Bank of Asheville (the “Bank”). The Bank is a state chartered
      commercial bank which was incorporated in North Carolina on October 29, 1997.
      The Bank provides consumer and commercial banking services in Buncombe County
      and surrounding areas. Common shares of The Bank of Asheville were exchanged
      for
      common shares of Weststar Financial Services Corporation on April 29, 2000.
      Weststar Financial Services Corporation formed the Weststar Financial Services
      Corporation I (the “Trust”) during October 2003 in order to facilitate the
      issuance of trust preferred securities. The Trust is a statutory business trust
      formed under the laws of the state of Delaware, of which all common securities
      are owned by Weststar Financial Services Corporation. Bank of Asheville Mortgage
      Company, LLC (the “Mortgage Company”) is a state chartered mortgage bank which
      was incorporated in North Carolina on October 19, 2004 of which Weststar
      Financial Services Corporation is a 50% owner. The Mortgage Company originates
      conventional mortgage loans.




***Basis
      of Presentation*** - The
      consolidated financial statements include the accounts of Weststar Financial
      Services Corporation and its subsidiary, The Bank of Asheville (herein referred
      to collectively as the “Company”). All significant intercompany accounts and
      transactions have been eliminated.




***Cash
      and Cash Equivalents*** - Cash
      and cash equivalents include cash on hand, amounts due from banks, and federal
      funds sold. Generally, federal funds are purchased and sold for one-day periods.




***Investment
      Securities*** - Debt
      securities that the Company has the positive intent and ability to hold to
      maturity are
      classified as “held-to-maturity securities” and reported at amortized cost. Debt
      and equity securities that are bought and held principally for the purpose
      of
      selling in the near term are classified as “trading securities” and reported at
      fair value, with unrealized gains and losses included in earnings. Debt
      securities not classified as either held-to-maturity securities or trading
      securities and equity securities not classified as trading securities are
      classified as “available-for-sale securities” and reported at fair value, with
      unrealized gains and losses reported as a component of other comprehensive
      income. Gains and losses on held for investment securities are recognized at
      the
      time of sale based upon the specific identification method. Declines in the
      fair
      value of individual held-to-maturity and available-for-sale securities below
      their cost that are other than temporary, result in writedowns of the individual
      securities to their fair value. The related writedowns are included in earnings
      as realized losses. Premiums and discounts are recognized in interest expense
      or
      interest income, respectively, using the interest method over the period to
      maturity. Transfers of securities between classifications are accounted for
      at
      fair value. The Company has not classified any securities as trading or
      held-to-maturity securities.




***Loans*** - Loans
      that management has the intent and ability to hold for the foreseeable future
      or
      until maturity or pay-off generally are reported at their outstanding unpaid
      principal balances adjusted for charge-offs and any deferred fees or costs
      on
      originated loans.




***Allowance
      for Loan Losses*** - The
      allowance for loan losses is established as losses are estimated to have
      occurred through a provision for loan losses charged to earnings. The provision
      for loan losses is based upon management’s best estimate of the amount needed to
      maintain the allowance for loan losses at an adequate level. Loan losses are
      charged against the allowance when management believes the uncollectibility
      of a
      loan balance is confirmed. Subsequent recoveries, if any, are credited to the
      allowance.




The
      allowance for loan losses is evaluated on a regular basis by management and
      is
      based upon management’s periodic review of the collectibility of the loans in
      light of the current status of the portfolio, historical experience, the nature
      and volume of the loan portfolio, adverse situations that may affect the
      borrower’s ability to repay, estimated value of any underlying collateral, and
      prevailing economic conditions. Management segments the loan portfolio by loan
      type in considering each of the aforementioned factors and their impact upon
      the
      level of the allowance for loan losses.


27
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





***Allowance
      for Loan Losses (Continued)***


This
      evaluation is inherently subjective as it requires estimates that are
      susceptible to significant revision as more information becomes available.
      Therefore, while management uses the best information available to make
      evaluations, future adjustments to the allowance may be necessary if conditions
      differ substantially from the assumptions used in making the evaluations. In
      addition, regulatory examiners may require the Company to recognize changes
      to
      the allowance for loan losses based on their judgments about information
      available to them at the time of their examination.





A
      loan is
      considered impaired when, based on current information and events, it is
      probable that the Company will be unable to collect the scheduled payments
      of
      principal or interest when due according to the contractual terms of the loan
      agreement. Factors considered by management in determining impairment include
      payment status, collateral value, and the probability of collecting scheduled
      principal and interest payments when due. Loans that experience insignificant
      payment delays and payment shortfalls generally are not classified as impaired.
      Management determines the significance of payment delays and payment shortfalls
      on a case-by-case basis, taking into consideration all of the circumstances
      surrounding the loan and the borrower, including the length of the delay, the
      reasons for the delay, the borrower’s prior payment record, and the amount of
      the shortfall in relation to the principal and interest owed. Impairment is
      measured on a loan by loan basis for commercial and construction loans by either
      the present value of expected future cash flows discounted at the loan’s
      effective interest rate, the loan’s obtainable market price, or the fair value
      of the collateral if the loan is collateral dependent.


Large
      groups of smaller balance homogeneous loans are collectively evaluated for
      impairment. Accordingly, the Company does not separately identify individual
      consumer and residential loans for impairment disclosures.




***Mortgage
      Servicing Rights***




When
      mortgage loans are sold, the proceeds are allocated between the related loans
      and the retained servicing rights based on their relative fair values. Servicing
      assets are amortized over the average period of estimated net servicing income.
      The Company recorded amortization of mortgage servicing rights of $3,647 during
      the year ended December 31, 2006.




All
      servicing assets are assessed for impairment based on their fair value. The
      Company recognized no impairment during the year ended December 31,
      2006.




***Stock
      Compensation Plans*** - Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123R (revised 2004), "Share-Based Payment," ("SFAS No. 123R") which was
      issued by the Financial Accounting Standards Board (“FASB”) in December 2004.
      SFAS No. 123R revises SFAS No. 123 "Accounting for Stock Based Compensation,"
      and supersedes APB No. 25, "Accounting for Stock Issued to Employees," (APB
      No.
      25) and its related interpretations. SFAS No.123R requires recognition of the
      cost of employee services received in exchange for an award of equity
      instruments in the financial statements over the period the employee is required
      to perform the services in exchange for the award (presumptively the vesting
      period). SFAS No. 123R also requires measurement of the cost of employee
      services received in exchange for an award based on the grant-date fair value
      of
      the award. SFAS No. 123R also amends SFAS No. 95 "Statement of Cash Flows,"
      to
      require that excess tax benefits be reported as financing cash inflows, rather
      than as a reduction of taxes paid, which is included within operating cash
      flows.





The
      Company adopted SFAS No. 123R using the modified prospective application as
      permitted under SFAS No. 123R. Accordingly, prior period amounts have not been
      restated. Under this application, the Company is required to record compensation
      expense for all awards granted after the date of adoption and for the unvested
      portion of previously granted awards that remain outstanding at the date of
      adoption. Prior to the adoption of SFAS No. 123R, the Company used the intrinsic
      value method as prescribed by APB No. 25 and thus recognized no compensation
      expense for options granted with exercise prices equal to the fair market value
      of the Company's common stock on the date of grant.


28
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





***Stock
      Compensation Plans (Continued)***


At
      December 31, 2006, the Company had two stock-based compensation plans, which
      had
      fully vested during 2005. Prior to January 1, 2006, the Company accounted for
      compensation costs related to the Company’s stock option plans using the
      intrinsic value method. Therefore, no compensation costs had been recognized
      for
      stock option awards because the options were granted at exercise prices based
      on
      the market value of the Company’s stock on the date of grant. The following
      illustrates the effect on net income available to common stockholders if the
      Company had applied the fair value recognition provisions of SFAS No. 123 to
      the
      prior year three and six months ended June 30, 2005 (in thousands, except per
      share data):




2005Net
                income as reported
            
            $
            1,078,751Less:
                Total stock-based employee compensation expensedetermined
                under fair value method for all awards, netof
                related tax effects
            
            
            47,703Pro
                forma net income
            
            $
            1,031,048Net
                income per share:As
                reported:Basic
            
            $
            .64Diluted
            
            $
            .60Pro
                forma:Basic
            
            $
            .61Diluted
            
            $
            .59





***Stock
      in Federal Home Loan Bank*** - As a
      requirement for membership, the Bank invested in stock of the Federal Home
      Loan
      Bank of Atlanta. This investment is carried at cost.




