U.S.
      SECURITIES AND EXCHANGE COMMISSION


Washington,
      D.C. 20549




FORM
      10-KSB




ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15 (d) OF




THE
      SECURITIES EXCHANGE ACT OF 1934





FOR
      FISCAL YEAR ENDED DECEMBER 31, 2007





Commission
      File Number:   000-30515





WESTSTAR
      FINANCIAL SERVICES CORPORATION


(Name
      of
      small business issuer as specified in its charter)





NORTH
      CAROLINA


(State
      of
      Incorporation)





56-2181423


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




79
      Woodfin Place




Asheville,
      North
      Carolina  28801


(Address
      of Principal Executive Office)





(828)
      252-1735


(Registrant’s
      telephone number, including area code)





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





COMMON
      STOCK, $1.00 PAR VALUE





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





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





Check
      whether the Issuer (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.  YESýNOo





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





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





The
      Registrant’s revenues for the year ended December 31, 2007 were
      $14,430,200.





The
      aggregate market value of the voting stock held by non-affiliates of the
      Registrant at December 31, 2007 was approximately $21,715,312.





The
      number of shares of the Registrant’s Common Stock outstanding on December 31,
      2007 was 2,118,437.





Documents
      Incorporated by Reference:





PART
      III:
      Definitive Proxy Statement dated March 5, 2008 as filed pursuant to Section
      14
      of the Securities Exchange Act of 1934 for the 2007 Annual Meeting of
      Shareholders.





Transitional
      Small Business Disclosure
      Format                      Yes  o     No
ý


1
 Index


FORM
      10-KSB CROSS-REFERENCE INDEX











20082007
            ProxyForm
                10-KSB
            StatementPage
            PagePART
                IItem
                1  -  Description of
                Business
            3
            n/aItem
                2  -  Description of
                Property
            6
            n/aItem
                3  -  Legal
                Proceedings
            6
            n/aItem
                4  -  Submission of Matters to a
                Vote of Security Holders
            6
            n/aPART
                IIItem
                5  -  Market  for Common
                Equity, Related Stockholder Matters and Small Business Issuer Purchases
                of
                Equity Securities
            6
            n/aItem
                6  -  Management’s Discussion and
                Analysis
            8
            n/aItem
                7  -  Financial
                Statements
            20
            n/aItem
                  8  -  Changes in and
                  Disagreements with Accountants on Accounting andFinancial
                  Disclosure
            46
            n/aItem
                8A(T) -  Controls and
                Procedures
            46
            n/aItem
                8B -  Other Information
            46
            n/aPART
                IIIItem
                9   - Directors, Executive Officers,
                Promoters, Control Persons, and Corporate Governance; Compliance with
                Section 16(a) of the Exchange Act
            47
            5
                -
                11Item
                10 - Executive Compensation
            47
            11
                - 15Item
                11 - Security Ownership of Certain Beneficial Owners
                and Management  and Related Stockholder Matters
            47
            3-5Item
                12 - Certain Relationships and Related Transactions,
                and Director Independence
            47
            6,
                11Item
                13 - Exhibits
            48
            n/aItem
                14 - Principal Accountant Fees and
                Services
            49
            8
                -9, 15








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














2
 Index


PART
      I





ITEM
      1:  DESCRIPTION OF BUSINESS





General





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





Primary
      Market Area





The
      Registrant’s market area consists of Asheville, Buncombe County, North Carolina
      and surrounding areas.  Buncombe County is part of the Asheville
      Ranally Metropolitan area.  Asheville is the county seat and the
      industrial center of Buncombe County with a population of approximately
      72,200.  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 220,100.  Statistics are the latest
      issued by the Asheville Metro Business Research Center.





Competition





Commercial
      banking inNorth Carolinais
      extremely competitive in large part
      due to a long history of statewide branching. Registrant competes in its market
      areas with some of the largest banking organizations in the state and the
      country and other financial institutions, such as federally and state-chartered
      savings and loan institutions and credit unions, as well as consumer finance
      companies, mortgage companies and other lenders engaged in the business of
      extending credit. Many of Registrant’s competitors have broader geographic
      markets and higher lending limits than Registrant and are also able to provide
      more services and make greater use of media advertising.In Buncombe
      County as of June 30, 2007 (the latest date for which statistics are available)
      there were 85 offices of 17 different commercial and savings banks (including
      the largest banks in North Carolina), as well as offices of credit unions and
      various other entities engaged in the extension of credit; the Registrant
      accounted for 3.6% 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 the Registrant’s competitors. In addition, as a result of
      interstate banking, out-of-state commercial banks have acquiredNorth Carolinabanks,
      which has heightened the
      competition among banks inNorth Carolina.





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





Employees





The
      Bank
      currently employs 53 full-time equivalent employees.  Registrant does
      not have any officers or employees who are not also officers or employees of
      the
      Bank.  None of the Registrant’s employees are covered by a collective
      bargaining agreement.  The Registrant believes its relations with its
      employees to be good.





Regulation





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


3
 Index











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





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





DEPOSIT
      INSURANCE. As a member
      institution of the Federal Deposit Insurance Corporation (“FDIC”), the Bank’s
      deposits are insured up to a maximum of $100,000 per depositor (or $250,000
      per
      depositor for certain retirement accounts) through the Deposit Insurance Fund
      (“DIF”), administered by the FDIC, and each member institution is required to
      pay semi-annual deposit insurance premium assessments to the FDIC. The DIF
      assessment rates vary based on an institution’s capital position and other
      supervisory factors.





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





A
      banking organization’s risk-based
      capital ratios are obtained by dividing its qualifying capital by its total
      risk
      adjusted assets. The regulators measure risk-adjusted assets, which include
      off
      balance sheet items, against both total qualifying capital (the sum of Tier
      1
      capital and limited amounts of Tier 2 capital) and Tier 1 capital. “Tier 1,” or
      core capital, includes common equity, qualifying noncumulative perpetual
      preferred stock, minority interests in certain equity accounts of consolidated
      subsidiaries, less goodwill and other intangibles, subject to certain exceptions
      and restricted core capital elements, including trust preferred securities.
      “Tier 2,” or supplementary capital, includes among other things, limited-life
      preferred stock, hybrid capital instruments, mandatory convertible securities,
      qualifying subordinated debt, and the allowance for loan and lease losses,
      subject to certain limitations and less required deductions. The inclusion
      of
      elements of Tier 2 capital is subject to certain other requirements and
      limitations of the federal banking agencies. Banks and bank holding companies
      subject to the risk-based capital guidelines are required to maintain a ratio
      of
      Tier 1 capital to risk-weighted assets of at least 4% and a ratio of total
      capital to risk-weighted assets of at least 8%. The appropriate regulatory
      authority may set higher capital requirements when particular circumstances
      warrant. As of December 31, 2007, the Company was classified as
“well-capitalized” with Tier 1 and Total Risk - Based Capitalof 13.04%
      and 14.29%, respectively.





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





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


4
 Index


amount
      of profits, if any, available for
      the payment of dividends to the shareholders.





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





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





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





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





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





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





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





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





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





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





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





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





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


5
 Index


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





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





ITEM
      2: DESCRIPTION OF PROPERTY





The
      following table sets forth the location of the Registrant’s offices as of
      December 31, 2007.





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








ITEM
      3:  LEGAL PROCEEDINGS





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.





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





Not
      applicable.


PART
      II





ITEM
        5: MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND SMALL
        BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES





Market
      Summary





Weststar
      Financial Services Corporation stock is traded on the Over-The-Counter Bulletin
      Board under the symbol “WFSC.” There were 2,118,437 shares outstanding at
      December 31, 2007 owned by approximately 800 shareholders.





During
      2007, 187,197 shares of the Company’s common stock were traded.  The
      closing price of the stock on December 31, 2007 was $10.25.





The
      following table represents stock prices during the trading
      periods.


6
 Index





2007
            
            1st
            
            
            2nd
            
            
            3rd
            
            
            4thQtr.
            
            
            Qtr.
            
            
            Qtr.
            
            
            Qtr.High
            
            $
            13.40
            
            
            $
            13.76
            
            
            $
            13.50
            
            
            $
            12.44Low
            
            $
            12.04
            
            
            $
            12.12
            
            
            $
            11.07
            
            
            $
            9.25Close
            
            $
            12.40
            
            
            $
            13.25
            
            
            $
            11.95
            
            
            $
            10.252006
            
            1st
            
            
            2nd
            
            
            3rd
            
            
            4thQtr.
            
            
            Qtr.
            
            
            Qtr.
            
            
            Qtr.High
            
            $
            9.63
            
            
            $
            12.00
            
            
            $
            11.27
            
            
            $
            13.20Low
            
            $
            6.74
            
            
            $
            9.17
            
            
            $
            9.60
            
            
            $
            10.00Close
            
            $
            9.17
            
            
            $
            11.20
            
            
            $
            10.40
            
            
            $
            13.20








No
      cash
      dividends were paid in 2007 or 2006.  A 25% stock dividend effected in
      the form of a 5-for-4 stock split was paid to shareholders in June 2007, and
      a
      20% stock dividend effected in the form of a 6-for-5 stock split was paid to
      shareholders in May 2006.   Stock prices in the table above have
      been adjusted to reflect the stock dividends.





Stock
      Transfer Agent and Registrar





Registrar
      and Transfer Company


10
      Commerce Drive


Cranford,
      NJ 07016


908.497.2300
      or 800.368.5948





Shareholder
      Information





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





Annual
      Shareholders Meeting





The
      Annual Meeting of the shareholders of Registrant will be held at 3:00 p.m.,
      Tuesday, April 15, 2008, at the Renaissance Asheville Hotel, One Thomas Wolfe
      Plaza, Asheville, North Carolina.





Independent
      Auditors





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





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






7
 Index




ITEM
      6 – MANAGEMENT’S DISCUSSION AND ANALYSIS





MANAGEMENT’S
      DISCUSSION AND ANALYSIS





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





EXECUTIVE
      OVERVIEW





During
      2007, the Company focused significant attention on improving asset quality,
      asset growth and expansion within its markets.  Management emphasized
      prudent underwriting standards, expanded periodic reviews of loans of $100,000
      or more, and enhancement of its loan quality monitoring systems.  Net
      charge-offs during 2007 totaled $200,680 compared to $160,942 during
      2006.  Non-performing assets totaled $283,470 and $1,081,190 at
      December 31, 2007 and 2006, respectively.  Loans outstanding grew by
      $13,270,504 or 10.84% to $135,734,224 from December 31, 2006 to December 31,
      2007.  Management balanced loan growth through liquidity by
      maintaining 14.99% of the Company’s assets in the investment portfolio, which
      totaled $26,113,294 at December 31, 2007.





The
      Company held deposit market share in Buncombe County of approximately 3.6%
      as of
      June 30, 2007, according to the latest Federal Deposit Insurance Corporation
      statistics.  From December 31, 2006 to December 31, 2007 the Company’s
      deposits grew to $149,191,016 – an increase of 10.62%.  During 2007,
      the majority of the Company’s deposit growth originated from time-deposits; rate
      sensitive customers sought maximum yields on discretionary
      funds.  Additionally, a small segment of rate-sensitive customers
      shifted funds from lower yielding money market accounts to higher yielding
      time-deposits.  The impact along with an increase in market rates
      caused the Company’s cost of deposits to increase from 3.6% to 4.1%





The
      Company’s average interest rate
      spread decreased from 4.2% to 4.0% during 2007, which combined with net earning
      asset growth, resulted in a 9.83% increase in net interest income during
      2007.  As a result of loan growth offset by a significant improvement
      in nonperforming loans, the Company added $406,725 to its allowance for loan
      losses compared to $284,645 in 2006.  Residential mortgage sales in
      the market area have slowed down; however, the Company has not experience the
      same magnitude as the national market.  The Company operates in a well
      diversified market.  Major economic drives include tourism, medical
      industry and light manufacturing.  The unemployment rate remains low,
      and the job market appears to be stable with no major layoffs. Non-interest
      income decreased $71,431 primarily as a result lower overdraft fees, fewer
      recoveries other than loans and a lower net loan servicing fees.  The
      Mortgage Company posted net operating loss of $120,198 during 2007 of which
      $60,099 was the Company’s portion compared to net income of $1,620 during 2006
      of which $810 was the Company’s portion.  Securities losses totaled $
      1,093 during 2007 compared to $249,674 during 2006.  Non-interest
      expenses totaled $5,553,236 and $4,914,727 in 2007 and 2006,
      respectively.  Operating expenses increased as a result of opening a
      new branch at199 Charlotte
      HighwayinBuncombeCountyduring
      the latter part of 2006 and
      increased expenses associated with supporting loan and deposit
      growth.  Management monitors expenses closely and reviews each expense
      relative to the benefit provided.  Net income totaled $2,046,006 in
      2007 compared to $2,062,732 in 2006 – a decrease of
      .81%.  Comprehensive income, which is the change in equity during a
      period excluding changes resulting from investments by shareholders and
      distributions to shareholders, net of tax totaled $2,166,783 and $2,374,992
      in
      2007 and 2006, respectively.








8
 Index


RESULTS
      OF OPERATIONS





The
      following discussion relates to operations for the year ended December 31,
      2007
      compared to the year ended December 31, 2006.





2007
      COMPARED TO 2006








Net
      income for 2007 totaled $2,046,006 compared to $2,062,732 in 2006 or $.89 and
      $.91 per diluted share for 2007 and 2006, respectively.  The return on
      average assets and equity, respectively, was 1.24% and 14.62% for 2007 compared
      to 1.39% and 17.68% in 2006.  The decrease in net income was primarily
      attributable increased provision for loan losses to accommodate loan growth,
      overhead associated with operating a new full-service banking location, which
      opened in late 2006, overall increased costs to service loans and deposits
      and
      losses incurred at the Mortgage Company.





