SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                        ANNUAL REPORT UNDER SECTION 13 OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                     FOR FISCAL YEAR ENDED DECEMBER 31, 2002

                        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 not 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, 2002 were $7,238,781.

The aggregate market value of the voting stock held by non-affiliates of the
Registrant at December 31, 2002 was approximately $10,523,354.

The number of shares of the Registrant's Common Stock outstanding on December
31, 2002 was 957,539.

                      Documents Incorporated by Reference:

PART III: Definitive Proxy Statement dated March 6, 2003 as filed pursuant to
Section 14 of the Securities Exchange Act of 1934 for the 2003 Annual Meeting of
Shareholders.

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


                                                                               1
<PAGE>

                        FORM 10-KSB CROSS-REFERENCE INDEX

<TABLE>
<CAPTION>
                                                                                               2003
                                                                                2002           Proxy
                                                                                Form 10-KSB    Statement
                                                                                Page           Page

PART I
<S>                                                                             <C>            <C>
Item 1 -  Business                                                               3             n/a
Item 2 -  Properties                                                             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                                                  19             n/a
Item 8 -  Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure                                                  39             n/a

PART III
Item 9 -  Directors, Executive Officers, Promoters and Control Persons          39             5 - 6, 8
Item 10 - Executive Compensation                                                39             8 - 10
Item 11 - Security Ownership of Certain Beneficial Owners and Management        39             3
Item 12 - Certain Relationships and Related Transactions                        39             6, 10 - 11
Item 13 - Exhibits and Reports on Form 8-K*                                     40             n/a
Item 14 - Controls and Procedures                                               40             n/a
</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: 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. At this time, Weststar does not engage in any business activities
on its own. It only owns The Bank of Asheville, which engages in the commercial
banking business.

Primary Market Area

The Registrant's market area consists of Asheville, Buncombe County, North
Carolina and surrounding areas. Buncombe County is part of the Asheville Ranally
Metropolitan area. Asheville is the county seat and the industrial center of
Buncombe County with a population of approximately 69,700. 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 208,600.
Statistics are according to the NC 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, 2002 there
were 67 offices of 14 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, 2002,
Registrant accounted for 2.92% 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 and 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 30 full-time equivalent employees. Registrant does
not have any officers or employees who are not also officers or employees of the
Bank. None of the Registrant's employees are covered by a collective bargaining
agreement. The Registrant believes its relations with its employees to be good.

Regulation

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


                                                                               3
<PAGE>

                          The Bank Holding Company Act

The Registrant is a bank holding company within the meaning of the Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"), and is
required to register as such with the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board" or "FRB"). A bank holding company is
required to file with the FRB annual reports and other information regarding its
business operations and those of its subsidiaries. It is also subject to
examination by the Federal Reserve Board and is required to obtain Federal
Reserve Board approval prior to acquiring, directly or indirectly, more than 5%
of the voting stock of such 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 Bank is required to make regular reports
to the Commissioner describing in detail its resources, assets, liabilities and
financial condition of Registrant. Among other things, the Commissioner
regulates mergers and consolidations 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, Registrant'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, 2002, Registrant was
classified as "well-capitalized" with Tier 1 and Total Risk - Based Capital of
12.40% and 13.65% 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 "Federal Deposit Insurance Corporation Improvement
Act of 1991" below, as applicable to undercapitalized institutions. In addition,
future changes in regulations or practices could further reduce the amount of
capital recognized for purposes of capital adequacy. Such a change could affect
the ability of Registrant to grow and could restrict the amount of profits, if
any, available for the payment of dividends to the shareholders.


                                                                               4
<PAGE>

FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. In December,
1991, Congress enacted the Federal Deposit Insurance Corporation Improvement Act
of 1991 ("FDICIA"), which substantially revised the bank regulatory and funding
provisions of the FDIA 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 Registrant's capital surplus is at least 50% of its paid-in capital.
Further, without the approval of the North Carolina Commissioner of Banks, a
bank that has not been in existence for at least three years may pay cash
dividends.

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, which was signed
into law on November 12, 1999, will allow 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.


                                                                               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 grant the Secretary of
the Treasury broad authority to establish regulations and to impose requirements
and restrictions on the operation of financial institutions. We have not as yet
determined the impact that this act will have on our operations although the
impact is to expected to be material.

ITEM 2: PROPERTIES

The following table sets forth the location of the Registrant's offices as of
December 31, 2002.

                                            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           800          Lease
557 New Leicester Highway
Asheville, NC

ITEM 3: LEGAL PROCEEDINGS

There were no known current or pending proceedings as of December 31, 2002.

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 957,539 shares outstanding at
December 31, 2002 owned by approximately 800 shareholders.

During 2002, 272,824 shares of the Company's common stock were traded. The
closing price of the stock was $10.99.

The following table represents stock prices during the trading periods.

2002     1st      2nd      3rd      4th
         Qtr.     Qtr.     Qtr.     Qtr.
High     $9.09    $9.27    $9.64    $11.50
Low      $6.82    $7.36    $8.68    $ 8.65
Close    $7.77    $8.95    $9.00    $10.99


                                                                               6
<PAGE>

2001     1st      2nd      3rd      4th
         Qtr.     Qtr.     Qtr.     Qtr.
High     $7.03    $7.06    $7.23    $7.50
Low      $5.37    $5.84    $6.41    $6.45
Close    $7.03    $6.61    $6.82    $7.50

No cash dividends were paid in 2002 or 2001. A 10% stock dividend in the form of
an 11-for-10 stock split was paid to shareholders in December 2002 and November
2001. Stock prices have been adjusted to reflect the stock dividends.

Stock Transfer Agent and Registrar

Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016
908.497.2312 or 800.368.5948

Shareholder Information

For information, contact Randall C. Hall, Executive Vice President and
Secretary, Registrant, 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 15 2003, at the Renaissance Asheville Hotel, One Thomas Wolfe
Plaza, Asheville, North Carolina.

Independent Auditors

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


                                                                               7
<PAGE>

ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS

                      MANAGEMENT'S DISCUSSION AND ANALYSIS

Management's Discussion and Analysis is provided to assist in understanding and
evaluating the Company's results of operations and financial condition. The
following discussion should be read in conjunction with the consolidated
financial statements and related notes included elsewhere herein. Weststar
Financial Services Corporation (the "Company") is a holding company with one
subsidiary, 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 of Asheville were exchanged for common shares
of Weststar Financial Services Corporation on April 29, 2000.

                             RESULTS OF OPERATIONS

The following discussion relates to operations for the year ended December 31,
2002 compared to the year ended December 31, 2001, the year ended December 31,
2001 compared to the year ended December 31, 2000, and the year ended December
31, 2000 compared to the year ended December 31, 1999.

                              2002 COMPARED TO 2001

Net income for 2002 totaled $691,353 compared to $600,600 in 2001 or $.71 per
diluted share and $.65 per diluted share for 2002 and 2001, respectively. The
return on average assets and equity, respectively, were .78% and 8.28% for 2002
compared to .77% and 8.07% in 2001. The increase in net income was attributable
to increased performance in net interest income, service charge income and
efficiency.

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 $5,561,535 for the year
ended December 31, 2002 compared to $6,135,208 in 2001. Growth in the average
balance of interest-earning assets increased from $71,963,747 to $81,832,128 or
14%; however, the decrease in earnings rates over 2001 resulted in lower
interest income. Interest expense, derived from interest-bearing liabilities
such as deposits and borrowed funds, totaled $1,773,924 in 2002 compared to
$2,742,677 in 2001. The decrease in interest expense was primarily attributable
to lower interest rates during 2002. The average balance of interest-bearing
liabilities grew from $58,868,331 in 2001 to $64,671,656 in 2002 or 10%.

Because of both the growth in loans and higher levels of charge-offs and
nonperforming loans, the Company provided $877,920 for loan losses in 2002
compared with $550,420 in 2001. Charge-offs, net of recoveries totaled $836,189
for 2002 compared with $443,659 for 2001. Nonperforming loans totaled $1,079,750
at the end of 2002 compared with $1,050,813 at the end of 2001.

Other income totaled $1,677,246 in 2002 compared to $1,187,168 in 2001. Service
charge fees on deposit accounts and other fees and commissions earned account
for the majority of non-interest income. During 2002, the Company earned
$1,214,454 from service charges on deposit accounts compared to $803,478 in
2001, an increase of 51%. In addition to growth in deposits, increased
utilization of the Company's services associated with deposits, such as
overdraft protection, resulted in the increase in service charge income. Other
service fees and commissions, including fees from the origination of mortgage
loans, totaled $404,923 in 2002 compared to $334,621 in 2001.

Mortgage loan fees accounted for $268,983 or 66% of other service fees and
commissions during 2002 compared to $192,960 or 58% of other fees and
commissions during 2001. Mortgage origination activity has a tendency to
increase during periods of declining interest rates, as was the case during
2002.

During 2002, the Company sold two investment securities, which resulted in
realized gains of $30,889. The sales 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 $26,980 in 2002
compared to $49,069 in 2001.

Other expenses totaled $3,484,699 in 2002 compared to $2,994,649 in 2001.
Expenses increased as a result of increased personnel expense, increased
supplies expense to process the Bank's growth in loans and deposits, and
non-recurring expenses. Salaries and benefits accounted for $1,506,719 in 2002
or 43% of other expenses compared to $1,426,729 or 48% in 2001. Equipment
expenses totaled $247,477 in 2002 compared to $259,628 in 2001. Other
non-interest expenses of $1,556,753 in 2002 compared to $1,308,292 in 2001
included sundry items such as marketing, accounting, occupancy, insurance, and
data processing. Additionally, the Company incurred an expense of $173,750 due
to the settlement of a lawsuit. The Company evaluates the cost of each expense
based upon the value generated.


                                                                               8
<PAGE>

                              2001 COMPARED TO 2000

Net income for 2001 totaled $600,600 compared to $947,282 in 2000 or $.65 per
share and $1.24 per share for 2001 and 2000, respectively. The return on average
assets and equity, respectively, were .77% and 8.07% for 2001 compared to 1.68%
and 16.39% in 2000. In 2001, the Company recorded $434,030 in income tax
expense. During 2000, the Company recognized an income tax benefit of $320,154
primarily related to the release of a valuation allowance of $543,000 previously
recorded against deferred tax assets, net of income taxes related to operations
for the year ended December 31, 2000. At December 31, 1999 management believed
the realization of the valuation allowance was not reasonably assured. Based
upon the taxable income being generated in 2000 and management's expectations of
continued profitability, management believed the realization of the deferred tax
asset was more likely than not. The valuation allowance was reversed in the
first quarter of 2000, thereby providing a deferred tax benefit.