***Premises
      and Equipment and Other Long-Lived Assets*** -
      Premises and equipment are stated at cost less accumulated depreciation and
      amortization. Depreciation and amortization, computed by the straight-line
      method, are charged to operations over the assets’ estimated useful lives, which
      range from 25 to 39 years for buildings, 5 to 15 years for furniture and
      equipment or, in the case of leasehold improvements, the term of the lease,
      if
      shorter. Maintenance and repairs are charged to operations in the year incurred.
      Gains and losses on dispositions are included in current operations.




The
      Company reviews long-lived assets and certain identifiable intangibles for
      impairment whenever events or changes in circumstances indicate that the
      carrying amount of an asset may not be recoverable. If the sum of the expected
      cash flows related to the asset is less than the stated amount of the asset,
      an
      impairment loss is recognized.


***Foreclosed
      Properties*** - Assets
      acquired through, or in lieu of, loan foreclosure are held for sale and are
      initially recorded at fair value at the date of foreclosure, establishing a
      new
      cost basis. Subsequent to foreclosure, valuations are periodically performed
      by
      management and the assets are carried at the lower of carrying amount or fair
      value less cost to sell. Revenue and expenses from operations and changes in
      the
      valuation allowance are included in net expenses from foreclosed properties.




***Income
      Taxes*** -
      Deferred income taxes are computed using the asset and liability approach.
      The
      tax effects of differences between the tax and financial accounting bases of
      assets and liabilities are reflected in the balance sheet at the tax rates
      expected to be in effect when the differences reverse. A valuation allowance
      is
      provided against deferred tax assets when realization is deemed not to be
      likely. As changes in tax laws or rates are enacted, deferred tax assets and
      liabilities are adjusted through the provision for income taxes.




***Interest
      Income and Expense*** - The
      Company utilizes the accrual method of accounting. Substantially all loans
      earn
      interest on the level yield method based on the daily outstanding balance.
      The
      accrual of interest is discontinued when, in management’s judgment, the interest
      may not be collected.


29
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***




**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





***Interest
      Income and Expense (Continued)***


The
      accrual of interest on mortgage, commercial and consumer loans is discontinued
      at the time the loan is 90 days delinquent. Other personal loans are typically
      charged off no later than 180 days past due. In all cases, loans are placed
      on
      nonaccrual or charged-off at an earlier date if collection of principal or
      interest is considered doubtful.





Interest
      accrued during the current calendar year but not collected for loans that are
      charged-off is reversed against interest income. Accrued but uncollected
      interest from prior periods is charged-off against the allowance for loan
      losses. Interest on nonaccrual loans is accounted for on the cash-basis or
      cost-recovery method until qualifying for return to accrual. Loans are returned
      to accrual status when all the principal and interest amounts contractually
      due
      are brought current and future payments are reasonably assured.





***Use
      of 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 amounts of assets and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements and the reported amounts of revenues and expenses
      during the reporting period. Actual results could differ from those estimates.
      Material estimates that are particularly susceptible to significant change
      in
      the near term relate to the determination of the allowance for loan losses
      and
      mortgage serving assets.




***Net
      Income Per Share*** **** -
      Basic
      and diluted net income per common share have been computed by dividing net
      income for each period by the weighted average number of shares of common stock
      outstanding during each period.




Basic
      earnings per common share represent income available to common stockholders
      divided by the weighted-average number of common shares outstanding during
      the
      period. Diluted earnings per common share reflect additional common shares
      that
      would have been outstanding if dilutive potential common shares had been issued,
      as well as any adjustment to income that would result from the assumed issuance.
      Potential common shares that may be issued by the Company relate solely to
      outstanding stock options and are determined using the treasury stock method.
      During 2006 and 2005, there were no shares excluded due to antidilution.




Basic
      and
      diluted net income per share have been computed based upon net income as
      presented in the accompanying statements of operations divided by the weighted
      average number of common shares outstanding or assumed to be outstanding, after
      retroactively adjusting for the 6-for-5 stock split paid May 2006, as summarized
      below:




2006
            
            2005Weighted
                average number of common shares used inin
                computing basic net income per share
            
            
            1,681,317
            
            
            1,679,968Effect
                of dilutive stock options
            
            
            137,370
            
            
            121,487Weighted
                average number of common shares and dilutive potentialcommon
                shares used in computing diluted net income per share
            
            
            1,818,687
            
            
            1,801,455





***Comprehensive
      Income*** -
      Accounting principles generally require that recognized revenue, expenses,
      gains
      and losses be included in net income. Although certain changes in assets and
      liabilities, such as unrealized gains and losses on available-for-sale
      securities, are reported as a separate component of the equity section of the
      balance sheet, such items, along with net income, are components of
      comprehensive income. The Company’s sole component of accumulated other
      comprehensive income is unrealized gains (losses) on securities available for
      sale.


30
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***




**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





***New
      Accounting Standards*** - In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157, *Fair
      Value Measurements* (FAS
      157). FAS 157 enhances existing guidance for measuring assets and liabilities
      using fair value. Prior to the issuance of FAS 157, guidance for applying fair
      value was incorporated in several accounting pronouncements. FAS 157 provides
      a
      single definition of fair value, together with a framework for measuring it,
      and
      requires additional disclosure about the use of fair value to measure assets
      and
      liabilities. FAS 157 also emphasizes that fair value is a market-based
      measurement, not an entity-specific measurement, and sets out a fair value
      hierarchy with the highest priority being quoted prices in active markets.
      Under
      FAS 157, fair value measurements are disclosed by level within that hierarchy.
      While FAS 157 does not add any new fair value measurements, it does change
      current practice. Changes to practice include: (1) a requirement for an
      entity to include its own credit standing in the measurement of its liabilities;
      (2) a modification of the transaction price presumption; (3) a
      prohibition on the use of block discounts when valuing large blocks of
      securities for broker-dealers and investment companies; and (4) a
      requirement to adjust the value of restricted stock for the effect of the
      restriction even if the restriction lapses within one year. FAS 157 is effective
      for financial statements issued for fiscal years beginning after
      November 15, 2007, and interim periods within those fiscal years. The
      Company has not determined the impact of adopting FAS 157 on its financial
      statements.




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No. 158, *Employers’
      Accounting for Defined Benefit Pension and Other Postretirement Plans (an
      amendment of FASB Statements No. 87, 88, 106, and 132R)* (FAS
      158), requires an employer to: (a) Recognize in its statement of financial
      position an asset for a plan’s overfunded status or a liability for a plan’s
      underfunded status; (b) measure a plan’s assets and its obligations that
      determine its funded status as of the end of the employer’s fiscal year (with
      limited exceptions); and (c) recognize changes in the funded status of a
      defined benefit postretirement plan in the year in which the changes occur.
      Those changes will be reported in comprehensive income of a business entity
      and
      in changes in net assets of a not-for-profit organization. The requirement
      by
      FAS 158 to recognize the funded status of a benefit plan and the disclosure
      requirements of FAS 158 are effective as of the end of the fiscal year ending
      after December 15, 2006 for entities with publicly traded equity
      securities. The requirement to measure plan assets and benefit obligations
      as of
      the date of the employer’s fiscal year-end statement of financial position is
      effective for fiscal years ending after December 15, 2008. The adoption of
      FAS 158 did not have a material effect on its financial position at
      December 31, 2006.





In
      September 2006, the SEC staff issued SAB No. 108, ****** *Considering
      the Effects of Prior Year Misstatements When Quantifying Misstatements in the
      Current Year Financial Statements (SAB No. 108)* .
      SAB No. 108 addresses the diversity in practice by registrants when
      quantifying the effect of an error on the financial statements.
      SAB No. 108 provides guidance on the consideration of the effects of
      prior year misstatements in quantifying current year misstatements and is
      effective for annual periods ending after November 15, 2006. The Company will
      be
      required to adopt the provisions of SAB No. 108 effective
      December 31, 2006. The adoption of SAB No. 108 did not have
      a material financial impact on our consolidated financial
      statements.





In
      July
      2006, the FASB issued Financial Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109”
(“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies
      how tax benefits for uncertain tax positions are to be recognized, measured,
      and
      derecognized in financial statements; requires certain disclosures of uncertain
      tax matters; specifies how reserves for uncertain tax positions should be
      classified on the balance sheet; and provides transition and interim period
      guidance, among other provisions. FIN 48 is effective for fiscal years beginning
      after December 15, 2006 and as a result, is effective for the Company in
      the first quarter of fiscal 2007. The Company is currently evaluating the impact
      of FIN 48 on its Consolidated Financial Statements.





