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, 2005

                        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. [_]

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 [X] NO [_]

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. [X]

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

The Registrant's revenues for the year ended December 31, 2005 were $9,158,340.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant at December 31, 2005 was approximately $15,694,179.

The number of shares of the  Registrant's  Common Stock  outstanding on December
31, 2005 was 1,401,266.

                      Documents Incorporated by Reference:

PART III:  Definitive  Proxy Statement dated March 10, 2006 as filed pursuant to
Section 14 of the Securities Exchange Act of 1934 for the 2006 Annual Meeting of
Shareholders.

Transitional Small Business Disclosure Format               Yes [_] No [X]

                                       1
<PAGE>
<TABLE>
<CAPTION>

                                         FORM 10-KSB CROSS-REFERENCE INDEX


                                                                                                           2006
                                                                                        2005               Proxy
                                                                                        Form 10-KSB        Statement
                                                                                        Page               Page
<S>                                                                                    <C>                   <C>
PART I
Item 1  -  Description of Business                                                      3                  n/a
Item 2  -  Description of Property                                                      6                  n/a
Item 3  -  Legal Proceedings                                                            6                  n/a
Item 4  -  Submission of Matters to a Vote of Security                                  6                  n/a
Holders

PART II
Item 5  -  Market  for Common Equity and Related Shareholder Matters                    6                  n/a
Item 6  -  Management's Discussion and Analysis                                         8                  n/a
Item 7  -  Financial Statements                                                         20                 n/a
Item 8  -  Changes in and Disagreements with Accountants on Accounting and
           Financial Disclosure                                                         45                 n/a
Item 8A -  Controls and Procedures                                                      45                 n/a
Item 8B -  Other Information                                                            45                 n/a

PART III
Item 9  -  Directors, Executive Officers, Promoters and Control Persons;
           Compliance with Section 16(a) of the Exchange Act                            45                 5 - 10
Item 10 -  Executive Compensation                                                       45                 10 - 12
Item 11 -  Security Ownership of Certain Beneficial Owners and Management
           and Related Stockholder Matters                                              45                 3-4
Item 12 -  Certain Relationships and Related                                            46                 6, 12
Transactions
Item 13 -  Exhibits                                                                     46                 n/a
Item 14 -  Principal Accountant Fees and Services                                       46                 9, 13
</TABLE>


* 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
<PAGE>

                                     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, 2005 (the latest date for which statistics are available) there were
79 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.  As of June 30, 2005,  Registrant
accounted for 3.69% 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 41 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
<PAGE>

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 Bank  Insurance
Fund ("BIF"),  administered by the FDIC, and each member institution is required
to pay semi-annual  deposit insurance  premium  assessments to the FDIC. The BIF
assessment  rates  have a  range  of 0  cents  to 27  cents  for  every  $100 in
assessable  deposits.  Banks with no premium are subject to an annual  statutory
minimum assessment.

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 and minority  interests in
equity   accounts  of  consolidated   subsidiaries,   less  goodwill  and  other
intangibles,  subject to certain exceptions. "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,  2005,  the Company was
classified as  "well-capitalized"  with Tier 1 and Total Risk - Based Capital of
13.77% and 15.33% 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
<PAGE>

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:

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

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

     o    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,

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

     o    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. In accordance with North Carolina banking law, dividends may not be
paid unless the Bank's capital  surplus is at least 50% of its paid-in  capital.
The Bank is the only source of dividends that may be paid by the Registrant.

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 qualify as a financial  holding
company.

                                       5
<PAGE>

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, 2005.

                                                    APPROX.
                                   YEAR             SQUARE
OFFICE LOCATION                    OPENED           FOOTAGE        OWN/LEASE
---------------                    ------           -------        ---------

Main Office
79 Woodfin Place                   1997             10,000         Own
Asheville, NC

Candler Office
6 Dogwood Road                     1999              1,900         Own building,
Candler, NC                                                        lease land

Leicester Highway Office           2000              2,500         Own building,
349 New Leicester Highway                                          lease land
Asheville, NC

Arden Office                       2003              2,629         Lease
1985 Hendersonville Highway
Asheville, NC

ITEM 3:  LEGAL PROCEEDINGS

There were no known current or pending proceedings as of December 31, 2005.

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 1,401,266 shares  outstanding
at December 31, 2005 owned by approximately 800 shareholders.

During 2005,  277,660  shares of the  Company's  common  stock were traded.  The
closing price of the stock on December 31, 2005 was $11.20.

                                       6
<PAGE>

The following table represents stock prices during the trading periods.

2005        1st     2nd      3rd      4th
            Qtr.    Qtr.     Qtr.     Qtr.
High      $15.00  $12.75   $11.75   $11.75
Low       $10.91  $11.00   $10.50   $10.00
Close     $11.75  $11.00   $11.25   $11.20

2004        1st     2nd      3rd      4th
            Qtr.    Qtr.     Qtr.     Qtr.
High      $10.63  $ 9.38    $8.75   $10.83
Low       $ 8.25  $ 8.21    $8.22   $ 8.34
Close     $ 9.58  $ 8.75    $8.54   $10.83

No cash dividends  were paid in 2005 or 2004. A 20% stock  dividend  effected in
the form of a 6-for-5  stock  split was paid to  shareholders  in January  2005.
Stock prices have been adjusted to reflect the stock dividend.

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 18, 2006, 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
<PAGE>

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 2005 totaled  $314,259  compared to $575,937 during 2004.  Non-performing
assets  totaled  $1,881,653  and  $3,011,402  at  December  31,  2005 and  2004,
respectively.  Loans  outstanding  grew by $15,641,532  or 18% to  $100,493,602.
Management  balanced  loan growth  through  liquidity  as  reflected  in the 20%
increase in the Company's  investment  portfolio,  which totaled  $27,824,748 at
December 31, 2005.

The  Company   maintained  its  deposit  market  share  in  Buncombe  County  at
approximately 3.7% as of June 30, 2005,  according to the latest Federal Deposit
Insurance  Corporation  statistics.  From December 31, 2004 to December 31, 2005
the  Company's  deposits  grew to  $119,112,899  - an increase of 4%. During the
second half of 2004,  one of the Company's real estate  customers  deposited and
maintained in excess of  $13,400,000  into its money market  accounts.  Funds in
these  accounts were  considered  short-term,  and were  subsequently  withdrawn
during the first  quarter  of 2005.  Excluding  these  deposits,  the  Company's
deposits  increased  18% from  December 31, 2004 to December  31, 2005.  Deposit
growth  reflected  continued  market  penetration.  During 2005,  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   2005,   the  Company   relocated  a  temporary   branch  on
Hendersonville  Highway to a permanent site within the same  community.  The new
facility allows for continued market  penetration and improved customer service.
In January 2005,  Bank of Asheville  Mortgage  Company,  LLC opened for business
with 2 offices  in  Buncombe  County  and one office in  Henderson  County.  The
Company owns a 50% interest in the Mortgage Company.

The Company  maintained an average  interest rate spread of  approximately  3.6%
during 2005 which,  combined with net earning  asset  growth,  resulted in a 14%
increase  in  net  interest   income  during  2005.  As  a  result  of  historic
charge-offs,  loan growth and a significant improvement in nonperforming assets,
the  Company  added  $466,270  to its  allowance  for loan  losses  compared  to
$1,010,300 in 2004. Non-interest income decreased primarily as a result of lower
fees from the  origination of mortgage loans due to higher  mortgage loan rates.
Mortgage  loan fees totaled  $116,529 in 2004 compared to $12,612 in 2005 at the
Bank level. In January all new mortgage origination  activities shifted from the
Bank to the  Mortgage  Company,  which  posted a net  operating  loss of $7,874.
Non-interest  expenses  totaled  $4,464,811  and  $4,093,885  in 2005 and  2004,
respectively. Operating expenses increased as a result of relocating a temporary
branch on  Hendersonville  Highway to a permanent site within the same community
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 $1,078,751 in 2005 compared to $658,204 in
2004 - a 64%  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 $779,057 and $619,318 in 2005
and 2004, respectively.


                              RESULTS OF OPERATIONS

The following  discussion  relates to operations for the year ended December 31,
2005 compared to the year ended December 31, 2004.

                                       8
<PAGE>

                              2005 COMPARED TO 2004

Net income for 2005 totaled $1,078,751  compared to $658,204 in 2004 or $.72 per
diluted  share and $.45 per diluted share for 2005 and 2004,  respectively.  The
return on average assets and equity, respectively,  was .81% and 10.67% for 2005
compared to .55% and 6.93% in 2004.  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  $7,726,454 for the year
ended  December 31, 2005 compared to  $6,036,303 in 2004.  Growth in the average
balance of  interest-earning  assets increased from $111,427,807 to $125,448,767
or 13%  and  was  complemented  by a 80  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  $2,538,483 in 2005 compared to $1,490,085 in 2004. The increase
in interest  expense was primarily  attributable to higher interest rates during
2005. The average balance of interest-bearing  liabilities grew from $90,335,639
in 2004 to  $98,416,429  in 2005 or 9%,  while the cost of funds  increased  100
basis points.

As a result of historic charge-offs,  loan growth and a significant  improvement
in  nonperforming  assets,  the Company added $466,270 to its allowance for loan
losses compared to $1,010,300 in 2004. Charge-offs,  net of recoveries,  totaled
$314,259 for 2005 compared to $575,937 for 2004.  Nonperforming  assets  totaled
$1,881,653 at the end of 2005 compared with $3,011,402 at the end of 2004.

Other income totaled  $1,431,886 in 2005 compared to $1,579,596 in 2004. Service
charge fees on deposit  accounts and other fees and  commissions  earned account
for the  majority of  non-interest  income.  During  2005,  the  Company  earned
$1,183,798  from service charges on deposit  accounts  compared to $1,192,809 in
2004.  The  decrease  resulted  from lower  service  charge  income  earned from
overdraft  charges,  which  produced  income of  $945,133  in 2005  compared  to
$964,883  in 2004.  Overdraft  charges  are based upon  activity  volume.  Other
service fees and  commissions,  including fees from the  origination of mortgage
loans,  totaled  $287,568 in 2005 compared to $332,900 in 2004. The decrease was
primarily a result of lower fees from the  origination  of mortgage loans at the
Bank level due to higher mortgage loan rates. Mortgage loan fees totaled $12,612
in 2005  compared to  $116,529  in 2004.  Mortgage  origination  activity  has a
tendency to decrease  during  periods of rising  interest  rates as was the case
during 2005. The Mortgage  Company assumed all mortgage  origination  activities
during January 2005, and posted a net operating loss of $15,748, of which $7,874
was the Company's portion.