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 $6,135,208 for the year
ended December 31, 2001 compared to $5,273,594 in 2000. Growth in interest
income was attributable to growth in interest-earning assets; the average
balance of interest-earning assets increased from $51,007,637 in 2000 to
$71,963,747 in 2001 or 41%. Interest expense, derived from interest-bearing
liabilities such as deposits and borrowed funds, totaled $2,742,677 in 2001
compared to $2,175,502 in 2000. The increase in interest expense was primarily
attributable to growth in interest-bearing liabilities. The average balance of
interest-bearing liabilities grew from $42,327,350 in 2000 to $58,868,331 in
2001 or 39%.

Because of both the growth in loans and higher levels of charge-offs and
nonperforming loans, the Company provided $550,420 for loan losses in 2001
compared with $454,960 in 2000. Charge-offs, net of recoveries totaled $443,659
for 2001 compared with $112,062 for 2000. Nonperforming loans totaled $1,050,813
at the end of 2001 compared with $522,137 at the end of 2000.

Other operating income totaled $1,187,168 in 2001 compared to $532,575 in 2000.
Service charge fees on deposit accounts and other fees and commissions earned
account for the majority of non-interest income. During 2001, the Company earned
$803,478 from service charges on deposit accounts compared to $360,756 in 2000,
an increase of 123%. In addition to growth in deposits, the implementation of a
new deposit service resulted in the increase in service charge income. Other
service fees and commissions, including fees from the origination of mortgage
loans, totaled $334,621 in 2001 compared to $160,179 in 2000.

Mortgage loan fees accounted for $192,960 or 58% of other fees and commissions
during 2001 compared to $40,239 or 25% of other fees and commissions during
2000. Mortgage origination activity has a tendency to increase during periods of
declining interest rates, as was the case during 2001.

Other income, primarily the fees from the sales of checks and deposit slips and
recoveries other than loans, provided additional income of $49,069 in 2001
compared to $11,640 in 2000.

Other expenses totaled $2,994,649 in 2001 compared to $2,548,579 in 2000.
Expenses increased as a result of increased personnel expense and increased
supplies expense to process the Bank's growth in loans and deposits. Salaries
and benefits accounted for $1,426,729 in 2001 or 48% of other expenses compared
to $1,209,456 or 47% in 2000. Equipment expenses totaled $259,628 in 2001
compared to $232,735 in 2000. The increase in equipment expense reflects the
Company's desire to provide state of the art technology for customer service.
Other non-interest expenses of $1,308,292 in 2001 compared to $1,106,388 in 2000
included sundry items such as marketing, accounting, occupancy, insurance, and
data processing.

                               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 $3,787,611, $3,392,531,
and $3,098,092 for 2002, 2001 and 2000, respectively, representing increases of
11.7% for 2002 over 2001, 9.5% for 2001 over 2000 and 89.9% for 2000 over 1999.
Interest rate spreads have been at least 3.8% over the last three 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 three years.


                                                                               9
<PAGE>

<TABLE>
<CAPTION>
                                                         AVERAGE BALANCES AND INTEREST INCOME ANALYSIS
                                                                 For the Years Ended December 31,
                                             2002                               2001                             2000
                                            Average                            Average                          Average
                                 Average     Yield/    Income/      Average    Yield/   Income/      Average     Yield/    Income/
                                 Balance      Cost     Expense      Balance     Cost    Expense      Balance      Cost     Expense
<S>                           <C>             <C>    <C>          <C>          <C>    <C>          <C>           <C>     <C>
ASSETS:
Loans (1)                     $  66,303,175   7.7%   $5,130,248   $63,318,525   9.1%   $5,734,776   $47,822,498   10.6%   $5,071,190
Taxable securities                6,618,314   4.2%      278,097     4,452,785   5.4%      241,278     2,191,380    6.4%      140,816
Non-taxable securities (2)          461,801   5.3%       16,109        60,460   4.8%        1,930            --     --            --
Federal funds sold                7,779,200   1.6%      122,859     4,037,962   3.8%      151,459       969,082    6.2%       59,957
Interest-bearing deposits           669,638   2.1%       14,222        94,015   6.1%        5,765        24,677    6.6%        1,631
                              -------------  ----    ----------   -----------   ---    ----------   -----------   ----    ----------
  Total interest-earning
  assets                         81,832,128   6.8%    5,561,535    71,963,747   8.5%    6,135,208    51,007,637   10.3%    5,273,594
                              -------------  ----    ----------   -----------   ---    ----------   -----------   ----    ----------

All other assets                  6,278,582                         5,863,532                         5,355,536
                              -------------                       -----------                       -----------
  Total assets                $  88,110,710                       $77,827,279                       $56,363,173
                              =============                       ===========                       ===========

Liabilities and
Shareholders' Equity:
Interest-bearing deposits     $  63,885,388   2.7%    1,753,262   $58,796,429   4.7%    2,738,809   $41,073,052    5.1%    2,080,648
Borrowings and other                786,268   2.6%       20,662        71,902   5.4%        3,868     1,254,298    7.6%       94,854
                              -------------          ----------   -----------          ----------   -----------           ----------
  Total interest-bearing
  liabilities                    64,671,656   2.7%    1,773,924    58,868,331   4.7%    2,742,677    42,327,350    5.1%    2,175,502
Other liabilities                15,091,600                        11,519,306                         8,256,448
Shareholders' equity              8,347,454                         7,739,642                         5,779,375
                              -------------                       -----------                       -----------
Total liabilities and
shareholders' equity          $  88,110,710                       $77,827,279                       $56,363,173
                              =============                       ===========                       ===========

Net yield on earning-assets
and net interest income (3)                   4.6%   $3,787,611                 4.7%   $3,392,531                  6.1%   $3,098,092
                                                     ==========                        ==========                         ==========
Interest rate spread                          4.1%                              3.8%                               5.2%
</TABLE>

(1)   Nonaccrual loans have been included

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

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

(4)   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>
                                                        2002 Compared to 2001               2001 Compared to 2000
                                            Volume (1)      Rate(1)          Total        Volume (1)          Rate(1)        Total
<S>                                          <C>          <C>              <C>            <C>              <C>            <C>
Interest-bearing deposits in other banks     $ 23,761     $   (15,304)     $   8,457      $     4,417      $    (283)     $   4,134
Investment securities                         117,573         (66,575)        50,998          134,891        (32,499)       102,392
Federal funds sold                             99,707        (128,307)       (28,600)         152,490        (60,988)        91,502
Loans                                         250,629        (855,157)      (604,528)       1,523,354       (859,768)       663,586
                                             --------     -----------      ---------      -----------      ---------      ---------
Increase in interest income                  $491,670     $(1,065,343)     $(573,673)     $ 1,815,152      $(953,538)     $ 861,614
                                             ========     ===========      =========      ===========      =========      =========

Interest-bearing deposits                    $ 33,952     $(1,019,499)     $(985,547)     $   959,589      $(301,428)     $ 658,161
Borrowings                                     28,601         (11,807)        16,794          (76,512)       (14,474)       (90,986)
                                             --------     -----------      ---------      -----------      ---------      ---------
Increase in interest expense                 $ 62,553     $(1,031,306)     $(968,753)     $   883,077      $(315,902)     $ 567,175
                                             ========     ===========      =========      ===========      =========      =========
</TABLE>

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


                                                                              10
<PAGE>

              LIQUIDITY, INTEREST RATE SENSITIVITY AND MARKET RISKS
     (INCLUDING QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS)

The objectives of the Company's liquidity management policy include providing
adequate funds to meet the cash needs of depositors and borrowers, as well as
providing funds to meet the basic needs for on-going operations of the Company
and regulatory requirements. Depositor cash needs, particularly those of
commercial depositors, can fluctuate significantly depending on both business
and economic cycles, while both retail and commercial deposits can fluctuate
significantly based on the yields 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, 2002 such
unfunded commitments to extend credit were $13,911,492, while commitments in the
form of letters of credit totaled $1,145,022.

Neither the Company nor its subsidiary has 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, 2002, payments due under such operating lease arrangements were
$37,545 in 2003, $33,750 in 2004 and $27,000 in 2005.

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, 2002 and 2001 core deposits
totaled $80,442,807 or 91% and $62,065,371 or 86%, 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 borrowings. Upstream correspondent banks, including the Federal Home
Loan Bank of Atlanta, have made available to the Company lines of credit of
approximately $14.7 million. Funding can also be borrowed from the Federal
Reserve Bank's discount window. Funds borrowed from the Federal Reserve Bank are
based upon a percentage of the underlying collateral. The Company has not
incurred a 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 through purchased or brokered
liabilities as the cost of these funds are 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,
that may or may not require future cash outflows.

The following table reflects contractual obligations of the Company as of
December 31, 2002.

                             CONTRACTUAL OBLIGATIONS
                             Payments Due by Period
                                December 31, 2002

<TABLE>
<CAPTION>
                                        On Demand
                                        Or Less Than
Contractual Obligations:                  1 Year        1 - 3 Years     4 - 5 Years        Total
<S>                                     <C>             <C>             <C>             <C>
  Operating leases                      $    37,011     $    60,750                     $    97,761
  Deposits                               87,450,936         763,813     $   264,520      88,479,269
                                        -----------     -----------     -----------     -----------
Total contractual cash obligations,
Including deposits                      $87,487,947     $   824,563     $   264,520     $88,577,030
                                        ===========     ===========     ===========     ===========
</TABLE>

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.


                                                                              11
<PAGE>

The following table reflects other commitments outstanding of the Company at
December 31, 2002.