31
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**1.**
            **SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES
                (Continued)**





***Reclassifications*** -
      Certain amounts in the prior year’s financial statements have been reclassified
      to conform to the 2006 presentation. The reclassifications had no effect on
      net
      income or shareholders’ equity as previously recorded.




**2.**
            **INVESTMENT
                SECURITIES**





The
      amortized cost, gross unrealized gains and losses and fair values of investment
      securities at December 31, 2006 and 2005 are as follows:





Available-for-sale
      securities consist of the following at December 31, 2006:





Gross
            
            GrossAmortized
            
            unrealized
            
            unrealized
            
            Faircost
            
            gains
            
            losses
            
            value**Type
                and Maturity Group**U.S.
                Government agencies due -Within
                1 year
            
            $
            1,500,000
            
            $
            -
            
            $
            (15,625
            )
            $
            1,484,375Mortgage-backed
                securities due -Within
                1 to 5 years
            
            
            2,897,219
            
            
            -
            
            
            (68,597
            )
            
            2,828,622Municipal
                bonds due -Within
                1 to 5 years
            
            
            557,215
            
            
            -
            
            
            (7,800
            )
            
            549,415Total
                due with in 1 to 5 years
            
            
            3,454,434
            
            
            -
            
            
            (76,397
            )
            
            3,378,037U.S.
                Government agencies due -Within
                5 to 10 years
            
            
            3,421,665
            
            
            50,382
            
            
            (14,380
            )
            
            3,457,667Mortgage-backed
                securities due -Within
                5 to 10 years
            
            
            2,761,099
            
            
            -
            
            
            (86,236
            )
            
            2,674,863Municipal
                bonds due -Within
                5 to 10 years
            
            
            727,973
            
            
            -
            
            
            (20,549
            )
            
            707,424Total
                due within 5 to 10 years
            
            
            6,910,737
            
            
            50,382
            
            
            (121,165
            )
            
            6,839,954Mortgage-backed
                securities due -after
                10 years
            
            
            7,202,599
            
            
            55,114
            
            
            (38,707
            )
            
            7,219,006Municipal
                bonds due -after
                10 years
            
            
            7,347,230
            
            
            13,300
            
            
            (40,892
            )
            
            7,319,638Total
                due within 5 to 10 years
            
            
            14,549,829
            
            
            68,414
            
            
            (79,599
            )
            
            14,538,644Total
                at December 31, 2006
            
            $
            26,415,000
            
            $
            118,796
            
            $
            (292,786
            )
            $
            26,241,010








32
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**2.**
            **INVESTMENT
                SECURITIES (Continued)**





Available-for-sale
      securities consist of the following at December 31, 2005:





Gross
            
            GrossAmortized
            
            unrealized
            
            unrealized
            
            Faircost
            
            gains
            
            losses
            
            value**Type
                and Maturity Group**U.S.
                Government agencies due -Within
                1 year
            
            $
            1,500,000
            
            $
            -
            
            $
            (39,844
            )
            $
            1,460,156U.S.
                Government agencies due -Within
                1 year
            
            
            10,005,602
            
            
            -
            
            
            (173,753
            )
            
            9,831,849Mortgage-backed
                securities due -Within
                1 to 5 years
            
            
            3,618,068
            
            
            -
            
            
            (126,517
            )
            
            3,491,551Municipal
                bonds due -Within
                1 to 5 years
            
            
            251,883
            
            
            -
            
            
            (2,432
            )
            
            249,451Total
                due with in 1 to 5 years
            
            
            13,875,553
            
            
            -
            
            
            (302,702
            )
            
            13,572,851U.S.
                Government agencies due -Within
                5 to 10 years
            
            
            1,921,409
            
            
            -
            
            
            -
            
            
            1,921,409Mortgage-backed
                securities due -Within
                5 to 10 years
            
            
            3,527,693
            
            
            -
            
            
            (127,691
            )
            
            3,400,002Municipal
                bonds due -Within
                5 to 10 years
            
            
            1,054,856
            
            
            -
            
            
            (36,617
            )
            
            1,018,239Total
                due within 5 to 10 years
            
            
            6,503,958
            
            
            -
            
            
            (164,308
            )
            
            (6,339,650
            )Mortgage-backed
                securities due -after
                10 years
            
            
            1,781,885
            
            
            -
            
            
            (37,972
            )
            
            1,743,913Municipal
                bonds due -after
                10 years
            
            
            4,845,493
            
            
            -
            
            
            (137,315
            )
            
            4,708,178Total
                due within 5 to 10 years
            
            
            6,627,378
            
            
            -
            
            
            (175,287
            )
            
            6,452,091Total
                at December 31, 2005
            
            $
            28,506,889
            
            $
            -
            
            $
            (682,141
            )
            $
            27,824,748





For
      the
      year ended December 31, 2006 and 2005, proceeds from the sales of investment
      securities available for sale totaled $10,002,906 and $5,516,201, respectively.
      Gross realized losses from the sales in 2006 and 2005 amounted to $249,674
      and
      $92,012, respectively.





Securities
      with carrying values of $1,400,000 and $1,800,000 at December 31, 2006 and
      2005,
      respectively, were pledged to secure public monies on deposit as required by
      law.





The
      following tables show investments’ gross unrealized losses and fair value,
      aggregated by investment category and length of time that individual securities
      have been in a continuous unrealized loss position, at December 31, 2006 and
      2005. These investments represents securities that the Company has the positive
      intent and ability to hold to maturity. The unrealized losses on investment
      securities as of December 31, 2006 and 2005 are a result of volatility in the
      market during 2006 and 2005 and relate to four U.S. Government agency bonds,
      18
      Municipal bonds and 18 Mortgage-backed securities at December 31, 2006 and
      nine
      U.S. Government agency bonds, 19 Municipal bonds and 17 Mortgage-backed
      securities at December 31, 2005. All unrealized losses on investment securities
      resulted from increases in interest rates and are considered by management
      to be
      temporary given the credit ratings on these investment securities and the
      duration of the unrealized loss.








33
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**2.**
            **INVESTMENT
                SECURITIES (Continued)**





December
      31, 2006:





Less
                Than 12 Months
            
            12
                Months or More
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            Unrealizedvalue
            
            losses
            
            value
            
            losses
            
            value
            
            lossesSecurities
                available for sale:U.S.
                government agencies
            
            $
            -
            
            $
            -
            
            $
            3,090,229
            
            $
            (30,005
            )
            $
            3,090,229
            
            $
            (30,005
            )Mortgage-backed
                securities
            
            
            634,117
            
            
            (3,912
            )
            
            6,983,946
            
            
            (189,628
            )
            
            7,618,063
            
            
            (193,540
            )Municipal
                bonds
            
            
            3,312,138
            
            
            (21,855
            )
            
            2,387,884
            
            
            (47,386
            )
            
            5,700,022
            
            
            (69,241
            )Total
                temporarily impairedsecurities
            
            $
            3,946,255
            
            $
            (25,767
            )
            $
            12,462,059
            
            $
            (267,019
            )
            $
            16,408,314
            
            $
            (292,786
            )





December
      31, 2005:





Less
                Than 12 Months
            
            12
                Months or More
            
            TotalFair
            
            Unrealized
            
            Fair
            
            Unrealized
            
            Fair
            
            Unrealizedvalue
            
            losses
            
            value
            
            losses
            
            value
            
            lossesSecurities
                available for sale:U.S.
                government agencies
            
            $
            6,424,817
            
            $
            (80,784
            )
            $
            4,867,188
            
            $
            (132,813
            )
            $
            11,292,005
            
            $
            (213,597
            )Municipal
                bonds
            
            
            5,507,244
            
            
            (147,875
            )
            
            468,624
            
            
            (28,489
            )
            
            5,975,868
            
            
            (176,364
            )Mortgage-backed
                securities
            
            
            2,649,552
            
            
            (51,987
            )
            
            5,985,914
            
            
            (240,193
            )
            
            8,635,466
            
            
            (292,180
            )Total
                temporarily impairedsecurities
            
            $
            14,581,613
            
            $
            (280,646
            )
            $
            11,321,726
            
            $
            (401,495
            )
            $
            25,903,339
            
            $
            (682,141
            )




The
      aggregate cost of the Company’s cost method investment, Federal Home Loan Bank
      stock, totaled $457,000 and $531,500 at December 31, 2006 and 2005,
      respectively. The Company estimated that the fair value equaled the cost of
      the
      investment (that is, the investment was not impaired). The investment in Federal
      Home Loan Bank stock is not reflected in investment securities; the investment
      is carried as a separate line item in the financial statements.




