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, 2004

                        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 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 (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|

The Registrant's revenues for the year ended December 31, 2004 were $7,627,308.

The aggregate market value of the voting stock held by non-affiliates of the
Registrant at December 31, 2004 was approximately $15,160,704.

The number of shares of the Registrant's Common Stock outstanding on December
31, 2004 was 1,166,208.

                      Documents Incorporated by Reference:

PART III: Definitive Proxy Statement dated March 11, 2005 as filed pursuant to
Section 14 of the Securities Exchange Act of 1934 for the 2005 Annual Meeting of
Shareholders.

Transitional Small Business Disclosure Format   Yes |_|  No |X|


                                       1
<PAGE>

                        FORM 10-KSB CROSS-REFERENCE INDEX

<TABLE>
<CAPTION>
                                                                                                        2005
                                                                                      2004              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 Holders                           6               n/a

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              4 - 9
Item 10 - Executive Compensation                                                        45              9 - 11
Item 11 - Security Ownership of Certain Beneficial Owners and Management
          and Related Stockholder Matters                                               45              3-4
Item 12 - Certain Relationships and Related Transactions                                46              6, 11-12
Item 13 - Exhibits                                                                      46              n/a
Item 14 - Principal Accountant Fees and Services                                        46              7 - 8, 12
</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  68,900.  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 214,600.
Statistics  are the  latest  issued by the North  Carolina  Office of Budget and
Management.

Competition

Commercial banking in North Carolina is extremely  competitive in large part due
to 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, 2004 (the
latest  date for which  statistics  are  available)  there were 77 offices of 15
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, 2004,  Registrant  accounted
for  3.70% 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 service
faster  and more  efficient  to  obtain.  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 43 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


                                       3
<PAGE>

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.

                          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,  2004,  the  Bank  was
classified as  "well-capitalized"  with Tier 1 and Total Risk - Based Capital of
14.44% and 16.45% 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


                                       4
<PAGE>

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.

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

International  Money Laundering  Abatement and Financial  Anti-Terrorism  Act of
2001.  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 not
had a material impact on our operations.

ITEM 2: DESCRIPTION OF PROPERY

The following  table sets forth the location of the  Registrant's  offices as of
December 31, 2004.

                                              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       1,300       Lease
2349 Hendersonville Highway
Arden, NC 28704

ITEM 3: LEGAL PROCEEDINGS

There were no known current or pending proceedings as of December 31, 2004.

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 1,166,208 shares  outstanding
at December 31, 2004 owned by approximately 800 shareholders.

During 2004,  181,100  shares of the  Company's  common  stock were traded.  The
closing price of the stock on December 31, 2004 was $13.00.


                                       6
<PAGE>

The following table represents stock prices during the trading periods.

2004     1st      2nd      3rd      4th
         Qtr.     Qtr.     Qtr.     Qtr.
High     $12.75   $11.25   $10.50   $13.00
Low      $ 9.90   $ 9.85   $ 9.86   $10.01
Close    $11.50   $10.50   $10.25   $13.00

2003     1st      2nd      3rd      4th
         Qtr.     Qtr.     Qtr.     Qtr.
High     $8.92    $10.25   $13.00   $11.25
Low      $7.83    $ 8.75   $ 9.67   $ 9.50
Close    $8.73    $10.00   $12.50   $11.00

No cash dividends  were paid in 2004 or 2003. A 20% stock  dividend  effected in
the form of a 6-for-5 stock split was paid to  shareholders  in September  2003.
Stock prices have been adjusted to reflect the stock  dividend.  During December
2004, the Board of Directors declared a 20% stock dividend, effected in the form
of a 6-for-5 stock split,  which was payable in January 2005.  Stock prices have
not been adjusted to reflect this 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 19, 2005, 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.


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<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.  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 2004,  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 2004 totaled $575,937 compared to $1,251,995 during 2003.  Non-performing
assets  totaled  $3,011,402  and  $3,412,741  at  December  31,  2004 and  2003,
respectively.  Loans  outstanding  grew by  $10,099,004  or 14% to  $84,852,070.
Management  balanced  loan growth  through  liquidity  as  reflected  in the 25%
increase in the Company's  investment  portfolio,  which totaled  $23,106,660 at
December 31, 2004.

The Company  increased its deposit market share in Buncombe  County from 3.3% at
June 30, 2003 to 3.7% at June 30, 2004,  according to the latest Federal Deposit
Insurance  Corporation  statistics.  From December 31, 2003 to December 31, 2004
the Company's  deposits grew to  $114,441,748  - an increase of 23%.  During the
second half of 2004,  one of the Company's  real estate trust account  customers
deposited  and  maintained  in excess of  $13,400,000  into their  money  market
accounts.  Funds in these accounts are considered  short-term.  Excluding  these
deposits, the Company's deposits increased 8% from December 31, 2003 to December
31, 2004. Deposit growth reflected continued market penetration and the addition
of a fourth  banking  location,  which opened during the latter part of October,
2003.  While the Company  experienced  growth in  virtually  all  categories  of
deposits, trends reflected interest rate sensitive customers shifting funds from
lower  interest  paying NOW and money market  demand  accounts into time deposit
accounts, which have begun to pay higher rates.

During August 2004,  the Company  relocated a temporary  branch on New Leicester
Highway to a permanent site within the same community. The new 2,500 square foot
facility allows for continued market  penetration and improved customer service.
In October,  2004, the Company began the formation of Bank of Asheville Mortgage
Company, LLC, which opened for business in January, 2005. The Company owns a 50%
interest in the Mortgage Company.

The Company  maintained an average  interest rate spread of  approximately  3.8%
during 2004 which,  combined with net earning  asset  growth,  resulted in a 15%
increase  in  net  interest   income  during  2004.  As  a  result  of  historic
charge-offs,  loan growth and a slight improvement in nonperforming  assets, the
Company  added  $1,010,300  to its loan loss reserve  compared to  $1,405,800 in
2003. 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  $290,431  in 2003.  Non-interest
expenses  totaled  $4,105,214  and  $3,420,460  in 2004 and 2003,  respectively.
Operating expenses increased as a result of relocating a temporary branch on New
Leicester  Highway  to a  permanent  site  within the same  community,  expenses
associated with operating a fourth banking location, which opened during October
2003,  equity in loss of Bank of Asheville  Mortgage  Company LLC, 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  $658,204 in 2004 compared to $515,461 in 2003 - a 28% 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  $619,318  and  $404,440  in 2004  and  2003,
respectively.

                              RESULTS OF OPERATIONS

The following  discussion  relates to operations for the year ended December 31,
2004 compared to the year ended December 31, 2003.


                                       8
<PAGE>

                              2004 COMPARED TO 2003

Net income for 2004  totaled  $658,204  compared to $515,461 in 2003 or $.45 per
diluted  share and $.36 per diluted share for 2004 and 2003,  respectively.  The
return on average assets and equity,  respectively,  was .55% and 6.93% for 2004
compared to .51% and 5.78% in 2003.  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  $6,036,383 for the year
ended  December 31, 2004 compared to  $5,351,372 in 2003.  Growth in the average
balance of interest-earning assets increased from $93,902,836 to $111,427,807 or
19%  offset  by a 3 basis  point  drop in the  rate on  interest-earning  assets
resulted  in  increased   interest  income.   Interest  expense,   derived  from
interest-bearing  liabilities  such as  deposits  and  borrowed  funds,  totaled
$1,490,085  in 2004  compared to  $1,397,761  in 2003.  The increase in interest
expense was primarily  attributable  to growth in  interest-bearing  liabilities
during  2004.  The average  balance of  interest-bearing  liabilities  grew from
$75,376,066 in 2003 to $90,335,639 in 2004 or 20%.

As a result of historic  charge-offs,  loan growth and a slight  improvement  in
nonperforming  assets,  the Company  added  $1,010,300  to its loan loss reserve
compared to $1,405,800 in 2003. Charge-offs, net of recoveries, totaled $575,937
for  2004  compared  to  $1,251,995  for  2003.   Nonperforming  assets  totaled
$3,011,402 at the end of 2004 compared with $3,412,741 at the end of 2003.

Other income totaled  $1,590,925 in 2004 compared to $1,668,110 in 2003. Service
charge fees on deposit  accounts and other fees and  commissions  earned account
for the  majority of  non-interest  income.  During  2004,  the  Company  earned
$1,192,809  from service charges on deposit  accounts  compared to $1,144,669 in
2003,  an increase of 4%. The  increase  resulted  from greater  service  charge
income earned from overdraft charges,  which produced income of $964,883 in 2004
compared to $939,350 in 2003. Other service fees and commissions, including fees
from the  origination of mortgage  loans,  totaled  $332,900 in 2004 compared to
$446,234 in 2003.  The  decrease  was  primarily 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 $290,431 in 2003. Mortgage origination
activity has a tendency to decrease  during periods of rising  interest rates as
was the case during 2004.