                                   COMMITMENTS
                              Expiration Per Period
                                December 31, 2002
<TABLE>
<CAPTION>
                                                                                                                      Total
                                                  Less                                                 After          Amounts
                                           Than 1 Year       1 - 3 Years       4 - 5 Years           5 Years        Committed
<S>                                        <C>               <C>               <C>               <C>               <C>
Lines of credit and loan commitments       $11,576,623           852,686       $   234,506       $ 1,247,675       $13,911,491
Letters of credit                            1,145,022                --                --                --         1,145,022
                                           -----------       -----------       -----------       -----------       -----------
  Total                                    $12,721,645       $   852,686       $   234,506       $ 1,247,675       $15,056,513
                                           ===========       ===========       ===========       ===========       ===========
</TABLE>

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

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

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

The majority of the Company's deposits are rate-sensitive instruments with
rates, which tend to fluctuate with market rates. These deposits, coupled with
the Company's short-term time deposits, have increased the opportunities for
deposit repricing. The Company places great significance on monitoring and
managing the Company's asset/liability position. The Company's policy of
managing its interest margin (or net yield on interest-earning assets) is to
maximize net interest income while maintaining a stable deposit base. The
Company's deposit base is not generally subject to volatility experienced in
national financial markets in recent years; however, the Company does realize
the importance of minimizing such volatility while at the same time maintaining
and improving earnings. A common method used to manage interest rate sensitivity
is to measure, over various time periods, the difference or gap between the
volume of interest-earning assets and interest-bearing liabilities repricing
over a specific time period. However, this method addresses only the magnitude
of funding mismatches and does not address the magnitude or 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, 2002, 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.


                                                                              12
<PAGE>

                    INTEREST RATE SENSITIVITY (GAP ANALYSIS)
                                DECEMBER 31, 2002

<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              $     40,018                                      $     40,018                   $     40,018
Federal funds sold                       10,279,000                                        10,279,000                     10,279,000
Investment securities                     3,050,000    $  2,000,000     $  2,008,960     $  7,058,960    $  5,448,575     12,507,535
Federal Home Loan
  Bank stock                                                                                                  229,800        229,800
Loans (1)                                49,280,684       2,301,682        5,156,305       56,738,671      10,159,558     66,898,229
                                       ------------    ------------     ------------     ------------    ------------   ------------
  Total interest-earning assets          62,649,702       4,301,682        7,165,265       74,116,649      15,837,933     89,954,582

Interest-bearing liabilities:
Time deposits                            11,124,994       7,280,894       15,533,709       33,939,597         832,795     34,772,392
All other deposits                       36,900,866                                        36,900,866                     36,900,866
                                       ------------    ------------     ------------     ------------    ------------   ------------
  Total interest-bearing liabilities     48,025,860       7,280,894       15,533,709       70,840,463         832,795     71,673,258

Interest sensitivity gap               $ 14,623,842    $ (2,979,212)    $ (8,368,444)    $  3,276,186
                                       ============    ============     ============     ============
Cumulative interest
  sensitivity gap                      $ 14,623,842    $ 11,644,630     $  3,276,186
                                       ============    ============     ============
Interest-earning assets
  as a percent of interest
  sensitive liabilities                       130.4%           59.1%            46.1%           104.6%
</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.

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, 2002

                                            Within         One to        Five
                                             One           Five        Years or
                                             Year          Years         More

Commercial, financial and agricultural   $13,306,003   $ 3,061,303   $        --
Real estate - Mortgage                    19,508,627    15,763,279     1,942,771

Predetermined rate, maturity
  greater than one year                           --    20,930,122     1,942,771
Variable rate or maturing within
  one year                                42,987,777            --            --

The Company paid an average rate of 2.7% on interest-bearing deposits during
2002 compared to 4.7% during 2001. Significant growth in deposits came from
interest-bearing accounts. Interest-bearing accounts grew by $13,784,044 with
interest-bearing transaction and savings accounts accounting for $11,010,213 or
80%. 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, 2002

Non-interest bearing deposits                                        $14,601,488
Interest-bearing                                                      63,885,388
                                                                     -----------
Total                                                                $78,486,876
                                                                     ===========

The above table includes deposits of $100,000 and over which at December 31,
2002 totaled $8,036,462. The table below presents the maturities of deposits of
$100,000 or more.


                                                                              13
<PAGE>

Maturities of Deposits of $100,000 or More
December 31, 2002

<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           3,751,364         $1,186,212        $2,998,886       $100,000
</TABLE>

CAPITAL RESOURCES

As of December 31, 2002 and 2001, the Company's ratio of total capital to
risk-adjusted assets was 13.65%, and 13.79%, respectively. Average capital to
average assets totaled 9.70% and 9.56% at December 31, 2002 and 2001,
respectively. During the fourth quarter of 2000 the Company began a secondary
stock offering, which was completed on February 28, 2001. The Company issued
157,397 shares and raised $1,221,910 in net capital. Proceeds generated during
the offering are being used to enhance capital and liquidity positions, fund
expansion plans, including the establishment of additional branch offices in and
around Buncombe County, and for general corporate purposes. The Company remains
well capitalized and with the capital generated during the secondary offering
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.

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, 2002 and 2001 were $67,977,979 and
$65,230,982, respectively. The Company places emphasis on consumer loans and
commercial loans to small businesses and professionals. The Company has a
diversified loan portfolio with no concentration to any one borrower or
industry. The amounts and types of loans outstanding for the past five years
ended December 31 are shown on the following table.

<TABLE>
<CAPTION>
                                                                  LOANS
                                                               December 31,
                                       2002                    2001                   2000
                                                   % of                    % of                  % of
                                                   Total                  Total                  Total
                                       Amount      Loans       Amount     Loans      Amount      Loans
<S>                                 <C>              <C>   <C>              <C>   <C>              <C>
LOANS
Real estate -
  Construction                      $ 12,334,543     18%   $ 11,139,588     17%   $  8,894,309     15%
  Mortgage                            37,214,677     55%     35,189,010     54%     32,332,304     53%
Commercial, financial and
  agricultural                        16,367,306     24%     16,512,498     25%     17,939,971     30%
Consumer                               2,188,840      3%      2,553,710      4%      1,338,067      2%
                                    ------------    ---    ------------    ---    ------------    ---
Total loans                           68,105,366    100%     65,394,806    100%     60,504,651    100%
                                                    ===                    ===                    ===
Deferred originations fees, net         (127,387)              (163,824)              (212,020)
                                    ------------           ------------           ------------
Total loans, net of deferred fees   $ 67,977,979           $ 65,230,982           $ 60,292,631
                                    ============           ============           ============

<CAPTION>
                                                           LOANS
                                                        December 31,
                                         1999                   1998
                                                     % of                     % of
                                                     Total                   Total
                                         Amount      Loans      Amount       Loans
<S>                                    <C>              <C>   <C>              <C>
LOANS
Real estate -
  Construction                         $  7,152,238     21%   $  1,780,563     13%
  Mortgage                               16,963,594     49%      7,414,218     53%
Commercial, financial and
  agricultural                            9,926,255     29%      4,594,259     32%
Consumer                                    562,765      1%        299,105      2%
                                       ------------    ---    ------------    ---
Total loans                              34,604,852    100%     14,088,145    100%
                                                       ===                    ===
Deferred originations fees, net            (144,128)               (64,880)
                                       ------------           ------------
Total loans, net of deferred fees      $ 34,460,724           $ 14,023,265
                                       ============           ============
</TABLE>

                              NONPERFORMING ASSETS
                                  December 31,

                         2002         2001       2000       1999   1998

NONPERFORMING ASSETS
Nonaccrual loans        $1,079,750   $1,050,813   $522,137   $247,559   $ --
Foreclosed properties      724,986      733,941         --         --
                        ----------   ----------   --------   --------   ----
Total                   $1,804,736   $1,784,754   $522,137   $247,559   $ --
                        ==========   ==========   ========   ========   ====


                                                                              14
<PAGE>

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 72.8% of the portfolio in 2002 compared to 70.8% in
2001. Commercial loans comprised 24.0% of the portfolio in 2002 compared to
25.3% in 2001, while consumer loans comprised 5.2% in 2002 compared to 3.9% in
2001. Commercial loans of $16,367,306, consumer loans of $2,188,840 and real
estate mortgage loans of $37,214,677 are loans for which the principal source of
repayment is derived from the ongoing cash flow of the business. Real estate
construction loans of $12,334,543 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 $15,056,513 and $19,280,406 at December 31,
2002 and 2001, 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 $2,160,936 and
$605,006 at December 31, 2002 and 2001, respectively. The increase in impaired
loans reflects a small number of larger balance loans, which experienced
deterioration in asset quality. The related allowance for loan losses determined
in accordance with SFAS No. 114 for impaired loans was $115,865 and $68,353 at
December 31, 2002 and 2001, respectively. For the years ended December 31, 2002,
2001 and 2000, the Company recognized interest income from impaired loans of
$45,000, $40,272 and $27,993, respectively.

Loans are considered impaired when based on current information, it is probable
that the Company will be unable to collect all amounts due according to the
contractual terms of the loan agreement, including interest payments. Impaired
loans are carried at the lower of the recorded investment in the loan, the
estimated present value of the total expected future cash flows, discounted at
the loan's effective rate or the fair value of the collateral, if the loan is
collateral dependent.

PROVISION AND ALLOWANCE FOR LOAN LOSSES

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

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

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

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


                                                                              15
<PAGE>

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, 2002, 2001 and 2000 was
$1,020,198, $978,467 and $871,706 or 1.50%, 1.50% and 1.45%, respectively, of
gross loans outstanding. The ratio of net charge-offs to average loans
outstanding was 1.26%, .70% and .23%, during 2002, 2001 and 2000, respectively.
Primarily because of a recessionary economy, charge-offs in 2002 and 2001
totaled $889,565 and $490,600, significantly higher than the $112,060 charged
off in 2000.