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
      $12,901,434 for the year ended December 31, 2007 compared to $11,121,208 in
      2006.  Growth in the average balance of interest-earning assets
      increased from $140,684,468 to $157,701,528 or 12.10% and was complemented
      by a
      30 basis point increase in the rate on interest-earning assets, which resulted
      in increased interest income.  Interest expense, derived from
      interest-bearing liabilities such as deposits and borrowed funds, totaled
      $5,295,506 in 2007 compared to $4,195,951 in 2006.  The increase in
      interest expense was primarily attributable to growth in interest-bearing
      liabilities, increased rates and a shift in the Company’s deposit
      composition.  The average balance of interest-bearing liabilities grew
      from $109,178,499 in 2006 to $122,327,327 in 2007 or 12.04%, while the cost
      of
      funds increased 50 basis points.





As
      a
      result of loan growth offset by a significant improvement in nonperforming
      assets, the Company added $406,725 to its allowance for loan losses compared
      to
      $284,645 in 2006.  Charge-offs, net of recoveries, totaled $200,680
      for 2007 compared to $160,942 for 2006.  Nonperforming assets totaled
      $283,470 at the end of 2007 compared with $1,081,190 at the end of
      2006.





Fee
      income totaled $1,589,958 in 2007
      compared to $1,661,389 in 2006.  Service charge fees on deposit
      accounts and other fees and commissions earned account for the majority of
      non-interest income.  During 2007, the Company earned $1,153,611 from
      service charges on deposit accounts compared to $1,194,696 in
      2006.  The decrease resulted from less revenue from overdraft fees,
      which is driven by overdraft activity.  Other service fees and
      commissions totaled $344,481 in 2007 compared to $310,528 in
      2006.  The increase was primarily a result of increased fees from
      Visa, MasterCard and ATM interchange fees, which totaled $241,304 and $183,657
      for 2007 and 2006, respectively.  The Mortgage Company posted a net
      loss of $120,198 during 2006 of which $60,099 was the Company’s portion compared
      to net income of $1,620 during 2007 of which $810 was the Company’s
      portion.  Decreased mortgage loan origination volume in 2007 resulted
      in the performance decline.The
      Company sold
      investment securities during 2007 and 2006, which resulted in realized losses
      of
      $1,093 and $249,674.  Sales of $10,002,906 million in investment
      securities in 2006 resulted from portfolio repositioning due to increased market
      rates; sales in2007 totaled $283,268.Other income, primarily
      the fees from
      the sales of checks and deposit slips, net loan servicing fees and recoveries
      other than loans, provided additional income of $91,866 in 2007 compared to
      $156,165 in 2006.





Other
      expenses totaled $5,553,236 in 2007 compared to $4,914,727 in 2006. Expenses
      increased as a result of increased personnel expense, increased supplies expense
      to process the Bank’s growth in loans and deposits, increased marketing expenses
      related to growth and expenses associated with a fifth full-service banking
      location, which opened during latter part of 2006.  Salaries and
      benefits accounted for $2,684,511 in 2007 or 48.34% of other expenses compared
      to $2,398,631 or 48.80% in 2006.  Equipment expenses totaled $429,588
      in 2007 compared to $396,816 in 2006.  (Income) expense associated
      with foreclosures totaled $(8,593) during 2007 compared to $28,324 during 2006.
      Data processing fees decreased by $62,026 as a result of contract negotiations
      and transferring selected services to a more competitively priced
      provider.  Other non-interest expenses of $1,851,052 in 2007 compared
      to $1,432,252 in 2006 included sundry items such as marketing, accounting,
      occupancy, and insurance.  During 2007 the FDIC began assessing an
      FDIC insurance premium in addition to the FICO premium previously assessed
      in an
      effort to increase its reserves.  FDIC/FICO premiums totaled $88,539
      in 2007 compared to $14,912 in 2006.  The FDIC estimates premiums to
      continue through 2008.








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
      $7,605,928 and $6,925,257 for 2007 and 2006, respectively, representing an
      increase of 9.83% for 2007 over 2006.  Interest rate spreads have been
      at least 4.0% over the last two years.  The Company continues efforts
      to maximize this spread by management of both loan and deposit rates in order
      to
      support the overall earnings growth.  The following table presents the
      daily average balances, interest income/expense and average rates earned and
      paid on interest-earning assets and interest-bearing liabilities of the Company
      for the last two years.


9
 Index








AVERAGE
      BALANCES AND INTEREST INCOME ANALYSIS


For
      the Years Ended December 31,





2007
            
            
            
            
            
            
            
            2006Average
            
            
            
            
            
            
            
            AverageAverage
            
            
            Yield/
            
            Income/
            
            
            Average
            
            
            Yield/
            
            Income/Balance
            
            
            Cost
            
            Expense
            
            
            Balance
            
            
            Cost
            
            ExpenseASSETS:Loans
                (1)
            
            $
            127,403,492
            
            
            
            9.0
            %
            
            $
            11,507,239
            
            
            $
            111,294,892
            
            
            
            8.8
            %
            
            $
            9,836,640Taxable
                securities (2)
            
            
            18,590,095
            
            
            
            4.9
            %
            
            
            914,872
            
            
            
            18,758,635
            
            
            
            4.6
            %
            
            
            854,377Non-taxable
                securities (3)
            
            
            8,697,843
            
            
            
            5.8
            %
            
            
            330,868
            
            
            
            8,371,136
            
            
            
            5.8
            %
            
            
            317,439Federal
                funds sold
            
            
            2,836,469
            
            
            
            5.0
            %
            
            
            140,895
            
            
            
            2,125,593
            
            
            
            5.0
            %
            
            
            106,097Interest-bearing
                deposits
            
            
            173,629
            
            
            
            4.4
            %
            
            
            7,560
            
            
            
            134,212
            
            
            
            5.0
            %
            
            
            6,655Total
                interest-earning assets
            
            
            157,701,528
            
            
            
            8.3
            %
            
            
            12,901,434
            
            
            
            140,684,468
            
            
            
            8.0
            %
            
            
            11,121,208All
                other assets
            
            
            7,961,999
            
            
            
            
            
            
            
            
            
            
            
            7,476,217Total
                assets
            
            $
            165,663,527
            
            
            
            
            
            
            
            
            
            
            $
            148,160,685LIABILITIES
                AND
              SHAREHOLDERS’
                EQUITY:Interest-bearing
                deposits
            
            $
            113,156,413
            
            
            
            4.1
            %
            
            
            4,684,827
            
            
            $
            99,429,058
            
            
            
            3.6
            %
            
            
            3,562,555Short-term
                borrowings
            
            
            1,046,914
            
            
            
            5.3
            %
            
            
            55,631
            
            
            
            1,625,441
            
            
            
            5.4
            %
            
            
            87,335Long-term
                debt
            
            
            8,124,000
            
            
            
            6.8
            %
            
            
            555,048
            
            
            
            8,124,000
            
            
            
            6.7
            %
            
            
            546,061Total
                interest-bearing liabilities
            
            
            122,327,327
            
            
            
            4.3
            %
            
            
            5,295,506
            
            
            
            109,178,499
            
            
            
            3.8
            %
            
            
            4,195,951Other
                liabilities
            
            
            29,339,096
            
            
            
            
            
            
            
            
            
            
            
            27,315,190Shareholders’
                equity
            
            
            13,997,104
            
            
            
            
            
            
            
            
            
            
            
            11,666,996Total
                liabilities and shareholders’ equity
            
            $
            165,663,527
            
            
            
            
            
            
            
            
            
            
            $
            148,160,685Net
                yield on earning-assets and net interest income (4)
            
            
            
            
            
            
            4.9
            %
            
            $
            7,605,928
            
            
            
            
            
            
            
            5.0
            %
            
            $
            6,925,257Interest
                rate spread (5)
            
            
            
            
            
            
            4.0
            %
            
            
            
            
            
            
            
            
            
            
            4.2
            %





(1)
            Nonaccrual
                loans have been included.


(2)
            Includes
                investment in Federal Home Loan Bank.


(3)
            Yields
                on tax-exempt investments have been adjusted to the tax equivalent
                basis
                using 34%.


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


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





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





Interest
      and Rate/Volume
      Variance


For
      the Years Ended December
      31,





2007
                Compared to 2006
            
            
            2006
                Compared to
                2005Volume
                (1)
            
            
            Rate(1)
            
            
            Total
            
            
            Volume
                (1)
            
            
            Rate
                (1)
            
            
            TotalInterest-bearing
                deposits in other
                banks
            
            $
            1,835
            
            
            $
            (930
            )
            
            $
            905
            
            
            $
            4,173
            
            
            $
            1,425
            
            
            $
            5,598Investment
                securities
            
            
            4,424
            
            
            
            69,500
            
            
            
            73,924
            
            
            
            38,860
            
            
            
            267,008
            
            
            
            305,868Federal
                Funds
                sold
            
            
            35,397
            
            
            
            (599
            )
            
            
            34,798
            
            
            
            (270,598
            )
            
            
            109,073
            
            
            
            (161,525
            )Loans
            
            
            1,439,342
            
            
            
            231,257
            
            
            
            1,670,599
            
            
            
            1,664,276
            
            
            
            1,611,052
            
            
            
            3,275,328Increase
                in interest
                income
            
            $
            1,480,998
            
            
            $
            299,228
            
            
            $
            1,780,226
            
            
            $
            1,436,711
            
            
            $
            1,988,558
            
            
            $
            3,425,269Interest-bearing
                deposits
            
            $
            530,092
            
            
            $
            592,180
            
            
            $
            1,122,272
            
            
            $
            273,155
            
            
            $
            1,196,456
            
            
            $
            1,469,611Borrowings
            
            
            (38,054
            )
            
            
            15,337
            
            
            
            (22,717
            )
            
            
            89,801
            
            
            
            98,056
            
            
            
            187,857Increase
                in interest
                expense
            
            $
            492,038
            
            
            $
            607,517
            
            
            $
            1,099,555
            
            
            $
            362,956
            
            
            $
            1,294,512
            
            
            $
            1,657,468








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





10
 Index


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, 2007, such
      unfunded commitments to extend credit were $38,206,567.





Neither
      the Company nor its subsidiaries have historically incurred off-balance sheet
      obligations through the use of or investment in off-balance sheet derivative
      financial instruments or structured finance or special purpose entities
      organized as corporations, partnerships, limited liability companies or trusts.
      However, the Bank has contractual off-balance sheet obligations in the form
      of
      noncancelable operating leases with unrelated vendors. As of December 31, 2007,
      payments due under such operating lease arrangements were $184,530, $184,530,
      $184,530, $188,280 and $193,530 in 2008 through 2012, respectively.





Liquidity
      requirements of the Company are met primarily through two categories of
      funds.  The first is core deposits, which includes demand deposits,
      savings accounts and certificates of deposit less than $100,000.  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, 2007 and 2006, core deposits totaled
      $122,606,840 or 82.18%, and $116,123,708 or 86.10%, respectively, of the
      Company’s total deposits.





The
      other
      principal methods of funding utilized by the Company are through large
      denomination certificates of deposit, federal funds purchased and other
      short-term and long-term borrowings.  Upstream correspondent banks,
      including the Federal Home Loan Bank of Atlanta, have made available to the
      Company lines of credit of approximately $16.4 million.  Funding can
      also be borrowed from the Federal Reserve Bank’s discount
      window.  Funds borrowed from the Federal Reserve Bank are based upon a
      percentage of the underlying collateral.  The Company has incurred
      limited need to borrow from the Federal Reserve Bank; as a result no securities
      have been allocated to secure borrowings.  The Company’s policy is to
      emphasize core deposit growth rather than purchased or brokered liabilities
      as
      the cost of these funds is greater.





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





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





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





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


11
 Index


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 slightly liability-sensitive in the one-year time period;
      meaning that in a given period there will be more liabilities than assets
      subject to immediate repricing as the market rates change. Theoretically, during
      periods of rising rates, this results in decreased net interest income. The
      opposite occurs during periods of declining rates.





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





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





The
      following table sets forth the amounts of interest-earning assets and
      interest-bearing liabilities outstanding at December 31, 2007, 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 mortgage-backed securities.  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
 Index


INTEREST
      RATE SENSITIVITY (GAP ANALYSIS)


DECEMBER
      31, 2007


1
                – 90
              
              
              91
                – 180
              
              
              181
                – 365
              
              
              Total
              
              
              Non-Days
              
              
              Days
              
              
              Days
              
              
              One
                  Year
              
              
              Sensitive
              
              
              TotalInterest-earning
                  assets:Interest
                  bearing deposits
              
              $
              132,284
              
              
              $
              -
              
              
              $
              -
              
              
              $
              132,284
              
              
              $
              -
              
              
              $
              132,284Investment
                  securities
              
              
              733,943
              
              
              
              649,091
              
              
              
              718,558
              
              
              
              2,101,592
              
              
              
              23,989,147
              
              
              
              26,090,739Federal
                  Home LoanBank
                  stock
              
              
              463,300
              
              
              
              -
              
              
              
              -
              
              
              
              463,300
              
              
              
              -
              
              
              
              463,300Loans
              
              
              107,898,541
              
              
              
              2,753,257
              
              
              
              7,217,700
              
              
              
              117,869,498
              
              
              
              17,864,726
              
              
              
              135,734,224Total
                  interest-earning assets
              
              
              112,883,068
              
              
              
              3,402,348
              
              
              
              7,936,258
              
              
              
              124,221,674
              
              
              
              41,853,873
              
              
              
              166,075,547Interest-bearing
                  liabilities:Time
                  deposits
              
              
              29,097,646
              
              
              
              19,329,922
              
              
              
              26,051,051
              
              
              
              74,478,619
              
              
              
              491,736
              
              
              
              74,970,355All
                  other deposits
              
              
              46,198,792
              
              
              
              -
              
              
              
              -
              
              
              
              46,198,792
              
              
              
              -
              
              
              
              46,198,792Short-term
                  borrowings
              
              
              419,669
              
              
              
              -
              
              
              
              -
              
              
              
              419,669
              
              
              
              -
              
              
              
              419,669Long-term
                  debt
              
              
              4,124,000
              
              
              
              -
              
              
              
              -
              
              
              
              4,124,000
              
              
              
              4,000,000
              
              
              
              8,124,000Total
                  interest-bearing liabilities
              
              
              79,840,107
              
              
              
              19,329,922
              
              
              
              26,051,051
              
              
              
              125,221,080
              
              
              