The Company sold investment  securities  during 2005 and 2004, which resulted in
realized  losses of  $92,012  and gains of  $31,613,  respectively.  2005  sales
resulted from portfolio repositioning due to increased market rates, while sales
during 2004 resulted from a need to improve liquidity.

Other income,  primarily the fees from the sales of checks and deposit slips and
recoveries  other  than  loans,  provided  additional  income of $60,406 in 2005
compared to $33,603 in 2004.

Other  expenses  totaled  $4,464,811  in 2005  compared to  $4,093,885  in 2004.
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 relocating a
full-service  banking  location  during the latter  part of 2005.  Salaries  and
benefits  accounted for $2,140,632 in 2005 or 48% of other expenses  compared to
$1,846,503 or 45% in 2004.  Equipment expenses totaled $373,560 in 2005 compared
to $329,382 in 2004. Net expenses associated with foreclosures  totaled $101,937
during 2005 compared to $239,531  during 2004.  Other  non-interest  expenses of
$1,848,682 in 2005 compared to $1,678,469 in 2004 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  $5,187,971  and
$4,546,298 for 2005 and 2004, respectively,  representing an increase of 14% for
2005 over 2004.  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
<PAGE>
<TABLE>
<CAPTION>
                                   AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
                                         For the Years Ended December 31,

                                                    2005                                    2004
                                                   Average                                 Average
                                     Average       Yield/     Income/        Average        Yield/      Income/
                                     Balance        Cost      Expense        Balance         Cost       Expense
<S>                               <C>                <C>    <C>            <C>                <C>    <C>
ASSETS:
Loans (1)                         $ 90,595,910       7.2%   $  6,561,312   $ 79,542,721       6.6%   $  5,225,639
Taxable securities (2)              22,908,714       3.4%        773,225     19,650,226       3.1%        603,307
Non-taxable securities (3)           2,720,871       5.2%         92,723      1,687,325       4.9%         54,458
Federal funds sold                   8,888,644       3.0%        267,622     10,251,120       1.4%        142,056
Interest-bearing deposits              334,628       9.4%         31,572        296,415       3.7%         10,923
                                  ------------              ------------   ------------              ------------
  Total interest-earning assets    125,448,767       6.2%      7,726,454    111,427,807       5.4%      6,036,383
                                  ------------              ------------   ------------              ------------
All other assets                     7,000,747                                7,338,116
                                  ------------                             ------------
  Total assets                    $132,449,514                             $118,765,923
                                  ============                             ============

Liabilities and
Shareholders' Equity:
Interest-bearing deposits         $ 90,175,827       2.3%      2,092,944   $ 84,107,904       1.5%      1,267,976
Short-term borrowings                1,004,273       1.8%         17,739      2,103,735       1.6%         34,358
Long-term debt                       7,236,329       5.9%        427,800      4,124,000       4.6%        187,751
                                  ------------              ------------   ------------              ------------
  Total interest-bearing            98,416,429       2.6%      2,538,483     90,335,639       1.6%      1,490,085
liabilities
Other liabilities                   23,918,497                               18,931,761
Shareholders' equity                10,114,588                                9,498,523
                                  ------------                             ------------
Total liabilities and
shareholders' equity              $132,449,514                             $118,765,923
                                  ============                             ============

Net yield on earning-assets
and net interest income (4)                          4.2%   $  5,187,971                      4.1%   $  4,546,298
                                                            ============                             ============
Interest rate spread (5)                             3.6%                                     3.8%

</TABLE>

(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.

<TABLE>
<CAPTION>
                                             Interest and Rate/Volume Variance
                                             For the Years Ended December 31,

                                                     2005 Compared to 2004                2004 Compared to 2003
                                           Volume (1)      Rate(1)       Total     Volume (1)     Rate (1)       Total
<S>                                        <C>           <C>          <C>          <C>          <C>           <C>
Interest-bearing deposits in other banks   $    2,507    $   18,142   $   20,649   $    5,807   $    4,561    $   10,368
Investment securities                         139,303        68,880      208,183      162,561       24,126       186,687
Federal funds sold                            (29,952)      155,518      125,566       15,253       32,736        47,989
Loans                                         763,333       572,340    1,335,673      716,007     (276,040)      439,967
                                           ----------    ----------   ----------   ----------   ----------    ----------
Increase in interest income                $  875,191    $  814,880   $1,690,071   $  899,628   $ (214,617)   $  685,011
                                           ==========    ==========   ==========   ==========   ==========    ==========

Interest-bearing deposits                  $  116,156    $  708,812   $  824,968   $  178,952   $ (243,450)   $  (64,498)
Borrowings                                     90,308       133,122      223,430      142,069       14,753       156,822
                                           ----------    ----------   ----------   ----------   ----------    ----------
Increase in interest expense               $  206,464    $  841,934   $1,048,398   $  321,021   $ (228,697)   $   92,324
                                           ==========    ==========   ==========   ==========   ==========    ==========
</TABLE>

     (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
<PAGE>

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, 2005, such unfunded commitments to extend credit were
$24,014,330,  while  commitments  in the  form  of  letters  of  credit  totaled
$1,566,547.

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 or 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, 2005,  payments due under such operating  lease  arrangements  were
$137,730,   $126,930,  $94,530,  $94,530  and  $94,530  in  2006  through  2010,
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, 2005 and 2004, core deposits
totaled  $105,872,861  or 89%,  and  $94,622,232  or 83% (which  excludes a real
estate   customer's   money  market  demand  accounts   totaling   $13,438,618),
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  $13.8  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  13 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

                                       11
<PAGE>

period.  However, this method addresses only the magnitude of funding mismatches
and  does  not  address  the  magnitude  or  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  following  table sets  forth the  amounts  of  interest-earning  assets and
interest-bearing  liabilities  outstanding  at  December  31,  2005,  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.

<TABLE>
<CAPTION>
                                     INTEREST RATE SENSITIVITY (GAP ANALYSIS)
                                                 DECEMBER 31, 2005

                                  1 - 90          91 - 180         181 - 365        Total            Non-
                                  Days            Days             Days             One Year         Sensitive      Total
<S>                               <C>                <C>            <C>             <C>              <C>            <C>
Interest-earning assets:
Interest bearing deposits         $    350,770                                      $    350,770                    $    350,770
Federal funds sold                     267,000                                           267,000                         267,000
Investment securities                3,249,351    $    551,457     $  7,108,464       10,909,272     $ 17,597,617     28,506,889
Federal Home Loan
  Bank stock                                                                                              531,500        531,500
Loans (1)                           76,970,489         733,772        2,391,263       80,095,524       18,643,425     98,738,949
                                  ------------    ------------     ------------     ------------     ------------   ------------
  Total interest-earning assets     80,837,610       1,285,229        9,499,727       91,622,566       36,772,542    128,395,108

Interest-bearing liabilities:
Time deposits                       16,097,730      13,627,394       11,141,086       40,866,210        2,695,452     43,561,662
All other deposits                  50,386,772                                        50,386,772                      50,386,772
Long-term debt                       4,124,000                                         4,124,000        4,000,000      8,124,000
                                  ------------    ------------     ------------     ------------     ------------   ------------
  Total interest-bearing
        liabilities                 70,608,502      13,627,394       11,141,086       95,376,982        6,695,452    102,072,434

Interest sensitivity gap          $ 10,229,108    $(12,342,165)    $ (1,641,359)    $ (3,754,416)
                                  ============     ============     ============   ============
Cumulative interest
  sensitivity gap                 $ 10,229,108    $ (2,113,057)    $ (3,754,416)
                                  ============    ============     ============
Interest-earning assets
  as a percent of interest
  sensitive liabilities                  114.5%            9.4%            85.3%            96.1%
</TABLE>

(1) Nonaccrual loans have been excluded.

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

                                       12
<PAGE>

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, 2005

                                            Within        One to         Five
                                             One           Five        Years or
                                             Year         Years          More

Commercial, financial and agricultural   $19,635,598   $        --   $        --
Real estate - mortgage                    45,629,284    11,022,134     2,535,735

Predetermined rate, maturity
  greater than one year                           --    11,022,134     2,535,735
Variable rate or maturing within
  one year                                65,264,882            --            --

The Company paid an average  rate of 2.3% on  interest-bearing  deposits  during
2005  compared to 1.5% during  2004.  Significant  growth in deposits  came from
interest-bearing  accounts.  Interest-bearing  transaction and savings  accounts
decreased by $15,713,746  during the period,  including a customer's real estate
trust  accounts  totaling  $13,438,618,  which  the  Company  considered  to  be
temporary funds at December 31, 2004 and was  subsequently  withdrawn during the
first quarter of 2005. 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.  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, 2005

Non-interest bearing deposits                        $ 23,062,027
Interest-bearing                                       90,175,827
                                                     ------------
Total                                                $113,237,854
                                                     ============

The above table  includes  deposits of $100,000 or more,  which at December  31,
2005 totaled $13,240,038. The table below presents the maturities of deposits of
$100,000 or more.