**3.**
            **LOANS**


Loans
      at
      December 31, 2006 and 2005 classified by type are as follows:


2006
            
            2005Real
                estate:****Construction
            
            $
            30,224,993
            
            $
            19,350,978Mortgage
            
            
            67,334,420
            
            
            59,187,153Commercial,
                financial and agricultural
            
            
            23,318,857
            
            
            19,635,598Consumer
            
            
            1,851,043
            
            
            2,531,935Subtotal
            
            
            122,729,313
            
            
            100,705,664Net
                deferred loan origination fees
            
            
            (265,593
            )
            
            (212,062
            )Total
            
            $
            122,463,720
            
            $
            100,493,602





34
 *Index*
 ***WESTSTAR
              FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
              Ended December 31, 2006 and 2005***


**3.**
            **LOANS
                (Continued)**


Nonperforming
      assets at December 31, 2006 and 2005:


2006
            
            2005Nonaccrual
                loans
            
            $
            975,190
            
            $
            1,754,653Foreclosed
                properties
            
            
            106,000
            
            
            127,000Repossessions
            
            
            -
            
            
            -Total
            
            $
            1,081,190
            
            $
            1,881,653





No
      loans
      have been restructured during 2006 or 2005. Loans totaling $980,646 and
      $1,792,486 were considered impaired as of December 31, 2006 and 2005,
      respectively. Impaired loans of $980,646 and $1,792,486 had related allowances
      for loan losses of $3,000 and $210,044 at December 31, 2006 and 2005,
      respectively. The average recorded investment in impaired loans during the
      years
      ended December 31, 2006 and 2005 was $1,320,500 and $1,576,007, respectively.
      For the years ended December 31, 2006 and 2005, the Company recognized interest
      income from impaired loans of approximately $5,270 and $3,451, respectively.





Directors
      and officers of the Company and companies with which they are affiliated are
      customers of and borrowers from the Company in the ordinary course of business.
      At December 31, 2005, directors’ direct and indirect indebtedness to the Company
      aggregated $1,917,000. During 2006, $1,787,364 in new loans were made and
      repayments of $2,074,898 were collected, resulting in a balance of $1,629,466
      at
      December 31, 2006. These loans were made on substantially the same terms,
      including interest rates and collateral, as those prevailing at the time for
      comparable transaction with other non-related borrowers. Management does not
      believe these loans involve more than the normal risk of collectibility or
      present other unfavorable features.




**4.**
            **ALLOWANCE
                FOR LOAN LOSSES**


Changes
      in the allowance for loan losses for the years ended December 31, 2006 and
      2005 are as follows:


2006
            
            2005Balance
                at beginning of year
            
            $
            1,760,377
            
            $
            1,608,366Provision
                for loan losses
            
            
            284,645
            
            
            466,270Charge-offs
            
            
            (218,455
            )
            
            (369,846
            )Recoveries
            
            
            57,513
            
            
            55,587Balance
                at end of year
            
            $
            1,884,080
            
            $
            1,760,377


35
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***




**5.**
            **LOAN
                SERVICING**


Mortgage
      loans serviced for others are not included in the accompanying Consolidated
      Balance Sheets. Mortgage loan portfolios serviced for others included a total
      commitment of $9,872,000 of which $5,171,235 was outstanding at December 31,
      2006 and none at December 31, 2005.




Servicing
      loans for others generally consists of collecting mortgage payments, maintaining
      escrow accounts, disbursing payment to investors and foreclosure processing.
      The
      carrying value of mortgage servicing rights is included as other assets in
      the
      Consolidated Balance Sheets. At December 31, 2006 and 2005, the mortgage
      servicing assets were carried at $30,996 and none, respectively. At December
      31,
      2006, the fair value of mortgage servicing assets was $30,996 and none,
      respectively.




Mortgage
      servicing rights are amortized into non-interest income in proportion to and
      over the period of estimated future net servicing income of the underlying
      financial assets. The amortization is adjusted prospectively in response to
      changes in estimated projections of future cash flows. Servicing assets are
      evaluated for impairment based upon the fair value of the rights as compared
      to
      amortized cost. Impairment is determined by stratifying rights by predominant
      characteristics, such as interest rates and terms. Fair value is determined
      using prices for similar assets with similar characteristics. Impairment is
      recognized to the extent that the capitalized amount for the stratum exceeds
      the
      fair value. The following summarizes mortgage servicing rights
      activity:




2006Mortgage
                servicing assets, beginning of year
            
            $
            -Capitalized
            
            
            34,643Amortization
            
            
            (3,647
            )Other
                than temporary impairment
            
            
            -Mortgage
                servicing rights, end of year
            
            $
            30,996




**6.**
            **PREMISES
                AND EQUIPMENT**


Premises
      and equipment at December 31, 2006 and 2005 are as follows:




2006
            
            2005Land
            
            $
            113,900
            
            $
            113,900Land
                improvements
            
            
            121,873
            
            
            121,873Building
                and improvements
            
            
            2,069,953
            
            
            2,066,237Furniture
                and equipment
            
            
            2,212,260
            
            
            1,836,037Leasehold
                improvements
            
            
            697,738
            
            
            416,207Construction
                in progress
            
            
            -
            
            
            902Total
            
            
            5,215,724
            
            
            4,555,156Less
                accumulated depreciation and amortization
            
            
            (2,211,134
            )
            
            (1,970,315
            )Total
            
            $
            3,004,590
            
            $
            2,584,841


Depreciation
      expense for the years ended December 31, 2006 and 2005 amounted to $367,972
      and
      $359,782, respectively.


36
 *Index*
 ***WESTSTAR
            FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
            Ended December 31, 2006 and 2005***




**7.**
            **DEPOSIT
                ACCOUNTS**





At
      December 31, 2006, the scheduled maturities of time deposits are as
      follows:




2007
            
            $
            57,560,6982008
            
            
            992,9782009
            
            
            190,2742010
            
            
            140,414Total
            
            $
            58,884,364





**8.**
            **INCOME
                TAXES**


The
      significant components of the income tax provision for the years ended
      December 31, 2006 and 2005 follow:


2006
            
            2005Current
                tax provisionFederal
            
            $
            876,193
            
            $
            628,971State
            
            
            199,557
            
            
            118,211Total
                current provision
            
            
            1,075,720
            
            
            747,182Deferred
                tax provisionFederal
            
            
            (2,501
            )
            
            (115,074
            )State
            
            
            2,459
            
            
            (22,083
            )Total
                deferred tax provision
            
            
            (42
            )
            
            (137,157
            )Net
                provision for income taxes
            
            $
            1,075,678
            
            $
            610,025





The
      difference between the provision for income taxes and the amounts applied by
      applying the statutory federal income tax rate of 34% to income before income
      taxes is summarized below:





2006
            
            2005Expense
                computed at statutory rate of 34%
            
            $
            1,067,060
            
            $
            574,184Effect
                of state income taxes
            
            
            152,941
            
            
            86,129Other
            
            
            (144,323
            )
            
            (50,288
            )$
            1,075,678
            
            $
            610,025





Significant
                components of deferred taxes at December 31, 2006 and 2005 are as
                follows:


2006
            
            2005Deferred
                tax assets:Allowance
                for loans losses
            
            $
            422,268
            
            $
            395,845Net
                unrealized losses on available for sale securities
            
            
            67,072
            
            
            262,965Deferred
                compensation
            
            
            102,221
            
            
            96,893Other
            
            
            14,680
            
            
            7,099Total
                deferred tax assets
            
            
            606,241
            
            
            762,802Deferred
                tax liabilities:Premises
                and equipment
            
            
            (39,881
            )
            
            (13,934
            )Prepaid
                expenses
            
            
            (46,904
            )
            
            (33,561
            )Total
                deferred tax liabilities
            
            
            (86,785
            )
            
            (47,495
            )Net
                recorded deferred tax asset
            
            $
            519,456
            
            $
            715,307




37
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**9.**
            **LEASES**





The
      Company leases certain banking facility premises and equipment under operating
      lease agreements. Future minimum rental payments are as follows:





2007
            
            $
            216,9302008
            
            
            184,5302009
            
            
            184,5302010
            
            
            184,5302010
            
            
            188,280$
            958,758




The
      land
      for a branch office is leased from a partnership that includes a director of
      the
      Company. The annual rental is $43,200. Rental expense charged to operations
      under all operating lease agreements was $180,009 and $107,116 for the years
      ended December 31, 2006 and 2005, respectively.












