**UNITED
      STATES SECURITITES AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**


**(Mark
      One)**


ý
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURTIES EXCHANGE
                ACT OF
                1934**





For
      the
      quarterly period ended September 30, 2006





 ̈
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
                1934**





For
      the
      transition period from _____________________ to
      __________________________





Commission
      File Number: 000-30515





Weststar
      Financial Services Corporation


(Exact
      name of registrant as specified in its charter)





North
                  Carolina
              56-2181423(State
                  or other jurisdiction of incorporation or organization)
              (IRS
                  Employer Identification
                  No.)


79
      Woodfin Place, Asheville NC 28801


(Address
      of principal executive offices)





828.252.1735


(Registrant’s
      telephone number, including area code)





(Former
      name, former address and former fiscal year, if changed since last
      report)





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





Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 12 months (or for such shorter period
      that the registrant was required to file such reports), and (2) has been subject
      to such filing requirements for the past 90 days. Yes ý No  ̈





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





**APPLICABLE
      ONLY TO CORPORATE ISSUERS:**


State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date.





Common
      stock, $1.00 par value - 1,681,290 shares outstanding as of November 10,
      2006.





Transitional
      Small Business Disclosure Format (Check one):  Yes  ̈ No ý

















INDEX
            PagePart
                I - FINANCIAL INFORMATIONFinancial
                Statements:Consolidated
                Balance SheetsSeptember
                30, 2006 and December 31, 2005
            3Consolidated
                Statements of OperationsThree
                and Nine Months Ended September 30, 2006 and
                2005
            4Consolidated
                Statements of Comprehensive
                IncomeThree
                and Nine Months Ended September 30, 2006 and
                2005
            5Consolidated
                Statements of Changes in Shareholders’
                EquityNine
                Months Ended September 30, 2006 and
                2005
            6Consolidated
                Statements of Cash FlowsNine
                Months Ended September 30, 2006 and
                2005
            7Notes
                to Consolidated Financial Statements
            8Item
                2 - Management’s Discussion and Analysis Financial
                Condition and Results of Operations
            11Item
                3 - Controls and Procedures
            23Part
                II - OTHER INFORMATIONExhibit
                Index
            24Signatures
            25








*Index*


Part
      I.FINANCIAL
      INFORMATION





**Item
      I.**  **Financial
      Statements**




**Weststar
                    Financial Services Corporation & Subsidiary**
                  **Consolidated
                    Balance Sheets**
                
                (unaudited)**September
                    30,**
                
                **December
                    31,****2006**
                
                **2005*****ASSETS:**Cash
                    and cash equivalents:Cash
                    and due from banks
                
                $
                3,948,053
                
                $
                6,243,192Interest-bearing
                    deposits
                
                
                349,222
                
                
                350,770Federal
                    funds sold
                
                
                355,000
                
                
                267,000Total
                    cash and cash equivalents
                
                
                4,652,275
                
                
                6,860,962Investment
                    securities -Available
                    for sale, at fair value (amortized cost of$25,905,003
                    and $28,506,899,respectively)
                
                
                25,711,065
                
                
                27,824,748Loans
                
                
                118,650,542
                
                
                100,493,602Allowance
                    for loan losses
                
                
                (1,862,809
                )
                
                (1,760,377
                )Net
                    loans
                
                
                116,787,733
                
                
                98,733,225Premises
                    and equipment, net
                
                
                3,009,393
                
                
                2,584,841Accrued
                    interest receivable
                
                
                935,670
                
                
                707,771Federal
                    Home Loan Bank stock, at cost
                
                
                616,800
                
                
                531,500Deferred
                    income taxes
                
                
                546,233
                
                
                715,310Foreclosed
                    properties
                
                
                136,177
                
                
                127,000Other
                    assets
                
                
                674,691
                
                
                668,178TOTAL
                
                $
                153,070,037
                
                $
                138,753,535**LIABILITIES
                    AND SHAREHOLDERS' EQUITY:**Deposits:Demand
                
                $
                28,442,629
                
                $
                25,164,465NOW
                    accounts
                
                
                13,038,367
                
                
                18,102,736Money
                    market accounts
                
                
                29,798,262
                
                
                29,901,364Savings
                
                
                2,078,625
                
                
                2,382,672Time
                    deposits of $100,000 or more
                
                
                18,771,818
                
                
                13,240,038Other
                    time deposits
                
                
                35,500,204
                
                
                30,321,624Total
                    deposits
                
                
                127,629,905
                
                
                119,112,899Short-term
                    borrowings
                
                
                3,550,000
                
                
                -Accrued
                    interest payable
                
                
                427,645
                
                
                266,835Other
                    liabilities
                
                
                1,002,334
                
                
                653,258Long-term
                    debt
                
                
                8,124,000
                
                
                8,124,000Total
                    liabilities
                
                
                140,733,884
                
                
                128,156,992**SHAREHOLDERS'
                    EQUITY:**Preferred
                    stock; authorized $1,000,000; issued and outstanding -
                    none
                
                
                -
                
                
                -Common
                    stock, $1 par value, authorized - 9,000,000shares;
                    issued and outstanding - 1,681,290 and 1,401,266,
                    respectively
                
                
                1,681,290
                
                
                1,401,266Additional
                    paid-in capital
                
                
                6,525,307
                
                
                6,805,331Retained
                    earnings
                
                
                4,248,731
                
                
                2,809,122Accumulated
                    other comprehensive loss
                
                
                (119,175
                )
                
                (419,176
                )Total
                    shareholders' equity
                
                
                12,336,153
                
                
                10,596,543TOTAL
                
                $
                153,070,037
                
                $
                138,753,535*Derived
                    from audited consolidated financial statements.
                  
                  See
                    notes to consolidated financial statements.




3
 *Index*




**Weststar
                        Financial Services Corporation &
                        Subsidiary************Consolidated
                        Statements of Operations**(unaudited)**Three
                        Months**
                      **Ended
                        September 30,**
                    
                    **Nine
                        Months**
                      **Ended
                        September 30,****2006**
                    
                    **2005**
                    
                    **2006**
                    
                    **2005****INTEREST
                        INCOME:**Interest
                        and fees on loans
                    
                    $
                    2,640,558
                    
                    $
                    1,690,454
                    
                    $
                    7,088,425
                    
                    $
                    4,663,473Federal
                        funds sold
                    
                    
                    27,203
                    
                    
                    98,356
                    
                    
                    51,264
                    
                    
                    242,672Interest-bearing
                        deposits
                    
                    
                    12,528
                    
                    
                    8,888
                    
                    
                    38,940
                    
                    
                    23,920Investments:Taxable
                        interest income
                    
                    
                    213,616
                    
                    
                    205,547
                    
                    
                    617,879
                    
                    
                    552,967Nontaxable
                        interest income
                    
                    
                    79,915
                    
                    
                    20,710
                    
                    
                    236,103
                    
                    
                    47,611Corporate
                        dividends
                    
                    
                    7,068
                    
                    
                    5,963
                    
                    
                    20,343
                    
                    
                    12,018Total
                        interest income
                    
                    
                    2,980,888
                    
                    
                    2,029,918
                    
                    
                    8,052,954
                    
                    
                    5,542,661**INTEREST
                        EXPENSE:**Time
                        deposits of $100,000 or more
                    