Maturities of Time Deposits of $100,000 or More
December 31, 2005
                                                                        Greater
                                    Within      Within      Within      Than
                                    Three       Six         Twelve      One
                                    Months      Months      Months      Year

Time deposits of $100,000 or more   $5,870,325  $3,389,860  $3,306,061  $673,792


CAPITAL RESOURCES

As of  December  31,  2005 and 2004,  the  Company's  ratio of total  capital to
risk-adjusted  assets was 15.33%, and 16.45%,  respectively.  Average capital to
average  assets  totaled  7.64%  and  8.00%  at  December  31,  2005  and  2004,
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, 2005, 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
<PAGE>
<TABLE>
<CAPTION>

                                             Trust                     Junior
                                           Preferred                Subordinated
                            Date of       Securities   Interest       Debt Owed    Final Maturity
   Issuing Entity          Issuance       Outstanding      Rate       To Trust          Date
----------------------    ----------    -------------  -----------   ----------    -----------
<S>                       <C>              <C>          <C>           <C>          <C>

Weststar Financial Ser-
   vices Corporation I    10/10/2003      $4,000,000   Floating          --        10/07/2033
Weststar Financial Ser-
   vices Corporation      10/10/2003          --       Floating      $4,124,000    10/07/2033
</TABLE>

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
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 in 5 years. 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.

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, 2005 and 2004 were  $100,493,602  and
$84,852,070,  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.

<TABLE>
<CAPTION>
                                                                     LOANS
                                                                  December 31,

                                       2005                2004                 2003             2002                 2001
                                                 % of                % of               % of               % of                % of
                                                 Total               Total              Total              Total               Total
                                       Amount    Loans    Amount     Loans     Amount   Loans    Amount    Loans     Amount    Loans
<S>                                <C>             <C> <C>             <C> <C>            <C> <C>            <C> <C>            <C>
LOANS
Real estate -
  Construction                     $ 19,350,978    19% $ 11,470,223    13% $  8,372,934   11% $ 12,334,543   18% $ 11,139,588   17%
  Mortgage                           59,187,153    59%   51,633,458    61%   46,014,314   61%   37,214,677   55%   35,189,010   54%
Commercial, financial and
  agricultural                       19,635,598    19%   20,162,307    24%   18,603,317   25%   16,367,306   24%   16,512,498   25%
Consumer                              2,531,935     3%    1,747,694     2%    1,909,709    3%    2,188,840    3%    2,553,710    4%
                                   ------------   ---  ------------   ---  ------------  ---  ------------  ---  ------------  ---
Total loans                         100,705,664   100%   85,013,682   100%   74,900,274  100%   68,105,366  100%   65,394,806  100%
                                                  ===                 ===                ===                ===                ===
Deferred originations fees, net        (212,062)           (161,612)           (147,208)          (127,387)          (163,824)
                                   ------------        ------------        ------------       ------------       ------------
Total loans, net of deferred fees  $100,493,602        $ 84,852,070        $ 74,753,066       $ 67,977,979       $ 65,230,982
                                   ============        ============        ============       ============       ============
</TABLE>

                                       14
<PAGE>
<TABLE>
<CAPTION>

                                            NONPERFORMING ASSETS
                                                 December 31,

                            2005        2004        2003        2002        2001
<S>                      <C>         <C>         <C>         <C>         <C>
NONPERFORMING ASSETS
Nonaccrual loans         $1,754,653  $2,567,816  $2,145,772  $1,079,750  $1,050,813
Other real estate owned     127,000     401,345   1,145,186     724,986     733,941
Repossessions                    --      42,241     121,783      67,204      18,598
                         ----------  ----------  ----------  ----------  ----------

Total                    $1,881,653  $3,011,402  $3,412,741  $1,871,940  $1,803,352
                         ==========  ==========  ==========  ==========  ==========
</TABLE>

Real estate loans  comprised  78% of the  portfolio  in 2005  compared to 74% in
2004. Commercial loans comprised 19% of the portfolio in 2005 compared to 24% in
2004,  while  consumer  loans  comprised  3% in  2005  compared  to 2% in  2004.
Commercial  loans of  $19,635,598,  consumer loans of $2,531,935 and real estate
mortgage  loans of  $59,187,153  are loans for  which  the  principal  source of
repayment  is derived from the ongoing  cash flow of the  business.  Real estate
construction  loans of $19,350,978  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  $25,580,877  and  $19,683,801 at December 31,
2005 and 2004, 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 $1,792,486 and
$2,567,816 at December 31, 2005 and 2004,  respectively.  The related  allowance
for loan losses  determined in accordance  with SFAS No. 114 for impaired  loans
was  $210,044  and  $301,898 at December  31, 2005 and 2004,  respectively.  The
average  recorded  investment in impaired  loans during the years ended December
31, 2005 and 2004 was $1,576,007  and  $1,844,874,  respectively.  For the years
ended December 31, 2005 and 2004, the Company  recognized  interest  income from
impaired loans of $3,451 and $65,234, 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
<PAGE>

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, 2005 and 2004 was  $1,760,377  and
$1,608,366 or 1.75% and 1.90%,  respectively,  of gross loans  outstanding.  The
ratio of net  charge-offs to average loans  outstanding was .35% and .72% during
2005 and  2004,  respectively.  Primarily  because  of a  recessionary  economy,
charge-offs  in  2003,   2002,  and  2001  exceeded  that  of  prior  historical
experiences.

<TABLE>
<CAPTION>
                                     CHANGES IN THE ALLOWANCE FOR LOAN LOSSES

                                                   2005            2004            2003            2002            2001

<S>                                            <C>             <C>             <C>             <C>             <C>
Balance at beginning of year                   $ 1,608,366     $ 1,174,003     $ 1,020,198     $   978,467     $   871,706
Loans charged-off:
  Commercial, financial and agricultural          (207,106)       (579,930)     (1,075,792)       (568,710)       (373,087)
  Real estate:
    Construction                                        --              --              --              --        (127,810)
    Mortgage                                      (129,401)        (48,000)       (157,142)        (33,574)        (90,275)
  Consumer                                         (33,339)        (69,682)       (124,680)       (159,471)        (27,238)
                                               -----------     -----------     -----------     -----------     -----------
Total charge-offs                                 (369,846)       (697,612)     (1,357,614)       (889,565)       (490,600)
                                               -----------     -----------     -----------     -----------     -----------
Recoveries of loans previously charged - off:
  Commercial, financial and agricultural            28,488          73,054          71,942          19,753          45,270
  Real estate:
    Construction                                        --              --              --           1,531              --

    Mortgage                                            --          25,000              --          13,322              --

  Consumer                                          27,099          23,621          33,677          18,770           1,671
                                               -----------     -----------     -----------     -----------     -----------
Total recoveries                                    55,587         121,675         105,619          53,376          46,941
                                               -----------     -----------     -----------     -----------     -----------
Net charge-offs                                   (314,259)       (575,937)     (1,251,995)       (836,189)       (443,659)
                                               -----------     -----------     -----------     -----------     -----------
Provision for loan losses                          466,270       1,010,300       1,405,800         877,920         550,420
                                               -----------     -----------     -----------     -----------     -----------
Balance at end of year                         $ 1,760,377     $ 1,608,366     $ 1,174,003     $ 1,020,198     $   978,467
                                               ===========     ===========     ===========     ===========     ===========

Ratio of net charge-offs during the year to
  average loans outstanding during the year            .35%            .72%           1.82%           1.26%            .70%
</TABLE>

Sustained  improvements  in economic  conditions,  asset quality and charge-offs
have  justified  a lower loan loss  reserve at the end of 2005.  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 2005, 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

                                       16
<PAGE>

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.

<TABLE>
<CAPTION>

                                                    ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
                                                                       December 31,

                           2005                2004                2003               2002                2001
                                     % of                %of                 %of                 %of                 %of
                                    Total               Total               Total               Total                Total
                          Amount    Loans     Amount    Loans     Amount    Loans     Amount    Loans     Amount     Loans
<S>                     <C>           <C>   <C>           <C>   <C>           <C>   <C>           <C>   <C>           <C>
Real estate             $1,350,460    78%   $1,139,769    74%   $  863,606    72%   $  690,842    73%   $  645,743    71%
Commercial, financial
 and agricultural          341,925    19%      388,559    24%      267,584    25%      287,860    24%      280,653    25%
 Consumer                   67,992     3%       54,528     2%        3,722     3%       19,184     3%       19,381     4%
Unallocated                     --    --        25,510    --        19,091    --        22,312    --        32,690    --
                        ----------   ---    ----------   ---    ----------   ---    ----------   ---    ----------   ---
Total allowance         $1,760,377   100%   $1,608,366   100%   $1,174,003   100%   $1,020,198   100%   $  978,467   100%
                        ==========   ===    ==========   ===    ==========   ===    ==========   ===    ==========   ===
</TABLE>

INVESTMENT SECURITIES

At  December  31,  2005 and 2004,  securities  carried at market  value  totaled
$27,824,748 and $23,106,660,  respectively,  with amortized costs of $28,506,889
and $23,301,098, 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, 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%
                                                     ===========   ===

December 31, 2004
Available for sale: (1)
                                                     Amortized
TYPE                                                 Cost              Yield (2)

U.S. Government agencies - within 1 to 5 years       $11,860,264   3.2%
Mortgage-backed securities - within 1 to 5 years       2,657,902   3.5%
                                                     -----------   ---
  Total - within 1 to 5 years                         14,518,166   3.2%
                                                     -----------

Mortgage-backed securities - within 5 to 10 years      6,111,075   3.4%
N.C. Municipal bonds - within 5 to 10 years            1,572,435   4.8%
                                                     -----------   ---
  Total - within 5 to 10 years                         7,683,510   4.1%
                                                     -----------

Mortgage-backed securities - greater than 10 years       986,001   4.5%
N.C. Municipal bonds - greater than 10 years             113,421   4.7%
                                                     -----------   ---
  Total - greater than 10 years                        1,099,422   4.5%
                                                     -----------

    Total                                            $23,301,098   3.6%
                                                     ===========   ===

(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
<PAGE>

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
<PAGE>
<TABLE>
<CAPTION>

                           SELECTED FINANCIAL INFORMATION AND OTHER DATA

SELECTED AVERAGE BALANCES:
                                                     2005      Yield       2004     Yield
<S>                                             <C>            <C>    <C>           <C>
         Non-interest bearing demand deposits   $ 23,062,027          $ 18,315,268
         Interest-bearing demand deposits         52,990,891    1.2%    50,844,982    1.2%
         Savings deposits                          2,258,496     .3%     2,291,726     .3%
         Time deposits                            34,926,440    2.1%    30,971,196    2.1%
                                                ------------          ------------
         Total deposits                         $113,237,854          $102,423,172
                                                ============          ============

SELECTED PERFORMANCE RATIOS:

         Return on average assets                        .81%                  .55%
         Return on average equity                      10.67%                 6.93%
         Dividend payout ratio                             0%                    0%
         Equity to assets ratio                         7.64%                 8.00%
</TABLE>

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 13 to the  consolidated
financial  statements  included  elsewhere  in this report for more  information
regarding these commitments and contingent liabilities.