38
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**10.**
            **STOCK
                OPTIONS**


In
      2001,
      the Company’s shareholders approved the Weststar Financial Services Corporation
      2001 Nonstatutory Stock Option Plan (“Nonstatutory Plan”) and the Weststar
      Financial Services Corporation 2001 Incentive Stock Option Plan (“Incentive
      Plan”). Under these plans, non-employee directors and employees were granted
      stock options on June 20, 2001. The maximum number of shares available for
      grant
      under the Nonstatutory Plan and Incentive Plan is 131,716 and 133,188,
      respectively. Of the maximum number of shares available for grant, 99,100 were
      outstanding under the Nonstatutory Plan and 125,123 were outstanding under
      the
      Incentive Plan at December 31, 2006. Option prices for both plans are
      established at market value, which was $4.08, on the dates granted by the Board
      of Directors.





Options
      granted become exercisable in accordance with the vesting schedule specified
      by
      the Board of Directors in the Plan agreements. Nonstatutory stock options vest
      over a three-year period with 46% vested at the date of grant and 27% per year
      beginning one year from the date of grant. Incentive stock options vest over
      a
      five-year period with 20% vested at the date of grant and 20% per year beginning
      one year from the date of grant. No vested option may be exercised more than
      ten
      years after the date of grant.





Stock
      option information related to the plans for the years ended December 31, 2006
      and 2005 follows:


Exercise
                PriceShares
            
            Per
                ShareNonstatutory
                PlanOutstanding,
                December 31, 2003
            
            
            99,100
            
            $
            4.08Outstanding,
                December 31, 2004
            
            
            99,100
            
            
            4.08Outstanding,
                December 31, 2005
            
            
            99,100
            
            
            4.08Outstanding,
                December 31, 2006
            
            
            99,100
            
            
            4.08Incentive
                PlanOutstanding,
                December 31, 2003
            
            
            129,877
            
            $
            4.08Cancelled
            
            
            (1,043
            )
            
            4.08Outstanding,
                December 31, 2004
            
            
            128,834
            
            
            4.08Cancelled
            
            
            (311
            )
            
            4.08Exercised
            
            
            (2,400
            )
            
            4.08Outstanding,
                December 31, 2005
            
            
            126,123
            
            
            4.08Exercised
            
            
            (1,000
            )
            
            4.08Outstanding,
                December 31, 2006
            
            
            125,123
            
            
            4.08





At
                  December 31, 2006Outstanding
                  Options
              
              Exercisable
                  OptionsRemaining
              
              Weighted
              
              
              
              WeightedLife
              
              Average
              
              
              
              AverageExercise
                  Price
              
              Shares
              
              (Years)
              
              Price
              
              Shares
              
              PriceNonstatutory
                  Plan$
                  4.08
              
              
              99,100
              
              
              4.5
              
              $
              4.08
              
              
              99,100
              
              $
              4.08Incentive
                  Plan$
                  4.08
              
              
              125,123
              
              
              4.5
              
              $
              4.08
              
              
              125,123
              
              $
              4.08


There
      were 3,145 shares available for future grants at December 31, 2006. The
      aggregate intrinsic values of outstanding and exercisable shares at December
      31,
      2006 and 2005, respectively, were $2,784,850 and $1,182,421.


39
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**11.**
            **EMPLOYEE
                BENEFIT PLANS**





The
      Company sponsors a defined contribution 401(k) plan which allows those employees
      who have attained the age of 21 years and worked 1,000 hours to elect to
      contribute a portion of their salary to the plan in accordance with the
      provisions and limits set forth in the plan document. The plan was established
      in March 1999. The Company makes discretionary matching contributions in an
      amount determined each plan year to each participant who makes 401(k) savings
      contributions during the year. The Company may also make a discretionary
      profit-sharing contribution for a plan year to those participants employed
      during the year. The Company’s contribution to the plan was $79,495 and $49,448
      for the years ended December 31, 2006 and 2005, respectively.





During
      2001, a key employee entered into a salary continuation agreement with the
      Company providing for periodic payments at the retirement or death of the
      employee. The present value of the estimated liability, which was $265,167
      and
      $251,345 at December 31, 2006 and 2005, respectively, is being accrued over
      the
      vesting period defined in the agreement, which has fully vested. The related
      expense was $13,822 and $83,471 for the years ended December 31, 2006 and 2005,
      respectively. The Company is the owner and beneficiary of a life insurance
      policy on this key employee which will be used to fund the Company’s liability
      under the salary continuation agreement. The total net cash surrender value
      of
      this policy at December 31, 2006 was $269,145.





**12.**
            **BORROWINGS**





**SHORT-TERM
      BORROWINGS**





The
      Company has $3,000,000 available in overnight federal fund lines of credit
      and
      an approximately $13,800,000 open line of credit with the Federal Home Loan
      Bank
      (FHLB). There were $306,000 in federal funds purchased at December 31, 2006
      and
      none at December 31, 2005. Pursuant to a collateral agreement with the FHLB,
      advances are collateralized by qualifying first mortgage loans. The balance
      of
      qualifying first mortgage loans as of December 31, 2006 and 2005 were
      approximately $10,052,000 and $8,275,000, respectively. Federal funds
      purchased generally represent overnight borrowing by the Company for temporary
      funding requirements. The average daily balance outstanding and the average
      annual interest rate paid during 2006 and 2005 were $549,674 at 5.41% and
      $39,129 at 4.37%, respectively. The maximum amount of federal funds outstanding
      at any month end during 2006 and 2005 were $1,389,000 and $63,000, respectively.





**LONG-TERM
      DEBT**





There
      was
      one advance from the FHLB in the amount of $4,000,000 at a fixed rate of 5.01%
      outstanding at December 31, 2005. The 4,000,000 advance is due in full on March
      24, 2010; interest is payable monthly.





In
      2004,
      the Company adopted FIN 46R, with no restatement of prior periods, resulting
      in
      the deconsolidation of Weststar Financial Services Corporation I, a statutory
      trust (the “Trust”), which was created for the sole purpose of issuing trust
      preferred securities. The implementation of FIN 46R resulted in the Company’s
      $124,000 investment in the common equity of the trust being included in the
      condensed consolidated balance sheets as other assets with a corresponding
      increase to long-term debt. The Company is now recording greater interest
      expense and income received from the trusts with no effect on net income. The
      income and interest expensed received from and paid to the trust, respectively,
      is being included in the consolidated statements of income and comprehensive
      income as other noninterest income and interest expense.





As
      of
      December 31, 2006, the Trust had the following Trust Preferred Securities
      outstanding, and the Company had the following issues of junior subordinated
      debentures, all held by the Trust, outstanding:


40
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**12.**
            **BORROWINGS
                (Continued)**





**LONG-TERM
      DEBT (Continued)**





Trust
            
            
            
            JuniorPreferred
            
            
            
            SubordinatedDate
                of
            
            Securities
            
            Interest
            
            Debt
                Owed
            
            Final
                MaturityIssuing Entity
            
            Issuance
            
            Outstanding
            
            Rate
            
            To
                Trust
            
            DateWeststar
                Financial Ser-vices
                Corporation I
            
            
            10/10/2003
            
            $
            4,000,000
            
            
            Floating
            
            
            -
            
            
            10/07/2033Weststar
                Financial Ser-vices
                Corporation
            
            
            10/10/2003
            
            
            -
            
            
            Floating
            
            $
            4,124,000
            
            
            10/07/2033




The
      Company owns all of the common stock of the Trust, which has issued trust
      preferred securities in conjunction with the Company issuing junior subordinated
      debentures to the Trusts. The terms of the junior subordinated debentures are
      substantially the same as the terms of the trust preferred securities. The
      interest rate in effect is LIBOR plus 3.15%. At December 31, 2006 the effective
      rate was 8.52%. The Company’s obligations under the debentures and a separate
      guarantee agreement constitute a full and unconditional guarantee by the Company
      of the obligations of the Trust.





Currently,
      regulatory capital rules allow trust preferred securities to be included as
      a
      component of regulatory capital for the Company. This treatment has continued
      despite the deconsolidation of these instruments for financial reporting
      purposes.