                    CHANGES IN THE ALLOWANCE FOR LOAN LOSSES

<TABLE>
<CAPTION>
                                               2002            2001          2000          1999          1998
<S>                                            <C>             <C>           <C>           <C>           <C>
Balance at beginning of year                   $   978,467     $ 871,706     $ 528,808     $ 218,719     $   3,200
Loans charged-off:
  Commercial, financial and agricultural          (568,710)     (373,087)     (112,062)      (16,453)      (55,522)
  Real estate:
    Construction                                  (127,810)           --            --            --            --
    Mortgage                                       (33,574)      (90,275)           --            --            --
  Consumer                                        (159,471)      (27,238)           --        (2,114)         (316)
                                               -----------     ---------     ---------     ---------     ---------
Total charge-offs                                 (889,565)     (490,600)     (112,062)      (18,567)      (55,838)
                                               -----------     ---------     ---------     ---------     ---------
Recoveries of loans previously charged -off:
  Commercial, financial and agricultural            19,753        45,270            --        11,971         1,743
  Real estate:
    Construction                                     1,531            --            --            --            --
    Mortgage                                        13,322            --            --            --            --
  Consumer                                          18,770         1,671            --            --            --
                                               -----------     ---------     ---------     ---------     ---------
Total recoveries                                    53,376        46,941            --            --            --
                                               -----------     ---------
Net charge-offs                                   (836,189)     (443,659)     (112,062)       (6,596)      (54,095)
                                               -----------     ---------     ---------     ---------     ---------
Provision for loan losses                          877,920       550,420       454,960       316,685       269,614
                                               -----------     ---------     ---------     ---------     ---------
Balance at end of year                         $ 1,020,198     $ 978,467     $ 871,706     $ 528,808     $ 218,719
                                               ===========     =========     =========     =========     =========

Ratio of net charge-offs during the year to
  average loans outstanding during the year           1.26%          .70%          .23%          .03%           .8%
</TABLE>

The Company does not have any significant loan concentrations. During the
period, loan terms remained relatively unchanged, and loan quality reflected
slight deterioration. However, the magnitude did not result in a significant
impact on the allowance. Growth in the allowance has been based upon our formula
allowance. Due to the overall consistency of the loan portfolio, there has been
no reallocation of the allowance among different parts of the portfolio.

During 2002, there were no changes in the estimation methods or assumptions that
affected our methodology for assessing the appropriateness of the formula and
specific allowance for credit losses. Changes in estimates and assumptions
regarding the effects of economic and business conditions on borrowers affect
the assessment of the allowance.

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


                                                                              16
<PAGE>

                   ALLOCATION OF THE ALLOWANCE FOR LOAN LOSSES
                                  December 31,

<TABLE>
<CAPTION>
                             2002                  2001                  2000                 1999                  1998
                                        % 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               $  690,842      73%     $645,743      71%     $553,337      68%     $367,917      70%    $140,500     65%
Commercial, financial
  and agricultural           287,860      24%      280,653      25%      278,879      30%      150,445      29%      68,040     33%
Consumer                      19,184       3%       19,381       4%       15,822       2%        8,650       1%       4,340      1%
Unallocated                   22,312      --        32,690      --        23,668      --         1,796      --        5,839     --
                          ----------     ---      --------     ---      --------     ---      --------     ---     --------    ---
Total allowance           $1,020,198     100%     $978,467     100%     $871,706     100%     $528,808     100%    $218,179    100%
                          ==========     ===      ========     ===      ========     ===      ========     ===     ========    ===
</TABLE>

INVESTMENT SECURITIES

At December 31, 2002 and 2001, securities carried at market value totaled
$12,557,103 and $6,859,668, respectively, with amortized costs of $12,507,535
and $6,793,328, 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, 2002
Available for sale: (1)

                                                       Amortized
Type                                                   Cost            Yield (2)

U.S. Government agencies - within 1 to 5 years         $10,002,843     3.1%
N.C. Municipal bonds - within 1 to 5 years                 259,113     5.3%
                                                       -----------     ---
  Total - within 1 to 5 years                           10,261,956     3.1%

U.S. Government agencies - within 5 to 10 years          1,521,499     4.2%
N.C. Municipal bonds - within 5 to 10 years                724,080     5.3%
                                                       -----------     ---
  Total - within 5 to 10 years                           2,245,579     4.6%

    Total                                              $12,507,535     3.4%
                                                       ===========     ===

December 31, 2001
Available for sale: (1)
                                                       Amortized
Type                                                   Cost            Yield (2)

Certificates of  deposit - within 1 year               $   750,000     4.6%
U.S. Government agencies - within 1 to 5 years           5,782,333     4.7%
N.C. Municipal  bonds - 5 to 10 years                      260,995     5.9%
                                                       -----------     ---
Total                                                  $ 6,793,328     4.8%
                                                       ===========     ===

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

(2)   Yields on tax-exempt securities reflect tax equivalent yields using 34%
      tax rate


                                                                              17
<PAGE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company's discussion and analysis of its financial condition and results of
operations are based upon its 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. All non-accruing loans are
considered impaired. 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 increase, but the magnitude of the change in
rates may not be the same.

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

                           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.


                                                                              18
<PAGE>

ITEM 7: FINANCIAL STATEMENTS

INDEPENDENT AUDITORS' REPORT

Board of Directors and Shareholders of
Weststar Financial Services Corporation:

We have audited the accompanying consolidated balance sheet of Weststar
Financial Services Corporation and Subsidiary (the "Company") as of December 31,
2002 and the related consolidated statements of operations, changes in
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Weststar Financial Services Corporation
and Subsidiary as of December 31, 2001 and for the years ended December 31, 2001
and 2000 were audited by other auditors whose report dated January 16, 2002
expresses an unqualified opinion on those statements.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 audit provides a
reasonable basis for our opinion.

In our opinion, the 2002 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Weststar
Financial Services Corporation and Subsidiary at December 31, 2002 and the
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of
America.


Dixon Odom PLLC

January 29, 2003
Charlotte, North Carolina


                                                                              19
<PAGE>

INDEPENDENT AUDITORS' REPORT

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,
2001 and 2000 and the related consolidated statements of operations and
comprehensive income (loss), changes in shareholders' equity, and cash flows for
each of the two years in the period ended December 31, 2001. These 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 auditing standards generally accepted
in the United States of America. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001
and 2000 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.


DELOITTE & TOUCHE LLP

Hickory, North Carolina
January 16, 2002


                                                                              20
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
================================================================================

<TABLE>
<CAPTION>
ASSETS                                                                             2002              2001
                                                                              ------------      ------------

<S>                                                                           <C>               <C>
Cash and cash equivalents (Notes 1 and 12):
   Cash and due from banks                                                    $  3,796,804      $  3,805,590
     Interest-bearing deposits                                                      40,018            36,115
     Federal funds sold                                                         10,279,000         1,585,000
                                                                              ------------      ------------
       Total cash and cash equivalents                                          14,115,822         5,426,705
                                                                              ------------      ------------
  Investment securities (Notes 1, 2 and 12) - available for sale, at fair
    value (amortized cost of $12,507,535 and $6,793,328 at
    December 31, 2002 and 2001, respectively)                                   12,557,103         6,859,668
                                                                              ------------      ------------
  Loans (Notes 3 and 12)                                                        67,977,979        65,230,982
  Allowance for loan losses (Notes 1 and 4)                                     (1,020,198)         (978,467)
                                                                              ------------      ------------
  Net loans                                                                     66,957,781        64,252,515
  Premises and equipment, net (Notes 1, 5 and 8)                                 2,004,769         2,195,191
  Accrued interest receivable                                                      487,949           470,592
  Federal Home Loan Bank stock, at cost                                            229,800           229,800
  Deferred income taxes (Note 7)                                                   189,486           246,510
  Foreclosed properties                                                            792,190           752,539
  Other assets                                                                     355,214           218,645
                                                                              ------------      ------------
TOTAL                                                                         $ 97,690,114      $ 80,652,165
                                                                              ============      ============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
   Deposits (Notes 6 and 12):
     Demand                                                                   $ 16,806,011      $ 14,243,137
     NOW accounts                                                                9,064,594         8,435,579
     Money market accounts                                                      25,949,134        16,296,256
     Savings                                                                     1,887,138         1,158,818
     Time deposits of $100,000 or more                                           8,036,462        10,066,980
     Other time deposits                                                        26,735,930        21,931,581
                                                                              ------------      ------------
        Total deposits                                                          88,479,269        72,132,351
  Accrued interest payable                                                         157,460           197,220
  Other liabilities                                                                384,231           340,397
                                                                              ------------      ------------
          Total liabilities                                                     89,020,960        72,669,968
                                                                              ------------      ------------

COMMITMENTS AND CONTINGENCIES (Note 14)

SHAREHOLDERS' EQUITY (Notes 1, 9 and 10):
   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 - 957,539 and 869,721 at
     December 31, 2002 and 2001, respectively                                      957,539           869,721
   Additional paid-in capital                                                    7,120,187         7,114,771
   Retained earnings (accumulated deficit)                                         561,003           (43,014)
   Accumulated other comprehensive income  (Note 2)                                 30,425            40,719
                                                                              ------------      ------------
          Total shareholders' equity                                             8,669,154         7,982,197
                                                                              ------------      ------------
TOTAL                                                                         $ 97,690,114      $ 80,652,165
                                                                              ============      ============
</TABLE>


                                                                              21
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Years Ended December 31, 2002, 2001 and 2000
================================================================================

<TABLE>
<CAPTION>
                                                           2002           2001            2000
                                                       ----------     ----------     -----------
<S>                                                    <C>            <C>            <C>
INTEREST AND DIVIDEND INCOME:
   Interest and fees on loans                          $5,130,248     $5,734,776     $ 5,071,190
   Federal funds sold                                     122,859        151,459          59,957
   Interest-bearing deposits                               14,222          5,765           1,631
   Investments:
      Certificates of Deposit                                  --         14,513              --
      U. S. Treasuries                                         --         27,997          44,575
      U. S. Government agencies                           265,170        182,884          88,252
      Municipal bonds                                      16,109          1,930              --
      Dividends                                            12,927         15,884           7,989
                                                       ----------     ----------     -----------
        Total interest and dividend income              5,561,535      6,135,208       5,273,594
                                                       ----------     ----------     -----------

INTEREST EXPENSE:
   Time deposits of $100,000 or more                      266,777        527,051         372,642
   Other time and interest bearing-deposits             1,486,485      2,211,758       1,708,006
   Federal funds purchased                                 14,888          1,083          94,813
   Other interest expense                                   5,774          2,785              41
                                                       ----------     ----------     -----------
        Total interest expense                          1,773,924      2,742,677       2,175,502
                                                       ----------     ----------     -----------

NET INTEREST INCOME                                     3,787,611      3,392,531       3,098,092

PROVISION FOR LOAN LOSSES (Notes 1 and 4)                 877,920        550,420         454,960
                                                       ----------     ----------     -----------