                    
                    235,664
                    
                    
                    86,568
                    
                    
                    574,861
                    
                    
                    218,001Other
                        time and savings deposits
                    
                    
                    719,052
                    
                    
                    475,812
                    
                    
                    1,915,911
                    
                    
                    1,259,693Short-term
                        borrowings
                    
                    
                    30,204
                    
                    
                    -
                    
                    
                    66,806
                    
                    
                    16,016Long-term
                        debt
                    
                    
                    141,396
                    
                    
                    121,270
                    
                    
                    405,610
                    
                    
                    300,794Total
                        interest expense
                    
                    
                    1,126,316
                    
                    
                    683,650
                    
                    
                    2,963,188
                    
                    
                    1,794,504**NET
                        INTEREST INCOME**
                    
                    
                    1,854,572
                    
                    
                    1,346,268
                    
                    
                    5,089,766
                    
                    
                    3,748,157**PROVISION
                        FOR LOAN LOSSES**
                    
                    
                    60,750
                    
                    
                    47,615
                    
                    
                    213,200
                    
                    
                    400,770**NET
                        INTEREST INCOME AFTER PROVISION****FOR
                        LOAN LOSSES**
                    
                    
                    1,793,822
                    
                    
                    1,298,653
                    
                    
                    4,876,566
                    
                    
                    3,347,387**OTHER
                        INCOME:**Service
                        charges on deposit accounts
                    
                    
                    310,372
                    
                    
                    318,044
                    
                    
                    902,652
                    
                    
                    883,185Other
                        service fees and commissions
                    
                    
                    75,619
                    
                    
                    67,118
                    
                    
                    222,436
                    
                    
                    217,120Securities
                        losses
                    
                    
                    (41,550
                    )
                    
                    (22,209
                    )
                    
                    (249,674
                    )
                    
                    (22,209
                    )Equity
                        in income (loss) of Bank of AshevilleMortgage
                        Company, LLC
                    
                    
                    11,380
                    
                    
                    16,855
                    
                    
                    (5,271
                    )
                    
                    (1,053
                    )Other
                    
                    
                    16,994
                    
                    
                    36,722
                    
                    
                    34,987
                    
                    
                    52,609Total
                        other income
                    
                    
                    372,815
                    
                    
                    416,530
                    
                    
                    905,130
                    
                    
                    1,129,652**OTHER
                        EXPENSES:**Salaries
                        and wages
                    
                    
                    532,848
                    
                    
                    467,944
                    
                    
                    1,529,309
                    
                    
                    1,369,763Employee
                        benefits
                    
                    
                    97,648
                    
                    
                    93,271
                    
                    
                    266,987
                    
                    
                    265,141Occupancy
                        expense, net
                    
                    
                    106,190
                    
                    
                    69,249
                    
                    
                    276,304
                    
                    
                    238,544Equipment
                          rentals, depreciation andmaintenance
                    
                    
                    92,033
                    
                    
                    84,844
                    
                    
                    284,052
                    
                    
                    268,194Supplies
                    
                    
                    65,530
                    
                    
                    61,833
                    
                    
                    188,074
                    
                    
                    184,677Professional
                        fees
                    
                    
                    47,606
                    
                    
                    72,936
                    
                    
                    152,249
                    
                    
                    232,744Data
                        processing fees
                    
                    
                    153,983
                    
                    
                    123,341
                    
                    
                    432,587
                    
                    
                    372,156Marketing
                    
                    
                    76,404
                    
                    
                    57,631
                    
                    
                    205,373
                    
                    
                    165,344(Income)
                        expenses from foreclosed properties
                    
                    
                    715
                    
                    
                    4,123
                    
                    
                    (202
                    )
                    
                    91,332Other
                    
                    
                    67,730
                    
                    
                    64,014
                    
                    
                    214,345
                    
                    
                    185,162Total
                        other expenses
                    
                    
                    1,240,687
                    
                    
                    1,099,186
                    
                    
                    3,549,078
                    
                    
                    3,373,057**INCOME
                        BEFORE INCOME TAXES**
                    
                    
                    925,950
                    
                    
                    615,997
                    
                    
                    2,232,618
                    
                    
                    1,103,982**INCOME
                        TAX PROVISION**
                    
                    
                    333,180
                    
                    
                    228,565
                    
                    
                    790,247
                    
                    
                    407,510**NET
                        INCOME**
                    
                    $
                    592,770
                    
                    $
                    387,432
                    
                    $
                    1,442,371
                    
                    $
                    696,472**EARNINGS
                        PER SHARE:**Basic
                    
                    $
                    0.35
                    
                    $
                    0.23
                    
                    $
                    0.86
                    
                    $
                    0.41Diluted
                    
                    $
                    0.33
                    
                    $
                    0.22
                    
                    $
                    0.79
                    
                    $
                    0.39See
                        notes to consolidated financial statements


4
 *Index*


**Weststar
                Financial Services Corporation &
Subsidiary****Consolidated
                Statements of ComprehensiveIncome**(unaudited)




**Three
                Months**
            
            **Nine
                Months****Ended
                September 30,**
            
            **Ended
                September 30,****2006**
            
            **2005**
            
            **2006**
            
            **2005****NET
                INCOME**
            
            $
            592,770
            
            $
            387,432
            
            $
            1,442,371
            
            $
            696,472**OTHER
                COMPREHENSIVE INCOME (LOSS)**Unrealized
                holding gains (losses) on securitiesavailable
                for sale
            
            
            690,100
            
            
            (162,448
            )
            
            238,528
            
            
            (272,525
            )Tax
                effect
            
            
            (266,033
            )
            
            62,624
            
            
            (91,952
            )
            
            105,059Unrealized
                holding gains (losses) on securitiesavailable
                for sale, net of tax
            
            
            424,067
            
            
            (99,824
            )
            
            146,576
            
            
            (167,466
            )Reclassification
                adjustment for realized losses
            
            
            41,550
            
            
            22,209
            
            
            249,674
            
            
            22,209Tax
                effect
            
            
            (16,018
            )
            
            (8,562
            )
            
            (96,249
            )
            
            (8,562
            )Reclassification
                adjustment for realized losses,net
                of tax
            
            
            25,532
            
            
            13,647
            
            
            153,425
            
            
            13,647OTHER
                COMPREHENSIVE INCOME (LOSS), NET OF TAX
            
            
            449,599
            
            
            (86,177
            )
            
            300,001
            
            
            (153,819
            )COMPREHENSIVE
                INCOME$
            1,042,369
            
            $
            301,255
            
            
            1,742,372
            
            $
            542,653




















See
      notes
      to consolidated financial statements.