During  2004,  the Company  sold an  investment  security,  which  resulted in a
realized gain of $31,613  compared to $45,482 in 2003.  The sale resulted from a
need to improve liquidity during the period.

Other income,  primarily the fees from the sales of checks and deposit slips and
recoveries  other  than  loans,  provided  additional  income of $33,603 in 2004
compared to $31,725 in 2003.

Other  expenses  totaled  $4,105,214  in 2004  compared to  $3,420,460  in 2003.
Expenses  increased  as a  result  of  increased  personnel  expense,  increased
supplies  expense  to  process  the  Bank's  growth in loans and  deposits,  and
expenses associated with opening a fourth  full-service  banking location during
the forth quarter of 2003.  Salaries and benefits  accounted  for  $1,846,503 in
2004 or 45% of other expenses  compared to $1,538,165 or 45% in 2003.  Equipment
expenses  totaled  $329,382 in 2004 compared to $264,871 in 2003.  Losses on the
dispositions of foreclosures  totaled  $239,531 during 2004 compared to $129,023
during 2003.  Other  non-interest  expenses of  $1,689,798  in 2004  compared to
$1,488,401  in  2003  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  $4,546,298  and
$3,953,611 for 2004 and 2003,  respectively,  representing  an increase of 15.0%
for 2004 over 2003.  Interest rate spreads have been at least 3.7% 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>

                  AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
                        For the Years Ended December 31,

<TABLE>
<CAPTION>
                                                               2004                                          2003
                                                              Average                                      Average
                                                Average       Yield/         Income/         Average        Yield/        Income/
                                                Balance        Cost          Expense         Balance         Cost         Expense
<S>                                          <C>                <C>       <C>             <C>                 <C>       <C>
ASSETS:
Loans (1)                                    $ 79,542,721       6.6%      $  5,225,639    $ 68,943,841        6.9%      $4,785,672
Taxable securities (2)                         19,650,226       3.1%           603,307      14,292,579        2.9%         416,277
Non-taxable securities (3)                      1,687,325       4.9%            54,458       1,617,975        5.1%          54,801
Federal funds sold                             10,251,120       1.4%           142,056       8,996,430        1.1%          94,067
Interest-bearing deposits                         296,415       3.7%            10,923          52,011        1.1%             555
                                             ------------                 ------------    ------------                  ----------
  Total interest-earning assets               111,427,807       5.4%         6,036,383      93,902,836        5.7%       5,351,372
                                             ------------                 ------------    ------------                  ----------
All other assets                                7,338,116                                    6,862,514
                                             ------------                                 ------------
  Total assets                               $118,765,923                                 $100,765,350
                                             ============                                 ============

Liabilities and
Shareholders' Equity:
Interest-bearing deposits                    $ 84,107,904       1.5%         1,267,976    $ 73,341,774        1.8%       1,332,474
Short-term borrowings                           2,103,735       1.6%            34,358              --         --               --
                                             ------------       ---       ------------    ------------                  ----------
Long-term debt                                  4,124,000       4.6%           187,751       2,034,292        3.2%          65,287
                                             ------------                 ------------    ------------                  ----------
  Total interest-bearing liabilities           90,335,639       1.6%         1,490,085      75,376,066        1.9%       1,397,761
Other liabilities                              18,931,761                                   16,469,730
Shareholders' equity                            9,498,523                                    8,919,554
                                             ------------                                 ------------
Total liabilities and
shareholders' equity                         $118,765,923                                 $100,765,350
                                             ============                                 ============

Net yield on earning-assets
and net interest income (4)                                     4.1%      $  4,546,298                        4.2%      $3,953,611
                                                                          ============                                  ==========
Interest rate spread (5)                                        3.8%                                          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.

(4)   Net yield on earning assets is computed by dividing net interest earned by
      average earning assets.

(5)   The  interest  rate spread is the  interest  earning  assets rate less the
      interest earning liabilities rate.

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

                        Interest and Rate/Volume Variance
                        For the Years Ended December 31,

<TABLE>
<CAPTION>
                                                    2004 Compared to 2003                      2003 Compared to 2002
                                            Volume (1)    Rate(1)        Total       Volume (1)     Rate (1)        Total
<S>                                         <C>          <C>           <C>           <C>           <C>           <C>
Interest-bearing deposits in other banks    $   5,807    $   4,561     $  10,368     $  (9,854)    $  (3,813)    $ (13,667)
Investment securities                         162,561       24,126       186,687       312,736      (135,864)      176,872
Federal funds sold                             15,253       32,736        47,989        15,975       (44,767)      (28,792)
Loans                                         716,007     (276,040)      439,967       193,811      (538,387)     (344,576)
                                            ---------    ---------     ---------     ---------     ---------     ---------
Increase in interest income                 $ 899,628    $(214,617)    $ 685,011     $ 512,668     $(722,831)    $(210,163)
                                            =========    =========     =========     =========     =========     =========

Interest-bearing deposits                   $ 178,952    $(243,450)    $ (64,498)    $ 215,662     $(636,450)    $(420,788)
Borrowings                                    142,069       14,753       156,822        36,425         8,200        44,625
                                            ---------    ---------     ---------     ---------     ---------     ---------
Increase in interest expense                $ 321,021    $(228,697)    $  92,324     $ 252,087     $(628,250)    $(376,163)
                                            =========    =========     =========     =========     =========     =========
</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


                                       10
<PAGE>

on both business and economic cycles,  while both retail and commercial deposits
can  fluctuate  significantly  based on the yields 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, 2004, such unfunded  commitments to extend credit were $18,689,927,
while commitments in the form of letters of credit totaled $993,874.

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, 2004,  payments due under such operating  lease  arrangements  were
$84,500 in 2005 and $35,000 in 2006.

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, 2004 and 2003, core deposits
totaled  $94,622,232 or 83% (which excludes a real estate trust customer's money
market  demand  accounts   totaling   $13,438,618),   and  $88,435,187  or  95%,
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  $16  million.  Funding can also be  borrowed  from the
Federal Reserve Bank's discount window.  Funds borrowed from the Federal Reserve
Bank are based upon a percentage of the underlying  collateral.  The Company has
incurred  limited need to borrow from the Federal  Reserve  Bank; as a result no
securities have been allocated to secure borrowings.  The Company's policy is to
emphasize core deposit  growth rather than purchased or brokered  liabilities as
the cost of these funds is greater.

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

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

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

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

The majority of the Company's deposits are rate-sensitive instruments with rates
which tend to fluctuate  with market  rates.  These  deposits,  coupled with the
Company's short-term time deposits, have increased the opportunities for deposit
repricing.  The Company places great significance on monitoring and managing the
Company's  asset/liability  position.  The  Company's  policy  of  managing  its
interest  margin (or net yield on  interest-earning  assets) is to maximize  net
interest income while  maintaining a stable deposit base. The Company's  deposit
base is not generally  subject to volatility  experienced in national  financial
markets in recent  years;  however,  the Company does realize the  importance of
minimizing  such  volatility  while at the same time  maintaining  and


                                       11
<PAGE>

improving earnings.  A common method used to manage interest rate sensitivity is
to measure,  over various time periods, the difference or gap between the volume
of interest-earning  assets and  interest-bearing  liabilities  repricing over a
specific  time period.  However,  this method  addresses  only the  magnitude of
funding mismatches and does not address the magnitude or 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,  2004,  which  are
projected to reprice or mature in each of the future time periods shown.  Except
as stated below,  the amounts of assets and  liabilities  shown which reprice or
mature  within a  particular  period  were  determined  in  accordance  with the
contractual terms of the assets or liabilities.  Loans with adjustable rates are
shown  as  being  due at the end of the  next  upcoming  adjustment  period.  In
addition, the table reflects scheduled principal payments which will be received
throughout  the  lives  of the  loans.  The  interest  rate  sensitivity  of the
Company's  assets and liabilities  illustrated in the following table would vary
substantially if different assumptions were used or if actual experience differs
from that indicated by such assumptions.