              4,491,736
              
              
              
              129,712,816Interest
                  sensitivity gap
              
              $
              33,042,961
              
              
              $
              (15,927,574
              )
              
              $
              (18,114,793
              )
              
              $
              (999,406
              )Cumulative
                  interestsensitivity
                  gap
              
              
              
              
              
              
              17,115,387
              
              
              $
              (999,406
              )Interest-earning
                  assetsas
                  a percent of interestsensitive
                  liabilities
              
              
              141.4
              %
              
              
              17.6
              %
              
              
              30.5
              %
              
              
              99.2
              %Cumulative
                  interest-earningassets
                  as a percent of interestsensitive
                  liabilities
              
              
              141.4
              %
              
              
              117.3
              %
              
              
              99.2
              %





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





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





MATURITIES
      AND SENSITIVITIES OF CERTAIN LOANS TO CHANGES IN INTEREST RATES


AS
      OF DECEMBER 31, 2007





Within
            
            
            One
                to
            
            
            FiveOne
            
            
            Five
            
            
            Years
                orYear
            
            
            Years
            
            
            MoreCommercial,
                financial and agricultural
            
            $
            18,171,565
            
            
            $
            5,984,525
            
            
            $
            636,448Real
                estate – mortgage
            
            
            51,348,446
            
            
            
            18,167,261
            
            
            
            2,633,581Predetermined
                rate, maturitygreater
                than one year
            
            
            -
            
            
            
            24,151,786
            
            
            
            3,270,029Variable
                rate or maturing withinone
                year
            
            
            69,520,011
            
            
            
            -
            
            
            
            -





The
      Company paid an average rate of 4.1% on interest-bearing deposits during 2007
      compared to 3.6% during 2006.  Significant growth in deposits came
      from interest-bearing time deposit accounts as rate conscious customers sought
      higher yields.  Time deposits increased from $58,884,364 to
      $74,970,355 or 27.32%, while non-time deposits decreased 2.32% to
      $74,220,661.   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, 2007





Non-interest
                bearing deposits
            
            $
            27,903,283Interest-bearing
            
            
            113,156,413Total
            
            $
            141,059,696


13
 Index





The
      above
      table includes deposits of $100,000 or more, which at December 31, 2007 totaled
      $26,584,176.  The table below presents the maturities of deposits of
      $100,000 or more.





Maturities
      of Time Deposits of $100,000 or More


December
      31, 2007


GreaterWithin
            
            
            Within
            
            
            Within
            
            
            ThanThree
            
            Six
            
            
            Twelve
            
            
            OneMonths
            
            
            Months
            
            
            Months
            
            
            YearTime
                deposits of $100,000 or more
            
            $
            15,024,269
            
            
            $
            5,080,635
            
            
            $
            6,259,509
            
            
            $
            219,763





CAPITAL
      RESOURCES





As
      of
      December 31, 2007 and 2006, the Company’s ratio of total capital to
      risk-adjusted assets was 14.29%, and 14.62%, respectively.  Average
      capital to average assets totaled 8.45% and 7.87% at December 31, 2007 and
      2006,
      respectively.  The Company remains well capitalized and fully expects
      to be able to meet future capital needs caused by growth and expansion as well
      as regulatory requirements.  The Company is not aware of any current
      recommendation by regulatory authorities which if implemented would materially
      affect the Company’s liquidity, capital resources or operations.





As
      of
      December 31, 2007, the Trust had the following Trust Preferred Securities
      outstanding, and the Company had the following issues of junior subordinated
      debentures, all held by the Trust, outstanding:





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





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





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





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





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





LOANS





The
      Company makes loans within its market area, defined as Asheville and Buncombe
      County, North Carolina.  It makes both commercial and consumer
      loans.  Total loans outstanding at December 31, 2007 and 2006 were
      $135,734,224 and $122,463,720, 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.








14
 Index


LOANS


December
      31,





2007
              
              
              
              
              
              2006
              
              
              
              
              
              2005
              
              
              
              
              
              2004
              
              
              
              
              
              2003%
                  of
              
              
              
              
              
              %
                  of
              
              
              
              
              
              %
                  of
              
              
              
              
              
              %
                  of
              
              
              
              
              
              %
                  ofTotal
              
              
              
              
              
              Total
              
              
              
              
              
              Total
              
              
              
              
              
              Total
              
              
              
              
              
              TotalAmount
              
              
              Loans
              
              
              Amount
              
              
              Loans
              
              
              Amount
              
              
              Loans
              
              
              Amount
              
              
              Loans
              
              
              Amount
              
              
              LoansLOANSReal
                  Estate-Construction
              
              $
              36,559,609
              
              
              
              27
              %
              
              $
              30,224,993
              
              
              
              25
              %
              
              $
              19,350,978
              
              
              
              19
              %
              
              $
              11,470,223
              
              
              
              13
              %
              
              $
              8,372,934
              
              
              
              11
              %Mortgage
              
              
              72,149,288
              
              
              
              53
              %
              
              
              67,334,420
              
              
              
              55
              %
              
              
              59,187,153
              
              
              
              59
              %
              
              
              51,633,458
              
              
              
              61
              %
              
              
              46,014,314
              
              
              
              61
              %Commercial,
                  financial, andagricultural
              
              
              24,792,538
              
              
              
              18
              %
              
              
              23,318,857
              
              
              
              19
              %
              
              
              19,635,598
              
              
              
              19
              %
              
              
              20,162,307
              
              
              
              24
              %
              
              
              18,603,317
              
              
              
              25
              %Consumer
              
              
              2,569,211
              
              
              
              2
              %
              
              
              1,851,043
              
              
              
              1
              %
              
              
              2,531,935
              
              
              
              3
              %
              
              
              1,747,694
              
              
              
              2
              %
              
              
              1,909,709
              
              
              
              3
              %Total
                  Loans
              
              
              136,070,646
              
              
              
              100
              %
              
              
              122,729,313
              
              
              
              100
              %
              
              
              100,705,664
              
              
              
              100
              %
              
              
              85,013,682
              
              
              
              100
              %
              
              
              74,900,274
              
              
              
              100
              %Deferred
                  originations fees, net
              
              
              (336,422
              )
              
              
              
              
              
              
              (265,593
              )
              
              
              
              
              
              
              (212,062
              )
              
              
              
              
              
              
              (161,612
              )
              
              
              
              
              
              
              (147,208
              )Total
                  loans, net of deferred fees
              
              $
              135,734,224
              
              
              
              
              
              
              $
              122,463,720
              
              
              
              
              
              
              $
              100,493,602
              
              
              
              
              
              
              $
              84,852,070
              
              
              
              
              
              
              $
              74,753,066


NONPERFORMING
      ASSETS


December
      31,





2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003NONPERFORMING
                ASSETSNonaccrual
                loans
            
            $
            195,683
            
            
            $
            975,190
            
            
            $
            1,754,653
            
            
            $
            2,567,816
            
            
            $
            2,145,772Other
                real estate owned
            
            
            87,787
            
            
            
            106,000
            
            
            
            127,000
            
            
            
            401,345
            
            
            
            1,145,186Repossessions
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            42,241
            
            
            
            121,783Total
            
            $
            283,470
            
            
            $
            1,081,190
            
            
            $
            1,881,653
            
            
            $
            3,011,402
            
            
            $
            3,412,741





Real
      estate loans comprised 80% of the portfolio in 2007 and 2006. Commercial loans
      comprised 18% of the portfolio in 2007 compared to 19% in 2006, while consumer
      loans comprised 2%in
      2007 compared to 1% in 2006.  Commercial loans of $24,792,538,
      consumer loans of $2,569,211 and real estate mortgage loans of $72,149,288
      are
      loans for which the principal source of repayment is derived from the ongoing
      cash flow of the business and other generally recurring sources of income.
      Real
      estate construction loans of $36,559,609 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 $38,206,567 and $30,044,210 at




December
      31, 2007 and 2006, 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 was $195,683
      and
      $975,190 at December 31, 2007 and
      2006, respectively.  The related allowance for loan losses determined
      was $120 and$3,000 at December 31, 2007 and 2006,
      respectively.  The average recorded investment in impaired loans
      during the years ended December 31, 2007 and 2006 was $400,074 and $1,320,500,
      respectively.  For the years ended December 31, 2007 and 2006, the
      Company recognized interest income from impaired loans of $1,535 and $5,270,
      respectively.








PROVISION
      AND ALLOWANCE FOR LOAN LOSSES





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




15
 Index


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 analyzes 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 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, 2007 and 2006
      was $2,090,125 and $1,884,080 or 1.54% and 1.54%, respectively, of gross loans
      outstanding.   The ratio of net charge-offs to average loans
      outstanding was .16% and .14% during 2007 and 2006,
      respectively.  Primarily because of a recessionary economy,
      charge-offs in 2003 exceeded that of prior historical experiences.





CHANGES
      IN THE ALLOWANCE FOR LOAN LOSSES








2007
            
            
            2006
            
            
            2005
            
            
            2004
            
            
            2003Balance
                at beginning of year
            
            $
            1,884,080
            
            
            $
            1,760,377
            
            
            $
            1,608,366
            
            
            $
            1,174,003
            
            
            $
            1,020,198Loans
                charged-offCommercial,
                financial, andagricultural
            
            
            (171,723
            )
            
            
            (163,191
            )
            
            
            (207,106
            )
            
            
            (579,930
            )
            
            
            (1,075,792
            )Real
                Estate:Construction
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Mortgage
            
            
            -
            
            
            
            (14,160
            )
            
            
            (129,401
            )
            
            
            (48,000
            )
            
            
            (157,142
            )Consumer
            
            
            (85,018
            )
            
            
            (41,104
            )
            
            
            (33,339
            )
            
            
            (69,682
            )
            
            
            (124,680
            )Total
                charge-offs
            
            
            (256,741
            )
            
            
            (218,455
            )
            
            
            (369,846
            )
            
            
            (697,612
            )
            
            
            (1,357,614
            )Recoveries
                of loans previouslycharged-off:Commercial,
                Financial, andagricultural
            
            
            24,600
            
            
            
            22,538
            
            
            
            28,488
            
            
            
            73,054
            
            
            
            71,942Real
                Estate:Construction
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Mortgage
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            25,000
            
            
            
            -Consumer
            
            
            31,461
            
            
            
            34,975
            
            
            
            27,099
            
            
            
            23,621
            
            
            
            33,677Total
                Recoveries
            
            
            56,061
            
            
            
            57,513
            
            
            
            55,587
            
            
            
            121,675
            
            
            
            105,619Net
                charge-offs
            
            
            (200,680
            )
            
            
            (160,942
            )
            
            
            (314,259
            )
            
            
            (575,937
            )
            
            
            (1,251,995
            )Provision
                for loan losses
            
            
            406,725
            
            
            
            284,645
            
            
            
            466,270
            
            
            
            1,010,300
            
            
            
            1,405,800Balance
                at end of year
            
            $
            2,090,125
            
            
            $
            1,884,080
            
            
            $
            1,760,377
            
            
            $
            1,608,366
            
            
            $
            1,174,003Ratio
                of net charge-offs duringthe
                year to average loansoutstanding
                during the year
            
            
            .16
            %
            
            
            .14
            %
            
            
            .35
            %
            
            
            .72
            %
            
            
            1.82
            %


16
 Index


A
      slight
      slow down in economic growth partially offset with improved asset quality
      resulted in maintaining a 1.54% loan loss reserve at the end of
      2007.  Management has reviewed each non-performing loan, supporting
      collateral, financial stability of each borrower and the relevant loan loss
      allowance.  Based upon this analysis, management believes the
      allowance is adequate to support current loans
      outstanding.  Management has continued its in-depth underwriting
      analysis, training and loan monitoring.





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





During
      2007, there were no changes in the estimation methods that affected our
      methodology for assessing the appropriateness of the formula and specific
      allowance for credit losses.  Changes in estimates and assumptions
      regarding the effects of economic and business conditions on borrowers affect
      the assessment of the allowance.





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





ALLOCATION
      OF THE ALLOWANCE FOR LOAN LOSSES





December
      31,


2007
            
            
            
            
            
            2006
            
            
            
            
            
            2005
            
            
            
            
            
            2004
            
            
            
            
            
            2003%
                of
            
            
            
            
            
            %
                of
            
            
            
            
            
            %
                of
            
            
            
            
            
            %
                of
            
            
            
            
            
            %
                ofTotal
            
            
            
            
            
            Total
            
            
            
            
            
            Total
            
            
            
            
            
            Total
            
            
            
            
            
            TotalAmount
            
            
            Loans
            
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            Loans
            
            
            Amount
            
            
            LoansReal
                Estate
            
            $
            1,596,565
            
            
            
            80
            %
            
            $
            1,443,604
            
            
            
            80
            %
            
            $
            1,350,460
            
            
            
            78
            %
            
            $
            1,139,769
            
            
            
            74
            %
            
            $
            863,606
            
            
            
            72
            %Commercial,
                Financialand
                Agricultural
            
            
            437,351
            
            
            
            18
            %
            
            
            401,777
            
            
            
            19
            %
            
            
            341,925
            
            
            
            19
            %
            
            
            388,559
            
            
            
            24
            %
            
            
            267,584
            
            
            
            25
            %Consumer
            
            
            56,209
            
            
            
            2
            %
            
            
            38,699
            
            
            
            1
            %
            
            
            67,992
            
            
            
            3
            %
            
            
            54,528
            
            
            
            2
            %
            
            
            23,722
            
            
            
            3
            %Unallocated
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            25,510
            
            
            
            -
            
            
            
            19,091
            
            
            
            -Total
                allowance
            
            $
            2,090,125
            
            
            
            100
            %
            
            $
            1,884,080
            
            
            
            100
            %
            
            $
            1,760,377
            
            
            
            100
            %
            
            $
            1,608,366
            
            
            
            100
            %
            
            $
            1,174,003
            
            
            
            100
            %











INVESTMENT
      SECURITIES





At
      December 31, 2007 and 2006, securities carried at market value totaled
      $26,113,294 and $26,241,010, respectively, with amortized costs of $26,090,739
      and $26,415,000, 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, 2007Available
                for sale: (1)AmortizedTYPE
            