NET INTEREST INCOME AFTER PROVISION FOR
   LOAN LOSSES                                          2,909,691      2,842,111       2,643,132
                                                       ----------     ----------     -----------

OTHER INCOME:
   Service charges on deposit accounts                  1,214,454        803,478         360,756
   Other service fees and commissions                     404,923        334,621         160,179
   Securities gains                                        30,889             --              --
   Other                                                   26,980         49,069          11,640
                                                       ----------     ----------     -----------
      Total other income                                1,677,246      1,187,168         532,575
                                                       ----------     ----------     -----------

OTHER EXPENSES:
   Salaries and wages                                   1,290,450      1,181,512       1,037,525
   Employee benefits                                      216,269        245,217         171,931
   Occupancy expense, net                                 184,251        159,735         138,513
   Equipment rentals, depreciation and maintenance        247,477        259,628         232,735
   Supplies                                               207,230        175,964         144,597
   Professional fees                                      783,814        627,778         587,060
   Marketing                                              118,903        143,782         183,418
   Legal settlement                                       173,750             --              --
   Other                                                  262,555        201,033          52,800
                                                       ----------     ----------     -----------
      Total other expenses                              3,484,699      2,994,649       2,548,579
                                                       ----------     ----------     -----------

INCOME BEFORE INCOME TAX
   PROVISION (BENEFIT)                                  1,102,238      1,034,630         627,128

INCOME TAX PROVISION (BENEFIT)                            410,885        434,030        (320,154)
                                                       ----------     ----------     -----------

NET INCOME                                             $  691,353     $  600,600     $   947,282
                                                       ----------     ----------     -----------
</TABLE>


                                                                              22
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Years Ended December 31, 2002, 2001 and 2000
================================================================================

<TABLE>
<CAPTION>
                                                           2002           2001           2000
                                                        ---------      ---------      ---------
<S>                                                     <C>            <C>            <C>
OTHER COMPREHENSIVE INCOME BEFORE TAX -
   Unrealized holding gains on securities available
   for sale                                                14,118         63,338          8,930
   Tax effect                                              (5,452)       (24,461)        (3,449)
                                                        ---------      ---------      ---------
   Unrealized holding gains on securities available
    for sale, net of tax                                    8,666         38,877          5,481

   Reclassification adjustment for realized gains         (30,889)            --             --
   Tax effect                                              11,929             --             --
                                                        ---------      ---------      ---------
   Reclassification adjustment for realized gains,
   net of tax                                             (18,960)            --             --
OTHER COMPREHENSIVE INCOME (LOSS) NET
   OF TAX                                                 (10,294)        38,877          5,481
                                                        ---------      ---------      ---------

COMPREHENSIVE INCOME                                    $ 681,059      $ 639,477      $ 952,763
                                                        =========      =========      =========

BASIC INCOME PER SHARE                                  $     .72      $     .65      $    1.24
                                                        =========      =========      =========

DILUTED INCOME PER SHARE                                $     .71      $     .65      $    1.24
                                                        =========      =========      =========
</TABLE>


                                                                              23
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended December 31, 2002, 2001 and 2000
================================================================================

<TABLE>
<CAPTION>
                                                                                                         Accumulated       Total
                                                                                         Retained          Other       Shareholders'
                                                                        Additional        Earnings         Compre-        Equity
                                                    Common Stock         Paid-In        (Accumulated       hensive       (Notes 1
                                               Shares       Amount       Capital          Deficit)         Income         (and 9)
                                               -------     --------     -----------      -----------     -----------   ------------
<S>                                            <C>         <C>          <C>              <C>              <C>           <C>
BALANCE, DECEMBER 31, 1999                     633,298     $633,298     $ 6,129,636      $(1,590,896)     $ (3,639)     $ 5,168,399
  Net unrealized gains on
    securities available for sale                   --           --              --               --         5,481            5,481
  Net income                                        --           --              --          947,282            --          947,282
                                               -------     --------     -----------      -----------      --------      -----------
BALANCE, DECEMBER 31, 2000                     633,298      633,298       6,129,636         (643,614)        1,842        6,121,162
  Net unrealized gains on
    securities available for sale                   --           --              --               --        38,877           38,877
  Secondary stock offering                     157,397      157,397       1,064,513               --            --        1,221,910
  Stock dividend                                79,026       79,026         (79,026)              --            --               --
  Cash paid in lieu of fractional shares            --           --            (352)              --            --             (352)
  Net income                                        --           --              --          600,600            --          600,600
                                               -------     --------     -----------      -----------      --------      -----------
BALANCE, DECEMBER 31, 2001                     869,721      869,721       7,114,771          (43,014)       40,719        7,982,197
  Net unrealized losses
    securities available for sale                   --           --              --               --       (10,294)         (10,294)
  Issuance of common stock                         800          800           5,416               --            --            6,216
  Stock dividend                                87,018       87,018                          (87,018)           --               --
  Cash paid in lieu of fractional shares            --           --              --             (318)           --             (318)
  Net income                                        --           --              --          691,353            --          691,353
                                               -------     --------     -----------      -----------      --------      -----------
BALANCE, DECEMBER 31, 2002                     957,539     $957,539     $ 7,120,187      $   561,003      $ 30,425      $ 8,669,154
                                               =======     ========     ===========      ===========      ========      ===========
</TABLE>


                                                                              24
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
================================================================================

<TABLE>
<CAPTION>
                                                                   2002               2001               2000
                                                               ------------       ------------       ------------
<S>                                                            <C>                <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income                                                  $    691,353       $    600,600       $    947,282
   Adjustments to reconcile net income (loss) to net cash
      provided by (used in) operating activities:
      Depreciation                                                  276,075            284,741            256,538
      Provision for loan loss                                       877,920            550,420            454,960
      Premium amortization and discount accretion, net                7,453             (2,826)           (22,033)
      Deferred income tax provision (benefit)                        63,502            188,959           (329,691)
      (Gain) loss on sales of foreclosed properties                  27,510             (3,401)                --
      Loss on sales of premises and equipment                         4,190                 --                 --
      Gains on sale of securities                                   (30,889)                --                 --
      Increase in accrued interest receivable                       (17,357)           (37,198)          (213,243)
      Increase (decrease) in accrued interest payable               (39,760)           (87,844)           125,915
      Increase in other assets                                      (62,244)           (66,430)           (91,092)
      Decrease in other liabilities                                  43,834             87,188            133,653
      Permanent write-down of other asset                             8,675                 --                 --
      Loss on uninsured deposits                                     67,000                 --                 --
                                                               ------------       ------------       ------------
        Net cash provided by operating activities                 1,917,262          1,514,209          1,262,289
                                                               ------------       ------------       ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of securities available for sale                   (15,875,486)        (7,520,895)        (2,010,234)
   Maturities of securities available for sale                    8,725,000          2,750,000          2,521,000
   Net increase in loans                                         (3,926,334)        (5,746,475)       (25,943,969)
   Proceeds from the sales of foreclosed properties                 275,987             22,000                 --
   Proceeds from sales of securities                              1,309,715                 --                 --
   Net expenditures on foreclosed properties                             --           (406,673)                --
   Additions to premises and equipment                              (89,843)           (47,397)          (233,566)
   Purchases of Federal Home Loan Bank stock                             --             (4,800)          (166,900)
                                                               ------------       ------------       ------------
      Net cash used in investing activities                      (9,580,961)       (10,954,240)       (25,833,669)
                                                               ------------       ------------       ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net increase in demand deposits, NOW accounts and
      savings accounts                                           13,573,087          8,776,560         12,214,951
   Net increase in certificates of deposits                       2,773,831            153,205         13,066,655
   Cash paid for fractional shares                                     (318)              (352)                --
   Issuance of common stock                                           6,216          1,221,910                 --
   Common stock subscriptions                                            --           (328,396)           328,396
                                                               ------------       ------------       ------------
      Net cash provided by financing activities                  16,352,816          9,822,927         25,610,002
                                                               ------------       ------------       ------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                         8,689,117            382,896          1,038,622

CASH AND CASH EQUIVALENTS:
   Beginning of year                                              5,426,705          5,043,809          4,005,187
                                                               ------------       ------------       ------------

   End of year                                                 $ 14,115,822       $  5,426,705       $  5,043,809
                                                               ============       ============       ============

SUPPLEMENTAL DISCLOSURE:
   Cash paid for interest                                      $  1,813,684       $  2,830,521       $  2,049,587
                                                               ============       ============       ============
   Cash paid for income taxes                                  $    480,588       $    208,545       $      7,600
                                                               ============       ============       ============

NONCASH TRANSACTIONS:
   Loans transferred to foreclosed properties                  $    343,148       $    364,465       $         --
                                                               ============       ============       ============
   Investments transferred to other assets                     $     83,000       $         --       $         --
                                                               ============       ============       ============
</TABLE>


                                                                              25
<PAGE>

WESTSTAR FINANCIAL SERVICES CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2002, 2001 and 2000
================================================================================

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      Organization - Weststar Financial Services Corporation is a holding
      company with one subsidiary, 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 of
      Asheville were exchanged for common shares of Weststar Financial Services
      Corporation on April 29, 2000.

      Basis of Presentation - The consolidated financial statements include the
      accounts of Weststar Financial Services Corporation and its wholly owned
      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.

      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


                                                                              26
<PAGE>

      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 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.

      At December 31, 2002, 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>
                                                                        2002             2001
<S>                                                                 <C>              <C>
      Net income as reported                                        $   691,353      $   600,600
      Less:  Total stock-based employee compensation expense
        determined under fair value method for all awards, net
        of related tax effects                                          241,749          467,238
                                                                    -----------      -----------
      Pro forma net income                                          $   449,604      $   133,362
                                                                    ===========      ===========

      Net income per share:
        As reported:
          Basic                                                     $      0.72      $      0.65
                                                                    ===========      ===========
          Diluted                                                   $      0.71      $      0.65
                                                                    ===========      ===========
        Pro forma:
          Basic                                                     $      0.47      $      0.14
                                                                    ===========      ===========
          Diluted                                                   $      0.46      $      0.14
                                                                    ===========      ===========
</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 assets.

      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


                                                                              27
<PAGE>

      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.