**13.**
            **REGULATION
                AND REGULATORY RESTRICTIONS**





The
      Company is regulated by the Board of Governors of the Federal Reserve System
      (“FRB”) and is subject to securities registration and public reporting
      regulations of the Securities and Exchange Commission. The Bank is regulated
      by
      the Federal Deposit Insurance Corporation (“FDIC”) and the North Carolina State
      Banking Commission.





The
      Company is not presently subject to any regulatory restrictions on dividends.
      The Company’s ability to pay dividends depends to a large extent on the amount
      of dividends paid by the Bank and any other subsidiaries. The Bank, as a North
      Carolina banking corporation, may pay dividends only out of undivided profits
      as
      determined pursuant to North Carolina General Statutes Section 53-87. As of
      December 31, 2006, the Bank had undivided profits of $4,475,954. Additionally,
      current federal regulations require that the Bank maintain a ratio of total
      capital to assets, as defined by regulatory authorities, in excess of 6%. As
      of
      December 31, 2006, the ratio was 10.19% for the Bank, leaving all $4,475,954
      of
      the Bank’s undivided profits available for the payment of
      dividends.





The
      Company is subject to various regulatory capital requirements administered
      by
      federal banking agencies. Failure to meet minimum capital requirements can
      initiate certain mandatory - and possibly additional discretionary - actions
      by
      regulators that, if undertaken, could have a direct material effect on the
      Company’s financial statements. Under capital adequacy guidelines and the
      regulatory framework for prompt corrective action, the Company must meet
      specific capital guidelines that involve quantitative measures of the Company’s
      assets, liabilities and certain off-balance-sheet items as calculated under
      regulatory accounting practices. The Company’s capital amounts and
      classification also are subject to qualitative judgments by the regulators
      about
      components, risk weightings and other factors.





Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company to maintain minimum amounts and ratios (set forth in the table below)
      of
      total and Tier I capital (as defined in the regulations) to risk-weighted assets
      (as defined), and of Tier I capital (as defined) to average assets (as defined).
      As of December 31, 2006, the most recent regulatory notifications categorized
      the Company as well capitalized under the regulatory framework for prompt
      corrective action. Management believes, as of December 31, 2006 and 2005, that
      the Company meets all capital adequacy requirements to which it is subject.
      To
      be categorized as adequately capitalized under the regulatory framework for
      prompt corrective action, the Company must monitor the minimum capital ratios
      as
      set forth in the table below.


41
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**13.**
            **REGULATION
                AND REGULATORY RESTRICTIONS
                (Continued)**





The
      Company’s actual capital amounts and ratios are also presented in the table
      (dollar amounts in thousands):




Minimum
                To Be WellMinimum
            
            Capitalized
                UnderFor
                Capital
            
            Prompt
                CorrectiveActual
            
            Requirement
            
            Action
                ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio**As
                of December 31, 2006:**Total
                Capital (to RiskWeighted
                Assets)Consolidated
            
            $
            18,676
            
            
            14.62
            %
            $
            10,218
            
            
            8.00
            %
            $
            12,773
            
            
            10.00
            %Bank
            
            
            17,731
            
            
            13.91
            %
            
            10,195
            
            
            8.00
            %
            
            12,744
            
            
            10.00
            %Tier
                I Capital (to RiskWeighted
                Assets)Consolidated
            
            
            17,076
            
            
            13.37
            %
            
            5,109
            
            
            4.00
            %
            
            7,664
            
            
            6.00
            %Bank
            
            
            16,134
            
            
            12.66
            %
            
            5,098
            
            
            4.00
            %
            
            7,646
            
            
            6.00
            %Tier
                I Capital (toAverage
                Assets)Consolidated
            
            
            17,076
            
            
            10.67
            %
            
            6,404
            
            
            4.00
            %
            
            8,005
            
            
            5.00
            %Bank
            
            
            16,134
            
            
            10.09
            %
            
            6,393
            
            
            4.00
            %
            
            7,991
            
            
            5.00
            %





Minimum
                To Be WellMinimum
            
            Capitalized
                UnderFor
                Capital
            
            Prompt
                CorrectiveActual
            
            Requirement
            
            Action
                ProvisionsAmount
            
            Ratio
            
            Amount
            
            Ratio
            
            Amount
            
            Ratio**As
                of December 31, 2005:**Total
                Capital (to RiskWeighted
                Assets)Consolidated
            
            $
            16,354
            
            
            15.33
            %
            $
            8,532
            
            
            8.00
            %
            $
            10,665
            
            
            10.00
            %Bank
            
            
            15,627
            
            
            14.69
            %
            
            8,509
            
            
            8.00
            %
            
            10,633
            
            
            10.00
            %Tier
                I Capital (to RiskWeighted
                Assets)Consolidated
            
            
            14,688
            
            
            13.77
            %
            
            4,266
            
            
            4.00
            %
            
            6,399
            
            
            6.00
            %Bank
            
            
            14,292
            
            
            13.44
            %
            
            4,254
            
            
            4.00
            %
            
            6,381
            
            
            6.00
            %Tier
                I Capital (toAverage
                Assets)Consolidated
            
            
            14,688
            
            
            10.90
            %
            
            5,391
            
            
            4.00
            %
            
            6,738
            
            
            5.00
            %Bank
            
            
            14,292
            
            
            10.63
            %
            
            5,379
            
            
            4.00
            %
            
            6,724
            
            
            5.00
            %





**14.**
            **COMMITMENTS
                AND CONTINGENCIES**





The
      Company has various financial instruments (outstanding commitments) with
      off-balance sheet risk that are issued 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. Commitments to
      extend credit are legally binding agreements to lend to a customer as long
      as
      there is no violation of any condition established in the contract. Commitments
      generally have fixed expiration dates or other termination clauses. Since many
      of the commitments are expected to expire without being drawn upon, the total
      commitment amounts outstanding do not necessarily represent future cash
      requirements. Standby letters of credit represent conditional commitments issued
      by the Company to assure the performance of a customer to a third party. The
      unused portion of commitments to extend credit at December 31, 2006 and 2005
      was
      $30,044,210 and 25,580,877, respectively.


42
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***




**14.**
            **COMMITMENTS
                AND CONTINGENCIES
                (Continued)**





The
      Company’s exposure to credit loss for commitments to extend credit and standby
      letters of credit is the contractual amount of those financial instruments.
      The
      Company uses the same credit policies for making commitments and issuing standby
      letters of credit as it does for on-balance sheet financial instruments. Each
      customer’s creditworthiness is evaluated on an individual case-by-case basis.
      The amount and type of collateral, if deemed necessary by management, is based
      upon this evaluation of creditworthiness. Collateral held varies, but may
      include marketable securities, deposits, property, plant and equipment,
      investment assets, inventories and accounts receivable. Management does not
      anticipate any significant losses as a result of these financial instruments.





In
      the
      normal course of its operations, the Company from time to time is party to
      various legal proceedings. Based upon information currently available, and
      after
      consultation with its legal counsel, management believes that such legal
      proceedings, in the aggregate, will not have a material adverse effect on the
      Company’s business, financial position or results of operations.





**15.**
            **FAIR
                VALUE OF FINANCIAL INSTRUMENTS**





The
      fair
      value estimates presented herein are based on pertinent information available
      to
      management as of December 31, 2006. Although management is not aware of any
      factors that would significantly affect the estimated fair value amounts, such
      amounts have not been comprehensively revalued for purposes of these financial
      statements since that date and, therefore, current estimates of fair value
      may
      differ significantly from the amounts presented herein.





2006
            
            2005Carrying
            
            Estimated
            
            Carrying
            
            Estimatedamount
            
            fair
                value
            
            amount
            
            fair
                value(In
                thousands)Assets:Cash
                and cash equivalents
            
            $
            5,027
            
            $
            5,027
            
            $
            6,861
            
            $
            6,861Investment
                securities
            
            
            26,241
            
            
            26,241
            
            
            27,825
            
            
            27,825Federal
                Home Loan Bank stock
            
            
            457
            
            
            457
            
            
            532
            
            
            532Loans
            
            
            122,464
            
            
            123,750
            
            
            100,494
            
            
            100,541Interest
                receivable
            
            
            923
            
            
            923
            
            
            708
            
            
            708Liabilities:Demand
                deposits, NOW accounts,money
                market accounts, savings
            
            
            75,987
            
            
            75,987
            
            
            75,551
            
            
            75,551Time
                deposits
            
            
            58,884
            
            
            58,838
            
            
            43,562
            
            
            43,576Short-term
                borrowings
            
            
            306
            
            
            306
            
            
            -
            
            
            -Interest
                payable
            
            
            498
            
            
            498
            
            
            267
            
            
            267Long-term
                debt
            
            
            8,124
            
            
            8,124
            
            
            8,124
            
            
            8,127Off-balance-sheet
                - commitments toextend
                credit
            
            
            -
            
            
            30,044
            
            
            -
            
            
            25,581





Fair
      Value of Financial Instruments - SFAS No. 107, *Disclosures
      About Fair Value of Financial Instruments* ,
      requires that the Company disclose estimated fair values for its financial
      instruments. Fair value methods and assumptions are set forth below for the
      Company’s consolidated financial instruments.