            Cost
            
            
            Yield
                (2)Mortgage-backed
                securities- within 1 year
            
            $
            787,042
            
            
            
            3.1
            %U.S.
                Government agencies- within 1 to 5 years
            
            
            500,000
            
            
            
            4.4
            %Mortgage-backed
                securities- within 1 to 5 years
            
            
            1,521,833
            
            
            
            4.0
            %Municipal
                bonds- due within 1 to 5 years
            
            
            556,685
            
            
            
            5.0
            %Total-
                within 1 to 5 years
            
            
            2,578,518
            
            
            
            4.3
            %U.S.
                Government agencies- within 5 to 10 years
            
            
            3,057,388
            
            
            
            5.3
            %Mortgage-backed
                securities- within 5 to 10 years
            
            
            2,109,757
            
            
            
            3.8
            %Municipal
                bonds- within 5 to 10 years
            
            
            1,090,077
            
            
            
            5.3
            %Total-
                within 5 to 10 years
            
            
            6,257,222
            
            
            
            4.8
            %Mortgage-backed
                securities- greater than 10 years
            
            
            9,320,592
            
            
            
            5.4
            %Municipal
                bonds- greater than 10 years
            
            
            7,147,365
            
            
            
            6.1
            %Total-
                greater than 10 years
            
            
            16,467,957
            
            
            
            5.7
            %Total
            
            $
            26,090,739
            
            
            
            5.3
            %


17
 Index





December
      31, 2006


Available
      for sale: (1)





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








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


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





SIGNIFICANT
      ACCOUNTING POLICIES AND ESTIMATES





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





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





ALLOWANCE
      FOR LOAN LOSSES





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





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





18
 Index


INTEREST
      INCOME RECOGNITION





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





ACCOUNTING
      FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES





Investments
      are reviewed quarterly for indicators of other-than-temporary
      impairment.  This determination requires significant
      judgment.  In making this judgment, management employs a systematic
      methodology quarterly that considers available quantitative and qualitative
      evidence in evaluating potential impairment of investments.  If the
      cost of an investment exceeds its fair value, management evaluates, among other
      factors, general market conditions, the duration and extent to which the fair
      value is less than cost, and the intent and ability to hold the
      investment.  Management also considers specific adverse conditions
      related to the financial health of and business outlook for the investee,
      including industry and sector performance, operational and financing cash flow
      factors, and rating agency actions.  Once a decline in fair value is
      determined to be other-than-temporary, an impairment charge is recorded and
      a
      new cost basis in the investment is established.  If market, industry
      and/or investee conditions deteriorate, management may incur future
      impairments.





INFLATION





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





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








SELECTED
      FINANCIAL INFORMATION AND OTHER DATA





SELECTED
                AVERAGE BALANCES:2007
            
            
            Yield
            
            
            2006
            
            
            YieldNon-interest
                bearing demand deposits
            
            $
            27,903,283
            
            
            
            
            
            $
            26,152,829Interest-bearing
                demand deposits
            
            
            43,204,940
            
            
            
            2.6
            %
            
            
            45,304,319
            
            
            
            2.4
            %Savings
                deposits
            
            
            2,136,461
            
            
            
            .5
            %
            
            
            2,177,100
            
            
            
            .5
            %Time
                deposits
            
            
            67,815,012
            
            
            
            5.2
            %
            
            
            51,947,639
            
            
            
            4.7
            %Total
                deposits
            
            $
            141,059,696
            
            
            
            
            
            
            $
            125,581,887SELECTED
                PERFORMANCE RATIOS:Return
                on average assets
            
            
            1.24
            %
            
            
            
            
            
            
            1.39
            %Return
                on average equity
            
            
            14.62
            %
            
            
            
            
            
            
            17.68
            %Dividend
                payout ratio
            
            
            0
            %
            
            
            
            
            
            
            0
            %Equity
                to assets ratio
            
            
            8.45
            %
            
            
            
            
            
            
            7.87
            %





FORWARD
      LOOKING
      STATEMENTS





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





OFF-BALANCE
      SHEET ARRANGEMENTS





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








19
 Index


ITEM
      7:  FINANCIAL STATEMENTS








WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


INDEX
      TO THE CONSOLIDATED FINANCIAL STATEMENTS





Page
                No.Report
                of Independent Registered Public Accounting
                Firm
            21Consolidated
                Balance Sheets as of December 31, 2007 and
                2006
            22Consolidated
                Statements of Operations and Comprehensive
                Incomefor
                the years ended December 31, 2007 and
                2006
            23Consolidated
                Statements of Changes in Shareholders’
                Equityfor
                the years ended December 31, 2007 and
                2006
            25Consolidated
                Statements of Cash Flowsfor
                the years ended December 31, 2007 and
                2006
            26Notes
                to Consolidated Financial
                Statements
            27








20
 Index














REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM











Board
      of
      Directors and Shareholders of


Weststar
      Financial Services Corporation:





We
      have
      audited the accompanying consolidated balance sheets of Weststar Financial
      Services Corporation and Subsidiary (the “Company”) as of December 31, 2007 and
      2006 and the related consolidated statements of operations and comprehensive
      income, changes in shareholders’ equity, and cash flows for the years then
      ended.  These consolidated financial statements are the responsibility
      of the Company’s management.  Our responsibility is to express an
      opinion on these financial statements based on our audits.





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





In
      our
      opinion, the consolidated financial statements referred to above present fairly,
      in all material respects, the financial position of Weststar Financial Services
      Corporation and Subsidiary as of December 31, 2007 and 2006 and the results
      of their operations and their cash flows for the years then ended in conformity
      with accounting principles generally accepted in the United States of
      America.











Charlotte,
      North Carolina


March
      5, 2008


21
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED
      BALANCE SHEETS


December
      31, 2007 and 2006





ASSETS
            
            2007
            
            
            2006Cash
                and cash equivalents:Cash
                and due from banks
            
            $
            4,740,172
            
            
            $
            4,816,290Interest-bearing
                deposits
            
            
            132,284
            
            
            
            210,337Federal
                funds sold
            
            
            3,655,000
            
            
            
            -Total
                cash and cash equivalents
            
            
            8,527,456
            
            
            
            5,026,627Investment
                securities - available for sale, at fair value(amortized
                cost of $26,090,739 and $26,415,000 atDecember
                31, 2007 and 2006, respectively)
            
            
            26,113,294
            
            
            
            26,241,010Loans
            
            
            135,734,224
            
            
            
            122,463,720Allowance
                for loan losses
            
            
            (2,090,125
            )
            
            
            (1,884,080
            )Net
                loans
            
            
            133,644,099
            
            
            
            120,579,640Premises
                and equipment, net
            
            
            2,981,163
            
            
            
            3,004,590Accrued
                interest receivable
            
            
            972,603
            
            
            
            918,780Federal
                Home Loan Bank stock, at cost
            
            
            463,300
            
            
            
            457,000Deferred
                income taxes
            
            
            572,594
            
            
            
            519,456Foreclosed
                properties
            
            
            87,787
            
            
            
            106,000Other
                assets
            
            
            895,702
            
            
            
            791,359TOTAL
            
            $
            174,257,998
            
            
            $
            157,644,462LIABILITIES
                AND SHAREHOLDERS’ EQUITYLIABILITIES:Deposits:Demand
            
            $
            28,021,869
            
            
            $
            27,463,717NOW
                accounts
            
            
            15,645,860
            
            
            
            14,198,547Money
                market accounts
            
            
            28,609,220
            
            
            
            32,367,876Savings
            
            
            1,943,712
            
            
            
            1,956,577Time
                deposits of $100,000 or more
            
            
            26,584,176
            
            
            
            18,747,373Other
                time deposits
            
            
            48,386,179
            
            
            
            40,136,991Total
                deposits
            
            
            149,191,016
            
            
            
            134,871,081Short-term
                borrowings
            
            
            419,669
            
            
            
            306,000Accrued
                interest payable
            
            
            567,710
            
            
            
            498,390Other
                liabilities
            
            
            776,364
            
            
            
            872,138Long-term
                debt
            
            
            8,124,000
            
            
            
            8,124,000Total
                liabilities
            
            
            159,078,759
            
            
            
            144,671,609COMMITMENTS
                AND CONTINGENCIES (Note 14)SHAREHOLDERS’
                EQUITY:Preferred
                stock, no par value, authorized - 1,000,000 shares;no
                shares issued and outstanding
            
            
            -
            
            
            
            -Common
                stock, $1 par value, authorized - 9,000,000 shares;outstanding
                shares – 2,118,437 and 1,682,290 atDecember
                31, 2007 and 2006, respectively
            
            
            2,118,437
            
            
            
            1,682,290Additional
                paid-in capital
            
            
            6,133,773
            
            
            
            6,528,387Retained
                earnings
            
            
            6,913,168
            
            
            
            4,869,092Accumulated
                other comprehensive income (loss)
            
            
            13,861
            
            
            
            (106,916
            )Total
                shareholders’ equity
            
            
            15,179,239
            
            
            
            12,972,853TOTAL
            
            $
            174,257,998
            
            
            $
            157,644,462





See
            Notes
            to Consolidated Financial Statements.
 22
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE
      INCOME


Years
      Ended December 31, 2007 and 2006





2007
            
            
            2006INTEREST
                AND DIVIDEND INCOME:Interest
                and fees on loans
            
            $
            11,507,239
            
            
            $
            9,836,640Federal
                funds sold
            
            
            140,895
            
            
            
            106,097Interest-bearing
                deposits
            
            
            7,560
            
            
            
            6,655Investments:Taxable
                interest income
            
            
            884,745
            
            
            
            825,639Non-taxable
                interest income
            
            
            330,868
            
            
            
            317,439Dividends
            
            
            30,127
            
            
            
            28,738Total
                interest and dividend income
            
            
            12,901,434
            
            
            
            11,121,208INTEREST
                EXPENSE:Time
                deposits of $100,000 or more
            
            
            1,248,784
            
            
            
            836,061Other
                time and interest bearing-deposits
            
            
            3,436,043
            
            
            
            2,726,494Short-term
                borrowings
            
            
            55,631
            
            
            
            87,335Long-term
                debt
            
            
            555,048
            
            
            
            546,061Total
                interest expense
            
            
            5,295,506
            
            
            
            4,195,951NET
                INTEREST INCOME
            
            
            7,605,928
            
            
            
            6,925,257PROVISION
                FOR LOAN LOSSES
            
            
            406,725
            
            
            
            284,645NET
                INTEREST INCOME AFTER PROVISION FORLOAN
                LOSSES
            
            
            7,199,203
            
            
            
            6,640,612OTHER
                INCOME:Service
                charges on deposit accounts
            
            
            1,153,611
            
            
            
            1,194,696Other
                service fees and commissions
            
            
            344,481
            
            
            
            310,528Securities
                losses
            
            
            (1,093
            )
            
            
            (249,674
            )Equity
                in income (loss) of Bank of Asheville Mortgage Company,
                LLC
            
            
            (60,099
            )
            
            
            810Other
            
            
            91,866
            
            
            
            156,165Total
                other income
            
            
            1,528,766
            
            
            
            1,412,525OTHER
                EXPENSES:Salaries
                and wages
            
            
            2,341,046
            
            
            
            2,087,074Employee
                benefits
            
            
            343,465
            
            
            
            311,557Occupancy
                expense, net
            
            
            472,912
            
            
            
            395,132Equipment
                rentals, depreciation and maintenance
            
            
            429,588
            
            
            
            396,816Supplies
            
            
            277,799
            
            
            
            261,603Data
                processing fees
            
            
            596,678
            
            
            
            658,704Professional
                fees
            
            
            355,529
            
            
            
            223,986Marketing
            
            
            310,073
            
            
            
            250,948(Income)
                expense from foreclosed properties
            
            
            (8,593
            )
            
            
            28,324Other
            
            
            434,739
            
            
            
            300,583Total
                other expenses
            
            
            5,553,236
            
            
            
            4,914,727INCOME
                BEFORE INCOME TAX PROVISION
            
            
            3,174,733
            
            
            
            3,138,410INCOME
                TAX PROVISION
            
            
            1,128,727
            
            
            
            1,075,678NET
                INCOME
            
            $
            2,046,006
            
            
            $
            2,062,732





See
            Notes
            to Consolidated Financial Statements.
 23
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Continued)


Years
      Ended December 31, 2007 and 2006





2007
            
            
            2006OTHER
                COMPREHENSIVE INCOME BEFORE TAX:Unrealized
                holding gains on securities available for sale
            
            $
            195,452
            
            
            $
            258,478Tax
                effect
            
            
            (75,347
            )
            
            
            (99,643
            )Unrealized
                holding gains on securities availablefor
                sale, net of tax
            
            
            120,105
            
            
            
            158,835Reclassification
                adjustment for realized losses
            
            
            1,093
            
            
            
            249,674Tax
                effect
            
            
            (421
            )
            
            
            (96,249
            )Reclassification
                adjustment for realized losses,net
                of tax
            
            
            672
            
            
            
            153,425OTHER
                COMPREHENSIVE INCOME, NET OF TAX
            
            
            120,777
            
            
            
            312,260COMPREHENSIVE
                INCOME
            
            $
            2,166,783
            
            
            $
            2,374,992BASIC
                NET INCOME PER COMMON SHARE
            
            $
            .97
            
            
            $
            .98DILUTED
                NET INCOME COMMON PER SHARE
            
            $
            .89
            
            
            $
            .91





See
            Notes
            to Consolidated Financial Statements.
 24
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


Years
      Ended December 31, 2007 and 2006





AccumulatedOtherAdditional
            
            
            
            
            
            Compre-
            
            
            TotalCommon
                Stock
            
            
            Paid-In
            
            
            Retained
            
            
            hensive
            
            
            Shareholders’Shares
            
            
            Amount
            
            
            Capital
            
            
            Earnings
            
            
            (Loss)
                Income
            
            
            EquityBALANCE,
                DECEMBER 31, 2006
            
            
            1,401,266
            
            
            $
            1,401,266
            
            
            $
            6,805,331
            
            
            $
            2,809,122
            
            
            $
            (419,176
            )
            