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

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

      Use of Estimates - The preparation of financial statements in conformity
      with accounting principles generally accepted in the United States of
      America requires management to make estimates and assumptions that affect
      the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements
      and the reported amounts of revenues and expenses during the reporting
      period. Actual results could differ from those estimates. Material
      estimates that are particularly susceptible to significant change in the
      near term relate to the determination of the allowance for loan losses.

      Net Income Per Share - Basic and diluted net income per common share has
      been computed using the weighted average number of shares of common stock
      outstanding during the year (957,233 shares in 2002, 925,907 shares in
      2001 and 696,628 shares in 2000). There were 22,783 dilutive securities
      during 2002 and none during 2001 and 2000. During 2002, there were no
      shares excluded due to antidilution. During 2001, there were 153,052
      potentially dilutive shares not included because the effect was
      antidilutive.

      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.

      New Accounting Standards - In November 2002, the Financial Accounting
      Standard Board ("FASB") issued FASB Interpretation No. 45, Guarantor's
      Accounting and Disclosure Requirements for Guarantees, Including Indirect
      Guarantees of Indebtedness of Others (FIN 45). FIN 45 requires a liability
      to be recognized at the time a company issues a guarantee for the fair
      value of the obligations assumed under certain guarantee agreements.
      Additional disclosures about guarantee agreements are also required in the
      interim and annual financial statements. The disclosure provisions of FIN
      45 are effective for the Company on December 31, 2002. The provisions for
      initial recognition and measurement of guarantee agreements are effective
      on a prospective basis for guarantees that are issued or modified after
      December 31, 2002. The Company is in the process of assessing the impact
      of FIN 45 on its consolidated financial statements.

      In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
      Compensation - Transition and Disclosure (Statement 148). Statement 148
      amends SFAS No. 123, Accounting for Stock-Based Compensation (Statement
      123), to provide alternative methods of transition for a voluntary change
      to the fair value based method of accounting for stock-based employee
      compensation. In addition, this Statement amends the disclosure
      requirements of Statement 123 to require prominent disclosures in both
      annual and interim financial statements about the method of accounting for
      stock-based employee compensation and the effect of the method used on
      reported results. Statement 148 is effective for financial statements for
      fiscal years ending after December 15, 2002. Early application of the
      disclosure provisions is encouraged. The Company continues to account for
      its stock-based compensation in accordance with APB 25 and has adopted the
      disclosure provisions of Statement 148 effective for all periods presented
      herein.

      Reclassifications - Certain amounts in the prior year's financial
      statements have been reclassified to conform to the 2002 presentation. The
      reclassifications had no effect on net income or stockholders' equity as
      previously recorded.


                                                                              28
<PAGE>

2.    INVESTMENT SECURITIES

      The amortized cost, gross unrealized gains and losses and fair values of
      investment securities at December 31, 2002 and 2001 are as follows:

      Available-for-sale securities consist of the following at December 31,
      2002:

<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                     $10,002,843       $    43,074       $        --        $10,045,917
      N.C. Municipal bond due -
        Within 1 to 5 years                         259,113            10,842                --            269,955
                                                -----------       -----------       -----------        -----------
           Total due with in 1 to 5 years        10,261,956            53,916                --         10,315,872

      U.S. Government agencies due -
        Within 5 to 10 years                      1,521,499                --                --          1,521,499
      N.C. Municipal bonds due -
        Within 5 to 10 years                        724,080             4,924            (9,272)           719,732
                                                -----------       -----------       -----------        -----------
           Total due within 5 to 10 years         2,245,579             4,924            (9,272)         2,241,231
                                                -----------       -----------       -----------        -----------

               Total at December 31, 2002       $12,507,535       $    58,840       $    (9,272)       $12,557,103
                                                ===========       ===========       ===========        ===========
</TABLE>

      Available-for-sale securities consist of the following at December 31,
      2001:

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

      Certificates of deposit due -
        Within 1 year                           $   750,000       $        --       $        --        $   750,000
      U.S. Government agencies due -
        Within 1 to 5 years                       5,782,333            79,230            (6,726)         5,854,837
      N.C. Municipal bond due -
        Within 5 to 10 years                        260,995                --            (6,164)           254,831
                                                -----------       -----------       -----------        -----------

      Total at December 31, 2001                $ 6,793,328       $    79,230       $   (12,890)       $ 6,859,668
                                                ===========       ===========       ===========        ===========
</TABLE>

      For the year ended December 31, 2002, proceeds from the sales of
      investment securities available for sale totaled $1,309,715. Gross
      realized gains from the sales in 2002 amounted to $30,889. There were no
      sales during 2001 or 2000.


                                                                              29
<PAGE>

3.    LOANS

      Loans at December 31, 2002 and 2001 classified by type are as follows:

                                                     2002            2001
                                                ------------    ------------
      Real estate:
       Construction                             $ 12,334,543    $ 11,139,588
       Mortgage                                   37,214,677      35,189,010
       Commercial, financial and agricultural     16,367,306      16,512,498
       Consumer                                    2,188,840       2,553,710
                                                ------------    ------------
           Subtotal                               68,105,366      65,394,806
       Net deferred loan origination fees           (127,387)       (163,824)
                                                ------------    ------------

      Total                                     $ 67,977,979    $ 65,230,982
                                                ============    ============

      Nonperforming assets at December 31, 2002 and 2001:

                                                     2002            2001
                                                ------------    ------------

      Nonaccrual loans                          $  1,079,750    $  1,050,813
      Other real estate owned                        724,986         733,941
      Repossessions                                   67,204          18,598
                                                ------------    ------------

      Total                                     $  1,871,940    $  1,803,352
                                                ============    ============

      No loans have been restructured during 2002, 2001 or 2000. Loans totaling
      $2,160,936 and $605,006 were considered impaired as of December 31, 2002
      and 2001, respectively. Impaired loans of $2,160,936 and $605,006 had
      related allowances for loan losses of $115,865 and $68,353 at December 31,
      2002 and 2001, respectively. The average recorded investment in impaired
      loans during the years ended December 31, 2002 and 2001 was $1,085,215 and
      $824,674, respectively. For the years ended December 31, 2002, 2001 and
      2000, the Company recognized interest income from impaired loans of
      approximately $45,000, $40,272 and $27,993, 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, 2001 directors' direct and indirect
      indebtedness to the company aggregated $258,352. During 2002 $370,080 in
      new loans were made and repayments of $187,880 were collected, resulting
      in a balance of $440,552 at December 31, 2002. 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,
      2002, 2001 and 2000 are as follows:

                                         2002           2001           2000
                                     -----------    -----------    -----------

      Balance at beginning of year   $   978,467    $   871,706    $   528,808
      Provision for loan losses          877,920        550,420        454,960
      Charge-offs                       (889,565)      (490,600)      (112,062)
      Recoveries                          53,376         46,941             --
                                     -----------    -----------    -----------

      Balance at end of year         $ 1,020,198    $   978,467    $   871,706
                                     ===========    ===========    ===========


                                                                              30
<PAGE>

5.    PREMISES AND EQUIPMENT

      Premises and equipment at December 31, 2002 and 2001 are as follows:

                                                          2002          2001
                                                      -----------   -----------

      Land                                            $   113,900   $   113,900
      Land improvements                                   121,873       121,873
      Building and improvements                         1,510,334     1,507,329
      Furniture and equipment                             952,885       914,810
      Leasehold improvements                              377,061       374,164
      Construction in progress                             15,529         3,004
                                                      -----------   -----------
             Total                                      3,091,582     3,035,080
      Less accumulated depreciation and amortization   (1,086,813)     (839,889)
                                                      -----------   -----------

      Total                                           $ 2,004,769   $ 2,195,191
                                                      ===========   ===========

      Depreciation expense for the years ended December 31, 2002, 2001 and 2000
      amounted to $276,075, 284,741 and $256,538, respectively

6.    DEPOSIT ACCOUNTS

      At December 31, 2002, the scheduled maturities of time deposits are as
      follows:

      2003                                                           $34,744,059
      2004                                                               317,241
      2005                                                               446,572
      2006                                                               264,520
                                                                     -----------

      Total                                                          $34,772,392
                                                                     ===========

7.    INCOME TAXES

      The components of the income tax provision (benefit) for the years ended
      December 31, 2002, 2001 and 2000 follow:

<TABLE>
<CAPTION>
                                                           2002         2001        2000
                                                        ---------    ---------   ---------
<S>                                                     <C>          <C>         <C>
      Income tax benefit:
        Current                                         $ 347,383    $ 245,071   $   9,537
        Deferred                                           63,502      188,959     213,309
                                                        ---------    ---------   ---------
      Provision for income tax expense before
        adjustment to deferred tax asset valuation
        allowance                                         410,885      434,030     222,846
      Decrease in valuation allowance                          --           --    (543,000)
                                                        ---------    ---------   ---------

      Total                                             $ 410,885    $ 434,030   $(320,154)
                                                        =========    =========   =========
</TABLE>

      A reconciliation of reported income tax provision (benefit) for the
      periods ended December 31, 2002, 2001 and 2000 to the amount of tax
      provision (benefit) computed by multiplying the loss before income taxes
      by the statutory federal income tax rate of 34% follows:

<TABLE>
<CAPTION>
                                                           2002         2001        2000
                                                        ---------    ---------   ---------
<S>                                                     <C>          <C>         <C>
      Income tax provision at statutory rate            $ 374,754    $ 351,774   $ 213,224
      Increase (decrease) resulting from:
        State income taxes net of federal tax benefit      50,151       38,966      30,551
        Decrease in valuation allowance                                           (543,000)
        Other                                             (14,030)      43,290     (20,929)
                                                        ---------    ---------   ---------

      Tax provision (benefit) reported                  $ 410,885    $ 434,030   $(320,154)
                                                        =========    =========   =========
</TABLE>


                                                                              31
<PAGE>

      The tax effect of the cumulative temporary differences and carryforwards
      that gave rise to the deferred tax assets and liabilities at December 31,
      2002 and 2001 are as follows:

<TABLE>
<CAPTION>
      2002                                                Assets    Liabilities     Total
                                                         ---------  -----------   ---------
<S>                                                      <C>         <C>          <C>
      Allowance for loan losses                          $ 247,621   $      --    $ 247,621
      Unrealized gain on securities available for sale          --     (19,143)     (19,143)
      Depreciation                                           3,884          --        3,884
      Prepaid expenses                                          --     (24,571)     (24,571)
      Deferred compensation                                 35,087          --       35,087
      Other, net                                                --     (53,392)     (53,392)
                                                         ---------   ---------    ---------