Cash
      and
      Cash Equivalents, Accrued Interest Receivable, and Accrued Interest Payable
      -
      The carrying amounts approximate their fair value because of the short maturity
      of these financial instruments.




Investment
      Securities - The fair value of securities, excluding the Federal Home Loan
      Bank
      stock, is based on quoted market prices. The carrying value of Federal Home
      Loan
      Bank stock approximates fair value based on the redemption provisions of the
      Federal Home Loan Bank.





43
 *Index*
 ***WESTSTAR
            FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
            Ended December 31, 2006 and 2005***


**15.**
            **FAIR
                VALUE OF FINANCIAL INSTRUMENTS
                (Continued)**





Loans
      -
      Fair values are estimated for portfolios of loans with similar financial
      characteristics. Loans are segregated by type such as commercial, financial
      and
      agricultural, real estate construction, real estate mortgages and installment
      loans to individuals. Each loan category is further segmented into fixed and
      variable interest rate terms. The fair value for loans is estimated by
      discounting the future cash flows using the current rates at which similar
      loans
      would be made to borrowers with similar credit ratings and for similar remaining
      maturities.





Deposits
      - The fair value of deposits with no stated maturity, such as
      non-interest-bearing demand deposits, savings, NOW, and money market accounts,
      is equal to the amount payable on demand as of the valuation date. The fair
      value of certificates of deposit is based on the discounted value of contractual
      cash flows. The discount rate is estimated using the rates currently offered
      for
      deposits of similar remaining maturities.





Short-term
      borrowings and long-term debt - The fair values are based on discounting
      expected cash flows at the interest rate for debt with same or similar remaining
      maturities and collateral requirements.





**16.**
            **PARENT
                COMPANY FINANCIAL DATA**





The
      following is a summary of the condensed financial statements of Weststar
      Financial Corporation as of and for the years ended December 31, 2006 and
      2005:





Condensed
      Balance Sheets


December
      31, 2006 and 2005





2006
            
            2005****AssetsCash
                and due from banks
            
            $
            790,892
            
            $
            564,528Investment
                in The Bank of Asheville, at equity
            
            
            16,031,692
            
            
            13,873,107****Investment
                in Weststar Financial Services Corporation I
            
            
            124,000
            
            
            124,000Investment
                in Bank of Asheville Mortgage Company, LLC, at equity
            
            
            44,107
            
            
            43,297Other
                assets
            
            
            188,014
            
            
            185,530Total
                assets
            
            $
            17,178,705
            
            $
            14,790,462Liabilities
                and Shareholders’ Equity****Liabilities:Junior
                subordinated debentures payable toWeststar
                Financial Services Corporation I
            
            $
            4,124,000
            
            $
            4,124,000Other
            
            
            81,852
            
            
            69,919****Shareholders’
                equity
            
            
            12,972,853
            
            
            10,596,543Total
                liabilities and shareholders’ equity
            
            $
            17,178,705
            
            $
            14,790,462


44
 *Index*
 ***WESTSTAR
          FINANCIAL SERVICES CORPORATION & SUBSIDIARY***
 ***NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS***
 ***Years
          Ended December 31, 2006 and 2005***


**17.**
            **PARENT
                COMPANY FINANCIAL DATA
                (Continued)**





Condensed
      Statements of Operations


Years
      Ended December 31, 2006 and 2005





2006
            
            2005Interest
                Income:Interest-bearing
                deposits
            
            $
            66,472
            
            $
            36,382Interest
                Expense:Junior
                subordinated debentures issued toWeststar
                Financial Services Corporation I
            
            
            345,661
            
            
            271,872Non-interest
                Income:Equity
                in earnings of subsidiary bank
            
            
            2,207,305
            
            
            1,212,397Equity
                in income (loss) of Bank of AshevilleMortgage
                Company, LLC
            
            
            810
            
            
            (7,874
            )Other
            
            
            132,793
            
            
            106,575Total
                Non-interest Income
            
            
            2,340,908
            
            
            1,311,098Non-interest
                Expenses:Other
            
            
            74,394
            
            
            65,707Income
                before income tax benefit
            
            
            1,987,325
            
            
            1,009,901Income
                tax benefit
            
            
            (75,407
            )
            
            (68,850
            )Net
                income
            
            $
            2,062,732
            
            $
            1,078,751








Condensed
      Statements of Cash Flows


Years
      Ended December 31, 2006 and 2005





2006
            
            2005Cash
                Flows from Operating Activities:Net
                income
            
            $
            2,062,732
            
            $
            1,078,751Noncash
                items included in net income:Equity
                in undistributed earnings of TheBank
                of Asheville
            
            
            (2,207,305
            )
            
            (1,212,397
            )Equity
                in undistributed income of Bank of AshevilleMortgage
                Company, LLC
            
            
            (810
            )
            
            7,874Increase
                in other assets
            
            
            (2,484
            )
            
            (23,617
            )Increase
                in other liabilities
            
            
            11,933
            
            
            20,057Net
                cash used in operating activities
            
            
            (135,934
            )
            
            (129,332
            )Cash
                Flows from Investing Activities:Upstream
                dividends received from The Bank of Asheville
            
            
            360,980
            
            
            297,650Investment
                in Bank of Asheville Mortgage Company, LLC
            
            
            -
            
            
            (12,500
            )Net
                cash provided by investing activities
            
            
            360,980
            
            
            285,150Cash
                Flows from Financing Activities:Cash
                paid for fractional shares
            
            
            (2,762
            )
            
            (2,501
            )Exercise
                of stock options
            
            
            4,080
            
            
            9,800Net
                cash provided (used) in financing activities
            
            
            1,318
            
            
            7,299Net
                increase in cash
            
            
            226,364
            
            
            163,117Beginning
            
            
            564,528
            
            
            401,411Ending
            
            $
            790,892
            
            $
            564,528





45
 *Index*


**ITEM
                8:**
            **CHANGES
                IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                DISCLOSURE**




None.





**ITEM
                8A:**
            **CONTROLS
                AND PROCEDURES**





The
      Company’s Chief Executive Officer and Chief Financial Officer have conducted an
      evaluation of the Company’s disclosure controls and procedures as of December
      31, 2006. Based on their evaluation, the Company’s Chief Executive Officer and
      Chief Financial Officer have concluded that the Company’s disclosure controls
      and procedures are effective to ensure that information required to be disclosed
      by the Company in reports that it files or submits under the Securities Exchange
      Act of 1934 is recorded, processed, summarized and reported within the time
      periods specified in the applicable Securities and Exchange Commission rules
      and
      forms.





There
      was
      not any change in the Company’s internal control over financial reporting that
      occurred during the fourth quarter ended December 31, 2006 that materially
      affected, or is reasonably likely to materially affect, the Registrant’s
      internal control over financial reporting.




**ITEM
                8B:**
            **OTHER
                INFORMATION**





None.





**PART
      III**





**ITEM
                9:**
            **DIRECTORS
                AND EXECUTIVE OFFICERS OF THE
                REGISTRANT**





See
      pages
      5 - 10 of Registrant’s 2007 Annual Meeting Proxy Statement, as filed with the
      SEC pursuant to Rule 14a-6(b).





**Code
      of Ethics**





The
      Company has adopted a Code of Ethics that applies among others, to its principal
      executive officer and principal financial officer. The Company’s Code of Ethics
      is available at http://www.bankofasheville.com.




**ITEM
                10:**
            **EXECUTIVE
                COMPENSATION**





See
      pages
      10 - 14 of Registrant’s 2007 Annual Meeting Proxy Statement, as filed with the
      SEC pursuant to Rule 14a-6(b).