            $
            10,596,543Six-for-five
                stock split
            
            
            280,024
            
            
            
            280,024
            
            
            
            (280,024
            )
            
            
            -
            
            
            
            -
            
            
            
            -Net
                unrealized lossessecurities
                available for sale
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            312,260
            
            
            
            312,260Issuance
                of common stock pursuantto
                the exercise of stock options
            
            
            1,000
            
            
            
            1,000
            
            
            
            3,080
            
            
            
            -
            
            
            
            -
            
            
            
            4,080Cash
                paid in lieu of fractional shares
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,762
            )
            
            
            -
            
            
            
            (2,762
            )Net
                income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,062,732
            
            
            
            -
            
            
            
            2,062,732BALANCE,
                DECEMBER 31, 2007
            
            
            1,682,290
            
            
            
            1,682,290
            
            
            
            6,528,387
            
            
            
            4,869,092
            
            
            
            (106,916
            )
            
            
            12,972,853Five-for-four
                stock split
            
            
            421,841
            
            
            
            421,841
            
            
            
            (421,841
            )
            
            
            -
            
            
            
            -
            
            
            
            -Net
                unrealized gainssecurities
                available for sale
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            120,777
            
            
            
            120,777Issuance
                of common stock pursuantto
                the exercise of stock options
            
            
            14,306
            
            
            
            14,306
            
            
            
            7,281
            
            
            
            -
            
            
            
            -
            
            
            
            21,587Tax
                benefit on exercise of non-qualified
                stock options
            
            
            -
            
            
            
            -
            
            
            
            19,946
            
            
            
            -
            
            
            
            -
            
            
            
            19,946Cash
                paid in lieu of fractional shares
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,930
            )
            
            
            -
            
            
            
            (1,930
            )Net
                income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,046,006
            
            
            
            -
            
            
            
            2,046,006BALANCE,
                DECEMBER 31, 2007
            
            
            2,118,437
            
            
            $
            2,118,437
            
            
            $
            6,133,773
            
            
            $
            6,913,168
            
            
            $
            13,861
            
            
            $
            15,179,239








See
            Notes
            to Consolidated Financial Statements.
 25
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


CONSOLIDATED
      STATEMENTS OF CASH FLOWS


Years
      Ended December 31, 2007 and 2006







2007
            
            
            2006CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            2,046,006
            
            
            $
            2,062,732Adjustments
                to reconcile net income to netcash
                provided by operating activities:Depreciation
            
            
            395,947
            
            
            
            367,972Provision
                for loan losses
            
            
            406,725
            
            
            
            284,645Premium
                amortization and discount accretion, net
            
            
            (29,621
            )
            
            
            12,873Deferred
                income tax provision
            
            
            (128,906
            )
            
            
            (42
            )(Income)
                expense from foreclosed properties
            
            
            (11,192
            )
            
            
            25,110(Gain)
                loss on disposals of premises and equipment
            
            
            (50
            )
            
            
            2,067Losses
                on sales of securities
            
            
            1,093
            
            
            
            249,674Increase
                in accrued interest receivable
            
            
            (53,823
            )
            
            
            (215,105
            )Increase
                in other assets
            
            
            (104,343
            )
            
            
            (119,081
            )Increase
                in accrued interest payable
            
            
            69,320
            
            
            
            231,555Increase
                (decrease) in other liabilities
            
            
            (95,774
            )
            
            
            218,880Net
                cash provided by operating activities
            
            
            2,495,382
            
            
            
            3,121,280CASH
                FLOWS FROM INVESTING ACTIVITIES:Purchases
                of securities available for sale
            
            
            (4,442,950
            )
            
            
            (10,653,655
            )Maturities
                of securities available for sale
            
            
            4,512,471
            
            
            
            2,480,092Net
                increase in loans
            
            
            (14,133,604
            )
            
            
            (22,304,987
            )Proceeds
                from the sales of foreclosed properties
            
            
            691,825
            
            
            
            169,817Proceeds
                from sales of securities
            
            
            283,268
            
            
            
            10,002,906Proceeds
                from sales of premises and equipment
            
            
            50
            
            
            
            50Additions
                to premises and equipment
            
            
            (372,520
            )
            
            
            (789,838
            )Purchase
                of Federal Home Loan Bank Stock
            
            
            (204,300
            )
            
            
            (341,800
            )FHLB
                Stock Redemption
            
            
            198,000
            
            
            
            416,300Net
                cash used in investing activities
            
            
            (13,467,760
            )
            
            
            (21,021,115
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                increase (decrease) in demand deposits, NOWaccounts
                and savings accounts
            
            
            (1,766,056
            )
            
            
            435,480Net
                increase in certificates of deposits
            
            
            16,085,991
            
            
            
            15,322,702Net
                increase in short-term borrowings
            
            
            113,669
            
            
            
            306,000Cash
                paid in lieu of fractional shares
            
            
            (1,930
            )
            
            
            (2,762
            )Issuance
                of common stock
            
            
            21,587
            
            
            
            4,080Tax
                Benefit from Nonqualified Stock Options
            
            
            19,946
            
            
            
            -Proceeds
                from Federal Home Loan Bank advances
            
            
            5,200,000
            
            
            
            14,820,000Maturities
                of Federal Home Loan Bank advances
            
            
            (5,200,000
            )
            
            
            (14,820,000
            )Net
                cash provided by financing activities
            
            
            14,473,207
            
            
            
            16,065,500NET
                INCREASE (DECREASE) IN      CASH AND CASH
                EQUIVALENTS
            
            
            3,500,829
            
            
            
            (1,834,335
            )CASH
                AND CASH EQUIVALENTS:Beginning
                of year
            
            
            5,026,627
            
            
            
            6,860,962End
                of year
            
            $
            8,527,456
            
            
            $
            5,026,627SUPPLEMENTAL
                DISCLOSURE:Cash
                paid for interest
            
            $
            5,226,186
            
            
            $
            3,964,396Cash
                paid for income taxes
            
            $
            1,332,740
            
            
            $
            1,115,472NONCASH
                TRANSACTIONS:Loans
                transferred to foreclosed properties
            
            $
            662,420
            
            
            $
            173,927Net
                unrealized gain (loss) on investment securities availablefor
                sale, net of deferred income tax expense (benefit)
            
            $
            120,777
            
            
            $
            312,260





See
            Notes to Consolidated Financial Statements.
 26
 Index





WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








1.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES





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




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




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




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




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




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




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




27
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








1.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





Allowance
      for Loan Losses (Continued)


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





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




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




Mortgage
      Servicing Rights




When
      mortgage loans are sold, the proceeds are allocated between the related loans
      and the retained servicing rights based on their relative fair
      values.  Servicing assets are amortized over the average period of
      estimated net servicing income.  The Company recorded amortization of
      mortgage servicing rights of $27,957 and $3,647 during the years ended December
      31, 2007 and 2006, respectively.




All
      servicing assets are assessed for impairment based on their fair
      value.  The Company recognized no impairment during the years ended
      December 31, 2007 and 2006.




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





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




28
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006









1.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES (Continued)






Stock
      Compensation Plans (Continued)


At
      December 31, 2007, the Company had two stock-based compensation plans, which
      had
      fully vested during 2005.  Therefore, no compensation costs were
      recognized for stock option awards during 2007 and 2006,
      respectively.





The
      Company estimated aggregate option values of $3.10 for 2007 and 2006,
      respectively, in order to compute its estimation of option compensation expense
      associated with the fair value method, using The Black Scholes
      Model.  The following assumptions were used for 2007 and
      2006.





Risk-free
                rate
            
            
            5.12
            %Average
                expected term (years)
            
            
            9.06Expected
                volatility
            
            
            123.06
            %Expected
                dividend yield
            
            
            0.00
            %Expected
                turnover
            
            
            2.00
            %








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




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




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




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




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




Uncertainty
      in Income Taxes applies to all “tax positions” within the scope of SFAS
      109.  The Company applies a “more-likely-than-not” threshold for
      initial recognition of a tax benefit in the financial statements, and requires
      measurement of the amount of benefit to be recognized based upon the larger
      amount of benefit that is greater than 50% likely of being realized upon
      ultimate settlement with the taxing authority.





In
      July 2006, the FASB issued Financial
      Interpretation No.48,
“Accounting
      for Uncertainty
      in Income Taxes-an interpretation of FASB Statement No.109”(“FIN
      48”), which is a change
      in accounting for
      income taxes. FIN 48 specifies how tax benefits for uncertain tax positions
      are
      to be recognized, measured, and derecognizedin financial statements;
      requires
      certain disclosures of uncertain tax matters; specifies how reserves
      for uncertain
      tax positions should be classified on the balance sheet; and provides transition
      and interim period


29
 Index





WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006









1.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES (Continued)





guidance,
      among other provisions. FIN 48
      is effective for fiscal years beginning after December 15, 2006 and as a
      result, was effective for the Company in the first quarter offiscal 2007. The adoption
      of FIN 48 did
      not have a material impact on the Company’s
      Consolidated Financial
      Statements.





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, commercial and consumer loans is discontinued
      at the time the loan is 90





days
      delinquent.  Other personal loans are typically charged off no later
      than 180 days past due.  In all cases, loans are placed on nonaccrual
      or charged-off at an earlier date if collection of principal or interest is
      considered doubtful.





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





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




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




Basic
      earnings per common share represent income available to common stockholders
      divided by the weighted-average number of common shares outstanding during
      the
      period. Diluted earnings per common share reflect additional common shares
      that
      would have been outstanding if dilutive potential common shares had been issued,
      as well as any adjustment to income that would result from the assumed issuance.
      Potential common shares that may be issued by the Company relate solely to
      outstanding stock options and are determined using the treasury stock method.
      During 2007 and 2006, there were no shares excluded due to
      antidilution.




Basic
      and
      diluted net income per share have been computed based upon net income as
      presented in the accompanying statements of operations divided by the weighted
      average number of common shares outstanding or assumed to be outstanding, after
      retroactively adjusting for the 5-for-4 stock split paid June 2007, as
      summarized below:




2007
            
            
            2006Weighted
                average number of common shares used inin
                computing basic net income per share
            
            
            2,111,612
            
            
            
            2,101,740Effect
                of dilutive stock options
            
            
            175,050
            
            
            
            171,788Weighted
                average number of common shares
                and      dilutive potentialcommon
                shares used in computing diluted net income per share
            
            
            2,286,662
            
            
            
            2,273,528


30
 Index








WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








1.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES (Continued)







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– SFAS No. 141 (R), Business Combinations,
      requires the acquiring entity in a business combination to recognize all (and
      only) the assets acquired and liabilities assumed in the transaction;
      establishes the acquisition-date fair value as of the measurement objective
      for
      all assets acquired and liabilities assumed; and requires the acquirer to
      disclose to investors and other users all of the information they need to
      evaluate and understand the nature and financial effect of the business
      combination.  In addition, this statement expands the scope of
      acquisition accounting to all transactions and circumstances under which control
      of a business is obtained.  This statement applies prospectively to
      business combinations for which the acquisition date is on or after the
      beginning of the first annual reporting period beginning on or after December
      15, 2008.  Earlier adoption is prohibited.





In
      February 2007, the FASB issued Statement of Financial Accounting Standards
      No.
      159, The Fair Value Option for
      Financial Assets and Financial Liabilities (SFAS 159), which permits
      entities to choose to measure many financial instruments and certain other
      items
      at fair value.  The objective of this standard is to improve financial
      reporting by providing entities with the opportunity to mitigate volatility
      in
      reported earnings caused by measuring related assets and liabilities differently
      without having to apply complex hedge accounting provisions.  This
      statement is effective for fiscal years beginning after November 15, 2007,
      with
      early adoption permitted under certain circumstances.  The Company did
      not elect early adoption.  The Company has determined the impact of
      adopting SFAS No. 159 on its financial statements to be immaterial.





In
        September 2006, the FASB issued SFAS 157, Fair Value Measurements,
        which upon adoption will replace various definitions of fair value in existing
        accounting literature with a single definition, will establish a framework
        for
        measuring fair value, and will require additional disclosures about fair
        value
        measurements. SFAS 157 clarifies that fair value is the price that would be
        received to sell an asset or the price paid to transfer a liability in the
        principal or most advantageous market available to the entity and emphasizes
        that fair value is a market-based measurement and should be based on the
        assumptions market participants would use. The statement also creates a
        three-level hierarchy under which individual fair value estimates are to
        be
        ranked based on the relative reliability of the inputs used in the valuation.
        This hierarchy is the basis for the disclosure requirements, with fair value
        estimates based on the least reliable inputs requiring more extensive
        disclosures about the valuation method used and the gains and losses associated
        with those estimates. SFAS 157 is required to be applied whenever another
        financial accounting standard requires or permits an asset or liability to
        be
        measured at fair value. The statement does not expand the use of fair value
        to
        any new circumstances.  SFAS is effective for financial statements
        issued for fiscal years beginning after November 15, 2007, and interim periods
        within those fiscal years.  The Company has determined the impact of
        adopting SFAS 157 on its financial statements to be
        immaterial.





In
      September 2006, the Emerging Issues Task Force (“EITF”) issued EITF Issue 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
      Endorsement Split-dollar Life Insurance Arrangements” (“EITF Issue
      06-4”).  IETF Issue 06-4 requires that for endorsement split-dollar
      insurance arrangements that provide a benefit to an employee that extends to
      postretirement periods, an employer should recognize a liability for future
      benefits in accordance with FASB Statement No. 106 or Accounting Principles
      Board (“APB”) Opinion No. 12 based on the substantive agreement of the
      employee.  If the employee has effectively agreed to maintain a life
      insurance policy during the postretirement periods, the costs of the life
      insurance policy during the postretirement periods should be accrued in
      accordance with either FASB Statement No. 106 or APB No. 12.  If the
      employer has agreed to provide a death benefit, the employer should recognize
      a
      liability for the future death benefit in accordance with either FASB Statement
      No. 106 or APB No. 12.  EITF Issue 06-4 is effective for fiscal years
      beginning after December 15, 2007.  The adoption of EITF Issue 06-4
      did not have a material financial  impact on the consolidated
      financial statements.