                                       19
<PAGE>

ITEM 7:  FINANCIAL STATEMENTS


              WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
                 INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

                                                                        Page No.

Report of Independent Registered Public Accounting Firm................    21

Consolidated Balance Sheets as of December 31, 2005 and 2004...........    22

Consolidated Statements of Operations and Comprehensive Income
   for the years ended December 31, 2005 and 2004......................    23

Consolidated Statements of Changes in Shareholders' Equity
   for the years ended December 31, 2005 and 2004......................    25

Consolidated Statements of Cash Flows
   for the years ended December 31, 2005 and 2004......................    26

Notes to Consolidated Financial Statements.............................    27

                                       20
<PAGE>

                            [LOGO DIXON HUGHES PLLC]

             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,
2005  and  2004  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, 2005 and 2004
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.

/s/ Dixon Hughes PLLC

Charlotte, North Carolina
February 22, 2006


                                       21
<PAGE>
<TABLE>
<CAPTION>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
-------------------------------------------------------------------------------------------------

ASSETS                                                                 2005             2004
                                                                   -------------    -------------
<S>                                                                <C>              <C>

Cash and cash equivalents:
   Cash and due from banks                                         $   6,243,192    $   3,729,987
   Interest-bearing deposits                                             350,770          321,280
   Federal funds sold                                                    267,000       15,570,000
                                                                   -------------    -------------
     Total cash and cash equivalents                                   6,860,962       19,621,267
                                                                   -------------    -------------
Investment securities - available for sale, at fair value
   (amortized cost of $28,506,889 and $23,301,098 at
   December 31, 2005 and 2004, respectively)                          27,824,748       23,106,660
Loans                                                                100,493,602       84,852,070
Allowance for loan losses                                             (1,760,377)      (1,608,366)
                                                                   -------------    -------------
   Net loans                                                          98,733,225       83,243,704
Premises and equipment, net                                            2,584,841        2,650,156
Accrued interest receivable                                              707,771          564,816
Federal Home Loan Bank stock, at cost                                    531,500          307,900
Deferred income taxes                                                    715,310          390,140
Foreclosed properties                                                    127,000          443,586
Other assets                                                             668,178          678,478
                                                                   -------------    -------------

TOTAL                                                              $ 138,753,535    $ 131,006,707
                                                                   =============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
   Deposits:
     Demand                                                        $  25,164,465    $  19,572,549
     NOW accounts                                                     18,102,736       22,603,723
     Money market accounts                                            29,901,364       41,332,780
     Savings                                                           2,382,672        2,164,015
     Time deposits of $100,000 or more                                13,240,038        6,380,898
     Other time deposits                                              30,321,624       22,387,783
                                                                   -------------    -------------
        Total deposits                                               119,112,899      114,441,748
Short-term borrowings                                                         --        2,000,000
Accrued interest payable                                                 266,835          138,362
Other liabilities                                                        653,258          492,410
Long-term debt                                                         8,124,000        4,124,000
                                                                   -------------    -------------
          Total liabilities                                          128,156,992      121,196,520
                                                                   -------------    -------------

COMMITMENTS 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 - 1,401,266 and 1,166,208 at
     December 31, 2005 and 2004, respectively                          1,401,266        1,166,208
   Additional paid-in capital                                          6,805,331        7,030,589
   Retained earnings                                                   2,809,122        1,732,872
   Accumulated other comprehensive loss                                 (419,176)        (119,482)
                                                                   -------------    -------------
          Total shareholders' equity                                  10,596,543        9,810,187
                                                                   -------------    -------------

TOTAL                                                              $ 138,753,535    $ 131,006,707
                                                                   =============    =============
</TABLE>
See Notes to Consolidated Financial Statements.

                                       22
<PAGE>
<TABLE>
<CAPTION>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Years Ended December 31, 2005 and 2004
-----------------------------------------------------------------------------------------

                                                                   2005           2004
                                                               -----------    -----------
<S>                                                            <C>            <C>
INTEREST AND DIVIDEND INCOME:
   Interest and fees on loans                                  $ 6,561,312    $ 5,225,639
   Federal funds sold                                              267,622        142,056
   Interest-bearing deposits                                        31,572         10,923
   Investments:
      Taxable interest income                                      756,853        595,446
      Non-taxable interest income                                   92,723         54,458
      Dividends                                                     16,372          7,861
                                                               -----------    -----------
        Total interest and dividend income                       7,726,454      6,036,383
                                                               -----------    -----------

INTEREST EXPENSE:
   Time deposits of $100,000 or more                               325,505        125,180
   Other time and interest bearing-deposits                      1,767,439      1,142,796
   Short-term borrowings                                            17,739         34,358
   Long-term debt                                                  427,800        187,751
                                                               -----------    -----------
        Total interest expense                                   2,538,483      1,490,085
                                                               -----------    -----------

NET INTEREST INCOME                                              5,187,971      4,546,298

PROVISION FOR LOAN LOSSES                                          466,270      1,010,300
                                                               -----------    -----------

NET INTEREST INCOME AFTER PROVISION FOR
   LOAN LOSSES                                                   4,721,701      3,535,998
                                                               -----------    -----------

OTHER INCOME:
   Service charges on deposit accounts                           1,183,798      1,192,809
   Other service fees and commissions                              287,568        332,900
   Securities gains (losses)                                       (92,012)        31,613
   Equity in loss of Bank of Asheville Mortgage Company, LLC        (7,874)       (11,329)
   Other                                                            60,406         33,603
                                                               -----------    -----------
        Total other income                                       1,431,886      1,579,596
                                                               -----------    -----------

OTHER EXPENSES:
   Salaries and wages                                            1,821,107      1,594,864
   Employee benefits                                               319,525        251,639
   Occupancy expense, net                                          310,683        336,941
   Equipment rentals, depreciation and maintenance                 373,560        329,382
   Supplies                                                        247,863        242,910
   Data processing fees                                            514,876        468,428
   Professional fees                                               282,328        266,273
   Marketing                                                       228,036        179,125
   Net expenses from foreclosed properties                         101,937        239,531
   Other                                                           264,896        184,792
                                                               -----------    -----------
      Total other expenses                                       4,464,811      4,093,885
                                                               -----------    -----------

INCOME BEFORE INCOME TAX PROVISION                               1,688,776      1,021,709

INCOME TAX PROVISION                                               610,025        363,505
                                                               -----------    -----------

NET INCOME                                                     $ 1,078,751    $   658,204
                                                               ===========    ===========
</TABLE>
See Notes to Consolidated Financial Statements.

                                       23
<PAGE>
<TABLE>
<CAPTION>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)
Years Ended December 31, 2005 and 2004
------------------------------------------------------------------------------------

                                                                 2005         2004
                                                              ---------    ---------
<S>                                                           <C>          <C>

OTHER COMPREHENSIVE LOSS BEFORE TAX:
   Unrealized holding losses on securities
      available for sale                                      $(579,716)   $ (31,668)
        Tax effect                                              223,481       12,208
                                                              ---------    ---------
   Unrealized holding losses on securities
      available for sale, net of tax                           (356,235)     (19,460)

   Reclassification adjustment for realized (gains) losses       92,012      (31,613)
      Tax effect                                                (35,471)      12,187
                                                              ---------    ---------
   Reclassification adjustment for realized (gains) losses,
      net of tax                                                 56,541      (19,426)

OTHER COMPREHENSIVE LOSS, NET OF TAX                           (299,694)     (38,886)
                                                              ---------    ---------

COMPREHENSIVE INCOME                                          $ 779,057    $ 619,318
                                                              =========    =========

BASIC NET INCOME PER COMMON SHARE                             $     .77    $     .47
                                                              =========    =========

DILUTED NET INCOME COMMON PER SHARE                           $     .72    $     .45
                                                              =========    =========

</TABLE>

See Notes to Consolidated Financial Statements.

                                       24
<PAGE>
<TABLE>
<CAPTION>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2005 and 2004
-----------------------------------------------------------------------------------------------------------------------------------


                                                                                                       Accumulated
                                                                                                         Other
                                                 Common Stock           Additional                       Compre-          Total
                                         ---------------------------     Paid-In         Retained        hensive      Shareholders'
                                            Shares         Amount        Capital         Earnings          Loss           Equity
                                         ------------   ------------   ------------    ------------    ------------    ------------
<S>                                        <C>         <C>            <C>             <C>             <C>             <C>
BALANCE, DECEMBER 31, 2003                  1,166,208   $  1,166,208   $  7,030,589    $  1,074,747    $    (80,596)   $  9,190,948

  Net unrealized losses
    securities available for sale                  --             --             --              --         (38,886)        (38,886)
  Cash paid in lieu of fractional shares           --             --             --             (79)             --             (79)
  Net income                                       --             --             --         658,204              --         658,204
                                         ------------   ------------   ------------    ------------    ------------    ------------

BALANCE, DECEMBER 31, 2004                  1,166,208      1,166,208      7,030,589       1,732,872        (119,482)      9,810,187

  Six-for-five stock split                    233,058        233,058       (233,058)             --              --              --
  Net unrealized losses
    securities available for sale                  --             --             --              --        (299,694)       (299,694)
  Issuance of common stock pursuant
    to the exercise of stock options            2,000          2,000          7,800              --              --           9,800
Cash paid in lieu of fractional shares             --             --             --          (2,501)             --          (2,501)
  Net income                                       --             --             --       1,078,751              --       1,078,751
                                         ------------   ------------   ------------    ------------    ------------    ------------

BALANCE, DECEMBER 31, 2005                  1,401,266   $  1,401,266   $  6,805,331    $  2,809,122    $   (419,176)   $ 10,596,543
                                          ============   ============   ============    ============    ============    ============
</TABLE>

See Notes to Consolidated Financial Statements.