5
 *Index*





**Weststar
                Financial Services Corporation & Subsidiary****Consolidated
                Statements of Changesin Shareholders’ Equity**(unaudited)**For
                the Nine Months Ended September 30, 2006 and 2005****Accumulated****Additional**
            
            
            
            **Other**
            
            **Total****Common
                Stock**
            
            **Paid-In**
            
            **Retained**
            
            **Comprehensive**
            
            **Shareholders’****Shares**
            
            **Amount**
            
            **Capital**
            
            **Earnings**
            
            **Loss**
            
            **Equity**Balance
                December 31, 2004
            
            
            1,166,208
            
            $
            1,166,208
            
            $
            7,030,589
            
            $
            1,732,872
            
            $
            (119,482
            )
            $
            9,810,18720%
                stock split
            
            
            233,058
            
            
            233,058
            
            
            (233,058
            )Net
                change in unrealizedlosses
                on securities held for sale
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (153,819
            )
            
            (153,819
            )Issuance
                of common stock
            
            
            1,000
            
            
            1,000
            
            
            3,900
            
            
            
            
            
            
            
            
            4,900Cash
                paid in lieu of fractionalshares
            
            
            
            
            
            
            
            
            
            
            
            (2,387
            )
            
            
            
            
            (2,387
            )Net
                income
            
            
            
            
            
            
            
            
            
            
            
            696,472
            
            
            
            
            
            696,472Balance
                September 30, 2005
            
            
            1,400,266
            
            $
            1,400,266
            
            $
            6,801,431
            
            $
            2,426,957
            
            $
            (273,301
            )
            $
            10,355,353Balance
                December 31, 2005
            
            
            1,401,266
            
            $
            1,401,266
            
            $
            6,805,331
            
            $
            2,809,122
            
            $
            (419,176
            )
            $
            10,596,54320%
                stock split
            
            
            280,024
            
            
            280,024
            
            
            (280,024
            )Net
                change in unrealizedlosses
                on securities held for sale
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            300,001
            
            
            300,001Cash
                paid in lieu of fractionalshares
            
            
            
            
            
            
            
            
            
            
            
            (2,762
            )
            
            
            
            
            (2,762
            )Net
                income
            
            
            
            1,442,371
            
            
            
            
            
            1,442,371Balance
                September 30, 2006
            
            
            1,681,290
            
            $
            1,681,290
            
            $
            6,525,307
            
            $
            4,248,731
            
            $
            (119,175
            )
            $
            12,336,153










See
      notes
      to consolidated financial statements.





6
 *Index*





**Weststar
                Financial Services Corporation & Subsidiary******
              **Consolidated
                Statementsof Cash Flows**(unaudited)**For
                the Nine Months Ended September 30,**
            
            **2006**
            
            **2005****CASH
                FLOWS FROM OPERATING ACTIVITIES:**Net
                income
            
            $
            1,442,371
            
            $
            696,472Adjustments
                to reconcile net income to net cash provided by operating
                activities:Depreciation
            
            
            254,653
            
            
            268,262Provision
                for loan losses
            
            
            213,200
            
            
            400,770Premium
                amortization and discount accretion, net
            
            
            17,043
            
            
            68,001Deferred
                income tax benefit
            
            
            (19,125
            )
            
            (126,665
            )Net
                (income) expenses from foreclosed properties
            
            
            (1,317
            )
            
            81,683Loss
                on sales of securities
            
            
            249,674
            
            
            22,209Loss
                on disposal/sale of premises and equipment
            
            
            2,067
            
            
            1,584Increase
                in accrued interest receivable
            
            
            (227,899
            )
            
            (101,494
            )(Increase)
                decrease in other assets
            
            
            (6,513
            )
            
            126,432Increase
                in accrued interest payable
            
            
            160,810
            
            
            77,959Increase
                in other liabilities
            
            
            349,076
            
            
            321,602Net
                cash provided by operating activities
            
            
            2,434,040
            
            
            1,836,815**CASH
                FLOWS FROM INVESTING ACTIVITIES:**Purchases
                of securities available for sale
            
            
            (9,513,257
            )
            
            (9,333,695
            )Maturities
                of securities available for sale
            
            
            1,845,520
            
            
            2,228,424Proceeds
                from sales of securities
            
            
            10,002,906
            
            
            1,579,234Net
                increase in loans
            
            
            (18,438,635
            )
            
            (9,857,107
            )Proceeds
                from sales of foreclosed properties
            
            
            163,067
            
            
            170,778Proceeds
                from sales of premises and equipment
            
            
            50
            
            
            1,947FHLB
                stock purchases
            
            
            (341,800
            )
            
            (223,600
            )FHLB
                stock redemptions
            
            
            256,500
            
            
            -Additions
                to premises and equipment
            
            
            (681,322
            )
            
            (254,338
            )Net
                cash used in investing activities
            
            
            (16,706,971
            )
            
            (15,688,357
            )**CASH
                FLOWS FROM FINANCING ACTIVITIES:**Net
                increase in demand deposits, NOW accounts, MMDA and savings
                accounts
            
            
            (2,193,354
            )
            
            (5,375,249
            )Net
                increase in time deposits
            
            
            10,710,360
            
            
            8,456,917Cash
                paid for fractional shares
            
            
            (2,762
            )
            
            (2,387
            )Issuance
                of common stock
            
            
            -
            
            
            4,900Proceeds
                from FHLB advances
            
            
            14,820,000
            
            
            4,000,000Repayment
                of FHLB advances
            
            
            (11,270,000
            )
            
            (2,000,000
            )Net
                cash provided by financing activities
            
            
            12,064,244
            
            
            5,084,181**NET
                DECREASE IN CASH AND CASH EQUIVALENTS**
            
            
            (2,208,687
            )
            
            (8,767,361
            )**CASH
                AND CASH EQUIVALENTS AT BEGINNING OF PERIOD**
            
            
            6,860,962
            
            
            19,621,267**CASH
                AND CASH EQUIVALENTS AT END OF PERIOD**
            
            $
            4,652,275
            
            $
            10,853,906





See
      notes
      to consolidated financial statements.





7
 *Index*





**WESTSTAR
      FINANCIAL SERVICES CORPORTION & SUBSIDIARY**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**







1.
            Weststar
                Financial Services Corporation (the “Company”) 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 area. 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 bank
                which was incorporated in North Carolina on October 19, 2004 of which
                Weststar Financial Services Corporation is a 50% owner. The Mortgage
                Company originates conventional mortgage
                loans.





In
      the
      opinion of management, the accompanying consolidated financial statements
      contain all adjustments necessary to present fairly the consolidated financial
      position of the Company as of September 30, 2006 and December 31, 2005, and
      the
      consolidated results of their operations for the three and nine-month periods
      ended September 30, 2006 and 2005 and their cash flows for the nine-month
      periods ended September 30 2006 and 2005. Operating results for the three and
      nine-month periods ended September 30, 2006 are not necessarily indicative
      of
      the results that may be expected for the fiscal year ending December 31,
      2006.





The
      accounting policies followed are set forth in Note 1 to the 2005 Annual Report
      to Shareholders (Form 10-KSB) on file with the Securities and Exchange
      Commission.