31
 Index





WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








1.
            SUMMARY
                OF SIGNIFICANT ACCOUNTING POLICIES (Continued)








In
      December 2007, The SEC staff issued SAB No. 110, Certain Assumptions Used
      in
      Valuation Methods, which  expresses the views of the staff
      regarding the use of a “simplified” method, as discussed in SAB No. 107, Share-Based Payment, in
      developing an estimate of expected term of “plain vanilla” share options in
      accordance with SFAS No. 123 (R), Share-Based
      Payment.  This simplified method will continue to be accepted
      by the staff provided certain conditions are met whereby the Company’s
      historical share option exercise experience does not provide a reasonable basis
      upon which to estimate the expected term of the plain vanilla
      option.





Reclassifications
      - Certain amounts in the prior year’s financial statements have been
      reclassified to conform to the 2007 presentation.  The
      reclassifications had no effect on net income or shareholders’ equity as
      previously recorded.




2.
            INVESTMENT
                SECURITIES





The
      amortized cost, gross unrealized gains and losses and fair values of investment
      securities at December 31, 2007 and 2006 are as follows:





Available-for-sale
      securities consist of the following at December 31, 2007:





Gross
            
            
            GrossAmortized
            
            
            unrealized
            
            
            unrealized
            
            
            Faircost
            
            
            gains
            
            
            losses
            
            
            valueType
                and Maturity GroupMortgage-backed
                securities -Within
                1 year
            
            $
            787,042
            
            
            $
            -
            
            
            $
            (6,884
            )
            
            $
            780,158U.S.
                Government agencies due –Within
                1 to 5 years
            
            
            500,000
            
            
            
            -
            
            
            
            (84
            )
            
            
            499,916Mortgage-backed
                securities due -Within
                1 to 5 years
            
            
            1,521,833
            
            
            
            -
            
            
            
            (13,011
            )
            
            
            1,508,822Municipal
                bonds due –Within
                1 to 5 years
            
            
            556,685
            
            
            
            2,208
            
            
            
            -
            
            
            
            558,893Total
                due within 1 to 5 years
            
            
            2,578,518
            
            
            
            2,208
            
            
            
            (13,095
            )
            
            
            2,567,631U.S.
                Government agencies due -Within
                5 to 10 years
            
            
            3,057,388
            
            
            
            38,185
            
            
            
            (8,564
            )
            
            
            3,087,009Mortgage-backed
                securities due -Within
                5 to 10 years
            
            
            2,109,757
            
            
            
            1,274
            
            
            
            (19,676
            )
            
            
            2,091,355Municipal
                bonds due –Within
                5 to 10 years
            
            
            1,090,077
            
            
            
            1,933
            
            
            
            (15,749
            )
            
            
            1,076,261Total
                due within 5 to 10 years
            
            
            6,257,222
            
            
            
            41,392
            
            
            
            (43,989
            )
            
            
            6,254,625Mortgage-backed
                securities due -after
                10 years
            
            
            9,320,592
            
            
            
            103,906
            
            
            
            (6,887
            )
            
            
            9,417,611Municipal
                bonds due –after
                10 years
            
            
            7,147,365
            
            
            
            5,302
            
            
            
            (59,398
            )
            
            
            7,093,269Total
                due after years
            
            
            16,467,957
            
            
            
            109,208
            
            
            
            (66,285
            )
            
            
            16,510,880Total
                at December 31, 2007
            
            $
            26,090,739
            
            
            $
            152,808
            
            
            $
            (130,253
            )
            
            $
            26,113,294








32
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








2.
            INVESTMENT
                SECURITIES (Continued)





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





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





For
      the
      year ended December 31, 2007 and 2006, proceeds from the sales of investment
      securities available for sale totaled $283,268 and $10,002,906,
      respectively.  Gross realized losses from the sales in 2007 and 2006
      amounted to $1,093 and $249,674, respectively.





Securities
      with carrying values of $1,915,652 and $1,400,000 at December 31, 2007 and
      2006,
      respectively, were pledged to secure public monies on deposit as required by
      law.





The
      following tables show investments’ gross unrealized losses and fair value,
      aggregated by investment category and length of time that individual securities
      have been in a continuous unrealized loss position, at December 31, 2007 and
      2006.  These investments represent securities that the Company has the
      positive intent and ability to hold to maturity.  The unrealized
      losses on investment securities as of December 31, 2007 and 2006 are a result
      of
      volatility in the market during 2007 and 2006 and relate to two U.S. Government
      agency bonds, 15 Municipal bonds and 15 Mortgage-backed securities at December
      31, 2007 and four U.S. Government agency bonds, 18 Municipal bonds and 18
      Mortgage-backed securities at December 31, 2006. All unrealized losses on
      investment securities resulted from increases in interest rates and are
      considered by management to be temporary given the credit ratings on these
      investment securities and the duration of the unrealized loss.








33
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








2.
            INVESTMENT
                SECURITIES (Continued)





December
      31, 2007:





Less
                Than 12 Months
            
            
            12
                Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealizedvalue
            
            
            losses
            
            
            value
            
            
            losses
            
            
            value
            
            
            lossesSecurities
                available for sale:U.S.
                government agencies
            
            $
            1,915,243
            
            
            $
            (8,648
            )
            
            $
            -
            
            
            $
            -
            
            
            $
            1,915,243
            
            
            $
            (8,648
            )Mortgage-backed
                securities
            
            
            -
            
            
            
            -
            
            
            
            4,697,677
            
            
            
            (46,458
            )
            
            
            4,697,677
            
            
            
            (46,458
            )Municipal
                bonds
            
            
            3,667,339
            
            
            
            (41,765
            )
            
            
            2,342,558
            
            
            
            (33,382
            )
            
            
            6,009,897
            
            
            
            (75,147
            )Total
                temporarily impairedsecurities
            
            $
            5,582,582
            
            
            $
            (50,413
            )
            
            $
            7,040,235
            
            
            $
            (79,840
            )
            
            $
            12,622,817
            
            
            $
            (130,253
            )




December
                31, 2006:Less
                Than 12 Months
            
            
            12
                Months or More
            
            
            TotalFair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealized
            
            
            Fair
            
            
            Unrealizedvalue
            
            
            losses
            
            
            value
            
            
            losses
            
            
            value
            
            
            lossesSecurities
                available for sale:U.S.
                government agencies
            
            $
            -
            
            
            $
            -
            
            
            $
            3,090,229
            
            
            $
            (30,005
            )
            
            $
            3,090,229
            
            
            $
            (30,005
            )Mortgage-backed
                securities
            
            
            634,117
            
            
            
            (3,912
            )
            
            
            6,983,946
            
            
            
            (189,628
            )
            
            
            7,618,063
            
            
            
            (193,540
            )Municipal
                bonds
            
            
            3,312,138
            
            
            
            (21,855
            )
            
            
            2,387,884
            
            
            
            (47,386
            )
            
            
            5,700,022
            
            
            
            (69,241
            )Total
                temporarily impairedsecurities
            
            $
            3,946,255
            
            
            $
            (25,767
            )
            
            $
            12,462,059
            
            
            $
            (267,019
            )
            
            $
            16,408,314
            
            
            $
            (292,786
            )








The
                aggregate cost of the Company’s cost method investment, Federal Home Loan
                Bank stock, totaled $463,300 and $457,000 at December 31, 2007 and
                2006,
                respectively.  The Company estimated that the fair value equaled
                the cost of the investment (that is, the investment was not
                impaired).  The investment in Federal Home Loan Bank stock is
                not reflected in investment securities; the investment is carried
                as a
                separate line item in the financial statements.




3.
            LOANS




Loans
      at
      December 31, 2007 and 2006 classified by type are as follows:




2007
            
            
            2006Real
                estate:Construction
            
            $
            36,559,609
            
            
            $
            30,224,993Mortgage
            
            
            72,149,288
            
            
            
            67,334,420Commercial,
                financial and agricultural
            
            
            24,792,538
            
            
            
            23,318,857Consumer
            
            
            2,569,211
            
            
            
            1,851,043Subtotal
            
            
            136,070,646
            
            
            
            122,729,313Net
                deferred loan origination fees
            
            
            (336,422
            )
            
            
            (265,593
            )Total
            
            $
            135,734,224
            
            
            $
            122,463,720












34
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006









3.
            LOANS
                (Continued)




Nonperforming
      assets at December 31, 2007 and 2006:




2007
            
            
            2006Nonaccrual
                loans
            
            $
            195,683
            
            
            $
            975,190Foreclosed
                properties
            
            
            87,787
            
            
            
            106,000Repossessions
            
            
            -
            
            
            
            -Total
            
            $
            283,470
            
            
            $
            1,081,190





No
      loans
      have been restructured during 2007 or 2006. Loans totaling $195,683 and $975,190
      were considered impaired as of December 31, 2007 and 2006,
      respectively.  Impaired loans of $195,683 and $975,190 had related
      allowances for loan losses of $120 and $3,000 at December 31, 2007 and 2006,
      respectively. The average recorded investment in impaired loans during the
      years
      ended December 31, 2007 and 2006 was $400,074 and $1,320,500,
      respectively.  For the years ended December 31, 2007 and 2006, the
      Company recognized interest income from impaired loans of approximately $1,535
      and $5,270, 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, 2006, directors’ direct and indirect indebtedness to the Company
      aggregated $1,897,882.  During 2007, $1,450,246 in new loans were made
      and repayments of $1,679,462 were collected, resulting in a balance of
      $1,668,666 at December 31, 2007.  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 uncollectibility or present other unfavorable
      features.




4.
            ALLOWANCE
                FOR LOAN LOSSES




Changes
      in the allowance for loan losses for the years ended December 31, 2007 and
      2006 are as follows:




2007
            
            
            2006Balance
                at beginning of year
            
            $
            1,884,080
            
            
            $
            1,760,377Provision
                for loan losses
            
            
            406,725
            
            
            
            284,645Charge-offs
            
            
            (256,741
            )
            
            
            (218,455
            )Recoveries
            
            
            56,061
            
            
            
            57,513Balance
                at end of year
            
            $
            2,090,125
            
            
            $
            1,884,080





35
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006







5.
            PREMISES
                AND EQUIPMENT




Premises
      and equipment at December 31, 2007 and 2006 are as follows:




2007
            
            
            2006Land
            
            $
            113,900
            
            
            $
            113,900Land
                improvements
            
            
            121,873
            
            
            
            121,873Building
                and improvements
            
            
            2,127,532
            
            
            
            2,069,953Furniture
                and equipment
            
            
            2,046,200
            
            
            
            2,212,260Leasehold
                improvements
            
            
            783,718
            
            
            
            697,738Construction
                in progress
            
            
            62,447
            
            
            
            -Total
            
            
            5,255,670
            
            
            
            5,215,724Less
                accumulated depreciation and amortization
            
            
            (2,274,507
            )
            
            
            (2,211,134
            )Total
            
            $
            2,981,163
            
            
            $
            3,004,590





Depreciation
      expense for the years ended December 31, 2007 and 2006 amounted to $395,947
      and
      $367,972, respectively.








6.
            DEPOSIT
                ACCOUNTS




At
      December 31, 2007, the scheduled maturities of time deposits are as
      follows:




2008
            
            $
            74,478,6192009
            
            
            331,4732010
            
            
            150,3422011
            
            
            9,921Total
            
            $
            74,970,355








7.
            INCOME
                TAXES




The
      significant components of the income tax provision for the years ended
      December 31, 2007 and 2006 follow:





2007
            
            
            2006Current
                tax provisionFederal
            
            $
            1,016,221
            
            
            $
            876,193State
            
            
            241,412
            
            
            
            199,557Total
                current provision
            
            
            1,257,633
            
            
            
            1,075,720Deferred
                tax provisionFederal
            
            
            (108,302
            )
            
            
            (2,501
            )State
            
            
            (20,604
            )
            
            
            2,459Total
                deferred tax provision
            
            
            (128,906
            )
            
            
            (42
            )Net
                provision for income taxes
            
            $
            1,128,727
            
            
            $
            1,075,678







36
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006







7.
            INCOME
                TAXES (Continued)




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





2007
            
            
            2006Expense
                computed at statutory rate of 34%
            
            $
            1,079,409
            
            
            $
            1,067,059Effect
                of state income taxes
            
            
            145,733
            
            
            
            133,331Tax-exempt
                income
            
            
            (95,775
            )
            
            
            (96,362
            )Other
            
            
            (640
            )
            
            
            (29,350
            )$
            1,128,727
            
            
            $
            1,075,678







Significant
                components of deferred taxes at December 31, 2007 and 2006 are as
                follows:




2007
            
            
            2006Deferred
                tax assets:Allowance
                for loan losses
            
            $
            521,108
            
            
            $
            422,268Net
                unrealized losses on available for sale securities
            
            
            -
            
            
            
            67,072Deferred
                compensation
            
            
            105,968
            
            
            
            102,221Other
            
            
            36,816
            
            
            
            14,680Total
                deferred tax assets
            
            
            663,892
            
            
            
            606,241Deferred
                tax liabilities:Premises
                and equipment
            
            
            (37,642
            )
            
            
            (39,881
            )Prepaid
                expenses
            
            
            (44,960
            )
            
            
            (46,904
            )Net
                unrealized gains on available for sale securities
            
            
            (8,696
            )
            
            
            -Total
                deferred tax liabilities
            
            
            (91,298
            )
            
            
            (86,785
            )Net
                recorded deferred tax asset
            
            $
            572,594
            
            
            $
            519,456





The
      Company adopted the provisions of FASB Interpretation No. 48 (FIN
      48).  There was no material impact from the adoption of FIN
      48.  It is the Company’s policy to recognize interest and penalties
      associated with uncertain tax positions as components of income
      taxes.  There were no interest or penalties accrued during the
      year.  The Company’s federal and state tax returns are subject to
      examination for the years 2004, 2005 and 2006.