      Total                                              $ 286,592   $ (97,106)   $ 189,486
                                                         =========   =========    =========

<CAPTION>
      2001                                                Assets    Liabilities     Total
                                                         ---------  -----------   ---------
<S>                                                      <C>         <C>          <C>
      Allowance for loan losses                          $ 317,600   $      --    $ 317,600
      Unrealized gain on securities available for sale          --     (25,621)     (25,621)
      Depreciation                                              --     (20,053)     (20,053)
      Capitalized start-up expenditures                     21,445          --       21,445
      Capitalized organization costs                        10,486          --       10,486
      Prepaid expenses                                          --     (35,985)     (35,985)
      Deferred compensation                                 22,263          --       22,263
      Other, net                                                --     (43,625)     (43,625)
                                                         ---------   ---------    ---------

      Total                                              $ 371,794   $(125,284)   $ 246,510
                                                         =========   =========    =========
</TABLE>

      During 2000, the Company recognized an income tax benefit of $320,154
      primarily related to the release of a valuation allowance of $543,000
      previously recorded against deferred tax assets. At December 31, 1999,
      management believed the realization of the deferred tax asset was not
      reasonably assured. Based upon the taxable income being generated in 2000
      and management's expectations of continued profitability, management
      determined the realization of the deferred tax asset was more likely than
      not. The valuation allowance was reversed in the first quarter of 2000,
      thereby providing a deferred tax benefit.

8.    LEASES

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

                            2003                              $37,011
                            2004                               33,750
                            2005                               27,000
                                                              -------

                            Total                             $97,761
                                                              =======

      The land for a branch office is leased from a partnership that includes a
      director of the Company. The annual rental is $30,000. Rental expense
      charged to operations under all operating lease agreements was $43,724,
      $50,721, and $42,555 for the years ended December 31, 2002, 2001 and 2000,
      respectively.

9.    SHAREHOLDERS' EQUITY

      In connection with the initial public offering of The Bank of Asheville
      common stock in 1997, the Bank issued 60,360 stock purchase warrants to
      certain common stockholders. Each warrant was convertible into one share
      of the Bank's common stock at an exercise price of $11.00 per share. The
      warrants were exercisable one year from issuance and expired five years
      from issuance. During 1999, 25,741 stock purchase warrants were exercised
      and the remaining stock purchase warrants were cancelled by the Bank.


                                                                              32
<PAGE>

      On March 1, 2001, 157,397 shares of the Company's $1.00 par value common
      stock were issued in connection with a secondary stock offering. At
      December 31, 2000, $328,396 in subscriptions had been received. Proceeds
      generated from the sale of these shares were used to enhance capital and
      liquidity positions, fund expansion plans, and for general corporate
      purposes.

      On October 16, 2001, the Company's Board of Directors approved a 10% stock
      dividend of the company's common stock. As a result, shareholders received
      one additional share of common stock on November 13, 2001 for each ten
      shares held as of the record date of October 30 2001.

      On November 19, 2002, the Company's Board of Directors approved a 10%
      stock dividend of the Company's common stock. As a result, shareholders
      received one additional share of common stock on December 13, 2002 for
      each ten shares held as of the record date of November 30, 2002.

      All per share amounts have been retroactively restated to reflect the
      effect of these stock dividends.

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 76,230 and 77,076, respectively. Of the maximum
      number of shares available for grant, 76,230 were outstanding under the
      Nonstatutory Plan and 75,410 were outstanding under the Incentive Plan at
      December 31, 2002. Option prices for both plans are established at market
      value, which was $7.06, 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 year ended December
      31, 2002 follows:

                                                                     Exercise
                                                                      Price
                                                      Shares        Per Share
                                                      ------        ---------
      Nonstatutory Plan

      Outstanding, December 31, 2001                   76,230        $  7.06
                                                      -------

      Outstanding, December 31, 2002                   76,230        $  7.06
                                                      =======

      Incentive Plan

      Outstanding, December 31, 2001                   76,824        $  7.06
        Exercised                                        (880)          7.06
        Canceled                                         (534)          7.06
                                                      -------

      Outstanding, December 31, 2002                   75,410        $  7.06
                                                      =======


                                                                              33
<PAGE>

<TABLE>
<CAPTION>
                                                  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
           $       7.06                    76,230             8.0     $       7.06          58,190     $       7.06

      Incentive Plan
           $       7.06                    75,410             8.5     $       7.06          29,633     $       7.06
</TABLE>

      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:

      Net income:                                    2002           2001
        As reported                             $   691,353    $   600,600
        Pro forma                               $   449,604    $   133,362

      Net income per share:
        As reported:
          Basic                                 $      0.72    $      0.65
          Diluted                               $      0.71    $      0.65
        Pro forma:
          Basic                                 $      0.47    $      0.14
          Diluted                               $      0.46    $      0.14

      In estimating the compensation expense associated with the fair value
      method, using The Black Scholes Option Pricing Model, the following
      assumptions were used:

      Option value, aggregate                          $    --     $  6.71
      Risk-free rate                                                  5.12%
      Average expected term (years)                                   9.06
      Expected volatility                                           123.06%
      Expected dividend yield                                           --

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 $29,862, $33,482 and $34,192 for the years
      ended December 31, 2002, 2001 and 2000, 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 is being accrued
      over the vesting period defined in the agreement. The related expense was
      $36,600 and $27,810 for 2002 and 2001, 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, 2002 was $43,693.


                                                                              34
<PAGE>

12.   BORROWINGS

      The Company has $4,900,000 available in overnight federal fund lines of
      credit and an approximately $10,000,000 open line of credit with the
      Federal Home Loan Bank (FHLB). There were no advances from the FHLB during
      2002. The Company intends to retain this line of credit for cash needs in
      the future. There were no federal funds purchased at December 31, 2002.
      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
      $711,200 and 2.09%, respectively. The maximum amount outstanding at any
      month-end during the year was $3,000,000.

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 primary source of funds for payment of dividends by Weststar Financial
      Services Corporation is dividends received from its subsidiary, The Bank
      of Asheville. 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, 2002, the Bank
      had undivided profits of $707,801, none of which were available for the
      payment of dividends due to regulatory restrictions.

      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, 2001, 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, 2002, 2001 and 2000, 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, 2002:
       Total Capital (to Risk
       Weighted Assets)
       Consolidated              $9,510         13.65%         $5,572          8.00%          $6,965         10.00%
       Bank                       9,421         13.53%          5,571          8.00%           6,964         10.00%
       Tier I Capital (to Risk
       Weighted Assets)
       Consolidated               8,638         12.40%          2,786          4.00%           4,179          6.00%
       Bank                       8,549         12.28%          2,786          4.00%           4,178          6.00%
     Tier I Capital (to
       Average Assets)
       Consolidated               8,638          9.17%          3,767          4.00%           4,709          5.00%
       Bank                       8,549          9.07%          3,767          4.00%           4,708          5.00%
</TABLE>


                                                                              35
<PAGE>

<TABLE>
<S>                              <C>            <C>            <C>             <C>            <C>            <C>
     As of December 31, 2001:
       Total Capital (to Risk
       Weighted Assets)
       Consolidated              $8,735         13.79%         $5,068          8.00%          $6,335         10.00%
       Bank                       8,635         13.63%          5,068          8.00%           6,335         10.00%
     Tier I Capital (to Risk
       Weighted Assets)
       Consolidated               7,941         12.53%          2,534          4.00%           3,801          6.00%
       Bank                       7,841         12.38%          2,534          4.00%           3,801          6.00%
     Tier I Capital (to
       Average Assets)
       Consolidated               7,941          9.77%          3,252          4.00%           4,064          5.00%
       Bank                       7,841          9.68%          3,241          4.00%           4,052          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, 2002 and 2001 was
      $15,056,513 and $19,280,406, 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.

15.   FAIR VALUE OF FINANCIAL INSTRUMENTS

      The fair value estimates presented herein are based on pertinent
      information available to management as of December 31, 2002. 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.


                                                                              36
<PAGE>

<TABLE>
<CAPTION>
                                                             2002                               2001
                                                 ---------------------------          ----------------------------
                                                 Carrying          Estimated          Carrying           Estimated
                                                  amount          fair value           amount           fair value
                                                 --------         ----------          -------           ----------
                                                                           (In thousands)
<S>                                               <C>               <C>                <C>                <C>
      Assets:
        Cash and cash equivalents                 $14,116           $14,116            $ 5,427            $ 5,427
        Investment securities                      12,557            12,557              6,860              6,860
        Federal Home Loan Bank stock                  230               230                230                230
        Loans                                      67,978            69,637             65,231             66,184
        Interest receivable                           488               488                471                471

      Liabilities:
        Demand deposits, NOW accounts,
          money market accounts, savings           53,707            53,707             40,134             40,134
        Time deposits                              34,772            34,895             31,999             32,377
        Interest payable                              157               157                197                197

      Off-balance-sheet - commitments to
        extend credit                                  --            15,057                 --             19,280
</TABLE>

Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, "Disclosures About Fair Value of Financial Instruments" (SFAS
No. 107), 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 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.