2.
            In
                the normal course of business there are various commitments and contingent
                liabilities such as commitments to extend credit, which are not reflected
                on the financial statements. The unused portions of commitments to
                extend
                credit were $31,570,051 and $25,580,877 at September 30, 2006 and
                December
                31, 2005, respectively.




3.
            Basic
                and diluted net income per shave have been computed by dividing net
                income
                for each period by the weighted average number of shares of common
                stock
                outstanding during each period.





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





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


8
 *Index*











Three
                Months
            
            Nine
                MonthsEnded
                September 30,
            
            Ended
                September 30,2006
            
            2005
            
            2006
            
            2005Weighted
                average number of common shares used in computing basic net income
                per
                share
            
            
            1,681,290
            
            
            1,679,890
            
            
            1,681,290
            
            
            1,679,813Effect
                of dilutive stock options
            
            
            140,448
            
            
            121,710
            
            
            135,495
            
            
            123,493Weighted
                average number of common shares and dilutive potential common shares
                used
                in computing diluted net income per common share
            
            
            1,821,738
            
            
            1,801,600
            
            
            1,816,785
            
            
            1,803,306





4.
            Effective
                January 1, 2006, the Company adopted SFAS No. 123 (revised 2004),*Share-Based
                Payments*,
                (“SFAS No. 123R”) which was issued by the 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
                in
                flows, 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
      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.





The
      Company has two share-based compensation plans in effect at September 30, 2006;
      an employee based incentive plan and a non-incentive plan for directors. Options
      within both plans had fully vested prior to 2006. As a result, no stock-based
      compensation expense was recognized in the income statement during the period
      ended September 30, 2006.





A
      summary
      of the Company’s option plans as of and for the nine months ended September 30,
      2006 is as follows:


9
 *Index*







Outstanding
                Options
            
            WeightedShares
            
            
            
            Weighted
            
            AverageAvailable
            
            
            
            Average
            
            RemainingFor
                Future
            
            Number
            
            Exercise
            
            ContractualGrants
            
            Outstanding
            
            Price
            
            TermAt
                December 31, 2005
            
            
            3,145
            
            
            225,223
            
            $
            4.08
            
            
            4.72Exercised
            
            
            -
            
            
            -
            
            
            -
            
            
            -Authorized
            
            
            -
            
            
            -
            
            
            -
            
            
            -Forfeited
            
            
            -
            
            
            -
            
            
            -
            
            
            -Granted
            
            
            -
            
            
            -
            
            
            -
            
            
            -OutstandingSeptember
                30, 2006
            
            
            3,145
            
            
            225,223
            
            $
            4.08
            
            
            4.72ExercisableSeptember
                30, 2006
            
            
            -
            
            
            225,223
            
            $
            4.08
            
            
            4.72





The
      aggregate intrinsic values of the outstanding and exercisable shares at
      September 30, 2006, respectively, are $2,008,989 and $2,008,989.





Had
      compensation costs for the Company’s stock option plans been determined using
      the fair value method in 2005, the Company’s pro forma net income would have
      been as follows:








Three
                  Months Ended9/30/2005
            
            Nine
                  Months Ended
                9/30/2005Net
                income as reported
            
            $
            387,432
            
            $
            696,472Less:
                Total stock-based employeecompensation
                expense determinedunder
                fair value method for all awards, net of related tax
                effects
            
            
            -
            
            
            47,815Pro
                forma net income
            
            $
            387,432
            
            $
            648,657Net
                income per share:As
                reported:Basic
            
            $
            0.23
            
            $
            0.41Diluted
            
            $
            0.22
            
            $
            0.39Pro
                forma:Basic
            
            $
            0.23
            
            $
            0.39Diluted
            
            $
            0.22
            
            $
            0.36


10
 *Index*


**Item
      2.**  **Management’s
      Discussion and Analysis Financial Condition and Results of
      Operations**





**Weststar
      Financial Services Corporation & Subsidiary**


**Management’s
      Discussion and Analysis**





EXECUTIVE
      OVERVIEW





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.





During
      2006, the Company continued its focus on improving asset quality, asset growth
      and expansion. Management emphasized prudent underwriting standards, periodic
      reviews of loans of $100,000 or more, and monitoring loan quality. During the
      period asset quality continued to demonstrate improvement. Non-performing assets
      decreased from $1,881,653 at December 31, 2005 to $1,073,481 at September 30,
      2006. Net charge-offs for the period totaled $110,768 compared to $312,775
      for
      the nine-month period ended September 30, 2005. Loans outstanding grew by 18%
      to
      $118,650,542 from December 31, 2005, which reflected improved economic
      conditions and increased business development efforts. Deposits increased 7%
      to
      $127,629,905. The increase was attributable to marketing campaigns, sales calls
      efforts, favorable interest rates and product development.





The
      Company increased its net interest income by 38% during the three-month period
      due to growth in net earning assets and an improved net interest margin. As
      a
      result of charge-offs and loan growth, the Company added $60,750 to the loan
      loss reserve compared to $47,615 during the comparable period in 2005. Service
      charges on deposits and other service fees and commissions remained relatively
      flat at $385,991. During the quarter, the Company realized $41,550 in losses
      from the sales of investment securities compared to $22,209 during same period
      in 2005. Bank of Asheville Mortgage Company, LLC posted net operating income
      of
      $22,760 during the quarter compared to $33,710 during 2005, of which $11,380
      and
      $16,855 was the Company’s portion during 2006 and 2005, respectively.
      Non-interest expenses increased 13% primarily as a result of growth in loans,
      deposits, marketing, personnel, personnel expenses and expenses associated
      with
      opening a new branch during the latter part of September 2006.


11
 *Index*


Net
      income totaled $592,770 and $387,432 for the quarters ended September 30, 2006
      and 2005, respectively - an increase of 53%.





The
      Company increased its net interest income by 36% during the nine-month period
      due to growth in earning assets and an improved net interest margin. As a result
      of charge-offs and loan growth, the Company added $213,200 to the loan loss
      reserve compared to $400,770 during the comparable period in 2005. Service
      charges on deposits and other service fees and commissions remained relatively
      flat at $1,125,088. During the period, the Company realized $249,674 in losses
      from the sales of investment securities compared to $22,209 during same period
      in 2005. Bank of Asheville Mortgage Company, LLC posted net operating losses
      of
      $10,542 during the period compared to losses of $2,106 during 2005, of which
      $5,271 and $1,053 was the Company’s portion during 2006 and 2005, respectively.
      Non-interest expenses increased 5% primarily as a result of growth in loans,
      deposits, marketing, personnel and personnel expenses. Management monitors
      expenses closely and reviews each expense relative to the benefit
      provided.





Net
      income totaled $1,442,371 and $696,472 for the nine-month periods ended
      September 30, 2006 and 2005, respectively - an increase of 107%.





12
 *Index*


CHANGES
      IN FINANCIAL CONDITION


SEPTEMBER
      30, 2006 COMPARED TO DECEMBER 31, 2005





During
      the period from December 31, 2005 to September 30, 2006, total assets increased
      $14,316,502 or 10%. This increase, reflected primarily in loans, resulted from
      an increase in deposits and borrowed funds.