8.
            LEASES




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





2008
            
            $
            184,5302009
            
            
            184,5302010
            
            
            184,5302011
            
            
            188,2802012
            
            
            193,530Total
            
            $
            935,400


37
 Index







WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








The
      land
      for a branch office is leased from a partnership that includes a director of
      the
      Company. The annual rental is $43,200. Rental expense charged to operations
      under all operating lease agreements was $237,706 and $180,009 for the years
      ended December 31, 2007 and 2006, respectively.







9.
            STOCK
                OPTIONS




In
      2007, the Company’s shareholders
      approved the Weststar Financial Services Corporation 2007 Nonstatutory Stock
      Option Plan (“Nonstatutory Plan”) and the Weststar Financial Services
      Corporation 2007 Incentive Stock Option Plan (“Incentive Plan”). The maximum
      number of shares available for grant under the Nonstatutory Plan and Incentive
      Plan is 50,000 and 75,000, respectively. No options were granted from the
      respective pools or were outstanding at December 31, 2007.





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 164,645 and 166,485, respectively.
      Of
      the maximum number of shares available for grant, 118,013 were outstanding
      under
      the Nonstatutory Plan and 143,272 were outstanding under the Incentive Plan
      at
      December 31, 2007. Option prices for both plans are established at market value,
      which was $3.26, on the dates granted by the Board of
      Directors.





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





Stock
      option information related to the
      plans for the years ended December 31, 2007 and 2006
      follows:





Exercise
                PriceShares
            
            
            Per
                ShareNonstatutory
                PlanOutstanding,
                December 31, 2004
            
            
            123,875
            
            
            $
            3.26Outstanding,
                December 31, 2005
            
            
            123,875
            
            
            
            3.26Outstanding,
                December 31, 2006
            
            
            123,875
            
            
            
            3.26Exercised
            
            
            (5,862
            )
            
            
            3.26Outstanding,
                December 31, 2007
            
            
            118,013
            
            
            
            3.26Incentive
                PlanOutstanding,
                December 31, 2004
            
            
            161,040
            
            
            $
            3.26Cancelled
            
            
            (388
            )
            
            
            3.26Exercised
            
            
            (3,000
            )
            
            
            3.26Outstanding,
                December 31, 2005
            
            
            157,652
            
            
            
            3.26Exercised
            
            
            (1,250
            )
            
            
            3.26Outstanding,
                December 31, 2006
            
            
            156,402
            
            
            
            3.26Exercised
            
            
            (13,130
            )
            
            
            3.26Outstanding,
                December 31, 2007
            
            
            143,272
            
            
            
            3.26










38
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006







9.
            STOCK
                OPTIONS (Continued)







At
                December 31, 2007Outstanding
                Options
            
            
            Exercisable
                OptionsRemaining
            
            
            Weighted
            
            
            
            
            
            WeightedLife
            
            
            Average
            
            
            
            
            
            AverageExercise
                Price
            
            
            Shares
            
            
            (Years)
            
            
            Price
            
            
            Shares
            
            
            PriceNonstatutory
                Plan$3.26
            
            
            
            118,013
            
            
            
            3.5
            
            
            $
            3.26
            
            
            
            118,013
            
            
            $
            3.26Incentive
                Plan$3.26
            
            
            
            143,272
            
            
            
            3.5
            
            
            $
            3.26
            
            
            
            143,272
            
            
            $
            3.26





There
      were 128,933 shares available for future grants at December 31,
      2007.  The aggregate intrinsic values of outstanding and exercisable
      shares at December 31, 2007 and 2006, respectively, were $1,826,382 and
      $2,784,850.  All options were vested prior to adoption of SFAS No.
      123(r).





10.
            EMPLOYEE
                BENEFIT PLANS




The
      Company sponsors a defined contribution 401(k) plan which allows those employees
      who have attained the age of 21 years and worked 1,000 hours to elect to
      contribute a portion of their salary to the plan in accordance with the
      provisions and limits set forth in the plan document. The plan was established
      in March 1999. The Company makes discretionary matching contributions in an
      amount determined each plan year to 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 $69,102 and $79,495
      for the years ended December 31, 2007 and 2006, respectively.





During
      2001, a key employee entered into a salary continuation agreement with the
      Company providing for periodic payments at the retirement or death of the
      employee. The present value of the estimated liability, which was $274,888
      and
      $265,167 at December 31, 2007 and 2006, respectively, is being accrued over
      the
      vesting period defined in the agreement, which has fully vested. The related
      expense was $9,721 and $13,822 based upon a discount rate of 6.182% and 5.820%
      for the years ended December 31, 2007 and 2006, 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, 2007 was $320,436.





11.
            BORROWINGS





SHORT-TERM
                BORROWINGS





The
                Company has $3,000,000 available in overnight federal fund lines
                of credit
                and an approximately $13,402,000 open line of credit with the Federal
                Home
                Loan Bank (FHLB). Pursuant to a collateral agreement with the FHLB,
                advances are collateralized by qualifying first mortgage loans. Federal
                funds purchased generally represent overnight borrowing by the Company
                for
                temporary funding requirements. Securities sold under agreements
                to
                repurchase represent short-term borrowings by the Bank collateralized
                by
                municipal securities.





39
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








11.
            BORROWINGS
                (Continued)





Short-term
      borrowings at December 31 are summarized as follows:





2007
            
            
            2006Short-term
                borrowings:Federal
                funds purchased
            
            $
            -
            
            
            $
            306,000Securities
                sold under agreements to repurchase
            
            
            419,669
            
            
            
            -Total
                overnight and short-term borrowings
            
            $
            419,669
            
            
            $
            306,000





A
      summary
      of selected data related to federal funds purchased, securities sold under
      agreements to repurchase and other short-term borrowed funds
      follows:





2007
            
            
            2006Federal
                funds purchased:Maximum
                amount outstanding at any month-end during the year
            
            
            464,000
            
            
            
            1,389,000Average
                daily balance outstanding during the year
            
            
            299,493
            
            
            
            548,674Average
                annual interest rate paid during the year
            
            
            5.71
            %
            
            
            5.42
            %Securities
                sold under agreements to repurchase:Balance
                at December 31
            
            
            419,669
            
            
            
            -Weighted
                average interest rate at December 31
            
            
            3.42
            %
            
            
            -Maximum
                amount outstanding at any month-end during the year
            
            
            419,669
            
            
            
            -Average
                daily balance outstanding during the year
            
            
            230,435
            
            
            
            -Average
                annual interest rate during the year
            
            
            4.20
            %
            
            
            -Other
                Short-term borrowings:Balance
                outstanding at year end
            
            $
            -
            
            
            $
            -Maximum
                outstanding at any month-end during the year
            
            
            4,400,000
            
            
            
            3,550,000Average
                daily balance
            
            
            516,986
            
            
            
            1,076,767Average
                interest rate during the year
            
            
            5.58
            %
            
            
            5.35
            %Average
                interest rate at end of year
            
            
            -
            
            
            
            -





LONG-TERM
      DEBT





There
      was one advance from the FHLB in
      the amount of $4,000,000 at a fixed rate of 5.01% outstanding at December 31,
      2006.  The 4,000,000 advance is due in full on March 24, 2010;
      interest is payable monthly.





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





As
      of
      December 31, 2007, the Trust had the following Trust Preferred Securities
      outstanding, and the Company had the following issues of junior subordinated
      debentures, all held by the Trust, outstanding:


40
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








11.
            BORROWINGS
                (Continued)





LONG-TERM
      DEBT
      (Continued)





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





The
      Company owns all of the common stock of the Trust, which has issued trust
      preferred securities in conjunction with the Company issuing junior subordinated
      debentures to the Trust.  The terms of the junior subordinated
      debentures are substantially the same as the terms of the trust preferred
      securities.  The interest rate in effect is LIBOR plus
      3.15%.  At December 31, 2007 the effective rate was
      8.39%.  The Company’s obligations under the debentures and a separate
      guarantee agreement constitute a full and unconditional guarantee by the Company
      of the obligations of the Trust.





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





12.
            REGULATION
                AND REGULATORY RESTRICTIONS





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





The
      Company is not presently subject to any regulatory restrictions on
      dividends.  The Company’s ability to pay dividends depends to a large
      extent on the amount of dividends paid by the Bank and any other
      subsidiaries.  The Bank, as a North Carolina banking corporation, may
      pay dividends only out of undivided profits as determined pursuant to North
      Carolina General Statutes Section 53-87.  As of December 31, 2007, the
      Bank had undivided profits of $6,389,333.  Additionally, current
      federal regulations require that the Bank maintain a ratio of total capital
      to
      assets, as defined by regulatory authorities, in excess of 6%.  As of
      December 31, 2007, the ratio was 10.39% for the Bank, leaving all $6,389,333
      of
      the Bank’s undivided profits available for the payment of
      dividends.





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





Quantitative
      measures established by regulation to ensure capital adequacy require the
      Company to maintain minimum amounts and ratios (set forth in the table below)
      of
      total and Tier I capital (as defined in the regulations) to risk-weighted assets
      (as defined), and of Tier I capital (as defined) to average assets (as defined).
      As of December 31, 2007, 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, 2007 and 2006, that
      the Company meets all capital adequacy requirements to which it is subject.
      To
      be categorized as adequately capitalized under the regulatory framework for
      prompt corrective action, the Company must monitor the minimum capital ratios
      as
      set forth in the table below.


41
 Index




WESTSTAR
        FINANCIAL SERVICES CORPORATION & SUBSIDIARY
 NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
        Ended December 31, 2007 and 2006


12.
            REGULATION
                AND REGULATORY RESTRICTIONS (Continued)





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





Minimum
                To Be WellMinimum
            
            
            Capitalized
                UnderFor
                Capital
            
            
            Prompt
                CorrectiveActual
            
            
            Requirement
            
            
            Action
                ProvisionsAmount
            
            
            Ratio
            
            
            Amount
            
            
            Ratio
            
            
            Amount
            
            
            RatioAs
                of December 31, 2007:Total
                Capital (to RiskWeighted
                Assets)Consolidated
            
            $
            21,005
            
            
            
            14.29
            %
            
            $
            N/A
            
            
            
            N/A
            
            
            $
            N/A
            
            
            
            N/ABank
            
            
            19,888
            
            
            
            13.55
            %
            
            
            11,738
            
            
            
            8.00
            %
            
            
            14,673
            
            
            
            10.00
            %Tier
                I Capital (to RiskWeighted
                Assets)Consolidated
            
            
            19,165
            
            
            
            13.04
            %
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ABank
            
            
            18,051
            
            
            
            12.30
            %
            
            
            5,869
            
            
            
            4.00
            %
            
            
            8,804
            
            
            
            6.00
            %Tier
                I Capital (toAverage
                Assets)Consolidated
            
            
            19,165
            
            
            
            11.17
            %
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/A
            
            
            
            N/ABank
            
            
            18,051
            
            
            
            10.54
            %
            
            
            6,851
            
            
            
            4.00
            %
            
            
            8,564
            
            
            
            5.00
            %




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





13.
            COMMITMENTS
                AND CONTINGENCIES





The
      Company has various financial instruments (outstanding commitments) with
      off-balance sheet risk that are issued in the normal course of business to
      meet
      the financing needs of its customers. These financial instruments include
      commitments to extend credit and standby letters of credit. Commitments to
      extend credit are legally binding agreements to lend to a customer as long
      as
      there is no violation of any condition established in the contract. Commitments
      generally have fixed expiration dates or other termination clauses. Since many
      of the commitments are expected to expire without being drawn upon, the total
      commitment amounts outstanding do not necessarily represent future cash
      requirements. Standby letters of credit represent conditional commitments issued
      by the Company to assure the performance of a customer to a third party. The
      unused portion of commitments to extend credit at December 31, 2007 and 2006
      was
      $38,206,567 and $30,044,210, respectively.


42
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








13.
            COMMITMENTS
                AND CONTINGENCIES (Continued)





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





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





14.
            FAIR
                VALUE OF FINANCIAL INSTRUMENTS





The
      fair
      value estimates presented herein are based on pertinent information available
      to
      management as of December 31, 2007. 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.





2007
            
            
            2006Carrying
            
            
            Estimated
            
            
            Carrying
            
            
            Estimatedamount
            
            
            fair
                value
            
            
            amount
            
            
            fair
                value(In
                thousands)Assets:Cash
                and cash equivalents
            
            $
            8,527
            
            
            $
            8,527
            
            
            $
            5,027
            
            
            $
            5,027Investment
                securities
            
            
            26,113
            
            
            
            26,113
            
            
            
            26,241
            
            
            
            26,241Federal
                Home Loan Bank stock
            
            
            463
            
            
            
            463
            
            
            
            457
            
            
            
            457Loans
            
            
            133,644
            
            
            
            134,659
            
            
            
            120,580
            
            
            
            121,866Interest
                receivable
            
            
            973
            
            
            
            973
            
            
            
            919
            
            
            
            919Bank
                owned life insurance
            
            
            351
            
            
            
            351
            
            
            
            300
            
            
            
            300Liabilities:Demand
                deposits, NOW accounts,money
                market accounts, savings
            
            
            74,221
            
            
            
            74,221
            
            
            
            75,987
            
            
            
            75,987Time
                deposits
            
            
            74,970
            
            
            
            74,898
            
            
            
            58,884
            
            
            
            58,838Short-term
                borrowings
            
            
            420
            
            
            
            420
            
            
            
            306
            
            
            
            306Interest
                payable
            
            
            568
            
            
            
            568
            
            
            
            498
            
            
            
            498Long-term
                debt
            
            
            8,124
            
            
            
            8,275
            
            
            
            8,124
            
            
            
            8,124





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




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




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










43
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








14.
            FAIR
                VALUE OF FINANCIAL INSTRUMENTS (Continued)





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





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





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





15.         
      PARENT COMPANY FINANCIAL
      DATA





The
      following is a summary of the
      condensed financial statements of Weststar Financial Corporation as of and
      for
      the years ended December 31, 2007 and 2006:





Condensed
      Balance Sheets


December
      31, 2007 and 2006





2007
            
            
            2006AssetsCash
                and due from banks
            
            $
            1,002,851
            
            
            $
            790,892Investment
                in The Bank of Asheville, at equity
            
            
            18,065,846
            
            
            
            16,031,692Investment
                in Weststar Financial Services Corporation I
            