                                       25
<PAGE>
<TABLE>
<CAPTION>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2005 and 2004
-----------------------------------------------------------------------------------------------

                                                                       2005            2004
                                                                   ------------    ------------
<S>                                                                <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                      $  1,078,751    $    658,204
   Adjustments to reconcile net income to net
     cash provided by operating activities:
      Depreciation                                                      359,782         381,313
      Provision for loan losses                                         466,270       1,010,300
      Premium amortization and discount accretion, net                   89,401         109,430
      Deferred income tax provision                                    (137,157)       (145,286)
      Net expenses from foreclosed properties                            91,438         204,927
      Loss on disposals of premises and equipment                         4,500          18,180
      Gains (losses) on sales of securities                              92,012         (31,613)
      Increase in accrued interest receivable                          (142,955)       (107,002)
      (Increase) decrease in other assets                                84,296         (28,738)
      Increase in accrued interest payable                              128,473          17,509
      Increase in other liabilities                                     160,848         143,461
                                                                   ------------    ------------
        Net cash provided by operating activities                     2,276,659       2,230,685
                                                                   ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of securities available for sale                       (13,683,285)    (12,385,613)
   Maturities of securities available for sale                        2,779,880       7,096,552
   Net increase in loans                                            (16,000,743)    (10,914,609)
   Proceeds from the sales of foreclosed properties                     195,100         858,124
   Proceeds from sales of securities                                  5,516,201         553,600
   Proceeds from sales of premises and equipment                          2,143             200
   Additions to premises and equipment                                 (301,110)       (715,980)
    Purchase of Federal Home Loan Bank Stock                           (223,600)       (132,500)
                                                                   ------------    ------------
        Net cash used in investing activities                       (21,715,414)    (15,640,226)
                                                                   ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase (decrease) in demand deposits, NOW
      accounts and savings accounts                                 (10,121,830)     17,599,668
   Net increase in certificates of deposits                          14,792,981       3,440,542
   Cash paid in lieu of fractional shares                                (2,501)            (79)
   Issuance of common stock                                               9,800              --
   Proceeds from long-term borrowings                                 4,000,000              --
   Maturity of short-term borrowing                                  (2,000,000)             --
                                                                   ------------    ------------
      Net cash provided by financing activities                       6,678,450      21,040,131
                                                                   ------------    ------------

NET INCREASE (DECREASE) IN
   CASH AND CASH EQUIVALENTS                                        (12,760,305)      7,630,590

CASH AND CASH EQUIVALENTS:
   Beginning of year                                                 19,621,267      11,990,677
                                                                   ------------    ------------

   End of year                                                     $  6,860,962    $ 19,621,267
                                                                   ============    ============

SUPPLEMENTAL DISCLOSURE:
   Cash paid for interest                                          $  2,410,010    $  1,472,576
                                                                   ============    ============
   Cash paid for income taxes                                      $    749,144    $    332,169
                                                                   ============    ============

NONCASH TRANSACTIONS:
   Loans transferred to foreclosed properties                      $     44,952    $    239,668
                                                                   ============    ============
   Loans receivable to finance other real estate owned             $     75,000    $         --
                                                                   ============    ============
   Net unrealized gain (loss) on investment securities available
     for sale, net of deferred income tax expense (benefit)        $   (419,176)   $   (119,482)
                                                                   ============    ============
</TABLE>

See Notes to Consolidated Financial Statements

                                       26
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------


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
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

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.

      Stock  Compensation  Plans - Statement of Financial  Accounting  Standards
      ("SFAS") No. 123, Accounting for Stock-Based Compensation,  encourages all
      entities to adopt a fair value based  method of  accounting  for  employee
      stock  compensation  plans,  whereby  compensation cost is measured at the
      grant  date  based on the value of the award  and is  recognized  over the
      service  period,  which is usually the vesting  period.  However,  it also
      allows an entity to continue to measure  compensation cost for those plans
      using the  intrinsic  value  based  method  of  accounting  prescribed  by
      Accounting  Principles Board ("APB") Opinion No. 25,  Accounting for Stock
      Issued to Employees,  whereby  compensation cost is the excess, if any, of
      the  quoted  market  price  of the  stock  at the  grant  date  (or  other
      measurement  date) over the  amount an  employee  must pay to acquire  the
      stock. The Company has elected to continue with the accounting methodology
      in  Opinion  No. 25 and,  as a result,  has  provided  the below pro forma
      disclosures of net income and earnings per share and other  disclosures as
      if the fair value based method of accounting had been applied.

      In  December  2004,  the FASB issued  Statement  of  Financial  Accounting
      Standards No. 123(r) ("SFAS No. 123(r)"),  "Share-Based Payment", which is
      a  revision  of  FASB  Statement  No.  123   "Accounting  for  Stock-Based
      Compensation"  and  supersedes  APB Opinion No. 25  "Accounting  for Stock
      Issued to Employees".  SFAS No. 123(r) requires  companies to recognize in
      the income  statement the grant-date fair value of stock options and other
      equity-based compensation issued to employees over the period during which
      an  employee is  required  to provide  service in exchange  for the award,
      which will often be the  shorter of the  vesting  period of the period the
      employee will be  retirement  eligible.  SFAS No.  123(r) sets  accounting
      requirements  for  "share-based"  compensation  to  employees,   including
      employee-stock  purchase  plans  ("ESPPs").  Awards  to  most  nonemployee
      directors will be accounted for as employee awards.  This Statement was to
      be  effective  for  public  companies  that do not file as small  business
      issuers  as of the  beginning  of  interim  or  annual  reporting  periods
      beginning  after June 15, 2005. In April 2005, the Securities and Exchange
      Commission ("SEC") issued Release No. 2005-57,  which defers the effective
      date of SFAS No. 123(r) for many registrants. Registrants that do not file
      as small  business users must adopt SFAS No. 123(r) as of the beginning of
      their first annual period beginning after June 15, 2005. Accordingly,  the
      Corporation  will  adopt  SFAS No.  123(r)  on  January  1,  2006,  and is
      currently evaluating the effect on its consolidated financial statements.

                                       28
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Stock Compensation Plans (Continued)
      At December 31, 2005, the Company had two stock-based  compensation plans.
      The Company accounts for compensation costs related to the Company's stock
      option plans using the intrinsic value method.  Therefore, no compensation
      costs has been  recognized for stock option awards because the options are
      granted at  exercise  prices  based on the market  value of the  Company's
      stock on the date of grant. Had compensation costs for the Company's stock
      option plans been  determined  using the fair value method,  the Company's
      pro forma net income would have been as follows:

<TABLE>
<CAPTION>
                                                                     2005          2004
                                                                 -----------   -----------
<S>                                                              <C>           <C>
      Net income as reported                                     $ 1,078,751   $   658,204
      Less:  Total stock-based employee compensation expense
        determined under fair value method for all awards, net
        of related tax effects                                        47,703       102,232
                                                                 -----------   -----------
      Pro forma net income                                       $ 1,031,048   $   555,972
                                                                 ===========   ===========

      Net income per share:
        As reported:
          Basic                                                  $       .77   $       .47
                                                                 ===========   ===========
          Diluted                                                $       .72   $       .45
                                                                 ===========   ===========
        Pro forma:
          Basic                                                  $       .74   $       .40
                                                                 ===========   ===========
          Diluted                                                $       .69   $       .38
                                                                 ===========   ===========
</TABLE>

      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 properties'  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
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

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.

      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  represents  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
      2005 and 2004, 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 six-for-5  stock
      split paid January 2005, as summarized below:

<TABLE>
<CAPTION>
                                                                            2005       2004
                                                                         ---------   ---------
<S>                                                                      <C>         <C>
      Weighted average number of  common shares used in
        in computing basic net income per share                          1,400,170   1,399,266

       Effect of dilutive stock options                                     90,404      71,877
                                                                         ---------   ---------

       Weighted average number of common shares and dilutive potential
        common shares used in computing diluted net income per share     1,490,574   1,471,143
                                                                         =========   =========
</TABLE>

      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
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      New   Accounting   Standards  -In  January  2003,  the  FASB  issued  FASB
      Interpretation No. (FIN) 46,  Consolidation of Variable Interest Entities.
      This interpretation addresses the consolidation by business enterprises of
      variable interest entities as defined in the  interpretation.  In December
      2003,  the FASB issued a revision  to FIN 46 (FIN 46R) to clarify  some of
      the  provisions  of FIN  46  and  to  exempt  certain  entities  from  its
      requirements. FIN 46R is effective for public entities that have interests
      in structures that are commonly  referred to as  special-purpose  entities
      for  periods  ending  after  December  15,  2003.  Application  by  public
      entities,  other  than  small  business  issuers,  for all other  types of
      variable interest entities is required in financial statements for periods
      ending  after March 15, 2004.  Application  by small  business  issuers to
      variable interest entities other than special-purpose entities is required
      for  periods  ending  after  December  15,  2004.  FIN 46R may be  applied
      prospectively  with a  cumulative-effect  adjustment  as of the date it is
      first applied, or by restating previously issued financial statements with
      a  cumulative-effect  adjustment  as of the  beginning  of the first  year
      restated.  FIN  46R  also  required  certain  disclosures  of an  entity's
      relationship with variable interest entities.

      The Company  adoption of FIN 46R resulted in  deconsolidation  of Weststar
      Financial  Services  Corporation I, which was created for the sole purpose
      of  issuing  trust   preferred   securities.   Historically,   the  junior
      subordinated  debentures  issued by the Company to the Trust were included
      in trust preferred  securities in the  consolidated  balance sheets.  As a
      result of the  implementation of FIN 46R, the Company's  investment in the
      common  equity of the Trust is now  included in the  consolidated  balance
      sheets in other assets. In addition,  trust preferred securities have been
      deconsolidated  and junior  subordinated  debentures  are now reflected in
      long-term debt.