                    INTEREST RATE SENSITIVITY (GAP ANALYSIS)
                                DECEMBER 31, 2004

<TABLE>
<CAPTION>

                                        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               $    321,280                                     $    321,280                   $    321,280
Federal funds sold                        15,570,000                                       15,570,000                     15,570,000
Investment securities                      7,936,622     $  4,087,019   $  1,174,038       13,197,679    $10,103,419      23,301,098
Federal Home Loan
  Bank stock                                                                                                 307,900         307,900
Loans (1)                                 63,884,380          897,702      2,615,720       67,397,802     14,886,452      82,284,254
                                        ------------     ------------   ------------     ------------    -----------    ------------
  Total interest-earning assets           87,712,282        4,984,721      3,789,758       96,486,761     25,297,771     121,784,532

Interest-bearing liabilities:
Time deposits                             15,757,416        3,828,198      7,230,531       26,816,145      1,952,536      28,768,681
All other deposits                        66,100,518                                       66,100,518                     66,100,518
Borrowings                                                  2,000,000                       2,000,000                      2,000,000
Long-term debt                             4,124,000                                        4,124,000                      4,124,000
                                        ------------     ------------   ------------     ------------    -----------    ------------
  Total interest-bearing liabilities      85,981,934        5,828,198      7,230,531       99,040,663      1,952,536     100,993,199

Interest sensitivity gap                $  1,730,348     $   (843,477)  $ (3,440,773)    $ (2,553,902)
                                        ============     ============   ============     ============
Cumulative interest
  sensitivity gap                       $  1,730,348     $    886,871   $ (2,553,902)
                                        ============     ============   ============
Interest-earning assets
  as a percent of interest
  sensitive liabilities                        102.0%            85.5%          52.4%            97.4%
</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, 2004

<TABLE>
<CAPTION>
                                            Within         One to           Five
                                             One            Five          Years or
                                             Year           Years           More
<S>                                       <C>            <C>            <C>
Commercial, financial and agricultural    $17,667,200    $ 2,394,145    $   100,962
Real estate - mortgage                     47,346,902     14,441,369      1,315,410

Predetermined rate, maturity
  greater than one year                            --     16,835,514      1,416,372
Variable rate or maturing within
  one year                                 65,014,102             --             --
</TABLE>

The Company paid an average  rate of 1.5% on  interest-bearing  deposits  during
2004  compared to 1.8% during  2003.  Significant  growth in deposits  came from
interest-bearing  accounts.  Interest-bearing  transaction and savings  accounts
grew by $15,734,548 during the period,  including a customer's real estate trust
accounts  totaling  $13,438,618,  which the Company  considers  to be  temporary
funds.  As interest  rates  demonstrated  signs of  increase  during the period,
customers  began  shifting  funds from lower rate bearing NOW,  money market and
savings 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, 2004

Non-interest bearing deposits            $ 18,315,268
Interest-bearing                           84,107,904
                                         ------------
Total                                    $102,423,172
                                         ============

The above table  includes  deposits of $100,000  and over which at December  31,
2004 totaled $6,380,898.  The table below presents the maturities of deposits of
$100,000 or more.

Maturities of Deposits of $100,000 or More
December 31, 2004

<TABLE>
<CAPTION>
                                                                                                 Greater
                                            Within            Within            Within           Than
                                            Three             Six               Twelve           One
                                            Months            Months            Months           Year
<S>                                         <C>               <C>               <C>              <C>
Time deposits of $100,000 or more           $2,796,188        $834,673          $2,080,156       $669,881
</TABLE>

CAPITAL RESOURCES

As of  December  31,  2004 and 2003,  the  Company's  ratio of total  capital to
risk-adjusted  assets was 16.45%, and 17.82%,  respectively.  Average capital to
average  assets  totaled  8.00%  and  8.85%  at  December  31,  2004  and  2003,
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, 2004, 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,  2004 and 2003 were  $84,852,070  and
$74,753,066,  respectively.  The Company  places  emphasis on consumer loans and
commercial  loans to small  businesses  and  professionals.  The  Company  has a
diversified  loan  portfolio  with  no  concentration  to any  one  borrower  or
industry.  The  amounts and types of loans  outstanding  for the past five years
ended December 31 are shown on the following table.

                                      LOANS
                                  December 31,

<TABLE>
<CAPTION>
                                 2004                2003                2002                  2001                  2000
                                           % 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               $11,470,223    13%  $ 8,372,934    11%  $12,334,543     18%   $11,139,588     17%   $ 8,894,309    15%
  Mortgage                    51,633,458    61%   46,014,314    61%   37,214,677     55%    35,189,010     54%    32,332,304    53%
Commercial, financial
  and agricultural            20,162,307    24%   18,603,317    25%   16,367,306     24%    16,512,498     25%    17,939,971    30%
Consumer                       1,747,694     2%    1,909,709     3%    2,188,840      3%     2,553,710      4%     1,338,067     2%
                             -----------   ---   -----------   ---   -----------    ---    -----------    ---    -----------   ---
Total loans                   85,013,682   100%   74,900,274   100%   68,105,366    100%    65,394,806    100%    60,504,651   100%
                                           ===                 ===                  ===                   ===                  ===
Deferred originations
  fees, net                     (161,612)           (147,208)           (127,387)             (163,824)             (212,020)
Total loans, net of
                             -----------         -----------         -----------           -----------           -----------
  deferred fees              $84,852,070         $74,753,066         $67,977,979           $65,230,982           $60,292,631
                             ===========         ===========         ===========           ===========           ===========
</TABLE>


                                       14
<PAGE>

                              NONPERFORMING ASSETS
                                  December 31,

<TABLE>
<CAPTION>
                             2004           2003           2002          2001         2000
<S>                        <C>           <C>           <C>           <C>           <C>
NONPERFORMING ASSETS
Nonaccrual loans           $2,567,816    $2,145,772    $1,079,750    $1,050,813    $  522,137
Other real estate owned       401,345     1,145,186       724,986       733,941            --
Repossessions                  42,241       121,783        67,204        18,598            --
                           ----------    ----------    ----------    ----------    ----------
Total                      $3,011,402    $3,412,741    $1,871,940    $1,803,352    $  522,137
                           ==========    ==========    ==========    ==========    ==========
</TABLE>

The increase in non-accrual  loans was primarily  attributable to a small number
of larger balance loans, which experienced deterioration in performance.

Real estate loans  comprised  74% of the  portfolio  in 2004  compared to 73% in
2003. Commercial loans comprised 24% of the portfolio in 2004 compared to 25% in
2003,  while  consumer  loans  comprised  2% in  2004  compared  to 3% in  2003.
Commercial  loans of  $20,162,307,  consumer loans of $1,747,694 and real estate
mortgage  loans of  $51,633,458  are loans for  which  the  principal  source of
repayment  is derived from the ongoing  cash flow of the  business.  Real estate
construction  loans of $11,470,228  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  $19,683,801  and  $20,435,251 at December 31,
2004 and 2003, 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 $1,869,920 and
$1,838,798 at December 31, 2004 and 2003,  respectively.  The related  allowance
for loan losses  determined in accordance  with SFAS No. 114 for impaired  loans
was $219,846 and $182,013 at December 31, 2004 and 2003,  respectively.  For the
years ended December 31, 2004 and 2003, the Company  recognized  interest income
from impaired loans of $59,546 and $89,004, 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


                                       15
<PAGE>

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.

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, 2004 and 2003 was  $1,608,366  and
$1,174,003 or 1.90% and 1.57%,  respectively,  of gross loans  outstanding.  The
ratio of net charge-offs to average loans  outstanding was .72% and 1.82% during
2004 and  2003,  respectively.  Primarily  because  of a  recessionary  economy,
charge-offs  in  2003,   2002,  and  2001  exceeded  that  of  prior  historical
experiences.

                    CHANGES IN THE ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                                    2004             2003             2002             2001              2000
<S>                                             <C>              <C>              <C>              <C>              <C>
Balance at beginning of year                    $ 1,174,003      $ 1,020,198      $   978,467      $   871,706      $   528,808
Loans charged-off:
  Commercial, financial and agricultural           (579,930)      (1,075,792)        (568,710)        (373,087)        (112,062)
  Real estate:
    Construction                                         --               --         (127,810)              --               --
    Mortgage                                        (48,000)        (157,142)         (33,574)         (90,275)              --
  Consumer                                          (69,682)        (124,680)        (159,471)         (27,238)              --
                                                -----------      -----------      -----------      -----------      -----------
Total charge-offs                                  (697,612)      (1,357,614)        (889,565)        (490,600)        (112,062)
                                                -----------      -----------      -----------      -----------      -----------
Recoveries of loans previously charged -off:
  Commercial, financial and agricultural             73,054           71,942           19,753           45,270               --
  Real estate:
    Construction                                         --               --            1,531               --               --
    Mortgage                                         25,000               --           13,322               --               --
  Consumer                                           23,621           33,677           18,770            1,671               --
                                                -----------      -----------      -----------      -----------      -----------
Total recoveries                                    121,675          105,619           53,376           46,941               --
                                                -----------      -----------      -----------      -----------      -----------
Net charge-offs                                    (575,937)      (1,251,995)        (836,189)        (443,659)        (112,062)
                                                -----------      -----------      -----------      -----------      -----------
Provision for loan losses                         1,010,300        1,405,800          877,920          550,420          454,960
                                                -----------      -----------      -----------      -----------      -----------
Balance at end of year                          $ 1,608,366      $ 1,174,003      $ 1,020,198      $   978,467      $   871,706
                                                ===========      ===========      ===========      ===========      ===========

Ratio of net charge-offs during the year to
  average loans outstanding during the year             .72%            1.82%            1.26%             .70%             .23%
</TABLE>

Despite  recent  improvements  in asset quality and  charge-offs,  the loan loss
reserve was increased due to historical asset quality and charge-offs. Sustained
improvements in economic conditions, asset quality and charge-offs may justify a
lower  loan  loss  reserve  in  the  future.   Management   has  reviewed   each
non-performing loan, supporting collateral, financial stability of each borrower
and the  relevant  loan  loss  reserve  allowance.  Based  upon  this  analysis,
management   believes  the  allowance  is  adequate  to  support  current  loans
outstanding.   Management  has  further  increased  its  underwriting  analysis,
training and loan monitoring.