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, 2002 and 2001:


                                                                              37
<PAGE>

                            Condensed Balance Sheets
                           December 31, 2002 and 2001

                                                          2002           2001
                                                       ----------     ----------

Assets
   Cash and due from banks                             $   81,233     $  104,587
   Investment in subsidiaries, at equity                8,580,117      7,882,610
   Other assets                                            12,587             --
                                                       ----------     ----------

Total assets                                           $8,673,937     $7,987,197
                                                       ==========     ==========

Liabilities and Stockholders' Equity
   Liabilities:
     Other liabilities                                 $    4,783     $    5,000
   Stockholders' equity                                 8,669,154      7,982,197
                                                       ----------     ----------
Total liabilities and stockholders' equity             $8,673,937     $7,987,197
                                                       ==========     ==========

                       Condensed Statements of Operations
                  Years Ended December 31, 2002, 2001 and 2000

                                            2002           2001           2000
                                         ---------      ---------      ---------

Equity in undistributed income           $ 707,801      $ 624,006      $ 946,127
Income (expense), net                      (16,448)       (23,406)         1,155
                                         ---------      ---------      ---------
Net income                               $ 691,353      $ 600,600      $ 947,282
                                         =========      =========      =========

                       Condensed Statements of Cash Flows
                     Years Ended December 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                        2002           2001           2000
                                                   -----------    -----------    -----------
<S>                                                <C>            <C>            <C>
Cash Flows from Operating Activities:
   Net income                                      $   691,353    $   600,600    $   947,282
   Noncash items included in net income:
   Equity in earnings of subsidiary                   (707,801)      (624,006)      (946,127)
   Increase in accrued interest receivable                  --          1,155         (1,155)
   Increase in other assets                            (12,587)            --             --
   Increase in other liabilities                          (217)         5,000             --
                                                   -----------    -----------    -----------
     Net cash used in operating activities             (29,252)       (17,251)             0
                                                   -----------    -----------    -----------

Cash Flows from Investing Activities:
   Investment in subsidiary                                 --     (1,099,720)            --
                                                   -----------    -----------    -----------
     Net cash used in investing activities                   0     (1,099,720)             0
                                                   -----------    -----------    -----------

Cash Flows from Financing Activities:
     Cash paid for fractional shares                      (318)          (352)            --
     Exercise of stock options                           6,216             --             --
     Issuance of common stock                                0      1,221,910             --
     Common stock subscriptions                              0       (328,396)       328,396
                                                   -----------    -----------    -----------
       Net cash provided by financing activities         5,898        893,162        328,396
                                                   -----------    -----------    -----------

Net increase (decrease) in cash                        (23,354)      (223,809)       328,396
   Beginning                                           104,587        328,396              0
                                                   -----------    -----------    -----------
   Ending                                          $    81,233    $   104,587    $   328,396
                                                   ===========    ===========    ===========
</TABLE>


                                                                              38
<PAGE>

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

The Registrant's former accountant, Deloitte & Touche, LLP, was dismissed on
April 16, 2002. The former accountant's reports for the past two years and the
interim period between December 31, 2001 and April 17, 2002 did not contain an
adverse opinion or disclaimer of opinion, and was not modified as to
uncertainty, audit scope, or accounting principles. The decision to change
accountants was recommended by the Registrant's Audit Committee and approved by
the Registrant's Board of Directors. During the past two fiscal years and the
interim period between December 31, 2001 and April 17, 2002, there were no
disagreements with the former accountant on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedure,
which, if not resolved to the former accountant's satisfaction, would have
caused it to make reference to the subject matter of the disagreements in
connection with its report.

PART III

ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

See Proxy Statement pages 5 - 6 and 8.

ITEM 10: EXECUTIVE COMPENSATION

See Proxy Statement pages 8 - 10.

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 76,230 and 77,076,
respectively. Of the maximum number of shares available for grant, 76,230 were
outstanding under the Nonstatutory Plan and 75,410 were outstanding under the
Incentive Plan at December 31, 2002. Option prices for both plans are
established at market value, which was $7.06, on the dates granted by the Board
of Directors. The following chart contains details of the grants:

<TABLE>
<CAPTION>
              Plan Category      Number of securities           Weighted-average      Number of securities
                                    to be issued upon          exercise price of       remaining available
                                          exercise of       outstanding options,       for future issuance
                                 outstanding options,        warrants and rights              under equity
                                                                                        compensation plans
                                                                                     (excluding securities
                                                                                    reflected in column (a))
                                                  (a)                        (b)                       (c)
<S>                             <C>                                        <C>                        <C>
        Equity compensation
          plans approved by     Nonstatutory - 76,230                      $7.06                      None
           security holders        Incentive - 75,410                      $7.06                       786

        Equity compensation
         plans not approved
        by security holders                      None                       None                      None

                      Total                   151,640                      $7.06                       786
</TABLE>

See Proxy Statement page 3 for additional information regarding executive
compensation.

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

See Proxy Statement pages 6 and 10 - 11.


                                                                              39
<PAGE>

ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K

(a) 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**

99 2003 Proxy Statement***

ITEM 14: CONTROLS AND PROCEDURES

Within the 90 days prior to the date of this report, the Company carried out an
evaluation under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures pursuant to Securities Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in the Company's periodic SEC
Filings. There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation.

*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 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.

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


                                                                              40
<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 18, 2003


                                                                              41
<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 18, 2003
----------------------------
W. Edward Anderson
Director


/s/M. David Cogburn, M.D.                          February 18, 2003
----------------------------
M. David Cogburn, M.D.
Director


/s/G. Gordon Greenwood                             February 18, 2003
----------------------------
G. Gordon Greenwood
President & Chief Executive Officer


/s/Patricia P. Grimes                              February 18, 2003
----------------------------
Pat Grimes
Director


/s/Darryl J. Hart                                  February 18, 2003
----------------------------
Darryl J. Hart
Director


/s/Carol L. King                                   February 18, 2003
----------------------------
Carol L. King
Director


/s/Stephen L. Pignatiello                          February 18, 2003
----------------------------
Stephen L. Pignatiello
Director


/s/Kent W. Salisbury, M.D.                         February 18, 2003
----------------------------
Kent W. Salisbury, M.D.
Director


/s/Laura A. Webb                                   February 18, 2003
----------------------------
Laura A. Webb
Director


/s/David N. Wilcox                                 February 18, 2003
----------------------------
David N. Wilcox
Director


                                                                              42
<PAGE>

                                  EXHIBIT INDEX

        Exhibit
         Number      Exhibit                                         Page Number
         ------      -------                                         -----------

          3(i)       Articles of Incorporation                            *

         3(ii)       Bylaws                                               *

         10(i)       Employment Agreement of G. Gordon Greenwood          *

         10(ii)      Employment Agreement of Randall C. Hall              *

        10(iii)      401 (k) Savings Plan                                 *

        10(iv)       Incentive Stock Option Plan                          *

         10(v)       Nonstatutory Stock Option Plan                       *

           99        2003 Proxy Statement                                **

*     Incorporated by reference.

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


                                                                              43
<PAGE>

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Randall C. Hall, certify that:

      1.    I have reviewed this annual report on Form 10-KSB of Weststar
            Financial Services Corporation;

      2.    Based on my knowledge, this report does not contain any untrue
            statement of material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this report, fairly present in all material
            respects the financial condition, results of operations and cash
            flows of the registrant as of, and for, the periods presented in
            this report;

      4.    The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act 13a-14 and 15-d-14) for the registrant and
            have:

                  a.    designed such disclosure controls and procedures to
                        ensure that material information relating to the
                        registrant, including its consolidated subsidiaries, is
                        made known to us by others within those entities,
                        particularly during the period in which this report is
                        being prepared;

                  b.    evaluated the effectiveness of the registrant's
                        disclosure controls and procedures as of a date within
                        90 days prior to the filing date of this report (the
                        "Evaluation Date"); and

                  c.    presented in this report our conclusions about the
                        effectiveness of the disclosure controls and procedures
                        based on our evaluation as of the Evaluation Date;

      5.    The registrant's other certifying officer and I have disclosed,
            based upon our most recent evaluation, to the registrant's auditors
            and the audit committee of the registrant's board of directors:

                  a.    all significant deficiencies in the design or operation
                        of internal controls which could adversely affect the
                        registrant's ability to record, process, summarize and
                        report financial data and have identified for the
                        registrant's auditors any material weaknesses in
                        internal controls; and

                  b.    any fraud, whether or not material, that involves
                        management or other employees who have a significant
                        role in the registrant's internal controls; and

      6.    The registrant's other certifying officer and I have indicated in
            this report whether there were significant changes in internal
            controls or in other factors that could significantly affect
            internal controls subsequent to the date of our most recent
            evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.


Date:   February 18, 2003               By:   /s/ Randall C. Hall
                                              ----------------------------------
                                              Randall C. Hall
                                              Executive Vice President and
                                              Chief Financial and Principal
                                              Accounting Officer


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<PAGE>

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, G. Gordon Greenwood, certify that:

      1.    I have reviewed this annual report on Form 10-KSB of Weststar
            Financial Services Corporation;

      2.    Based on my knowledge, this report does not contain any untrue
            statement of material fact or omit to state a material fact
            necessary to make the statements made, in light of the circumstances
            under which such statements were made, not misleading with respect
            to the period covered by this report;

      3.    Based on my knowledge, the financial statements, and other financial
            information included in this report, fairly present in all material
            respects the financial condition, results of operations and cash
            flows of the registrant as of, and for, the periods presented in
            this report;

      4.    The registrant's other certifying officer and I are responsible for
            establishing and maintaining disclosure controls and procedures (as
            defined in Exchange Act 13a-14 and 15-d-14) for the registrant and
            have:

                  a.    designed such disclosure controls and procedures to
                        ensure that material information relating to the
                        registrant, including its consolidated subsidiaries, is
                        made known to us by others within those entities,
                        particularly during the period in which this report is
                        being prepared;

                  b.    evaluated the effectiveness of the registrant's
                        disclosure controls and procedures as of a date within
                        90 days prior to the filing date of this report (the
                        "Evaluation Date"); and

                  c.    presented in this report our conclusions about the
                        effectiveness of the disclosure controls and procedures
                        based on our evaluation as of the Evaluation Date;

      5.    The registrant's other certifying officer and I have disclosed,
            based upon our most recent evaluation, to the registrant's auditors
            and the audit committee of the registrant's board of directors:

                  a.    all significant deficiencies in the design or operation
                        of internal controls which could adversely affect the
                        registrant's ability to record, process, summarize and
                        report financial data and have identified for the
                        registrant's auditors any material weaknesses in
                        internal controls; and

                  b.    any fraud, whether or not material, that involves
                        management or other employees who have a significant
                        role in the registrant's internal controls; and

      6.    The registrant's other certifying officer and I have indicated in
            this report whether there were significant changes in internal
            controls or in other factors that could significantly affect
            internal controls subsequent to the date of our most recent
            evaluation, including any corrective actions with regard to
            significant deficiencies and material weaknesses.


Date:   February 18, 2003           By:   /s/ G. Gordon Greenwood
                                          --------------------------------------
                                          G. Gordon Greenwood
                                          President and Chief Executive Officer


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