Securities,
      federal funds sold and interest-bearing balances with other financial
      institutions at September 30, 2006 totaled $26,415,287 compared to $28,442,518
      at December 31, 2005. Through an investment in the Federal Home Loan Bank,
      the
      Company gained access to the Federal Home Loan Bank system. This access grants
      the Company sources of funds for lending and liquidity. Investments in Federal
      Home Loan Bank stock to date total $616,800.





At
      September 30, 2006, the loan portfolio constituted 78% of the Company’s total
      assets. Loans increased $18,156,940 from December 31, 2005 to September 30,
      2006. Improved economic conditions and business development efforts resulted
      in
      the 18% increase in loan growth. Management places a strong emphasis on loan
      quality. At September 30, 2006, management was not aware of any loan that (i)
      represented or resulted from trends or uncertainties which management reasonably
      expects to materially impact future operating results, liquidity, or capital
      resources, or (ii) represented a material credit about which management was
      aware of any information which caused management to have serious doubts as
      to
      the ability of such borrower to comply with the loan repayment terms, except
      as
      disclosed as impaired loans.





The
      recorded investment in loans that are considered to be impaired in accordance
      with criteria set forth in Statement of Financial Accounting Standards No.
      114
      of the Financial Accounting Standards Board was $944,411, $901,556, and
      $1,792,486 at September 30, 2006 and 2005, and December 31, 2005, respectively.
      The average recorded balance of impaired loans for the nine months ended
      September 30, 2006 and 2005 totaled $1,458,483 and $1,347,414, respectively
      and
      $1,576,007 for the year end December 31, 2005. The related allowance for loan
      losses determined in accordance with SFAS No. 114 for impaired loans was $20,299
      and $99,368 and $210,044 at September 30, 2006 and 2005, and December 31, 2005
      respectively.  For
      the
      nine-month periods ended September 30, 2006 and 2005, Weststar recognized
      interest income from impaired loans of approximately $3,620 and
      $14,980.  See
      “Asset Quality” for discussion for an analysis of loan loss
      reserves.





Deposits
      increased $8,517,006 during the nine months ended September 30, 2006. The
      increase in deposits is primarily reflected in demand and time deposits. During
      the period, customers continued to shift funds from lower yielding NOW and
      money
      market demand accounts to time accounts, which have continued to pay
      increasingly higher rates due to the higher interest rate environment and
      competition. Time deposits increased $10,710,360, while NOW and money market
      accounts decreased $5,064,369 and $103,102, respectively. Demand deposit
      accounts increased $3,278,164 as a result of continued market penetration and
      branch expansion.





Short-term
      borrowings consisted of one advance from the FHLB, which totaled $3,550,000.
      The
      daily rate credit advance bears a variable rate of interest and matures on
      June
      27, 2007; however, it can be repaid at any time without penalty.





Long-term
      borrowings consisted of one advance from the FHLB, which totaled $4,000,000
      and
      junior subordinated debentures of $4,124,000. The interest rate on this advance
      was 5.01% and matures on March 23, 2010. Advances from the FHLB are secured
      by a
      blanket lien on 1-4 family real estate loans and certain commercial real estate
      loans. The junior subordinated debentures bear a rate of LIBOR plus 315 basis
      points and pay dividends quarterly. The rate is subject to quarterly resets.
      The
      junior subordinated debentures mature October 7, 2033, and


13
 *Index*


are
      callable on or after October 7, 2008. Approximately $4 million was eligible
      for
      inclusion as Tier I capital.





The
      Company’s capital at September 30, 2006 to risk weighted assets totaled 14.42%.
      Current regulations require a minimum ratio of total capital to risk weighted
      assets of 8%, with at least 4% being in the form of Tier 1 capital, as defined
      in the regulation. As of September 30, 2006, the Company’s capital exceeded the
      current regulatory capital requirements.





RESULTS
      OF OPERATIONS


FOR
      THE
      THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2006 AND
      2005





Net
      interest income, the principal source of the Company’s earnings, is the amount
      of income generated by earning assets (primarily loans and investment
      securities) less the total interest cost of the funds obtained to carry them
      (primarily deposits and other borrowings). The volume, rate and mix of both
      earning assets and related funding sources determine net interest
      income.





COMPARATIVE
      THREE MONTHS





Net
      interest income for the quarter ended September 30, 2006 totaled $1,854,572
      compared to $1,346,268 in 2005 primarily due to higher yields on and volumes
      of
      loans, partially offset by higher rates paid on interest-bearing deposits.
      Because a significant portion of the Company’s loans are variable rate
      commercial loans, they reprice more rapidly than rate sensitive interest-bearing
      deposits, thus an increase in net interest margin during a rising rate
      environment. The Company’s net interest margins were approximately 4.95% and
      4.04% for the quarters ended September 30, 2006 and 2005, respectively.





Weststar
      recorded a provision for loan losses of $60,750 and $47,615 for the quarters
      ended September 30, 2006 and 2005, respectively. The provision for loan losses
      is charged to operations to bring the allowance to a level deemed appropriate
      by
      management based on the factors discussed under “Asset Quality.”





Other
      non-interest income for the September 30, 2006 and 2005 quarters totaled
      $372,815 and $416,530, respectively. The decrease in other income primarily
      reflects realized losses of $41,550 from the sales of securities during the
      period compared to $22,209 during the same period in 2005 and a $21,807 decrease
      in recoveries other than loans, which is carried in the category “Other” income.
      Lower yielding securities were sold with funds being reinvested into higher
      yielding securities. The Mortgage Company posted net operating income of $22,760
      and $33,710 during the 2006 and 2005 periods, respectively, of which $11,380
      and
      $16,855 was the Company’s portion during 2006 and 2005, respectively.





Other
      non-interest expense totaled $1,240,687 compared to $1,099,186 in 2005. This
      increase was primarily attributable to overall company growth to support loans
      and deposits. Professional fees decreased from $72,936 during 2005 to $47,606.
      The decrease parallels overall increase in asset quality and a reduction in
      accounting services related to documenting and testing the Company’s internal
      controls. Occupancy expense increased from $69,249 to $106,190, which reflects
      relocation from a temporary branch in September 2005 to a permanent location.
      Additionally, the Bank opened its fifth full-service branch during September
      2006. Income before income tax provision totaled $925,950 and $615,997 for
      the
      quarters ended September 30, 2006 and 2005, respectively. Income tax provision
      totaled $333,180 and $228,565 for the quarters ended September 30, 2006 and
      2005, respectively, which equated to an effective tax rate of 35.98% and 37.10%.
      The decrease in the effective tax rate resulted from increased tax exempt income
      generated from purchases of tax exempt municipal bonds. Net income totaled
      $592,770 and $387,432 for the quarters ended September 30, 2006 and 2005,
      respectively.


14
 *Index*





Other
      comprehensive income (loss) totaled $449,599 and $(86,177) in 2006 and 2005,
      respectively. Comprehensive income, which is the change in shareholders’ equity
      excluding transactions with shareholders, totaled $1,042,369 and $301,255 for
      the quarters ended September 30, 2006 and 2005, respectively.