            
            124,000
            
            
            
            124,000Investment
                in Bank of Asheville Mortgage Company, LLC, at equity
            
            
            (992
            )
            
            
            44,107Other
                assets
            
            
            192,217
            
            
            
            188,014Total
                assets
            
            $
            19,383,922
            
            
            $
            17,178,705Liabilities
                and Shareholders’ EquityLiabilities:Junior
                subordinated debentures payable toWeststar
                Financial Services Corporation I
            
            $
            4,124,000
            
            
            $
            4,124,000Other
            
            
            80,683
            
            
            
            81,852Shareholders’
                equity
            
            
            15,179,239
            
            
            
            12,972,853Total
                liabilities and shareholders’ equity
            
            $
            19,383,922
            
            
            $
            17,178,705


44
 Index


WESTSTAR
      FINANCIAL SERVICES CORPORATION & SUBSIDIARY


NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS


Years
      Ended December 31, 2007 and 2006








15.
            PARENT
                COMPANY FINANCIAL DATA
                (Continued)





Condensed
      Statements of Operations


Years
      Ended December 31, 2007 and 2006





2007
            
            
            2006Interest
                Income:Interest-bearing
                deposits
            
            $
            78,633
            
            
            $
            66,472Interest
                Expense:Junior
                subordinated debentures issued toWeststar
                Financial Services Corporation I
            
            
            354,648
            
            
            
            345,661Non-interest
                Income:Equity
                in earnings of subsidiary bank
            
            
            2,274,357
            
            
            
            2,207,305Equity
                in income (loss) of Bank of AshevilleMortgage
                Company, LLC
            
            
            (60,099
            )
            
            
            810Other
            
            
            133,063
            
            
            
            132,793Total
                Non-interest Income
            
            
            2,347,321
            
            
            
            2,340,908Non-interest
                Expenses:Other
            
            
            84,469
            
            
            
            74,394Income
                before income tax benefit
            
            
            1,986,837
            
            
            
            1,987,325Income
                tax benefit
            
            
            (59,169
            )
            
            
            (75,407
            )Net
                income
            
            $
            2,046,006
            
            
            $
            2,062,732








Condensed
      Statements of Cash Flows


Years
      Ended December 31, 2007 and 2006





2007
            
            
            2006Cash
                Flows from Operating Activities:Net
                income
            
            $
            2,046,006
            
            
            $
            2,062,732Noncash
                items included in net income:Equity
                in undistributed earnings of TheBank
                of Asheville
            
            
            (2,274,357
            )
            
            
            (2,207,305
            )Equity
                in undistributed (income) loss of Bank of AshevilleMortgage
                Company, LLC
            
            
            60,099
            
            
            
            (810
            )(Increase)
                decrease in other assets
            
            
            15,743
            
            
            
            (2,484
            )Increase
                (decrease) in other liabilities
            
            
            (1,169
            )
            
            
            11,933Net
                cash used in operating activities
            
            
            (150,678
            )
            
            
            (135,934
            )Cash
                Flows from Investing Activities:Upstream
                dividends received from The Bank of Asheville
            
            
            360,980
            
            
            
            360,980Investment
                in Bank of Asheville Mortgage Company, LLC
            
            
            (15,000
            )
            
            
            -Net
                cash provided by investing activities
            
            
            345,980
            
            
            
            360,980Cash
                Flows from Financing Activities:Cash
                paid for fractional shares
            
            
            (1,930
            )
            
            
            (2,762
            )Exercise
                of stock options
            
            
            21,587
            
            
            
            4,080Net
                cash provided (used) in financing activities
            
            
            19,657
            
            
            
            1,318Net
                increase in cash
            
            
            214,959
            
            
            
            226,364Beginning
            
            
            790,892
            
            
            
            564,528Ending
            
            $
            1,002,851
            
            
            $
            790,892





45
 Index








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




None.





ITEM
      8A(T):  CONTROLS AND PROCEDURES





At
      the
      end of the period covered by 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 were effective
      (1) to provide reasonable assurance that information required to be
      disclosed by the Company in the reports filed or submitted by it under the
      Securities Exchange Act was recorded, processed, summarized and reported within
      the time periods specified in the SEC’s rules and forms, and (2) to provide
      reasonable assurance that information required to be disclosed by the Company
      in
      such reports is accumulated and communicated to the Company’s management,
      including its Chief Executive Officer and Chief Financial Officer, as
      appropriate to allow for timely decisions regarding required
      disclosure.




There
      were no changes in the Company’s internal control over financial reporting
      during the period covered by this report that have materially affected, or
      are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting. The Company reviews its disclosure controls and procedures,
      which may include its internal control over financial reporting, on an ongoing
      basis, and may from time to time make changes aimed at enhancing their
      effectiveness and to ensure that the Company’s systems evolve with its
      business.





MANAGEMENT’S
      REPORT ON INTERNAL CONTROL
      OVER FINANCIAL REPORTING





Management
      is responsible for
      establishing and maintaining adequate internal control over financial reporting
      for the Company. The Company's internal control over financial reporting is
      a
      process designed under the supervision of the Company's CEO and CFO to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of the Company's financial statements for external reporting
      purposes in accordance withU.S.generally
      accepted accounting
      principles. Management has made a comprehensive review, evaluation and
      assessment of the Company's internal control over financial reporting as of
      December 31, 2007. In making its assessment of internal control over financial
      reporting, management used the criteria issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (“COSO”) in Internal
      Control−−Integrated Framework. In accordance with Section 404 of the
      Sarbanes−Oxley Act of 2002, management makes the following
      assertions:





·
            Management
                has implemented a
                process to monitor and assess both the design and operating effectiveness
                of internal control over financial
                reporting.





·
            All
                internal control systems, no
                matter how well designed, have inherent limitations.  Therefore,
                even those systems determined to be effective can provide only reasonable
                assurance with respect ot financial statement preparation and
                presentation.





·
            The
                Company’s management assessed
                the effectiveness of the Company’s internal control over financial
                reporting as of December 31, 2007.  In making this assessment,
                it used criteria set forth by the Committee of Sponsoring Organizations
                of
                the Treadway Commission (COSO) in Internal Control – Integrated
                Framework.  Based on that assessment, we believe that, as of
                December 31, 2007, the Company’s internal  control over
                financial reporting is effective based on those
                criteria.





This
      annual report does not include an
      attestation report of the company's registered public accounting firm regarding
      internal control over financial reporting. Management's report was not subject
      to attestation by the company's registered public accounting firm pursuant
      to
      temporary rules of the Securities and Exchange Commission that permit the
      company to provide only management's report in this annual
      report.











ITEM
      8B:  OTHER INFORMATION





None.


46
 Index


PART
      III





ITEM
                9:
            DIRECTORS,
                EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND
                CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
                ACT
                AND EXECUTIVE OFFICERS OF THE REGISTRANT





See
      pages
      5 - 11 of Registrant’s 2008 Annual Meeting Proxy Statement, as filed with the
      SEC pursuant to Rule 14a-6(b).





Code
      of Ethics





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





ITEM
      10:  EXECUTIVE COMPENSATION




See
      pages
      11 - 15 of Registrant’s 2008 Annual Meeting Proxy Statement, as filed with the
      SEC pursuant to Rule 14a-6(b).





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





In
      2007, the Company’s shareholders
      approved the Weststar Financial Services Corporation 2007 Nonstatutory Stock
      Option Plan (“Nonstatutory Plan”) and the Weststar Financial Services
      Corporation 2007 Incentive Stock Option Plan (“Incentive Plan”). The maximum
      number of shares available for grant under the Nonstatutory Plan and Incentive
      Plan is 50,000 and 75,000, respectively. No options were granted from the
      respective pools or outstanding at December 31, 2007.





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 164,645 and 166,485, respectively.
      Of
      the maximum number of shares available for grant, 118,013 were outstanding
      under
      the Nonstatutory Plan and 143,272 were outstanding under the Incentive Plan
      at
      December 31, 2007. Option prices for both plans are established at market value,
      which was $3.26, on the dates options were granted by the Board of
      Directors.  The following chart contains details of the
      grants:





Plan
                Category
            Number
                of
                securities
            Weighted-average
            Number
                of
                securitiesto
                be issued
                upon
            exercise
                price
                of
            remaining
                availableexercise
                of
            outstanding
                options,
            for
                future
                issuanceoutstanding
                options,
            warrants
                and
                rights
            under
                equitywarrants
                and
                rights
            
            compensation
                plans(excluding
                securitiesreflected
                in column
                (a))(a)
            (b)
            (c)Equity
                compensationplans
                approved
                by
            Nonstatutory
–
                118,013
            $3.26
            50,000security
                holders
            Incentive
–
                143,272
            $3.26
            78,933Equity
                compensationplans
                not
                approvedby
                security
                holders
            None
            None
            NoneTotal
            261,285
            $3.26
            128,933





All
      share and per share amounts have
      been adjusted to reflect a 5-for-4 stock paid during 2007.





See
      pages 3 – 5 of Registrant’s 2008
      Annual Meeting Proxy Statement, as filed with the SEC pursuant to Rule 14a-6(b),for additionalinformation
      regarding Security Ownership of Certain Beneficial Owners and
      Management.




ITEM
      12:  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
      AND DIRECTOR INDEPENDENCE




See
      pages
      6 and 11 of Registrant’s 2008 Annual Meeting Proxy Statement, as filed with the
      SEC pursuant to Rule 14a-6(b).


47
 Index


ITEM
      13:  EXHIBITS




3(i)  Articles
      of Incorporation of the Registrant*




3(ii)  Bylaws
      of the Registrant*




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




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





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




10(iv)
      2001 Incentive Stock Option Plan**




10(v)
      2001 Nonstatutory Stock Option Plan**





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





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





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




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





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





10(xi)
      2007 Incentive Stock Option Plan****





10(xii)
      2007 Nonstatutory Stock Option Plan****





21  Subsidiaries





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





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





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





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





99   2008
      Proxy Statement*****





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




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





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





****Incorporated
      by reference to the Registration Statement on Form S-8 (Registration No.
      333-145500 filed August 16, 2007 with the Securities and Exchange
      Commission).





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





ITEM
      14:  PRINCIPAL ACCOUNTANT FEES AND
      SERVICES





See
      pages
      8 - 9 and 15 of Registrant’s 2008 Annual Meeting Proxy Statement, as filed with
      the SEC pursuant to Rule 14a-6(b).


48
 Index





SIGNATURES





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








WESTSTAR
                FINANCIAL
                SERVICES CORPORATION(Registrant)By:
            /s/Randall
                C.
                HallRandall
                C. HallExecutive
                Vice PresidentChief
                Financial Officer and PrincipalAccounting
                OfficerDate:
            March
                5, 2008





49
 Index


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





/s/W.
                  Edward
                  Anderson
                W.
                  Edward Anderson
                Director
              March
                  5, 2008/s/M.
                  David Cogburn,
                  M.D.
                M.
                  David Cogburn, M.D.
                Director
              March
                  5, 2008/s/Steven
                  D.
                  Cogburn
                Steven
                  D. Cogburn
                Director
              March
                  5, 2008/s/G.
                  Gordon
                  Greenwood
                G.
                  Gordon Greenwood
                President
                  & Chief Executive Officer
              March
                  5, 2008/s/Patricia
                  P.
                  Grimes
                Patricia
                  P. Grimes
                Director
              March
                  5, 2008/s/Randall
                  C.
                  Hall
                Randall
                  C. Hall
                Secretary/Treasurer
                Chief
                  Financial Officer and
                Principal
                  Accounting Officer
              March
                  5, 2008/s/Darryl
                  J.
                  Hart
                Darryl
                  J. Hart
                Director
              March
                  5, 2008/s/Carol
                  L.
                  King
                Carol
                  L. King
                Director
              March
                  5, 2008/s/Stephen
                  L.
                  Pignatiello
                Stephen
                  L. Pignatiello
                Director
              March
                  5, 2008/s/Laura
                  A.
                  Webb
                Laura
                  A. Webb
                Director
              March
                  5, 2008/s/David
                  N.
                  Wilcox
                David
                  N. Wilcox
                Director
              March
                  5, 2008





50
 Index





EXHIBIT
      INDEX











Exhibit
              Number
            Exhibit
            Page
              Number3(i)
            Articles
                of Incorporation
            *3(ii)
            Bylaws
            *10(i)
            Employment
                Agreement of G. Gordon Greenwood
            *10(ii)
            Employment
                Agreement of Randall C. Hall
            *10(iii)
            401
                (k) Savings Plan
            *10(iv)
            2001
                Incentive Stock Option Plan
            *10(v)
            2001
                Nonstatutory Stock Option Plan
            *10(vi)
            Amended
                and Restated Declaration of Trust
            *10(vii)
            Indenture
                between Weststar Financial Services Corporation and Wells Fargo Bank,
                N.A.
            *10(viii)
            Guarantee
                Agreement by and between Weststar Financial Services Corporation
                and Wells
                Fargo Bank, N.A.
            *10(ix)
              
              
              
              10(x)
              
              
              10(xi)
              
              
              10(xii)
            Floating
                Rate Junior Subordinated Debenture of Weststar Financial Services
                Corporation
              
              
              Employment
                Agreement of John R. Hamrick.
              
              
              2007
                Incentive Stock Option Plan
              
              
              2007
                Nonstatutory Stock Option Plan
            *
              
              
              
              *
              
              
              *
              
              
              *21
            Subsidiaries
            Filed
                herewith31.1
            Certification
                of Principal Executive Officer Pursuant to Section 302 of the Sarbanes
                Oxley Act of 2002
            Filed
                herewith31.2
            Certification
                of Principal Financial Officer Pursuant to Section 302 of the Sarbanes
                Oxley Act of 2002
            Filed
                herewith32.1
            Certification
                of Principal Executive Officer Pursuant to Section 906 of the Sarbanes
                Oxley Act of 2002
            Filed
                herewith32.2
            Certification
                of Principal Financial Officer Pursuant to Section 906 of the Sarbanes
                Oxley Act of 2002
            Filed
                herewith99
            2008
                Proxy Statement
            **








*              Incorporated
      by reference.


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




51