The  Company  does not have any  significant  loan  concentrations.  During  the
period,  loan terms remained  relatively  unchanged,  and loan quality reflected
slight deterioration  throughout most of the year. During the latter part of the
fourth  quarter,  the Company began  experiencing  improvements  in overall loan
quality. 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.


                                       16
<PAGE>

During 2004, there were no changes in the estimation methods or assumptions that
affected our  methodology for assessing the  appropriateness  of the formula and
specific  allowance  for credit  losses.  Changes in estimates  and  assumptions
regarding the effects of economic and business  conditions  on borrowers  affect
the assessment of the allowance.

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

                   ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                                                       December 31,
                             2004                 2003                   2002                  2001                  2000
                                        % 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              $1,139,769     74%    $  863,606      72%    $  690,842     73%    $  645,743     71%    $  553,337    68%
Commercial, financial
  and agricultural          388,559     24%       267,584      25%       287,860     24%       280,653     25%       278,879    30%
Consumer                     54,528      2%        23,722       3%        19,184      3%        19,381      4%        15,822     2%
Unallocated                  25,510     --         19,091      --         22,312     --         32,690     --         23,668    --
                         ----------    ---     ----------     ---     ----------    ---     ----------    ---     ----------   ---
Total allowance          $1,608,366    100%    $1,174,003     100%    $1,020,198    100%    $  978,467    100%    $  871,706   100%
                         ==========    ===     ==========     ===     ==========    ===     ==========    ===     ==========   ===
</TABLE>

INVESTMENT SECURITIES

At  December  31,  2004 and 2003,  securities  carried at market  value  totaled
$23,106,660 and $18,512,297,  respectively,  with amortized costs of $23,301,098
and $18,643,453, 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, 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%
                                                        ===========    ===

December 31, 2003
Available for sale: (1)
                                                        Amortized
TYPE                                                    Cost           Yield (2)

U.S. Government agencies - within 1 year                $   500,624    4.4%
                                                        -----------

U.S. Government agencies - within 1 to 5 years            5,500,000    2.7%
Mortgage-backed securities - within 1 to 5 years          2,767,375    3.3%
N.C. Municipal bonds - within 1 to 5 years                  257,162    5.3%
                                                        -----------    ---
  Total - within 1 to 5 years                             8,524,537    3.0%


                                       17
<PAGE>

Mortgage-backed securities - within 5 to 10 years         7,463,939    3.9%
N.C. Municipal bonds - within 5 to 10 years               1,451,675    5.0%
                                                        -----------    ---
  Total - within 5 to 10 years                            8,915,614    4.1%

Mortgage-backed securities - greater than 10 years          588,247    4.1%
N.C. Municipal bonds - greater than 10 years                114,413    4.7%
                                                        -----------    ---
  Total - greater than 10 years                             702,660    4.2%

    Total                                               $18,643,453    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.

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


                                       18
<PAGE>

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.

SELECTED FINANCIAL INFORMATION AND OTHER DATA

SELECTED AVERAGE BALANCES:
<TABLE>
<CAPTION>
                                                              2004      Yield             2003      Yield
<S>                                                  <C>                 <C>    <C>                  <C>
         Non-interest bearing demand deposits        $  18,315,268              $   15,904,282
         Interest-bearing demand deposits               50,844,982       1.2%       39,442,377       1.3%
         Savings deposits                                2,291,726        .3%        2,030,104        .4%
         Time deposits                                  30,161,196       2.1%       31,869,293       2.5%
                                                     -------------              --------------
         Total deposits                              $ 102,423,172              $   89,246,056
                                                     =============              ==============
</TABLE>

SELECTED PERFORMANCE RATIOS:

<TABLE>
<S>                                                           <C>                         <C>
         Return on average assets                              .55%                        .51%
         Return on average equity                             6.93%                       5.78%
         Dividend payout ratio                                   0%                          0%
         Equity to assets ratio                               8.00%                       8.85%
</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 14 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, 2004 and 2003.........      22

Consolidated Statements of Operations and Comprehensive Income
   for the years ended December 31, 2004 and 2003....................      23

Consolidated Statements of Changes in Shareholders' Equity
   for the years ended December 31, 2004 and 2003....................      25

Consolidated Statements of Cash Flows
   for the years ended December 31, 2004 and 2003....................      26

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


                                       20
<PAGE>

                                     [LOGO]

                        [LETTERHEAD OF 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,
2004  and  2003  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.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the 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, 2004 and 2003
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 2, 2005


                                       21
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
================================================================================

<TABLE>
<CAPTION>
ASSETS                                                                     2004                2003
                                                                      -------------       -------------
<S>                                                                   <C>                 <C>
Cash and cash equivalents:
   Cash and due from banks                                            $   3,729,987       $   3,657,060
   Interest-bearing deposits                                                321,280              39,617
   Federal funds sold                                                    15,570,000           8,294,000
                                                                      -------------       -------------
     Total cash and cash equivalents                                     19,621,267          11,990,677
                                                                      -------------       -------------
Investment securities - available for sale, at fair value
   (amortized cost of $23,301,098 and $18,643,453 at
   December 31, 2004 and 2003, respectively)                             23,106,660          18,512,297
Loans                                                                    84,852,070          74,753,066
Allowance for loan losses                                                (1,608,366)         (1,174,003)
                                                                      -------------       -------------
   Net loans                                                             83,243,704          73,579,063
Premises and equipment, net                                               2,650,156           2,333,869
Accrued interest receivable                                                 564,816             457,814
Federal Home Loan Bank stock, at cost                                       307,900             175,400
Deferred income taxes                                                       390,140             220,460
Foreclosed properties                                                       443,586           1,266,969
Other assets                                                                678,478             525,739
                                                                      -------------       -------------

TOTAL                                                                 $ 131,006,707       $ 109,062,288
                                                                      =============       =============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
   Deposits:
     Demand                                                           $  19,572,549       $  17,707,429
     NOW accounts                                                        22,603,723          22,923,031
     Money market accounts                                               41,332,780          25,469,714
     Savings                                                              2,164,015           1,973,225
     Time deposits of $100,000 or more                                    6,380,898           4,966,351
     Other time deposits                                                 22,387,783          20,361,788
                                                                      -------------       -------------
        Total deposits                                                  114,441,748          93,401,538
Short-term borrowings                                                     2,000,000                  --
Accrued interest payable                                                    138,362             120,853
Other liabilities                                                           492,410             348,949
Long-term debt                                                            4,124,000           6,000,000
                                                                      -------------       -------------
          Total liabilities                                             121,196,520          99,871,340
                                                                      -------------       -------------

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 - 1,166,208 at December 31, 2004
     and 2003, respectively                                               1,166,208           1,166,208
   Additional paid-in capital                                             7,030,589           7,030,589
   Retained earnings                                                      1,732,872           1,074,747
   Accumulated other comprehensive loss                                    (119,482)            (80,596)
                                                                      -------------       -------------
          Total shareholders' equity                                      9,810,187           9,190,948
                                                                      -------------       -------------

TOTAL                                                                 $ 131,006,707       $ 109,062,288
                                                                      =============       =============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       22
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Years Ended December 31, 2004 and 2003
================================================================================

                                                         2004             2003
                                                      ----------      ----------
INTEREST AND DIVIDEND INCOME:
   Interest and fees on loans                         $5,225,639      $4,785,672
   Federal funds sold                                    142,056          94,067
   Interest-bearing deposits                              10,923             555
   Investments:
      Taxable interest income                            595,446         407,293
      Non-taxable interest income                         54,458          54,801
      Dividends                                            7,861           8,984
                                                      ----------      ----------
        Total interest and dividend income             6,036,383       5,351,372
                                                      ----------      ----------

INTEREST EXPENSE:
   Time deposits of $100,000 or more                     125,180         178,405
   Other time and interest bearing-deposits            1,142,796       1,154,069
   Short-term borrowings                                  34,358              10
   Long-term debt                                        187,751          65,277
                                                      ----------      ----------
        Total interest expense                         1,490,085       1,397,761
                                                      ----------      ----------

NET INTEREST INCOME                                    4,546,298       3,953,611

PROVISION FOR LOAN LOSSES                              1,010,300       1,405,800
                                                      ----------      ----------

NET INTEREST INCOME AFTER PROVISION FOR
   LOAN LOSSES                                         3,535,998       2,547,811
                                                      ----------      ----------

OTHER INCOME:
   Service charges on deposit accounts                 1,192,809       1,144,669
   Other service fees and commissions                    332,900         446,234
   Securities gains                                       31,613          45,482
   Other                                                  33,603          31,725
                                                      ----------      ----------
      Total other income                               1,590,925       1,668,110
                                                      ----------      ----------

OTHER EXPENSES:
   Salaries and wages                                  1,594,864       1,344,343
   Employee benefits                                     251,639         193,822
   Occupancy expense, net                                336,941         238,277
   Equipment rentals, depreciation and maintenance       329,382         264,871
   Supplies                                              242,910         225,770
   Data processing fees                                  468,428         386,113
   Professional fees                                     266,273         327,670
   Marketing                                             179,125         115,799
   Net expenses from foreclosed properties               239,531         129,023
   Other                                                 196,121         194,772
                                                      ----------      ----------
      Total other expenses                             4,105,214       3,420,460
                                                      ----------      ----------

INCOME BEFORE INCOME TAX PROVISION                     1,021,709         795,461

INCOME TAX PROVISION                                     363,505         280,000
                                                      ----------      ----------

NET INCOME                                            $  658,204      $  515,461
                                                      ==========      ==========

See Notes to Consolidated Financial Statements.