COMPARATIVE
      NINE MONTHS





Net
      interest income for the nine-month period September 30, 2006 totaled $5,089,766
      compared to $3,748,157 in 2005 primarily due to higher yields on and volumes
      of
      loans, partially offset by higher rates paid on interest-bearing deposits.
      Because a significant portion of the company’s loans are variable rate
      commercial loans, they reprice more rapidly than rate sensitive interest-bearing
      deposits, thus an increase in net interest margin during a rising rate
      environment as was experienced during the nine-month period. The Company’s net
      interest margins were approximately 4.83% and 3.92% for the periods ended
      September 30, 2006 and 2005, respectively.





Weststar
      recorded a provision for loan losses of $213,200 and $400,770 for the nine
      months ended September 30, 2006 and 2005, respectively. The provision for loan
      losses is charged to operations to bring the allowance to a level deemed
      appropriate by management based on the factors discussed under “Asset Quality.”





Other
      non-interest income for the September 30, 2006 and 2005 periods totaled $905,130
      and $1,129,652, respectively. The decrease in other income primarily reflects
      realized losses of $249,674 from the sales of securities during the period
      compared to $22,209 during the same period in 2005. Lower yielding securities
      were sold with funds being reinvested into higher yielding securities. Service
      charges, fees and commissions increased from $1,100,305 to $1,125,088 or 2%.
      The
      increase resulted from increased volume in services charge related services
      such
      as overdraft charges, brokerage fee and commissions, and credit card
      commissions. The Mortgage Company posted net operating losses of $10,542 and
      $2,106 during the 2006 and 2005 periods, respectively, of which $5,271 and
      $1,053 was the Company’s portion during 2006 and 2005, respectively. Other
      income decreased $17,622 primarily attributable to a large recovery other than
      loans that occurred during 2005.





Other
      non-interest expense totaled $3,549,078 compared to $3,373,057 in 2005. This
      increase was primarily attributable to overall company growth to support loans
      and deposits and branch expansions. Professional fees decreased from $232,744
      during 2005 to $152,249. The decrease parallels overall improvement in asset
      quality and a reduction in accounting services related to documenting and
      testing the Company’s internal controls. Net expenses from foreclosed properties
      totaled $91,332 during 2005 compared to net revenue of $202 during 2006.
      Write-downs on foreclosed assets totaled $66,873 for 2005 as compared to $0
      for
      2006. Other expenses increased $29,183 primarily attributable to sustaining
      a
      loss on a fraudulent check deposit with the Bank. Income before income tax
      provision totaled $2,232,618 and $1,103,982 for the periods ended September
      30,
      2006 and 2005, respectively. Income tax provision totaled $790,247 and $407,510
      for the periods ended September 30, 2006 and 2005, respectively, which equated
      to an effective tax rate of 35.40% and 36.91%. The decrease in the effective
      tax
      rate resulted from increased tax exempt income generated from purchases of
      tax
      exempt municipal bonds. Net income totaled $1,442,371 and $696,472 for the
      periods ended September 30, 2006 and 2005, respectively.





Other
      comprehensive income (loss) totaled $300,001 and $(153,819) in 2006 and 2005,
      respectively. Comprehensive income, which is the change in shareholders’ equity
      excluding transactions with shareholders, totaled $1,742,372 and $542,653 for
      the periods ended September 30, 2006 and 2005, respectively.


15
 *Index*





**ASSET/LIABILITY
      MANAGEMENT**





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.





**Interest
      Rate Gap Analysis.** 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
      income should be negatively affected. Conversely, the cost of funds for an
      institution with a positive gap would generally be expected to increase more
      slowly than the yield on its assets in a rising interest rate environment,
      and
      such institution’s net interest income generally would be expected to be
      positively affected by rising interest rates. Changes in interest rates
      generally have the opposite effect on an institution with a “negative
      gap.”





The
      majority of the Company’s deposits are rate-sensitive instruments with rates
      that tend to fluctuate with market rates. These deposits, coupled with the
      Company’s short-term certificates of deposit, 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 the level of 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. 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 variable rate loans are generally repriced to current market
      rates. Based on its analysis, the Company believes that its balance sheet is
      slightly asset-sensitive, meaning that in a given period there will be more
      assets than liabilities subject to immediate repricing as the market rates
      change. Because a significant portion of the Company’s loans are variable rate
      commercial loans, they reprice more rapidly than rate sensitive interest-bearing
      deposits. During periods of rising rates, this results in increased net interest
      income, assuming similar growth rates and stable product mixes in loans and
      deposits. 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


16
 *Index*


distorting
      the balance sheet’s sensitivity to changing interest rates. The Company
      simulates the effects of interest rate changes on its earnings by assuming
      no
      change in interest rates as its base case scenario and either (1) gradually
      increasing or decreasing interest rates by over a twelve-month period or
      (2) immediately increasing or decreasing interest rates by 25%, .50%, 1%
      and 2%. Although these methods are subject to the accuracy of the assumptions
      that underlie the process and do not take into account the pricing strategies
      that management would undertake in response to sudden interest rate changes,
      the
      Company believes that these methods provide a better indication of the
      sensitivity of earnings to changes in interest rates than other analyses.





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





The
      following table sets forth the amounts of interest-earning assets and
      interest-bearing liabilities outstanding at September 30, 2006, which are
      projected to reprice or mature in each of the future time periods shown. Except
      as stated below, the amounts of assets and liabilities shown which reprice
      or
      mature within a particular period were determined in accordance with the
      contractual terms of the assets or liabilities. Loans with adjustable rates
      are
      shown as being due at the end of the next upcoming adjustment period. 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.














17
 *Index*


****TERMS
                TO REPRICING AT SEPTEMBER 30, 20061-90
                  Days
              
              91-180
                  Days
              
              181-365
                  Days
              
              Total
                  One
                Year
              
              Non-
                Sensitive
              
              TotalInterest-earning
                  assets:Interest
                  bearing deposits
              
              $
              349,222
              
              
              
              
              
              
              
              $
              349,222
              
              
              
              
              $
              349,222Federal
                  funds sold
              
              
              355,000
              
              
              
              
              
              
              
              
              355,000
              
              
              
              
              
              355,000Investment
                  securities
              
              
              1,199,819
              
              $
              699,819
              
              $
              1,899,638
              
              
              3,799,276
              
              $
              22,105,727
              
              
              25,905,003Federal
                  Home Loan Bank stock
              
              
              616,800
              
              
              -
              
              
              -
              
              
              616,800
              
              
              -
              
              
              616,800Loans
                  (1)
              
              
              90,921,049
              
              
              3,964,332
              
              
              5,185,203
              
              
              100,070,584
              
              
              17,642,654
              
              
              117,713,238Total
                  interest-earning assets
              
              
              93,441,890
              
              
              4,664,151
              
              
              7,084,841
              
              
              105,190,882
              
              
              39,748,381
              
              
              144,939,263Interest-bearing
                  liabilities:Time
                  deposits
              