      In November  2003,  the Emerging  Issues Task Force  ("EITF")  issued EITF
      Issue No. 03-01, "The Meaning of  Other-Than-Temporary  Impairment and Its
      Application to Certain  Investments  ("EITF 03- 01").  EITF 03-01 provided
      guidance for  evaluating  whether an investment is  other-than-temporarily
      impaired  and  requires   certain   disclosures   with  respect  to  these
      investments.  In September 2004, the Financial  Accounting Standards Board
      ("FASB")  issued a FASB Staff  Position  ("FSP EITF  03-1-b") to delay the
      requirement  to record  impairment  losses EITF 03-1.  The  guidance  also
      included  accounting  considerations  subsequent to the  recognition of an
      other-than-temporary  impairment and  requirements  for disclosures  about
      unrealized  losses that have not been  recognized as  other-than-temporary
      impairments.  In  November  2005,  the FASB  issued  FSP FAS 115-1 and FAS
      124-1,  which  addresses  the  determination  as to when an  investment is
      considered impaired. This FSP nullifies certain requirements of EITF 03-01
      and supersedes EITF Topic No. D-44,  "Recognition of  Other-Than-Temporary
      Impairment  upon the Planned  Sale of a Security  Whose Cost  Exceeds Fair
      Value." This FSP is to be applied to  reporting  periods  beginning  after
      December 15, 2005. The  Corporation is in process of evaluating the impact
      of this FSP.

      In March 2005,  the SEC issued  Staff  Accounting  Bulletin  No. 107 ("SAB
      107"),  which contains  guidance on applying the  requirements in SFAS No.
      123(r). SAB 107 provides guidance on valuation techniques,  development of
      assumptions  used in valuing  employee  share  options  and  related  MD&A
      disclosures.  SAB 107 is effective for the period in which SFAS No. 123(r)
      is adopted.  The Corporation will adopt SAB 107 on January 1, 2006, and is
      currently evaluating the effect on its consolidated financial statements.

      In May 2005, the FASB issued Statement of Financial  Accounting  Standards
      No. 154 ("SFAS No.  154"),  "Accounting  Changes  and Error  Corrections",
      which replaces APB Opinion No. 20 "Accounting  Changes" and FASB Statement
      No. 3 "Reporting Accounting Changes in Interim Financial Statements". SFAS
      No. 154 changes the requirements for the accounting for and reporting of a
      change in an  accounting  principle.  SFAS No. 154 requires  retrospective
      application for voluntary changes in an accounting  principle unless it is
      impracticable  to do so. SFAS No. 154 is effective for accounting  changes
      made in fiscal years  beginning  after December 15, 2005. The  Corporation
      will  adopt SFAS No.  154 on  January  1, 2006 with no  expected  material
      effect on its consolidated financial statements.

      From time to time, the FASB issues exposure drafts for proposed statements
      of financial  accounting  standards.  Such exposure  drafts are subject to
      comment from the public, to revisions by the FASB and to final issuance by
      the FASB as  statements  of  financial  accounting  standards.  Management
      considers  the  effect  of the  proposed  statements  on the  consolidated
      financial statements of the Corporation and monitors the status of changes
      to and

                                       31
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      proposed effective dates of exposure drafts.

      Reclassifications   -  Certain  amounts  in  the  prior  year's  financial
      statements have been reclassified to conform to the 2005 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, 2005 and 2004 are as follows:

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

<TABLE>
<CAPTION>
                                                               Gross         Gross
                                             Amortized      unrealized     unrealized         Fair
                                                cost           gains         losses           value
                                            ------------   ------------   ------------    ------------
<S>                                        <C>             <C>            <C>            <C>
      Type and Maturity Group

      U.S. Government agencies due -
        Within 1 year                       $  1,500,000   $         --   $    (39,844)   $  1,460,156
                                            ------------   ------------   ------------    ------------

      U.S. Government agencies due -
        Within 1 year                         10,005,602             --       (173,753)      9,831,849
      Mortgage-backed securities due -
        Within 1 to 5 years                    3,618,068             --       (126,517)      3,491,551
      Municipal bonds due -
        Within 1 to 5 years                      251,883             --         (2,432)        249,451
                                            ------------   ------------   ------------    ------------
           Total due with in 1 to 5 years     13,875,553             --       (302,702)     13,572,851
                                            ------------   ------------   ------------    ------------

      U.S. Government agencies due -
        Within 5 to 10 years                   1,921,409             --             --       1,921,409
      Mortgage-backed securities due -
        Within 5 to 10 years                   3,527,693             --       (127,691)      3,400,002
      Municipal bonds due -
        Within 5 to 10 years                   1,054,856             --        (36,617)      1,018,239
                                            ------------   ------------   ------------    ------------
           Total 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)      1,743,913
      Municipal bonds due -
        after 10 years                         4,845,493             --       (137,315)      4,708,178
                                            ------------   ------------   ------------    ------------
           Total due within 5 to 10 years      6,627,378             --       (175,287)      6,452,091
                                            ------------   ------------   ------------    ------------

               Total at December 31, 2005   $ 28,506,889   $         --   $   (682,141)   $ 27,824,748
                                            ============   ============   ============    ============
</TABLE>

                                       32
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

2.    INVESTMENT SECURITIES (Continued)

      Available-for-sale  securities  consist of the  following  at December 31,
      2004:

<TABLE>
<CAPTION>
                                                             Gross        Gross
                                             Amortized     unrealized   unrealized        Fair
                                               cost          gains        losses          value
                                            -----------   -----------   -----------    -----------
<S>                                             <C>               <C>        <C>           <C>
      Type and Maturity Group

      U.S. Government agencies due -
        Within 1 to 5 years                 $11,860,264   $     3,031   $   (79,326)   $11,783,969
      Mortgage-backed securities due -
        Within 1 to 5 years                   2,657,902         1,027       (35,177)     2,623,752
                                            -----------   -----------   -----------    -----------
           Total due with in 1 to 5 years    14,518,166         4,058      (114,503)    14,407,721
                                            -----------   -----------   -----------    -----------

      Mortgage-backed securities due -
        Within 5 to 10 years                  6,111,075         9,701       (79,276)     6,041,500
      Municipal bonds due -
        Within 5 to 10 years                  1,572,435        10,230       (17,119)     1,565,546
                                            -----------   -----------   -----------    -----------
           Total due within 5 to 10 years     7,683,510        19,931       (96,395)     7,607,046
                                            -----------   -----------   -----------    -----------

      Mortgage-backed securities due -
        after 10 years                          986,001           390        (2,330)       984,061
      Municipal bonds                           113,421            --        (5,589)       107,832
                                            -----------   -----------   -----------    -----------
           Total due within 5 to 10 years     1,099,422           390        (7,919)     1,091,893
                                            -----------   -----------   -----------    -----------

               Total at December 31, 2004   $23,301,098   $    24,379   $  (218,817)   $23,106,660
                                            ===========   ===========   ===========    ===========
</TABLE>

      For the year ended December 31, 2005 and 2004,  proceeds from the sales of
      investment  securities available for sale totaled $5,516,201 and $553,600,
      respectively.  Gross  realized  gains  (losses) from the sales in 2005 and
      2004 amounted to $(92,012) and $31,613, respectively.

      Securities  with  carrying  values of  $1,800,000 at December 31, 2005 and
      2004 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,  2005 and 2004.  The  unrealized  losses  on  investment
      securities  as of December 31, 2005 and 2004 are a result of volatility in
      the market during 2005 and 2004 and relate to nine U.S.  Government agency
      bonds,  19 Municipal bonds and 17  Mortgage-backed  securities at December
      31, 2005 and seven U.S.  Government agency bonds, two Municipal bonds, and
      eleven  Mortgage-backed  securities at December 31, 2004.  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
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

2.    INVESTMENT SECURITIES (Continued)

<TABLE>
<CAPTION>

      December 31, 2005:

                                          Less Than 12 Months          12 Months or More                 Total
                                       -------------------------    -------------------------    -------------------------
                                          Fair       Unrealized        Fair       Unrealized        Fair       Unrealized
                                          value        losses          value        losses          value        losses
                                       -----------   -----------    -----------   -----------    -----------   -----------
<S>                                    <C>           <C>            <C>           <C>            <C>           <C>
      Securities 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 impaired
          securities                   $14,581,613   $  (280,646)   $11,321,726   $  (401,495)   $25,903,339   $  (682,141)
                                       ===========   ===========    ===========   ===========    ===========   ===========

      December 31, 2004:

                                          Less Than 12 Months          12 Months or More                 Total
                                       -------------------------    -------------------------    -------------------------
                                          Fair       Unrealized        Fair       Unrealized        Fair       Unrealized
                                          value        losses          value        losses          value        losses
                                       -----------   -----------    -----------   -----------    -----------   -----------
      Securities available for sale:
        U.S. government agencies       $ 6,466,094   $    44,170    $ 1,464,844   $    35,156    $ 7,930,938   $    79,326
        N.C. municipal bonds               107,833         5,583        370,606        17,125        478,439        22,708
        Mortgage-backed securities         512,793         2,330      6,897,285       114,453      7,410,078       116,783
                                       -----------   -----------    -----------   -----------    -----------   -----------

        Total temporarily impaired
          securities                   $ 7,086,720   $    52,083    $ 8,732,735   $   166,734    $15,819,455   $   218,817
                                       ===========   ===========    ===========   ===========    ===========   ===========
</TABLE>

      The aggregate cost of the Company's cost method  investment,  Federal Home
      Loan Bank stock,  totaled  $531,500  and $307,900 at December 31, 2005 and
      2004, respectively.  The Company estimated that the fair value equaled the
      cost of the investment  (that is, the investment was not impaired) with an
      aggregate  cost of $531,500  and  $307,900 at December  31, 2005 and 2004,
      respectively.  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, 2005 and 2004 classified by type are as follows:

                                                    2005             2004
                                                -------------    -------------
      Real estate:
       Construction                             $  19,350,978    $  11,470,223
       Mortgage                                    59,187,153       51,633,458
       Commercial, financial and agricultural      19,635,598       20,162,307
       Consumer                                     2,531,935        1,747,694
                                                -------------    -------------
           Subtotal                               100,705,664       85,013,682
       Net deferred loan origination fees            (212,062)        (161,612)
                                                -------------    -------------