                                       23
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)
Years Ended December 31, 2004 and 2003
================================================================================

                                                           2004          2003
                                                        ---------     ---------

OTHER COMPREHENSIVE LOSS BEFORE TAX:
   Unrealized holding losses on securities
      available for sale                                $ (31,668)    $(135,242)
        Tax effect                                         12,208        52,161
                                                        ---------     ---------
   Unrealized holding losses on securities
      available for sale, net of tax                      (19,460)      (83,081)

   Reclassification adjustment for realized gains         (31,613)      (45,482)
      Tax effect                                           12,187        17,542
                                                        ---------     ---------
   Reclassification adjustment for realized gains,
      net of tax                                          (19,426)      (27,940)

OTHER COMPREHENSIVE LOSS, NET OF TAX                      (38,886)     (111,021)
                                                        ---------     ---------

COMPREHENSIVE INCOME                                    $ 619,318     $ 404,440
                                                        =========     =========

BASIC INCOME PER SHARE                                  $     .47     $     .37
                                                        =========     =========

DILUTED INCOME PER SHARE                                $     .45     $     .36
                                                        =========     =========

See Notes to Consolidated Financial Statements.


                                       24
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2004 and 2003
================================================================================

<TABLE>
<CAPTION>
                                                                                                       Accumulated
                                                                                                          Other
                                                  Common Stock            Additional                      Compre-         Total
                                           --------------------------      Paid-In       Retained         hensive      Shareholders'
                                              Shares         Amount        Capital       Earnings      Income (Loss)      Equity
                                           -----------    -----------    -----------    -----------   --------------   -------------
<S>                                            <C>        <C>            <C>            <C>             <C>            <C>
BALANCE, DECEMBER 31, 2002                     957,539    $   957,539    $ 7,120,187    $   561,003     $    30,425    $ 8,669,154
  Net unrealized losses
    securities available for sale                   --             --             --             --        (111,021)      (111,021)
  Issuance of common stock                      15,436         15,436        103,635             --              --        119,071
  Stock split                                  193,233        193,233       (193,233)            --              --             --
  Cash paid in lieu of fractional shares            --             --             --         (1,717)             --         (1,717)
  Net income                                        --             --             --        515,461              --        515,461
                                           -----------    -----------    -----------    -----------     -----------    -----------

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
                                           ===========    ===========    ===========    ===========     ===========    ===========
</TABLE>

See Notes to Consolidated Financial Statements.


                                       25
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2004 and 2003
================================================================================

<TABLE>
<CAPTION>
                                                                  2004                2003
                                                              ------------       ------------
<S>                                                           <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                 $    658,204       $    515,461
   Adjustments to reconcile net income to net
     cash provided by operating activities:
      Depreciation                                                 381,313            328,364
      Provision for loan losses                                  1,010,300          1,405,800
      Premium amortization and discount accretion, net             109,430             84,003
      Deferred income tax provision                               (145,286)            38,730
      Net expenses from foreclosed properties                      204,927             91,092
      Loss on sales of premises and equipment                       18,180                 15
      Gains on sale of securities                                  (31,613)           (45,482)
      (Increase) decrease in accrued interest receivable          (107,002)            30,135
      Increase in other assets                                     (28,738)          (185,901)
      Increase (decrease) in accrued interest payable               17,509            (36,607)
      Increase (decrease) in other liabilities                     143,461            (35,282)
      Loss on uninsured deposits                                        --             67,811
                                                              ------------       ------------
        Net cash provided by operating activities                2,230,685          2,258,139
                                                              ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of securities available for sale                  (12,385,613)       (20,316,885)
   Maturities of securities available for sale                   7,096,552         12,103,695
   Net increase in loans                                       (10,914,609)        (8,643,965)
   Proceeds from the sales of foreclosed properties                858,124            269,109
   Proceeds from sales of securities                               553,600          2,038,750
   Net expenditures on foreclosed properties                            --           (218,097)
   Proceeds from sales of premises and equipment                       200              1,625
   Additions to premises and equipment                            (715,980)          (659,104)
    Purchase of Federal Home Loan Bank Stock                      (132,500)                --
   Redemption of Federal Home Loan Bank stock                           --             54,400
                                                              ------------       ------------
      Net cash used in investing activities                    (15,640,226)       (15,370,472)
                                                              ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in demand deposits, NOW accounts
      and savings accounts                                      17,599,668         14,366,522
   Net increase (decrease) in certificates of deposits           3,440,542         (9,444,253)
   Cash paid for fractional shares                                     (79)            (1,717)
   Issuance of common stock                                             --             66,636
   Proceeds from borrowings                                             --          2,000,000
   Proceeds from issuance of trust preferred securities                 --          4,000,000
                                                              ------------       ------------
      Net cash provided by financing activities                 21,040,131         10,987,188
                                                              ------------       ------------

NET INCREASE (DECREASE) IN
   CASH AND CASH EQUIVALENTS                                     7,630,590         (2,125,145)

CASH AND CASH EQUIVALENTS:
   Beginning of year                                            11,990,677         14,115,822
                                                              ------------       ------------

   End of year                                                $ 19,621,267       $ 11,990,677
                                                              ============       ============

SUPPLEMENTAL DISCLOSURE:
   Cash paid for interest                                     $  1,472,576       $  1,434,368
                                                              ============       ============
   Cash paid for income taxes                                 $    332,169       $    210,608
                                                              ============       ============

NONCASH TRANSACTIONS:
   Loans transferred to foreclosed properties                 $    239,668       $    830,510
                                                              ============       ============
</TABLE>

See Notes to Consolidated Financial Statements.


                                       26
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

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, 2004 and 2003
================================================================================

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.


                                       28
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      Stock Compensation Plans (Continued)

      At December 31, 2004, 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>
                                                                        2004                2003
                                                                    -------------      -------------
<S>                                                                 <C>                <C>
      Net income as reported                                        $     658,204      $     515,461
      Less: Total stock-based employee compensation expense
        determined under fair value method for all awards, net
        of related tax effects                                            102,232            159,001
                                                                    -------------      -------------
      Pro forma net income                                          $     555,972      $     356,460
                                                                    =============      =============

      Net income per share:
        As reported:
          Basic                                                     $         .47      $         .37
                                                                    =============      =============
          Diluted                                                   $         .45      $         .36
                                                                    =============      =============
        Pro forma:
          Basic                                                     $         .40      $         .26
                                                                    =============      =============
          Diluted                                                   $         .38      $         .24
                                                                    =============      =============
</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 50 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, 2004 and 2003
================================================================================

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 - During both 2004 and 2003,  the Company  declared a
      six-for-five  stock  split.  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
      after retroactively adjusting for the stock splits.

      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
      2004 and 2003, 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 two stock splits,  as
      summarized below:

<TABLE>
<CAPTION>
                                                                               2004          2003
                                                                            ---------      ---------
<S>                                                                         <C>            <C>
      Weighted average number of common shares used in
        in computing basic net income per share                             1,399,266      1,384,694

       Effect of dilutive stock options                                        71,877         67,128
                                                                            ---------      ---------

       Weighted average number of common shares and dilutive potential
        common shares used in computing diluted net income per share        1,471,143      1,451,822
                                                                            =========      =========
</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, 2004 and 2003
================================================================================

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

      New  Accounting  Standards  - In May 2003,  the FASB  issued SFAS No. 150,
      Accounting for Certain Financial  Instruments with Characteristics of both
      Liabilities  and Equity.  SFAS No. 150  establishes  standards  for how an
      issuer  classifies  and  measures  certain   financial   instruments  with
      characteristics of both liabilities and equity. It requires that an issuer
      classify a  financial  instrument  that is within its scope as a liability
      (or an  asset  in some  circumstances).  SFAS  No.  150 is  effective  for
      financial  instruments  entered into or modified by the Company  after May
      31, 2003,  and is effective at the beginning of the first  interim  period
      beginning after June 15, 2003. However, the FASB has deferred indefinitely
      the classification  and measurement  provisions as they related to certain
      mandatorily redeemable  noncontrolling  interests. The Company adoption of
      SFAS No. 150 did not have a material impact on the Company's  consolidated
      financial statements.