**ITEM
      11:       SECURITY OWNERSHIP OF
      CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
      MATTERS**





In
      2001,
      the Company’s shareholders approved the Weststar Financial Services Corporation
      2001 Nonstatutory Stock Option Plan (“Nonstatutory Plan”) and the Weststar
      Financial Services Corporation 2001 Incentive Stock Option Plan (“Incentive
      Plan”). Under these plans, non-employee directors and employees were granted
      stock options on June 20, 2001. The maximum number of shares available for
      grant
      under the Nonstatutory Plan and Incentive Plan is 131,716 and 133,188,
      respectively. Of the maximum number of shares available for grant, 99,100 were
      outstanding under the Nonstatutory Plan and 125,123 were outstanding under
      the
      Incentive Plan at December 31, 2006. Option prices for both plans are
      established at market value, which was $4.08, on the dates options were granted
      by the Board of Directors. The following chart contains details of the
      grants:





**Plan
                Category**
            
            **Number
                of securities**
            **Weighted-average**
            **Number
                of securities****to
                be issued upon**
            **exercise
                price of**
            **remaining
                available****exercise
                of**
            **outstanding
                options,**
            **for
                future issuance****outstanding
                options,**
            **warrants
                and rights**
            **under
                equity****warrants
                and rights**
            
            **compensation
                plans****(excluding
                securities****reflected
                in column (a))****(a)**
            **(b)**
            **(c)****Equity
                compensation****plans
                approved by**
            
            Nonstatutory
                - 99,100
            $4.08
            None**security
                holders**
            
            Incentive
                - 125,123
            $4.08
            3,145**Equity
                compensation****plans
                not approved****by
                security holders**
            
            None
            None
            None**Total**
            
            224,223
            $4.08
            3,145


46
 *Index*





See
      pages
      3 - 5 of Registrant’s 2007 Annual Meeting Proxy Statement, as filed with the SEC
      pursuant to Rule 14a-6(b), for
      additional information regarding Security Ownership of Certain Beneficial Owners and
      Management.




**ITEM
      12: CERTAIN RELATIONSHIPS AND RELATED
      TRANSACTIONS**





See
      pages
      6 and 10 - 12 of Registrant’s 2007 Annual Meeting Proxy Statement, as filed with
      the SEC pursuant to Rule 14a-6(b).




**ITEM
      13: EXHIBITS**




3(i)
      Articles of Incorporation of the Registrant*




3(ii)
      Bylaws of the Registrant*




10(i)
      Employment Agreement between the Bank and G. Gordon Greenwood dated February
      9,
      2000*




10(ii)
      Employment Agreement between the Bank and Randall C. Hall, dated March 20,
      1998*





10(iii)
      401(k) Savings Plan of the Bank*




10(iv)
      2001 Incentive Stock Option Plan**




10(v)
      2001 Nonstatutory Stock Option Plan**





10(vi)
      Amended and Restated Declaration of Trust by and between Wells Fargo Bank,
      N.A.,
      as Delaware Trustee and Institutional Trustee, Weststar Financial Services
      Corporation, as Sponsor, and certain Administrative Trustees, dated October
      10,
      2003***





10(vii)
      Indenture between Weststar Financial Services Corporation and Wells Fargo Bank,
      N.A., as Indenture trustee, dated October 10, 2003***





10(viii)
      Guarantee Agreement by and between Weststar Financial Services Corporation
      and
      Wells Fargo Bank, N.A., as Guarantee Trustee, dated October 10,
      2003***




10(ix)
      Floating Rate Junior Subordinated Debenture of Weststar Financial Services
      Corporation, dated October 10, 2003 (included as Exhibit A to Exhibit
      10(vii))***





10(x)
      Employment Agreement between the Bank and John R. Hamrick dated February 18,
      2005





21
      Subsidiaries





31.1
      Certification of Principal Executive Officer Pursuant to Section 302 of the
      Sarbanes Oxley Act of 2002





31.2
      Certification of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes Oxley Act of 2002





32.1
      Certification of Principal Executive Officer Pursuant to Section 906 of the
      Sarbanes Oxley Act of 2002





32.2
      Certification of Principal Financial Officer Pursuant to Section 302 of the
      Sarbanes Oxley Act of 2002





99
      2007
      Proxy Statement****





*Incorporated
      by reference to the Registration Statement on Form S-4 (Registration No.
      333-30200 filed February 11, 2000 with the Securities and Exchange
      Commission.)




**Incorporated
      by reference to the Registrant’s Annual Report on Form 10-KSB for the year ended
      December 31, 2001 filed with the Securities and Exchange Commission on March
      22,
      2002.





***Incorporated
      by reference to the Registrant’s Current report on Form 8-K, filed with the
      Securities and Exchange Commission on November 5, 2003.





****As
      filed with the SEC pursuant to Rule 14a-6(b).





47
 *Index*


**ITEM
      14: PRINCIPAL ACCOUNTANT FEES AND
      SERVICES**





See
      pages
      8 - 10 and 21 of Registrant’s 2007 Annual Meeting Proxy Statement, as filed with
      the SEC pursuant to Rule 14a-6(b).
















48
 *Index*





**SIGNATURES**





In
      accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
      this report to be signed on its behalf by the undersigned, thereunto duly
      authorized.








**WESTSTAR
                FINANCIAL SERVICES CORPORATION**(Registrant)By:
            /s/Randall
                C. HallRandall
                C. HallExecutive
                Vice PresidentChief
                Financial Officer and PrincipalAccounting
                OfficerDate:
            March
                2, 2007





49
 *Index*


In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the Registrant and in the capacities and on
      the
      dates indicated.








/s/W.
                Edward Anderson
              W.
                Edward Anderson
              Director
            March
                2, 2007/s/M.
                David Cogburn, M.D.
              M.
                David Cogburn, M.D.
              Director
            March
                2, 2007/s/Steven
                D. Cogburn
              Steven
                D. Cogburn
              Director
            March
                2, 2007/s/G.
                Gordon Greenwood
              G.
                Gordon Greenwood
              President
                & Chief Executive Officer
            March
                2, 2007/s/Patricia
                P. Grimes
              Pat
                Grimes
              Director
            March
                2, 2007/s/Randall
                C. Hall
              Randall
                C. Hall
              Secretary/Treasurer
              Chief
                Financial Officer and
              Principal
                Accounting Officer
            March
                2, 2007/s/Darryl
                J. Hart
              Darryl
                J. Hart
              Director
            March
                2, 2007/s/Carol
                L. King
              Carol
                L. King
              Director
            March
                2, 2007/s/Stephen
                L. Pignatiello
              Stephen
                L. Pignatiello
              Director
            March
                2, 2007/s/Laura
                A. Webb
              Laura
                A. Webb
              Director
            March
                2, 2007/s/David
                N. Wilcox
              David
                N. Wilcox
              Director
            March
                2, 2007




50
 *Index*





EXHIBIT
      INDEX











**Exhibit**
              **Number**
            **Exhibit**
            **Page**
              **Number**3(i)
            Articles
                of Incorporation
            *3(ii)
            Bylaws
            *10(i)
            Employment
                Agreement of G. Gordon Greenwood
            *10(ii)
            Employment
                Agreement of Randall C. Hall
            *10(iii)
            401
                (k) Savings Plan
            *10(iv)
            2001
                Incentive Stock Option Plan
            *10(v)
            2001
                Nonstatutory Stock Option Plan
            *10(vi)
            Amended
                and Restated Declaration of Trust
            *10(vii)
            Indenture
                between Weststar Financial Services Corporation and Wells Fargo Bank,
                N.A.
            *10(viii)
            Guarantee
                Agreement by and between Weststar Financial Services Corporation
                and Wells
                Fargo Bank, N.A.
            *10(ix)
            Floating
                Rate Junior Subordinated Debenture of Weststar Financial Services
                Corporation
            *10(x)
            Employment
                Agreement of John R.
                Hamrick.
            Filed
                herewith21
            Subsidiaries
            Filed
                herewith31.1
            Certification
                of Principal Executive Officer Pursuant to
                Section 302 of the Sarbanes Oxley Act of 2002
            Filed
                herewith31.2
            Certification
                of Principal Financial Officer Pursuant to
                Section 302 of the Sarbanes Oxley Act of 2002
            Filed
                herewith32.1
            Certification
                of Principal Executive Officer Pursuant to
                Section 906 of the Sarbanes Oxley Act of 2002
            Filed
                herewith32.2
            Certification
                of Principal Financial Officer Pursuant to
                Section 906 of the Sarbanes Oxley Act of 2002
            Filed
                herewith99
            2007
                Proxy Statement
            **








*
      Incorporated by reference.


**  As
      filed
      with the SEC pursuant to Rule 14a-6(b).


51