      Total                                     $ 100,493,602    $  84,852,070
                                                =============    =============

                                       34
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

3.    LOANS (Continued)

      Nonperforming assets at December 31, 2005 and 2004:

                                                  2005             2004
                                               ----------       ----------

      Nonaccrual loans                         $1,754,653       $2,567,816
      Foreclosed properties                       127,000          401,345
      Repossessions                                    --           42,241
                                               ----------       ----------

      Total                                    $1,881,653       $3,011,402
                                               ==========       ==========

      No loans  have  been  restructured  during  2005 or 2004.  Loans  totaling
      $1,792,486 and $2,567,816 were considered impaired as of December 31, 2005
      and 2004,  respectively.  Impaired  loans of $1,792,486 and $2,567,816 had
      related  allowances  for loan losses of $210,044  and $301,898 at December
      31,  2005 and 2004,  respectively.  The  average  recorded  investment  in
      impaired  loans  during the years  ended  December  31,  2005 and 2004 was
      $1,576,007 and $1,844,874,  respectively. For the years ended December 31,
      2005 and 2004, the Company recognized  interest income from impaired loans
      of approximately $3,451 and $65,234, 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, 2004,  directors' direct and indirect
      indebtedness to the Company aggregated  $3,050,749.  During 2005, $766,835
      in new loans  were  made and  repayments  of  $1,900,584  were  collected,
      resulting in a balance of  $1,917,000  at December  31, 2005.  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,
      2005 and 2004 are as follows:

                                                 2005             2004
                                             -----------      -----------

      Balance at beginning of year           $ 1,608,366      $ 1,174,003
      Provision for loan losses                  466,270        1,010,300
      Charge-offs                               (369,846)        (697,612)
      Recoveries                                  55,587          121,675
                                             -----------      -----------

      Balance at end of year                 $ 1,760,377      $ 1,608,366
                                             ===========      ===========

                                       35
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

5.    PREMISES AND EQUIPMENT

      Premises and equipment at December 31, 2005 and 2004 are as follows:

                                                            2005         2004
                                                       -----------  -----------

      Land                                             $   113,900  $   113,900
      Land improvements                                    121,873      121,873
      Building and improvements                          2,066,237    1,977,959
      Furniture and equipment                            1,836,037    1,633,851
      Leasehold improvements                               416,207      413,507
      Construction in progress                                 902       65,253
                                                       -----------  -----------
                 Total                                   4,555,156    4,326,343
      Less accumulated depreciation and amortization    (1,970,315)  (1,676,187)
                                                       -----------  -----------

      Total                                            $ 2,584,841  $ 2,650,156
                                                       ===========  ===========

      Depreciation  expense  for the  years  ended  December  31,  2005 and 2004
      amounted to $359,782 and $381,313, respectively.


6.    DEPOSIT ACCOUNTS

      At December 31, 2005,  the  scheduled  maturities  of time deposits are as
      follows:

      2006                                              $ 40,866,210
      2007                                                 2,110,125
      2008                                                   389,060
      2009                                                    90,680
      2010                                                   105,587
                                                        ------------

      Total                                             $ 43,561,662
                                                        ============


7.    INCOME TAXES

      The significant components of the income tax provision for the years ended
      December 31, 2005 and 2004 follow:
                                                    2005           2004
                                                 ---------      ---------

      Current tax provision
        Federal                                  $ 628,971      $ 423,462
        State                                      118,211         85,329
                                                 ---------      ---------
          Total current provision                  747,182        508,791
                                                 ---------      ---------
      Deferred tax provision
        Federal                                   (115,074)      (120,472)
        State                                      (22,083)       (24,814)
                                                 ---------      ---------
          Total deferred tax provision            (137,157)      (145,286)
                                                 ---------      ---------

      Net provision for income taxes             $ 610,025      $ 363,505
                                                 =========      =========

                                       36
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

7.    INCOME TAXES (Continued)

      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:

                                                      2005         2004
                                                   ---------    ---------

      Expense computed at statutory rate of 34%    $ 574,184    $ 347,381

      Effect of state income taxes                    86,129       52,139
      Other                                          (50,288)     (36,015)
                                                   ---------    ---------

                                                   $ 610,025    $ 363,505
                                                   =========    =========

      Significant components of deferred taxes at December 31, 2005 and 2004 are
      as follows:

<TABLE>
<CAPTION>

                                                                    2005        2004
                                                                 ---------   ---------
<S>                                                              <C>         <C>
      Deferred tax assets:
        Allowance for loans losses                               $ 395,845   $ 329,961
        Net unrealized losses on available for sale securities     262,965      74,956
        Deferred compensation                                       96,893      64,715
        Other                                                        7,099          --
                                                                 ---------   ---------

          Total deferred tax assets                                762,802     469,632
                                                                 ---------   ---------

      Deferred tax liabilities:
        Premises and equipment                                     (13,934)    (35,387)
        Prepaid expenses                                           (33,561)    (44,104)
                                                                 ---------   ---------

          Total deferred tax liabilities                           (47,495)    (79,491)
                                                                 ---------   ---------

      Net recorded deferred tax asset                            $ 715,307   $ 390,141
                                                                 =========   =========
</TABLE>

8.    LEASES

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

                          2006                        $ 137,730
                          2007                          126,930
                          2008                           94,530
                          2009                           94,530
                          2010                           94,530
                                                      ---------
                          Total                       $ 548,250
                                                      =========


       The land for a branch office is leased from a partnership that includes a
       director of the Company.  The annual  rental is $37,800.  Rental  expense
       charged to operations  under all operating lease  agreements was $107,116
       and $88,882 for the years ended December 31, 2005 and 2004, respectively.

                                       37
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

9.    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 109,765 and 110,990,  respectively.  Of the maximum
      number of shares available for grant,  82,584 were  outstanding  under the
      Nonstatutory Plan and 105,107 were outstanding under the Incentive Plan at
      December 31, 2004.  Option prices for both plans are established at market
      value, which was $4.90, 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, 2005 and 2004 follows:

                                                                Exercise Price
                                                       Shares     Per Share
                                                      --------    ---------
      Nonstatutory Plan
      Outstanding, December 31, 2003                    82,584    $   4.90
                                                      --------

      Outstanding, December 31, 2004                    82,584        4.90
                                                      --------

      Outstanding, December 31, 2005                    82,584        4.90
                                                      ========

      Incentive Plan
      Outstanding, December 31, 2003                   108,237    $   4.90
        Cancelled                                         (870)       4.90
                                                      --------
      Outstanding, December 31, 2004                   107,367        4.90
                                                      --------
        Cancelled                                         (260)       4.90
        Exercised                                       (2,000)       4.90
                                                      --------

      Outstanding, December 31, 2005                   105,107        4.90
                                                      ========

                                           At December 31, 2005
                          ------------------------------------------------------
                                 Outstanding Options        Exercisable Options
                          -------------------------------  ---------------------
                                     Remaining   Weighted             Weighted
                                       Life      Average               Average
      Exercise Price       Shares     (Years)     Price     Shares     Price
                          --------   ---------   --------  --------   -------
      Nonstatutory Plan
           $  4.90          82,584         5.5   $   4.90    82,584   $  4.90

      Incentive Plan
           $  4.90         105,107         5.5   $   4.90   105,107   $  4.90

10.   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

                                       38
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

10.   EMPLOYEE BENEFIT PLANS  (continued)

      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  $49,448  and  $42,445  for the years  ended
      December 31, 2005 and 2004, 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 $251,345 and $167,873 at December 31, 2005 and 2004, respectively,  is
      being  accrued  over the  vesting  period  defined in the  agreement.  The
      related  expense was $83,471 and $40,259 for the years ended  December 31,
      2005 and 2004, 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, 2005 was $200,715.

11.   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 was one advance from the FHLB in the
      amount of $2,000,000 at a fixed rate of 1.65%  outstanding at December 31,
      2004. The $2,000,000  advance was paid in full on June 27, 2005;  interest
      was payable  monthly.  The Company intends to retain the remaining line of
      credit for cash needs in the future. There were no federal funds purchased
      at December 31, 2005 or 2004. 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, 2005 and
      2004 were approximately $8,275,000 and $8,266,000,  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 2005 and 2004 were $39,129 at
      4.37% and $103,735 at 1.31%,  respectively.  The maximum amount of federal
      funds  outstanding  at any month end during 2005 and 2004 were $63,000 and
      $332,000, 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,  2005,  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:

                                       39
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

11.  LONG-TERM DEBT (Continued)

<TABLE>
<CAPTION>
                                                    Trust                     Junior
                                                  Preferred                Subordinated
                                   Date of       Securities     Interest     Debt Owed    Final Maturity
          Issuing Entity          Issuance       Outstanding      Rate       To Trust          Date
       ----------------------    ----------    -------------  -----------   ----------    --------------
<S>                              <C>           <C>            <C>           <C>          <C>
       Weststar Financial Ser-
          vices Corporation I    10/10/2003      $4,000,000   Floating           --        10/07/2033
       Weststar Financial Ser-
          vices Corporation      10/10/2003           --        Floating    $4,124,000     10/07/2033
</TABLE>

      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, 2005 the effective  rate was 7.30%.  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.

12.   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, 2005, the Bank
      had  undivided  profits  of  $2,629,630.   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,  2005,  the  ratio was  10.02%  for the  Bank,  leaving  all
      $2,629,630 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, 2005, 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, 2005 and 2004,  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

                                       40
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

      action,  the Company must monitor the minimum  capital ratios as set forth
      in the table below.