      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) reached a partial
      consensus on Issue 03-1,  The Meaning of  Other-Than-Temporary  Impairment
      and Its Application to Certain  Investments.  Issue 03-1 requires  certain
      quantitative and qualitative  disclosures for investments  subject to SFAS
      No. 115, Accounting for Certain Investments in Debt and Equity Securities,
      that  are   impaired  at  the   balance   sheet  date  but  for  which  an
      other-than-temporary  impairment  has not  been  recognized.  The  Company
      adopted the partial  consensus  on Issue 03-1 during 2003 and has provided
      the  new  disclosures  in  Note  2.  The  EITF  is  expected  to  continue
      deliberating  other  aspects of Issue 03-1,  including  when to  recognize
      other-than-temporary impairment.

      Reclassifications   -  Certain  amounts  in  the  prior  year's  financial
      statements have been reclassified to conform to the 2004 presentation. The
      reclassifications  had no effect on net income or shareholders'  equity as
      previously recorded.


                                       31
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

2.    INVESTMENT SECURITIES

      The amortized cost,  gross  unrealized gains and losses and fair values of
      investment securities at December 31, 2004 and 2003 are as follows:

      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
      N.C. 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
      N.C. 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>


                                       32
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

2.    INVESTMENT SECURITIES (Continued)

      Available-for-sale  securities  consist of the  following  at December 31,
      2003:

<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                          $    500,627      $      9,975      $         --       $    510,602
                                               ------------      ------------      ------------       ------------

      U. S. Government agencies due -
        Within 1 to 5 years                       5,500,000             5,937           (33,750)         5,472,187
      Mortgage-backed securities due -
        Within 1 to 5 years                       2,767,375                --           (37,950)         2,729,425
      N.C. Municipal bonds due -
        Within 1 to 5 years                         257,177            12,600                --            269,777
                                               ------------      ------------      ------------       ------------
           Total due with in 1 to 5 years         8,524,552            18,537           (71,700)         8,471,389
                                               ------------      ------------      ------------       ------------

      Mortgage-backed securities due -
        Within 5 to 10 years                      7,463,939               586          (107,094)         7,357,431
      N.C. Municipal bonds due -
        Within 5 to 10 years                      1,451,675            22,460              (954)         1,473,181
                                               ------------      ------------      ------------       ------------
           Total due within 5 to 10 years         8,915,614            23,046          (108,048)         8,830,612
                                               ------------      ------------      ------------       ------------

      Mortgage-backed securities due -
        after 10 years                              588,247             3,025                --            591,272
      N.C. Municipal bonds                          114,413                --            (5,991)           108,422
                                               ------------      ------------      ------------       ------------
           Total due within 5 to 10 years           702,660             3,025            (5,991)           699,694
                                               ------------      ------------      ------------       ------------

               Total at December 31, 2003      $ 18,643,453      $     54,583      $   (185,739)      $ 18,512,297
                                               ============      ============      ============       ============
</TABLE>

      For the year ended December 31, 2004 and 2003,  proceeds from the sales of
      investment  securities available for sale totaled $553,600 and $2,038,750,
      respectively.  Gross  realized  gains  from  the  sales  in 2004  and 2003
      amounted to $31,613 and $45,482, respectively.

      Securities  with carrying  values of $1,800,000 and $1,425,000 at December
      31, 2004 and 2003,  respectively,  were pledged to secure public monies on
      deposit as required by law.

      The following table shows  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, 2004 and 2003.  These  unrealized  losses on  investment
      securities  as of  December  31,  2004 are a result of  volatility  in the
      market during 2004 and relate to seven U.S.  Government  Agency bonds, two
      N.C.  Municipal  bonds,  and  eleven   mortgage-backed   securities.   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, 2004 and 2003
================================================================================

2.    INVESTMENT SECURITIES (Continued)

      December 31, 2004:

<TABLE>
<CAPTION>
                                                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          $ 6,466,094     $    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>

      December 31, 2003:

<TABLE>
<CAPTION>
                                               Less Than 12 Months                                 12 Months or More
                                          ---------------------------                   -----------------------------------------
                                             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          $ 1,466,250     $    33,750    $        --    $        --    $ 1,466,250    $    33,750
        N.C. municipal bonds                  482,238           6,945             --             --        482,238          6,945
        Mortgage-backed securities          9,043,474         145,044             --             --      9,043,474        145,044
                                          -----------     -----------    -----------    -----------    -----------    -----------

        Total temporarily impaired
          securities                      $10,991,962     $   185,739    $        --    $        --    $10,991,962    $   185,739
                                          ===========     ===========    ===========    ===========    ===========    ===========
</TABLE>

      The aggregate cost of the Company's cost method  investment,  Federal Home
      Loan Bank  stock,  totaled  $307,900  at December  31,  2004.  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 $307,900.  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, 2004 and 2003 classified by type are as follows:

<TABLE>
<CAPTION>
                                                       2004               2003
                                                   ------------       ------------
<S>                                                <C>                <C>
      Real estate:
       Construction                                $ 11,470,223       $  8,372,934
       Mortgage                                      51,633,458         46,014,314
       Commercial, financial and agricultural        20,162,307         18,603,317
       Consumer                                       1,747,694          1,909,709
                                                   ------------       ------------
           Subtotal                                  85,013,682         74,900,274
       Net deferred loan origination fees              (161,612)          (147,208)
                                                   ------------       ------------

      Total                                        $ 84,852,070       $ 74,753,066
                                                   ============       ============
</TABLE>


                                       34
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

3.    LOANS (Continued)

      Nonperforming assets at December 31, 2004 and 2003:

                                                       2004             2003
                                                   ----------        ----------

      Nonaccrual loans                             $2,567,816        $2,145,772
      Other real estate owned                         401,345         1,145,186
      Repossessions                                    42,241           121,783
                                                   ----------        ----------

      Total                                        $3,011,402        $3,412,741
                                                   ==========        ==========

      No loans  have  been  restructured  during  2004 or 2003.  Loans  totaling
      $1,869,920 and $1,838,798 were considered impaired as of December 31, 2004
      and 2003,  respectively.  Impaired  loans of $1,869,920 and $1,838,936 had
      related  allowances  for loan losses of $219,846  and $182,013 at December
      31,  2004 and 2003,  respectively.  The  average  recorded  investment  in
      impaired  loans  during the years  ended  December  31,  2004 and 2003 was
      $1,705,295 and $1,981,764,  respectively. For the years ended December 31,
      2004 and 2003, the Company recognized  interest income from impaired loans
      of approximately $59,546 and $89,004, 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, 2003,  directors' direct and indirect
      indebtedness to the Company aggregated $2,949,251. During 2004, $1,758,011
      in new loans  were  made and  repayments  of  $1,656,513  were  collected,
      resulting in a balance of  $3,050,749  at December  31, 2004.  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,
      2004 and 2003 are as follows:

                                                      2004              2003
                                                  -----------       -----------

      Balance at beginning of year                $ 1,174,003       $ 1,020,198
      Provision for loan losses                     1,010,300         1,405,800
      Charge-offs                                    (697,612)       (1,357,614)
      Recoveries                                      121,675           105,619
                                                  -----------       -----------

      Balance at end of year                      $ 1,608,366       $ 1,174,003
                                                  ===========       ===========


                                       35
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

5.    PREMISES AND EQUIPMENT

      Premises and equipment at December 31, 2004 and 2003 are as follows:

<TABLE>
<CAPTION>
                                                              2004              2003
                                                          -----------       -----------
<S>                                                       <C>               <C>
      Land                                                $   113,900       $   113,900
      Land improvements                                       121,873           121,873
      Building and improvements                             1,977,959         1,530,875
      Furniture and equipment                               1,633,851         1,463,839
      Leasehold improvements                                  413,507           459,238
      Construction in progress                                 65,253            29,580
                                                          -----------       -----------
                 Total                                      4,326,343         3,719,305
      Less accumulated depreciation and amortization       (1,676,187)       (1,385,436)
                                                          -----------       -----------

      Total                                               $ 2,650,156       $ 2,333,869
                                                          ===========       ===========
</TABLE>

6.    Depreciation  expense  for the  years  ended  December  31,  2004 and 2003
      amounted to $381,313 and $328,364, respectively.