              
              12,836,975
              
              
              15,803,903
              
              
              18,313,278
              
              
              46,954,156
              
              
              7,317,866
              
              
              54,272,022All
                  other deposits
              
              
              44,915,254
              
              
              -
              
              
              -
              
              
              44,915,254
              
              
              -
              
              
              44,915,254Short-term
                  debt
              
              
              3,550,000
              
              
              -
              
              
              -
              
              
              3,550,000
              
              
              -
              
              
              3,550,000Long-term
                  debt
              
              
              4,124,000
              
              
              -
              
              
              -
              
              
              4,124,000
              
              
              4,000,000
              
              
              8,124,000Total
                  interest-bearing liabilities
              
              
              65,426,229
              
              
              15,803,903
              
              
              18,313,278
              
              
              99,543,410
              
              
              11,317,866
              
              
              110,861,276Interest
                  sensitivity gap
              
              $
              28,015,661
              
              $
              (11,139,752
              )
              $
              (11,228,437
              )
              $
              (5,647,472
              )
              $
              28,430,515Cumulative
                  interest sensitivityGap
              
              $
              28,015,661
              
              $
              16,875,909
              
              $
              5,647,472Cumulative
                  ratio of interest -earning
                  assets as a percentof
                  interest sensitive liabilities
              
              
              142.8
              %
              
              29.5
              %
              
              38.7
              %
              
              105.7
              %





(1)
      Non-accrual loans have been excluded.


Weststar
      has established an acceptable range of 80% to 120% for interest-earning assets
      as a percent of interest sensitive liabilities, when considering the total
      one
      year horizon.





**ASSET
      QUALITY**





Management
      considers Weststar’s asset quality to be of primary importance. We maintain an
      allowance for loan losses to absorb probable losses inherent in the loan
      portfolio. The loan portfolio is analyzed monthly in an effort to identify
      potential problems before they actually occur. The allowance for loan losses
      is
      established as losses are estimated to have occurred through a provision for
      loan losses charged to earnings. The provision for loan losses is based upon
      management’s best estimate of the amount needed to maintain the allowance for
      loan losses at an adequate level. Loan losses are charged against the allowance
      when management believes the uncollectibility of a loan balance is confirmed.
      Subsequent recoveries, if any, are credited to the allowance.





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





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


18
 *Index*


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 September 30, 2006 and 2005, and December
      31,
      2005 was $1,862,809, $1,696,361 and $1,760,377 or 1.57%, 1.80% and 1.75%,
      respectively, of gross loans outstanding. The ratio of net charge-offs to
      average loans outstanding was .14%, .47% and .35% during the periods ended
      September 30, 2006 and 2005, and December 31, 2005, respectively. During the
      period, loan quality demonstrated significant improvement over September 30,
      2005 and December 31, 2005. At September 30, 2006, nonperforming loans dropped
      to .79% of gross loans outstanding compared to 1.75% at December 31, 2005 and
      1.89% at September 30, 2005. In light of the sustained improvement in asset
      quality, the loan loss reserve was reduced from 1.75% of gross loans outstanding
      at December 31, 2005 to 1.57% of gross loans outstanding at September 30, 2006.





The
      following table contains an analysis for the allowance for loan losses,
      including the amount of charge-offs and recoveries by loan type, for the nine
      months ended September 30, 2006 and 2005, and for the year ended December 31,
      2005.





**Summary
      of Allowance for Loan Losses**





For
                the nine months
            
            For
                the year endedended
                September 30,
            
            December
                31,2006
            
            2005
            
            2005Balance,
                beginning of period
            
            $
            1,760,377
            
            $
            1,608,366
            
            $
            1,608,366Charge-offs:Commercial,
                financial and agricultural
            
            
            (119,204
            )
            
            (188,365
            )
            
            (207,106
            )Real
                estate:Construction
            
            
            -
            
            
            -
            
            
            -Mortgage
            
            
            (14,161
            )
            
            (129,401
            )
            
            (129,401
            )Consumer
            
            
            (26,323
            )
            
            (24,948
            )
            
            (33,339
            )Total
                charge-offs
            
            
            (159,688
            )
            
            (342,714
            )
            
            (369,846
            )RecoveriesCommercial,
                financial and agricultural
            
            
            20,149
            
            
            9,707
            
            
            28,488Real
                estate:Construction
            
            
            -
            
            
            -
            
            
            -Mortgage
            
            
            6,483
            
            
            -
            
            
            -Consumer
            
            
            22,288
            
            
            20,232
            
            
            27,099Total
                recoveries
            
            
            48,920
            
            
            29,939
            
            
            55,587Net
                (charge-offs) recoveries
            
            
            (110,768
            )
            
            (312,775
            )
            
            (314,259
            )Provision
                charged to operations
            
            
            213,200
            
            
            400,770
            
            
            466,270Balance,
                end of period
            
            $
            1,862,809
            
            $
            1,696,361
            
            $
            1,760,377Percentage
                of net charge-offs toaverage
                loans
            
            
            .14
            %
            
            .47
            %
            
            .35
            %Percentage
                of allowance toperiod-end
                loans
            
            
            1.57
            %
            
            1.80
            %
            
            1.75
            %






19
 *Index*





During
      2006, there were no changes in estimation methods or assumptions that affected
      our methodology for assessing the appropriateness of the formula and specific
      allowance for credit losses. Changes in estimates and assumptions regarding
      the
      effect of economic and business conditions on borrowers affect the assessment
      of
      the allowance. The Company does not have any significant loan
      concentrations.





**CAPITAL
      RESOURCES**





Banks
      and
      bank holding companies, as regulated institutions, must meet required levels
      of
      capital. The Federal Deposit Insurance Corporation (“FDIC”) and the Federal
      Reserve, the primary regulators of The Bank of Asheville and Weststar,
      respectively, have adopted minimum capital regulations or guidelines that
      categorize components and the level of risk associated with various types of
      assets. Financial institutions are expected to maintain a level of capital
      commensurate with the risk profile assigned to its assets in accordance with
      these guidelines. As shown in the following table, Weststar and The Bank of
      Asheville both maintained capital levels exceeding the minimum levels for "well
      capitalized" banks and bank holding companies.