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

<TABLE>
<CAPTION>

                                                                            Minimum To Be Well
                                                            Minimum         Capitalized Under
                                                          For Capital       Prompt Corrective
                                       Actual             Requirement       Action Provisions
                                  -----------------    -----------------    -----------------
                                   Amount    Ratio      Amount    Ratio     Amount     Ratio
                                  -------   -------    -------   -------    -------   -------
<S>                               <C>         <C>      <C>          <C>     <C>         <C>
      As of December 31, 2005:
       Total Capital (to Risk
        Weighted 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 Risk
        Weighted 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 (to
        Average 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%

                                                                            Minimum To Be Well
                                                            Minimum         Capitalized Under
                                                          For Capital       Prompt Corrective
                                       Actual             Requirement       Action Provisions
                                  -----------------    -----------------    -----------------
                                   Amount    Ratio      Amount    Ratio     Amount     Ratio
                                  -------   -------    -------   -------    -------   -------
      As of December 31, 2004:
       Total Capital (to Risk
        Weighted Assets)
        Consolidated              $15,080     16.45%   $ 7,332      8.00%   $ 9,165     10.00%
        Bank                       14,525     15.90%     7,310      8.00%     9,137     10.00%
        Tier I Capital (to Risk
        Weighted Assets)
        Consolidated               13,239     14.44%     3,666      4.00%     5,499      6.00%
        Bank                       13,337     14.64%     3,655      4.00%     5,482      6.00%
        Tier I Capital (to
        Average Assets)
        Consolidated               13,239     10.25%     5,165      4.00%     6,456      5.00%
          Bank                     13,337     10.35%     5,154      4.00%     6,442      5.00%
</TABLE>

13.    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, 2005 and
       2004 was $25,580,877 and $19,683,801, respectively.

                                       41
<PAGE>
WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

       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.


14.    FAIR VALUE OF FINANCIAL INSTRUMENTS

       The  fair  value  estimates  presented  herein  are  based  on  pertinent
       information  available to  management  as of December 31, 2005.  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.

<TABLE>
<CAPTION>
                                                      2005                          2004
                                           ---------------------------   ---------------------------
                                             Carrying      Estimated        Carrying      Estimated
                                              amount       fair value        amount      fair value
                                           ------------   ------------   ------------   ------------
                                                                (In thousands)
<S>                                        <C>            <C>            <C>            <C>
      Assets:
        Cash and cash equivalents          $      6,861   $      6,861   $     19,621   $     19,621
        Investment securities                    27,825         27,825         23,107         23,107
        Federal Home Loan Bank stock                532            532            308            308
        Loans                                   100,494        100,541         84,852         86,105
        Interest receivable                         708            708            565            565

      Liabilities:
        Demand deposits, NOW accounts,
          money market accounts, savings         75,551         75,551         85,673         85,673
        Time deposits                            43,562         43,576         28,769         28,778
        Short-term borrowings                        --             --          2,000          2,000
        Interest payable                            267            267            138            138
        Long-term debt                            8,124          8,127          4,124          4,124

      Off-balance-sheet - commitments to
        extend credit                                --         25,581             --         19,684
</TABLE>

       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.

                                       42
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

       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.

15.    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,
       2005 and 2004:

<TABLE>
<CAPTION>

                                             Condensed Balance Sheets
                                            December 31, 2005 and 2004

                                                                                      2005            2004
                                                                                  ------------    ------------
<S>                                                                               <C>             <C>
             Assets
               Cash and due from banks                                            $    564,528    $    401,411
               Investment in The Bank of Asheville, at equity                       13,873,107      13,258,054
               Investment in Weststar Financial Services Corporation I                 124,000         124,000
               Investment in Bank of Asheville Mortgage Company, LLC, at equity         43,297          38,671
               Other assets                                                            185,530         161,913
                                                                                  ------------    ------------

             Total assets                                                         $ 14,790,462    $ 13,984,049
                                                                                  ============    ============

             Liabilities and Shareholders' Equity
               Liabilities:
                 Junior subordinated debentures payable to
                   Weststar Financial Services Corporation I                      $  4,124,000    $  4,124,000
                 Other                                                                  69,919          49,862
               Shareholders' equity                                                 10,596,543       9,810,187
                                                                                  ------------    ------------

             Total liabilities and shareholders' equity                           $ 14,790,462    $ 13,984,049
                                                                                  ============    ============

                                           Condensed Statements of Operations
                                         Years Ended December 31, 2005 and 2004

                                                                                      2005            2004
                                                                                  ------------    ------------
             Interest Income:
               Interest-bearing deposits                                          $     36,382    $     21,655
                                                                                  ------------    ------------
             Interest Expense:
               Junior subordinated debentures issued to
                 Weststar Financial Services Corporation I                             271,872         187,751
                                                                                  ------------    ------------
             Non-interest Income:
               Equity in earnings of subsidiary bank                                 1,212,397         739,953
               Equity in loss of Bank of Asheville Mortgage Company, LLC                (7,874)        (11,329)
</TABLE>

                                       43
<PAGE>
WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2005 and 2004
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

<S>                                                                                    <C>              <C>
               Other                                                                   106,575          98,400
                                                                                  ------------    ------------
                 Total Non-interest Income                                           1,311,098         827,024
             Non-interest Expenses:
               Other                                                                    65,707          44,169
                                                                                  ------------    ------------

             Income before income tax benefit                                        1,009,901         616,759

             Income tax benefit                                                        (68,850)        (41,445)
                                                                                  ------------    ------------

             Net income                                                           $  1,078,751    $    658,204
                                                                                  ============    ============


                                        Condensed Statements of Cash Flows
                                      Years Ended December 31, 2005 and 2004

                                                                                     2005             2004
                                                                                  ------------    -----------
       Cash Flows from Operating Activities:
         Net income                                                               $  1,078,751    $   658,204
         Noncash items included in net income:
           Equity in undistributed earnings of The
              Bank of Asheville                                                     (1,212,397)      (739,953)
           Equity in undistributed loss of The Bank of Asheville
              of Asheville Mortgage Company, LLC                                         7,874         11,329
           (Increase) decrease in other assets                                         (23,617)        33,058
           Increase in other liabilities                                                20,057          9,170
                                                                                  ------------    -----------
              Net cash used in operating activities                                   (129,332)       (28,192)
                                                                                  ------------    -----------

       Cash Flows from Investing Activities:
         Upstream dividends received from The Bank of Asheville                        297,650        215,322
         Investment in Bank of Asheville Mortgage Company, LLC                         (12,500)       (50,000)
                                                                                  ------------    -----------
              Net cash provided by investing activities                                285,150        165,322
                                                                                  ------------    -----------

       Cash Flows from Financing Activities:
         Cash paid for fractional shares                                                (2,501)           (79)
         Exercise of stock options                                                       9,800             --
                                                                                  ------------    -----------
              Net cash provided (used) in financing activities                           7,299            (79)
                                                                                  ------------    -----------

       Net increase (decrease) in cash                                                 163,117        137,051
         Beginning                                                                     401,411        264,360
                                                                                  ------------    -----------

         Ending                                                                   $    564,528    $   401,411
                                                                                  ============    ===========
</TABLE>

                                       44
<PAGE>

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, 2005. 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, 2005 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, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

See pages 5 - 10 of Registrant's  2006 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 - 12 of Registrant's 2006 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

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 109,764 and 110,982,
respectively.  Of the maximum number of shares available for grant,  82,584 were
outstanding  under the Nonstatutory  Plan and 105,107 were outstanding under the
Incentive  Plan  at  December  31,  2005.  Option  prices  for  both  plans  are
established at market value,  which was $4.90, on the dates options were granted
by the Board of Directors. The following chart contains details of the grants:

<TABLE>
<CAPTION>

       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)
<S>                                     <C>                         <C>         <C>
Equity compensation
   plans approved by     Nonstatutory - 82,584                      $4.90                      None
    security holders       Incentive - 105,107                      $4.90                     2,616

 Equity compensation
  plans not approved
 by security holders                      None                       None                      None

               Total                   187,691                      $4.90                     2,616
</TABLE>

See pages 3 - 4 of Registrant's  2006 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.


                                       45
<PAGE>

ITEM 12:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See pages 6 and 12 of Registrant's 2006 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))***

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   2006 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).


ITEM 14:  PRINCIPAL ACCOUNTANT FEES AND SERVICES

See pages 9 and 13 of Registrant's 2006 Annual Meeting Proxy Statement, as filed
with the SEC pursuant to Rule 14a-6(b).


                                       46
<PAGE>


                                   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. Hall
                                           ------------------
                                           Randall C. Hall
                                           Executive Vice President
                                           Chief Financial Officer and Principal
                                           Accounting Officer

                                     Date: February 22, 2006

                                       47
<PAGE>

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                                     February 22, 2006
----------------------
W. Edward Anderson
Director

/s/M. David Cogburn, M.D.                                 February 22, 2006
-------------------------
M. David Cogburn, M.D.
Director

/s/Steven D. Cogburn                                      February 22, 2006
--------------------
Steven D. Cogburn
Director

/s/G. Gordon Greenwood                                    February 22, 2006
----------------------
G. Gordon Greenwood
President & Chief Executive Officer

/s/Patricia P. Grimes                                     February 22, 2006
---------------------
Pat Grimes
Director

/s/Randall C. Hall                                        February 22, 2006
------------------
Randall C. Hall
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer

/s/Darryl J. Hart                                         February 22, 2006
-----------------
Darryl J. Hart
Director

/s/Carol L. King                                          February 22, 2006
----------------
Carol L. King
Director

/s/Stephen L. Pignatiello                                 February 22, 2006
-------------------------
Stephen L. Pignatiello
Director

/s/Laura A. Webb                                          February 22, 2006
----------------
Laura A. Webb
Director

/s/David N. Wilcox                                        February 22, 2006
------------------
David N. Wilcox
Director


                                       48
<PAGE>
<TABLE>
<CAPTION>


                                        EXHIBIT INDEX



  Exhibit                                                                                Page
   Number           Exhibit                                                             Number
   ------           -------                                                             ------
<S>                <C>                                                                   <C>
    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)            Incentive Stock Option Plan                                            *

   10(v)            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

     21             Subsidiaries                                                    Filed herewith

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

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

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

    32.2            Certification of Principal Financial Officer Pursuant to        Filed herewith
                    Section 906 of the Sarbanes Oxley Act of 2002

     99             2006 Proxy Statement                                                  **

</TABLE>

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



                                       49