DEPOSIT ACCOUNTS

      At December 31, 2004,  the  scheduled  maturities  of time deposits are as
follows:

<TABLE>
<S>                                                                         <C>
      2005                                                                  $   26,685,824
      2006                                                                       1,450,041
      2007                                                                         489,401
      2008                                                                         143,415
                                                                            --------------

      Total                                                                 $   28,768,681
                                                                            ==============
</TABLE>

INCOME TAXES

7.    The significant components of the income tax provision for the years ended
      December 31, 2004 and 2003 follow:

<TABLE>
<CAPTION>
                                                              2004              2003
                                                          -----------       -----------
<S>                                                       <C>               <C>
      Current tax provision                               $   508,791       $   241,270
      Deferred tax provision                                 (145,286)           38,730
                                                          -----------       -----------

      Net provision for income taxes                      $   363,505       $   280,000
                                                          ===========       ===========
</TABLE>

      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:

<TABLE>
<CAPTION>
                                                              2004              2003
                                                          -----------       -----------
<S>                                                       <C>               <C>
      Benefit computed at statutory rate of 34%           $   347,381       $   270,457

      Effect of state income taxes                             52,139            36,193
      Other                                                   (36,015)          (26,650)
                                                          -----------       -----------

                                                          $   363,505       $   280,000
                                                          ===========       ===========
</TABLE>


                                       36
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

7.    INCOME TAXES (Continued)

      Significant components of deferred taxes at December 31, 2004 and 2003 are
      as follows:

<TABLE>
<CAPTION>
                                                                        2004              2003
                                                                    -----------       -----------
<S>                                                                 <C>               <C>
      Deferred tax assets:
        Allowance for loans losses                                  $   329,961       $   195,412
        Net unrealized losses on available for sale securities           74,956            50,561
        Loss on investment                                                   --            33,854
        Deferred compensation                                            64,715            49,195
                                                                    -----------       -----------

          Total deferred tax assets                                     469,632           329,022
                                                                    -----------       -----------

      Deferred tax liabilities:
        Premises and equipment                                          (35,387)          (16,030)
        Prepaid expenses                                                (44,104)          (39,140)
        Other                                                                --           (53,392)
                                                                    -----------       -----------

          Total deferred tax liabilities                                (79,491)         (108,562)
                                                                    -----------       -----------

      Net recorded deferred tax asset                               $   390,141       $   220,460
                                                                    ===========       ===========
</TABLE>

8.    LEASES

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

                   2005                     $      84,500
                   2006                            35,000
                                            -------------

                   Total                    $     119,500
                                            =============

      The land for a branch office is leased from a partnership  that includes a
      director of the  Company.  The annual  rental is $33,750.  Rental  expense
      charged to operations under all operating lease agreements was $88,882 and
      $51,251 for the years ended December 31, 2004 and 2005, respectively.

9.    LONG-TERM DEBT

      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 (loss) as
      other  noninterest  income and interest  expense.  The  increases to other
      noninterest  income and  interest  expense  would have been $1,215 for the
      year ended  December 31, 2004 has FIN 46R been  implemented  on January 1,
      2003.

      As of December  31,  2004,  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:


                                       37
<PAGE>

9.    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 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.

10.   STOCK OPTIONS

      In 2001,  the  Company's  shareholders  approved  the  Weststar  Financial
      Services  Corporation 2001 Nonstatutory  Stock Option Plan  ("Nonstatutory
      Plan") and the Weststar  Financial  Services  Corporation  2001  Incentive
      Stock Option Plan  ("Incentive  Plan").  Under these  plans,  non-employee
      directors and employees  were granted stock options on June 20, 2001.  The
      maximum number of shares available for grant under the  Nonstatutory  Plan
      and  Incentive  Plan is 91,471 and  92,491,  respectively.  Of the maximum
      number of shares available for grant,  68,821 were  outstanding  under the
      Nonstatutory  Plan and 89,475 were outstanding under the Incentive Plan at
      December 31, 2004.  Option prices for both plans are established at market
      value, which was $5.88, 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, 2004 and 2003 follows:

                                                                Exercise
                                                                  Price
                                                   Shares       Per Share
                                                   ------       ---------
      Nonstatutory Plan
      -----------------
      Outstanding December 31, 2002                91,471         $5.88
        Exercised                                 (22,650)         5.88
                                                  -------
      Outstanding, December 31, 2003               68,821          5.88
                                                  -------

      Outstanding, December 31, 2004               68,821          5.88
                                                  =======


                                       38
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

10.   STOCK OPTIONS (Continued)

      Incentive Plan
      --------------
      Outstanding, December 31, 2002                    90,490       $5.88
        Cancelled                                         (290)       5.88
                                                   -----------
      Outstanding, December 31, 2003                    90,200        5.88
        Cancelled                                         (725)       5.88
                                                   -----------
      Outstanding, December 31, 2004                    89,475        5.88
                                                   ===========

<TABLE>
<CAPTION>
                                                                At December 31, 2004
                                      ------------------------------------------------------------------------
                                                  Outstanding Options                   Exercisable Options
                                      ------------------------------------------    --------------------------
                                                       Remaining      Weighted                       Weighted
                                                         Life         Average                         Average
      Exercise Price                    Shares          (Years)        Price          Shares           Price
                                      ----------      ----------    ------------    ------------    ----------
<S>                                     <C>                <C>        <C>              <C>           <C>
      Nonstatutory Plan
           $  5.88                      68,821             6.5        $    5.88        68,821        $    5.88

      Incentive Plan
           $  5.88                      89,475             6.5        $    5.88        71,365        $    5.88
</TABLE>

11.   EMPLOYEE BENEFIT PLANS

      The Company sponsors a defined contribution 401(k) plan which allows those
      employees  who have attained the age of 21 years and worked 1,000 hours to
      elect to  contribute a portion of their  salary to the plan in  accordance
      with the provisions  and limits set forth in the plan  document.  The plan
      was  established in March 1999. The Company makes  discretionary  matching
      contributions  in an amount  determined each plan year to each participant
      who makes 401(k)  savings  contributions  during the year. The Company may
      also make a discretionary  profit-sharing  contribution for a plan year to
      those participants employed during the year. The Company's contribution to
      the plan was $42,445 and $34,038 for the years ended December 31, 2004 and
      2003, 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 $167,873 and $127,615 at December 31, 2004 and 2003, respectively,  is
      being  accrued  over the  vesting  period  defined in the  agreement.  The
      related  expense was $40,259 and $36,600 for the years ended  December 31,
      2004 and 2003, 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, 2004 was $152,015.

12.   BORROWINGS

      The Company has  $5,000,000  available in overnight  federal fund lines of
      credit  and an  approximately  $13,000,000  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 and 2003, respectively.  The advance is due in full on June 27, 2005;
      interest is 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, 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, 2004 was
      approximately  $8,266,000.  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 the year were  $103,735 and 1.31%,  respectively.  The maximum
      amount of  federal  funds  outstanding  at any month end  during  2004 was
      $332,000.


                                       39
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

13.   REGULATION AND REGULATORY RESTRICTIONS

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

      The Company is not presently  subject to any  regulatory  restrictions  on
      dividends.  The  Company's  ability  to pay  dividends  depends to a large
      extent  on the  amount  of  dividends  paid  by the  Bank  and  any  other
      subsidiaries.  The Bank, as a North Carolina banking corporation,  may pay
      dividends  only out of undivided  profits as determined  pursuant to North
      Carolina General Statutes Section 53-87. As of December 31, 2004, the Bank
      had  undivided  profits  of  $1,714,883.   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,  2004,  the  ratio was  10.14%  for the  Bank,  leaving  all
      $1,714,883 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, 2004, 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, 2004 and 2003,  that the Company
      meets all capital  adequacy  requirements  to which it is  subject.  To be
      categorized as adequately  capitalized under the regulatory  framework for
      prompt  corrective  action,  the Company must monitor the minimum  capital
      ratios as set forth in the table below.

      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, 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>


                                       40
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

13.   REGULATION AND REGULATORY RESTRICTIONS (Continued)

<TABLE>
<S>                                <C>          <C>         <C>           <C>        <C>          <C>
    As of December 31, 2003:
      Total Capital (to Risk
        Weighted Assets)
        Consolidated               $14,274      17.82%      $ 6,408       8.00%      $ 8,010      10.00%
        Bank                        13,855      17.32%        6,397       8.00%        7,997      10.00%
      Tier I Capital (to Risk
        Weighted Assets)
        Consolidated                12,361      15.43%        3,204       4.00%        4,806       6.00%
        Bank                        12,853      16.07%        3,199       4.00%        4,798       6.00%
      Tier I Capital (to
        Average Assets)
        Consolidated                12,361      11.48%        4,306       4.00%        5,382       5.00%
        Bank                        12,853      11.95%        4,301       4.00%        5,376       5.00%
</TABLE>

14.   COMMITMENTS AND CONTINGENCIES

      The Company has various financial  instruments  (outstanding  commitments)
      with  off-balance  sheet  risk  that are  issued in the  normal  course of
      business to meet the financing  needs of its  customers.  These  financial
      instruments  include  commitments to extend credit and standby  letters of
      credit.  Commitments  to extend credit are legally  binding  agreements to
      lend to a  customer  as long as there  is no  violation  of any  condition
      established in the contract.  Commitments  generally have fixed expiration
      dates or other  termination  clauses.  Since many of the  commitments  are
      expected to expire without being drawn upon, the total commitment  amounts
      outstanding do not necessarily represent future cash requirements. Standby
      letters of credit represent conditional  commitments issued by the Company
      to assure the  performance  of a  customer  to a third  party.  The unused
      portion of  commitments to extend credit at December 31, 2004 and 2003 was
      $19,683,801 and $20,435,251, respectively.