20
 *Index*


**REGULATORY
      CAPITAL**





**To
                Be Well****Capitalized
                Under****For
                Capital**
            
            **Prompt
                Corrective****Actual**
            
            **Adequacy
                Purposes**
            
            **Action
                Provisions****Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**
            
            **Amount**
            
            **Ratio**(Dollars
                in Thousands)As
                of September 30, 2006Total
                Capital (to Risk Weighted Assets)Consolidated
            
            $
            18,021
            
            
            14.42
            %
            $
            10,000
            
            
            8.00
            %
            $
            12,500
            
            
            10.00
            %Bank
            
            $
            17,144
            
            
            13.75
            %
            $
            9,977
            
            
            8.00
            %
            $
            12,471
            
            
            10.00
            %Tier
                1 Capital (to Risk Weighted Assets)Consolidated
            
            $
            16,455
            
            
            13.16
            %
            $
            5,000
            
            
            4.00
            %
            $
            7,500
            
            
            6.00
            %Bank
            
            $
            15,581
            
            
            12.49
            %
            $
            4,988
            
            
            4.00
            %
            $
            7,483
            
            
            6.00
            %Tier
                1 Capital (to Average Assets)Consolidated
            
            $
            16,455
            
            
            10.78
            %
            $
            6,105
            
            
            4.00
            %
            $
            7,631
            
            
            5.00
            %Bank
            
            $
            15,581
            
            
            10.23
            %
            $
            6,094
            
            
            4.00
            %
            $
            7,617
            
            
            5.00
            %








**LIQUIDITY**





Maintaining
      adequate liquidity, while managing interest rate risk, is the primary goal
      of
      Weststar’s asset and liability management strategy. Liquidity is the ability to
      fund the needs of the Company’s borrowers and depositors, pay operating
      expenses, and meet regulatory liquidity requirements. Loan repayments, deposit
      growth, federal funds purchased and borrowings from the Federal Home Loan Bank
      are presently the main sources of the Company’s liquidity. The Company’s primary
      uses of liquidity are to fund loans and to make investments.





As
      of
      September 30, 2006 liquid assets (cash due from banks, interest-earning bank
      deposits and federal funds sold) were approximately $4.7 million, which
      represents 3.0% of total assets and 3.7% of total deposits. Supplementing this
      liquidity, Weststar has available lines of credit from correspondent banks
      of
      approximately $10.7 million. At September 30, 2006, outstanding commitments
      to
      extend credit and available lines of credit were  $31.6
      million . Management
      believes that the combined aggregate liquidity position of the Company is
      sufficient to meet the funding
      requirements of loan demand and deposit maturities and withdrawals in the near
      term.





Certificates
      of deposit represented approximately 42.5% of Weststar’s total deposits at
      September 30, 2006. The Company’s growth strategy includes efforts focused on
      increasing the relative volume of transaction deposit accounts, as the branch
      network is expanded, making it more convenient for our banking customers.
      Certificates of deposit of $100,000 or more represented 14.7% of the Company’s
      total deposits at September 30, 2006. These deposits are generally considered
      rate sensitive, but management believes most of them are relationship-oriented.
      While the Company will need to pay competitive rates to retain these deposits
      at
      maturity, there are other subjective factors that will determine the Company’s
      continued retention of these deposits.











21
 *Index*


**IMPACT
      OF INFLATION AND CHANGING PRICES**





A
      financial institution has assets and liabilities that are distinctly different
      from those of a company with substantial investments in plant and inventory
      because the major portion of its assets is monetary in nature. As a result,
      a
      bank’s performance may be significantly influenced by changes in interest rates.
      Although the banking industry is more affected by changes in interest rates
      than
      by inflation in the prices of goods and services, inflation is a factor, which
      may influence interest rates. However, the frequency and magnitude of interest
      rate fluctuations do not necessarily coincide with changes in the general
      inflation rate. Inflation does affect operating expenses in that personnel
      expenses, cost of supplies and outside services tend to increase more during
      periods of high inflation .





**Recent
      Accounting Pronouncements**





**FIN
      48**


In
      July
      2006, the FASB issued Financial Interpretation No. 48, “Accounting for
      Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109” (“FIN
      48”), which is a change in accounting for income taxes. FIN 48 specifies how tax
      benefits for uncertain tax positions are to be recognized, measured, and
      derecognized in financial statements;, requires certain disclosures of uncertain
      tax matters; specifies how reserves for uncertain tax positions should be
      classified on the balance sheet; and provides transition and interim period
      guidance among other provision. FIN 48 is effective for fiscal years beginning
      after December 15, 2006 and as a result, is effective for the Company in the
      first quarter of fiscal 2008. The Company is currently evaluating the impact
      of
      FIN 48 on its Consolidated Financial Statements.





**FAS
      155**


SFAS
      No.
      155, “Accounting for Certain Hybrid Financial Instruments - an amendment of SFAS
      No. 133 and 140” provides entities relief from the requirement to separately
      determine the fair value of an embedded derivative that would otherwise be
      bifurcated from the host contract under SFAS 133. The statement allows an
      irrevocable election on an instrument-by-instrument basis to measure such a
      hybrid financial instrument at fair value. This statement is effective for
      all
      financial instruments acquired or issued after the beginning of the fiscal
      years
      beginning after September 15, 2006. The Company has evaluated this statement
      and
      does not believe it will have a material effect on the Company’s financial
      position, results of operations and cash flows.





**FAS
      157**


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


22
 *Index*


**SAB
      108**


In
      September 2006, the SEC staff issued SAB No. 108, Considering the Effects of
      Prior Year Misstatements When Quantifying Misstatements in the Current Year
      Financial Statements (SAB No. 108). SAB No. 108 addresses the diversity in
      practice by registrants when quantifying the effect of an error on the financial
      statements. SAB No. 108 provides guidance on the consideration of the effects
      of
      prior year misstatements in quantifying current year misstatements and is
      effective for annual periods ending after November 15, 2006. The Company will
      be
      required to adopt the provisions of SAB No. 108 effective December 31, 2006.
      We
      currently believe that the adoption of SAB No. 108 will not have a material
      impact on our consolidated financial statements (or revise if adoption will
      have
      a material impact - registrants should understand what their prior year audit
      differences were in order to evaluate impact of this standard).





**Item
      3.**  **Controls
      and
      Procedures**





The
      Company carried out an evaluation as of the end of the period covered by this
      report 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 and Exchange Act
      Rule
      13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that the Company’s disclosure controls and
      procedures are effective in timely alerting them to material information
      relating to the Company required to be included in the Company’s periodic SEC
      Filings. There were no significant changes in the Company’s internal controls or
      in other factors that could significantly affect the controls during the most
      recent quarter.


23
 *Index*


**Part
      II.**  **OTHER
      INFORMATION**





**Item
      4.**  **Submission
      of Matters to a Vote of Security Holders**


None.





**Item6.**  **Exhibits**





(a)  Exhibits.





31.1
      -
      Certification of the Chief Executive Officer pursuant to Rule
      13a-14(a) under
      the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002





31.2
      -
      Certification of the Chief Financial Officer pursuant to Rule
      13a-14(a) under
      the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002





32.1
      -
      Certification by the Chief Executive Officer pursuant to 18 U.S.C. 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





32.2
      -
      Certification by the Chief Financial Officer pursuant to 18 U.S.C. 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002








24
 *Index*





**SIGNATURES**








Under
      the
      requirements of the Securities Exchange Act of 1934, the registrant has duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.








**WESTSTAR
                FINANCIAL SERVICES CORPORATION**Date:
                November 10, 2006
            By:
            /s/
                G. Gordon GreenwoodG.
                Gordon GreenwoodPresident
                and Chief Executive OfficerDate:
                November 10, 2006
            By:
            /s/
                Randall C. HallRandall
                C. HallExecutive
                Vice President and Chief Financialand
                Principal Accounting Officer






25