      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.


                                       41
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

15.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The  fair  value  estimates   presented  herein  are  based  on  pertinent
      information  available to  management  as of December  31, 2004.  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>
                                                       2004                        2003
                                              ----------------------      -----------------------
                                              Carrying     Estimated      Carrying      Estimated
                                               amount     fair value       amount      fair value
                                              --------    ----------      --------     ----------
                                                                (In thousands)
<S>                                           <C>           <C>           <C>           <C>
      Assets:
        Cash and cash equivalents             $ 19,621      $ 19,621      $ 11,991      $ 11,991
        Investment securities                   23,307        23,107        18,512        18,512
        Federal Home Loan Bank stock               308           308           175           175
        Loans                                   84,852        86,105        74,753        76,250
        Interest receivable                        565           565           458           458

      Liabilities:
        Demand deposits, NOW accounts,
          money market accounts, savings        85,673        85,673        68,073        68,073
        Time deposits                           28,769        28,778        25,328        25,389
        Short-term borrowings                    2,000         2,000         2,000         2,000
        Interest payable                           138           138           121           121
        Long-term debt                           4,124         4,124         4,000         4,000

      Off-balance-sheet - commitments to
        extend credit                               --        19,684            --        20,435
</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.

      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.


                                       42
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

16.   PARENT COMPANY FINANCIAL DATA

      The  following  is a summary  of the  condensed  financial  statements  of
      Weststar Financial  Corporation as of and for the years ended December 31,
      2004 and 2003:

                            Condensed Balance Sheets
                           December 31, 2004 and 2003

<TABLE>
<CAPTION>
                                                                                  2004               2003
                                                                              ------------       ------------
<S>                                                                           <C>                <C>
      Assets
        Cash and due from banks                                               $    401,411       $    264,360
        Investment in The Bank of Asheville, at equity                          13,258,054         12,772,309
        Investment in Weststar Financial Services Corporation I                    124,000            124,000
        Investment in Bank of Asheville Mortgage Company, LLC, at equity            38,671                 --
        Other assets                                                               161,913            194,971
                                                                              ------------       ------------

      Total assets                                                            $ 13,984,049       $ 13,355,640
                                                                              ============       ============

      Liabilities and Shareholders' Equity
        Liabilities:
          Junior subordinated debentures payable to
            Weststar Financial Services Corporation I                         $  4,124,000       $  4,124,000
          Other                                                                     49,862             40,692
        Stockholders' equity                                                     9,810,187          9,190,948
                                                                              ------------       ------------

      Total liabilities and shareholders' equity                              $ 13,984,049       $ 13,355,640
                                                                              ============       ============
</TABLE>

                       Condensed Statements of Operations
                     Years Ended December 31, 2004 and 2003

<TABLE>
<CAPTION>
                                                                                  2004                2003
                                                                              ------------       ------------
<S>                                                                           <C>                <C>
      Interest Income:
        Interest-bearing deposits                                             $     21,655       $         --
                                                                              ------------       ------------
      Interest Expense:
        Junior subordinated debentures issued to
          Weststar Financial Services Corporation I                                187,751             39,178
                                                                              ------------       ------------
      Non-interest Income:
        Equity in earnings of subsidiary bank                                      739,953            541,211
        Other                                                                       98,400             56,500
                                                                              ------------       ------------
          Total Non-interest Income                                                858,353            597,711
      Non-interest Expenses:
        Equity in loss of Bank of Asheville Mortgage Company., LLC                  11,329                 --
        Other                                                                       44,169             56,337
                                                                              ------------       ------------
          Total Non-interest Expenses                                               55,498             56,337

      Income before income tax benefit                                             636,759            502,196

      Income tax benefit                                                           (41,445)           (13,265)
                                                                              ------------       ------------

      Net income                                                              $    658,204       $    515,461
                                                                              ============       ============
</TABLE>


                                       43
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003
================================================================================

16.   PARENT COMPANY FINANCIAL DATA (Continued)

                       Condensed Statements of Cash Flows
                     Years Ended December 31, 2004 and 2003

<TABLE>
<CAPTION>
                                                                         2004              2003
                                                                     -----------       -----------
<S>                                                                  <C>               <C>
      Cash Flows from Operating Activities:
        Net income                                                   $   658,204       $   515,461
        Noncash items included in net income:
          Equity in undistributed earnings of The
             Bank of Asheville                                          (739,953)         (541,211)
          Equity in undistributed loss of The Bank of Asheville
             of Asheville Mortgage Company, LLC                           11,329                --
          Income tax (benefit)                                            24,255           (13,265)
          Increase in other assets                                         8,803          (116,684)
          Increase (decrease) in other liabilities                         9,170            35,909
                                                                     -----------       -----------
             Net cash used in operating activities                       (28,192)         (119,790)
                                                                     -----------       -----------

      Cash Flows from Investing Activities:
        Upstream dividends received from The Bank of Asheville           215,322            37,998
        Investment in Weststar Financial Services
          Corporation I                                                       --          (124,000)
          The Bank of Asheville Mortgage Company, LLC                    (50,000)               --
          The Bank of Asheville                                               --        (3,800,000)
                                                                     -----------       -----------
             Net cash provided (used) in investing activities            165,322        (3,886,002)
                                                                     -----------       -----------

      Cash Flows from Financing Activities:
        Junior subordinated debentures issued to
          Weststar Financial Services Corporation I                           --         4,124,000
        Cash paid for fractional shares                                      (79)           (1,717)
        Exercise of stock options                                             --            66,636
                                                                     -----------       -----------
             Net cash provided (used) in financing activities                (79)        4,188,919
                                                                     -----------       -----------

      Net increase (decrease) in cash                                    137,051           183,127
        Beginning                                                        264,360            81,233
                                                                     -----------       -----------

        Ending                                                       $   401,411       $   264,360
                                                                     ===========       ===========
</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, 2004. 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, 2004 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 4 - 9 of Registrant's  2005 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 9 - 11 of Registrant's  2005 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 91,471 and 92,491,
respectively.  Of the maximum number of shares available for grant,  68,821 were
outstanding  under the Nonstatutory  Plan and 89,475 were outstanding  under the
Incentive  Plan  at  December  31,  2004.  Option  prices  for  both  plans  are
established at market value,  which was $5.88, on the dates options were granted
by the Board of Directors. The following chart contains details of the grants:

<TABLE>
<CAPTION>
                                                                                           Number of securities
                                                                                            remaining available
                                                                                            for future issuance
                                      Number of securities           Weighted-average              under equity
                                         to be issued upon         exercise price of         compensation plans
                                               exercise of       outstanding options,     (excluding securities
              Plan Category           outstanding options,        warrants and rights   reflected in column (a))
                                                  (a)                        (b)                        (c)
<S>                             <C>                                        <C>                       <C>
       Equity compensation
          plans approved by     Nonstatutory - 68,821                      $5.88                      None
           security holders        Incentive - 89,475                      $5.88                     1,961

        Equity compensation
         plans not approved
        by security holders                      None                       None                      None

                      Total                   158,296                      $5.88                     1,961
</TABLE>

See pages 3 - 4 of Registrant's  2005 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 11-12 of Registrant's  2005 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

99 2005 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 7 - 8, and 12 of Registrant's 2005 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 15, 2005


                                       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 15, 2005
----------------------
W. Edward Anderson
Director

/s/M. David Cogburn, M.D.                        February 15, 2005
-------------------------
M. David Cogburn, M.D.
Director

/s/Steven D. Cogburn                             February 15, 2005
--------------------
Steven D. Cogburn
Director

/s/G. Gordon Greenwood                           February 15, 2005
----------------------
G. Gordon Greenwood
President & Chief Executive Officer

/s/Patricia P. Grimes                            February 15, 2005
---------------------
Pat Grimes
Director

/s/Randall C. Hall                               February 15, 2005
------------------
Randall C. Hall
Secretary/Treasurer
Chief Financial Officer and
Principal Accounting Officer

/s/Darryl J. Hart                                February 15, 2005
-----------------
Darryl J. Hart
Director

/s/Carol L. King                                 February 15, 2005
----------------
Carol L. King
Director

/s/Stephen L. Pignatiello                        February 15, 2005
-------------------------
Stephen L. Pignatiello
Director

/s/Laura A. Webb                                 February 15, 2005
----------------
Laura A. Webb
Director

/s/David N. Wilcox                               February 15, 2005
------------------
David N. Wilcox
Director


                                       48
<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
        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                              *

                          Indenture between Weststar Financial Services Corporation
        10(vii)           and Wells Fargo Bank, N.A.                                             *

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

                          Floating Rate Junior Subordinated Debenture of Weststar
         10(ix)           Financial Services Corporation                                         *

           21             Subsidiaries                                                    Filed herewith

           99             2005 Proxy Statement                                                  **
</TABLE>

*     Incorporated by reference.

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


                                       49